UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x         QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
the quarterly period ended March 31, 2010
 or
 o         TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 Commission
File Number   000-52566
 
 CORNERSTONE
CORE PROPERTIES REIT, INC.
 (Exact
name of registrant as specified in its charter)
 
 MARYLAND
              73-1721791(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
              92614(Address
      of principal executive offices)
              (Zip
      Code)
 
 949-852-1007
 (Registrant’s
telephone number, including area code)
 
 Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
 x  Yes  o  No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 o  Yes  o  No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company.  See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
      filer o
              Smaller
      reporting company x
   Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 o Yes  x  No
 
 As
of May 12, 2010, we had 22,819,551 shares issued and
outstanding.
  1
 
 PART
I - FINANCIAL INFORMATION
 FORM
10-Q
 Cornerstone
Core Properties REIT, Inc.
 TABLE
OF CONTENTS
 
 PART
      I.
                  FINANCIAL
      INFORMATIONItem
      1.
                  Financial
      Statements:Condensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
      (unaudited)
                  3Condensed
      Consolidated Statements of Operations for the Three Months ended March 31,
      2010 and 2009 (unaudited)
                  4Condensed
      Consolidated Statements of Equity for the Three Months ended March 31,
      2010 and 2009 (unaudited)
                  5Condensed
      Consolidated Statements of Cash Flows for the Three Months ended March 31,
      2010 and 2009 (unaudited)
                  6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                  7Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  17Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  22Item
      4(T).
                  Controls
      and Procedures
                  23PART
      II.
                  OTHER
      INFORMATIONItem
      1A.
                  Risk
      Factors
                  24Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  24Item
      6.
                  Exhibits
                  25SIGNATURES
                  26
 
 2
 
 CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
  March
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009ASSETSCash
      and cash equivalents
                  
                  $
                  14,585,000
                  
                  
                  $
                  18,673,000Investments
      in real estate:Land
                  
                  
                  38,604,000
                  
                  
                  
                  38,604,000Buildings
      and improvements, net
                  
                  
                  86,954,000
                  
                  
                  
                  87,671,000Intangible
      lease assets, net
                  
                  
                  694,000
                  
                  
                  
                  804,000126,252,000
                  
                  
                  
                  127,079,000Notes
      receivable, net
                  
                  
                  3,125,000
                  
                  
                  
                  2,875,000Note
      receivable from related party
                  
                  
                  7,275,000
                  
                  
                  
                  6,911,000Deferred
      costs and deposits
                  
                  
                  29,000
                  
                  
                  
                  29,000Deferred
      financing costs, net
                  
                  
                  121,000
                  
                  
                  
                  174,000Tenant
      and other receivables, net
                  
                  
                  866,000
                  
                  
                  
                  863,000Other
      assets, net
                  
                  
                  594,000
                  
                  
                  
                  648,000Total
      assets
                  
                  $
                  152,847,000
                  
                  
                  $
                  157,252,000LIABILITIES
      AND EQUITYLiabilities:Notes
      payable
                  
                  $
                  38,837,000
                  
                  
                  $
                  38,884,000Accounts
      payable and accrued liabilities
                  
                  
                  1,150,000
                  
                  
                  
                  698,000Payable
      to related parties
                  
                  
                  139,000
                  
                  
                  
                  347,000Prepaid
      rent, security deposits and deferred revenue
                  
                  
                  942,000
                  
                  
                  
                  1,010,000Intangible
      lease liability, net
                  
                  
                  194,000
                  
                  
                  
                  217,000Distributions
      payable
                  
                  
                  932,000
                  
                  
                  
                  941,000Total
      liabilities
                  
                  
                  42,194,000
                  
                  
                  
                  42,097,000Commitments
      and contingencies (Note 13)Equity:Stockholders’ Equity:Preferred
      stock, $0.001 par value; 10,000,000 shares authorized; no shares were
      issued or outstanding at March 31, 2010 and December 31,
    2009
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $0.001 par value; 290,000,000 shares
      authorized;  22,888,493 and 23,114,201 shares issued and
      outstanding at March 31, 2010 and
                    December
      31, 2009, respectively
                  
                  
                  24,000
                  
                  
                  
                  24,000Additional
      paid-in capital
                  
                  
                  124,040,000
                  
                  
                  
                  128,559,000Accumulated
      deficit
                  
                  
                  (13,539,000
                  )
                  
                  
                  (13,559,000
                  )Total
      stockholders’ equity
                  
                  
                  110,525,000
                  
                  
                  
                  115,024,000Noncontrolling
      interest
                  
                  
                  128,000
                  
                  
                  
                  131,000Total
      equity
                  
                  
                  110,653,000
                  
                  
                  
                  115,155,000Total
      liabilities and  equity
                  
                  $
                  152,847,000
                  
                  
                  $
                  157,252,000
  The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
 
 3
 
 CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
  Three
      Months Ended March 31,2010
                  
                  
                  2009RevenuesRental
      revenues
                  
                  $
                  1,960,000
                  
                  
                  $
                  2,110,000Tenant
      reimbursements and other income
                  
                  
                  481,000
                  
                  
                  
                  539,000Interest
      income from notes receivable
                  
                  
                  424,000
                  
                  
                  
                  297,0002,865,000
                  
                  
                  
                  2,946,000ExpensesProperty
      operating and maintenance
                  
                  
                  686,000
                  
                  
                  
                  865,000General
      and administrative
                  
                  
                  647,000
                  
                  
                  
                  463,000Asset
      management fees
                  
                  
                  382,000
                  
                  
                  
                  375,000Real
      estate acquisition costs
                  
                  
                  6,000
                  
                  
                  
                  172,000Depreciation
      and amortization
                  
                  
                  824,000
                  
                  
                  
                  931,0002,545,000
                  
                  
                  
                  2,806,000Operating
      income
                  
                  
                  320,000
                  
                  
                  
                  140,000Interest
      income
                  
                  
                  1,000
                  
                  
                  
                  2,000Interest
      expense
                  
                  
                  (301,000
                  )
                  
                  
                  (367,000
                  )Net
      income (loss)
                  
                  
                  20,000
                  
                  
                  
                  (225,000
                  )Less:
      Net income (loss) attributable to the noncontrolling
    interest
                  
                  
                  —
                  
                  
                  
                  —Net
      income (loss) attributable to common stockholders
                  
                  $
                  20,000
                  
                  
                  $
                  (225,000
                  )Basic
      and diluted net income (loss) per common share attributable to common
      stockholders
                  
                  $
                  0.00
                  
                  
                  $
                  (0.01
                  )Weighted
      average number of common shares
                  
                  
                  23,003,489
                  
                  
                  
                  20,931,999Dividend
      declared per common share
                  
                  $
                  0.12
                  
                  
                  $
                  0.12
 
 The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
 
 4
 
 CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
 For
the Three Months Ended March 31, 2010 and 2009
 
 (Unaudited)
 
  Common
      StockNumber
      of
                      Shares
                    
                    
                    Common
                      Stock
      Par
                      Value
                    
                    
                    Additional
                      Paid-In
      Capital
                    
                    
                    Accumulated
                      Deficit
                    
                    
                    Total
      Stockholders’ Equity
                    
                    
                    Noncontrolling
      Interest
                    
                    
                    Total
      EquityBalance
      - December 31, 2009
                    
                    
                    23,114,201
                    
                    
                    $
                    24,000
                    
                    
                    $
                    128,559,000
                    
                    
                    $
                    (13,559,000
                    )
                    
                    $
                    115,024,000
                    
                    
                    $
                    131,000
                    
                    
                    $
                    115,155,000Issuance
      of common stock
                    
                    
                    283,916
                    
                    
                    
                    —
                    
                    
                    
                    2,193,000
                    
                    
                    
                    —
                    
                    
                    
                    2,193,000
                    
                    
                    
                    —
                    
                    
                    
                    2,193,000Redeemed
      shares
                    
                    
                    (509,624
                    )
                    
                    
                    —
                    
                    
                    
                    (3,866,000
                    )
                    
                    
                    —
                    
                    
                    
                    (3,866,000
                    )
                    
                    
                    —
                    
                    
                    
                    (3,866,000
                    )Offering
      costs
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (135,000
                    )
                    
                    
                    —
                    
                    
                    
                    (135,000
                    )
                    
                    
                    —
                    
                    
                    
                    (135,000
                    )Dividends
      declared
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,711,000
                    )
                    
                    
                    —
                    
                    
                    
                    (2,711,000
                    )
                    
                    
                    (3,000
                    )
                    
                    
                    (2,714,000
                    )Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    20,000
                    
                    
                    
                    20,000
                    
                    
                    
                    —
                    
                    
                    
                    20,000Balance
      – March 31, 2010
                    
                    
                    22,888,493
                    
                    
                    $
                    24,000
                    
                    
                    $
                    124,040,000
                    
                    
                    $
                    (13,539,000
                    )
                    
                    $
                    110,525,000
                    
                    
                    $
                    128,000
                    
                    
                    $
                    110,653,000
  Common
      StockNumber
      of
                        Shares
                      
                      
                      Common
                        Stock
      Par
                        Value
                      
                      
                      Additional
                        Paid-In
      Capital
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      Total
      Stockholders’ Equity
                      
                      
                      Noncontrolling
      Interest
                      
                      
                      Total
      EquityBalance
      - December 31, 2008
                      
                      
                      20,570,120
                      
                      
                      $
                      21,000
                      
                      
                      $
                      121,768,000
                      
                      
                      $
                      (5,456,000
                      )
                      
                      $
                      116,333,000
                      
                      
                      $
                      151,000
                      
                      
                      $
                      116,484,000Issuance
      of common stock
                      
                      
                      1,268,280
                      
                      
                      
                      1,000
                      
                      
                      
                      10,070,000
                      
                      
                      
                      —
                      
                      
                      
                      10,071,000
                      
                      
                      
                      —
                      
                      
                      
                      10,071,000Redeemed
      shares
                      
                      
                      (331,251
                      )
                      
                      
                      —
                      
                      
                      
                      (2,538,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,538,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,538,000
                      )Offering
      costs
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (958,000
                      )
                      
                      
                      —
                      
                      
                      
                      (958,000
                      )
                      
                      
                      —
                      
                      
                      
                      (958,000
                      )Distributions
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,484,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,484,000
                      )
                      
                      
                      (3,000
                      )
                      
                      
                      (2,487,000
                      )Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (225,000
                      )
                      
                      
                      (225,000
                      )
                      
                      
                      —
                      
                      
                      
                      (225,000
                      )Balance
      – March 31, 2009
                      
                      
                      21,507,149
                      
                      
                      $
                      22,000
                      
                      
                      $
                      125,858,000
                      
                      
                      $
                      (5,681,000
                      )
                      
                      $
                      120,199,000
                      
                      
                      $
                      148,000
                      
                      
                      $
                      120,347,000
   The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
 
 5
 
 CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
  CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Three
      Months Ended March 31,2010
                  
                  
                  2009Cash
      flows from operating activitiesNet
      income (loss)
                  
                  $
                  20,000
                  
                  
                  $
                  (225,000
                  )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Amortization
      of deferred financing costs
                  
                  
                  53,000
                  
                  
                  
                  64,000Depreciation
      and amortization
                  
                  
                  824,000
                  
                  
                  
                  931,000Straight-line
      rents and amortization of acquired above (below) market leases,
      net
                  
                  
                  (52,000
                  )
                  
                  
                  (44,000
                  )Provision
      for bad debt
                  
                  
                  (77,000
                  )
                  
                  
                  136,000Change
      in operating assets and liabilities:Tenant
      and other receivables
                  
                  
                  140,000
                  
                  
                  
                  (129,000
                  )Prepaid
      and other assets
                  
                  
                  28,000
                  
                  
                  
                  83,000Payable
      and accrued liabilities
                  
                  
                  452,000
                  
                  
                  
                  362,000Payable
      to related parties
                  
                  
                  (217,000
                  )
                  
                  
                  (88,000
                  )Prepaid
      rent, security deposit and deferred revenues
                  
                  
                  (68,000
                  )
                  
                  
                  —Net
      cash provided by operating activities
                  
                  
                  1,103,000
                  
                  
                  
                  1,090,000Cash
      flows from investing activitiesReal
      estate additions
                  
                  
                  (9,000
                  )
                  
                  
                  (37,000
                  )Notes
      receivable
                  
                  
                  (250,000
                  )
                  
                  
                  (14,875,000
                  )Notes
      receivable to related parties
                  
                  
                  (364,000
                  )
                  
                  
                  —Net
      cash used in investing activities
                  
                  
                  (623,000
                  )
                  
                  
                  (14,912,000
                  )Cash
      flows from financing activitiesIssuance
      of common stock
                  
                  
                  689,000
                  
                  
                  
                  8,488,000Redeemed
      shares
                  
                  
                  (3,866,000
                  )
                  
                  
                  (2,538,000
                  )Repayment
      of notes payable
                  
                  
                  (47,000
                  )
                  
                  
                  (44,000
                  )Offering
      costs
                  
                  
                  (125,000
                  )
                  
                  
                  (1,058,000
                  )Distributions
      paid to stockholders
                  
                  
                  (1,216,000
                  )
                  
                  
                  (997,000
                  )Distributions
      paid to noncontrolling interest
                  
                  
                  (3,000
                  )
                  
                  
                  (3,000
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (4,568,000
                  )
                  
                  
                  3,848,000Net
      decrease in cash and cash equivalents
                  
                  
                  (4,088,000
                  )
                  
                  
                  (9,974,000
                  )Cash
      and cash equivalents - beginning of period
                  
                  
                  18,673,000
                  
                  
                  
                  26,281,000Cash
      and cash equivalents - end of period
                  
                  $
                  14,585,000
                  
                  
                  $
                  16,307,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                  
                  $
                  223,000
                  
                  
                  $
                  328,000Supplemental
      disclosure of non-cash financing and investing activities:Distribution
      declared not paid
                  
                  $
                  932,000
                  
                  
                  $
                  869,000Receivable
      from transfer agent
                  
                  $
                  —
                  
                  
                  $
                  138,000Distribution
      reinvested
                  
                  $
                  1,504,000
                  
                  
                  $
                  1,445,000Payable
      to related party
                  
                  $
                  10,000
                  
                  
                  $
                  25,000
 
 The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
 
 6
 
 CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 
 UNAUDITED
 1.
              Organization
 
 Cornerstone
Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. Subject to certain restrictions and limitations, our
business is managed pursuant to an advisory agreement by an affiliate,
Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was
formed on November 30, 2004 (the “Advisor”).
 
 Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At March 31, 2010, we
owned a 99.88% general partner interest in the Operating Partnership while the
Advisor owned a 0.12% limited partnership interest.  We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership.  Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements.  All intercompany accounts and
transactions have been eliminated in consolidation.
 
 2.
              Public
      Offerings
 
 On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan.  On June 10,
2009, SEC declared our follow-on offering effective and we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares
for sale pursuant to our dividend reinvestment plan.
 
 We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as our dealer manager for our offerings.  PCC is responsible
for marketing our shares being offered pursuant to the offerings. We used the
net proceeds from our initial public offering to invest primarily in investment
real estate including multi-tenant industrial real estate located in major
metropolitan markets in the United States.  We intend to use the net
proceeds from our follow-on offering to pay down temporary acquisition financing
on our existing assets and to acquire additional real estate investments. As
of March 31, 2010, a total of 20.8 million shares of our common
stock had been sold in both offerings for aggregate gross proceeds of
approximately $166.6 million, excluding approximately 1.8 million shares that
were issued pursuant to our distribution reinvestment plan and approximately 1.6
million shares issued in connection with the special 10% stock dividend related
to our initial public offering, reduced by approximately 1.3 million shares
pursuant to our stock repurchase program.
 
 3.
              Summary
      of Significant Accounting Policies
 
 The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more
information regarding our critical accounting policies and estimates please
refer to "Summary of Significant Accounting Policies” contained in our Annual
Report on Form 10-K for the year ended December 31, 2009. There have been no
material changes to the critical accounting policies previously disclosed in
that report except as discussed below.
 
 Interim
Financial Information
 
 The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC.  Certain information and footnote
disclosures required for annual financial statements have been condensed or
excluded pursuant to SEC rules and regulations.  Accordingly, the
interim condensed consolidated financial statements do not include all of the
information and footnotes required by GAAP for complete financial
statements.  The accompanying financial information reflects all
adjustments which are, in the opinion of our management, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year.  The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the 2009 Annual Report on Form 10-K
as filed with the SEC.  Operating results for the three months ended
March 31, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010.
 
 7
 Fair
Value of Financial Instruments
  Financial
Accounting Standards Board Accounting Standard Codification (“ASC”) 825-10,
Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.
  We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.
  Our
condensed consolidated balance sheets include the following financial
instruments: cash and cash equivalents, notes receivable, note receivable from
related party, tenant and other receivables, other assets, deferred costs and
deposits, deferred financing costs, payable to related parties, prepaid rent,
security deposits and deferred revenue, accounts payable and accrued
liabilities, distribution payable and notes payable. We consider the carrying
values of cash and cash equivalents, tenant and other receivables, deferred
financing costs, other assets, deferred costs and deposits, payable to related
parties, prepaid rent, security deposits and deferred revenue, accounts payable
and accrued liabilities to approximate fair value for these financial
instruments because of the short period of time between origination of the
instruments and their expected payment. The fair value of the note payable to
related party is not determinable due to the related party nature of the note
payable.
  The fair
value of notes payable is estimated using lending rates available to
us for financial instruments with similar terms and maturities and had been
estimated to approximate the carrying value at March 31, 2010. The fair
value of notes receivable is estimated using current rates at which management
believes similar loans would be made and had been calculated to approximate the
carrying value. The fair value of notes receivable is estimated to approximate
the carrying value at March 31, 2010.
 
 Recently
Issued Accounting Pronouncements
 
 In
June 2009, the Financial Accounting Standard Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB
Interpretation No. 46(R),” which was primarily codified into Topic 810 –
“Consolidation” in the ASC.  The new guidance impacts the
consolidation guidance applicable to VIEs and among other things require a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a VIE, continuous assessments of whether a company is the primary
beneficiary of a VIE and enhanced disclosures about a company’s involvement with
a VIE. We adopted this guidance on January 1, 2010 and it did not have a
material impact on our condensed consolidated financial statements and
disclosures.
  In
January 2010, the FASB issued an Accounting Standard Update (“ASU”)
2010-02, Consolidation –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification, to address implementation issues associated with the
accounting for decreases in the ownership of a subsidiary.  The new
guidance clarified the scope of the entities covered by the guidance related to
accounting for decreases in the ownership of a subsidiary and specifically
excluded in-substance real estate or conveyances of oil and gas mineral rights
from the scope.  Additionally, the new guidance expands the disclosures
required for a business combination achieved in stages and deconsolidation of a
business or nonprofit activity.  The new guidance became effective for
interim and annual periods ending on or after December 31, 2009 and must be
applied on a retrospective basis to the first period that an entity adopted the
new guidance related to noncontrolling interests.  We adopted this guidance
on January 1, 2010 and it did not have a material impact on our condensed
consolidated financial statements and disclosures.
 
 In January 2010, the FASB issued
ASU2010-06,Improving
Disclosures about Fair Value Measurements, or ASU2010-06. ASU2010-06 amends ASC Topic 820 to require
additional disclosure and clarify existing disclosure requirements about fair
value measurements. ASU2010-06 requires entities to provide
fair value disclosures by each class of assets and liabilities, which may be a
subset of assets and liabilities within a line item in the statement of
financial position. The additional requirements also include disclosure
regarding the amounts and reasons for significant transfers in and out of Level
1 and 2 of the fair value hierarchy and separate presentation of purchases,
sales, issuances and settlements of items within Level 3 of the fair value
hierarchy. The guidance clarifies existing disclosure requirements regarding the
inputs and valuation techniques used to measure fair value for measurements that
fall in either Level 2 or Level 3 of the hierarchy. ASU2010-06 is
effective for interim and annual reporting periods beginning after
December 15, 2009 except for the disclosures about purchases, sales,
issuances and settlements which is effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We
adopted ASU2010-06 on January 1, 2010, which
only applies to our disclosures on the fair value of financial instruments. The
adoption of ASU2010-06 did not have a material impact
on our footnote disclosures.
  In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain
Recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent
Events).  ASU 2010-09 clarifies that subsequent events should
be evaluated through the date the financial statements are issued. In addition,
this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for
financial statements issued subsequent to February 24, 2010. We adopted this
guidance on February 24, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
 
 8
 In June 2009, the FASB issued Statement of Financial
Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation
No. 46(R),” which was primarily codified into Topic 810 – “Consolidation”
in the ASC.  The new guidance impacts the consolidation guidance
applicable to VIEs and among other things require a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE, continuous
assessments of whether a company is the primary beneficiary of a VIE and
enhanced disclosures about a company’s involvement with a VIE. We adopted
this guidance on January 1, 2010 and it did not have a material impact on our
condensed consolidated financial statements.
   4.
              Investments
      in Real Estate
 
 As of
March 31, 2010, our portfolio consists of twelve properties which were
approximately 80.34% leased.  The following table provides summary
information regarding our properties.
 
 Property
                
                
                Location
                
                
                Date
      Purchased
                
                
                Square
                  Footage
                
                
                Purchase
                  Price
                
                
                Associated
      Debt
                
                
                March
      31, 2010
                  %
      Leased2111
      South Industrial Park
                
                
                North
      Tempe, AZ
                
                
                June
      1, 2006
                
                
                
                26,800
                
                
                $
                1,975,000
                
                
                $
                —
                
                
                
                73.13
                %Shoemaker
      Industrial Buildings
                
                
                Santa
      Fe Springs, CA
                
                
                June
      30, 2006
                
                
                
                18,921
                
                
                
                2,400,000
                
                
                
                —
                
                
                
                100.00
                %15172
      Goldenwest Circle
                
                
                Westminster,
      CA
                
                
                December
      1, 2006
                
                
                
                102,200
                
                
                
                11,200,000
                
                
                
                2,824,000
                
                
                
                100.00
                %20100
      Western Avenue
                
                
                Torrance,
      CA
                
                
                December
      1, 2006
                
                
                
                116,433
                
                
                
                19,650,000
                
                
                
                4,701,000
                
                
                
                51.46
                %Mack Deer Valley
                
                
                Phoenix,
      AZ
                
                
                January
      21, 2007
                
                
                
                180,985
                
                
                
                23,150,000
                
                
                
                3,868,000
                
                
                
                100.00
                %Marathon Center
                
                
                Tampa
      Bay, FL
                
                
                April
      2, 2007
                
                
                
                52,020
                
                
                
                4,450,000
                
                
                
                —
                
                
                
                72.29
                %Pinnacle Park Business Center
                
                
                Phoenix,
      AZ
                
                
                October
      2, 2007
                
                
                
                159,661
                
                
                
                20,050,000
                
                
                
                4,553,000
                
                
                
                100.00
                %Orlando Small Bay
      PortfolioCarter
                
                
                Winter
      Garden, FL
                
                
                November
      15, 2007
                
                
                
                49,125
                
                
                
                4,624,000
                
                
                
                
                
                
                
                88.55
                %Goldenrod
                
                
                Orlando,
      FL
                
                
                November
      15, 2007
                
                
                
                78,646
                
                
                
                7,402,000
                
                
                
                
                
                
                
                66.15
                %Hanging
      Moss
                
                
                Orlando,
      FL
                
                
                November
      15, 2007
                
                
                
                94,200
                
                
                
                8,866,000
                
                
                
                
                
                
                
                93.42
                %Monroe
      South
                
                
                Sanford,
      FL
                
                
                November
      15, 2007
                
                
                
                172,500
                
                
                
                16,236,000
                
                
                
                
                
                
                
                64.40
                %394,471
                
                
                
                37,128,000
                
                
                
                15,860,000
                
                
                
                74.70
                %Monroe North
      CommerCenter
                
                
                Sanford,
      FL
                
                
                April
      17, 2008
                
                
                
                181,348
                
                
                
                14,275,000
                
                
                
                7,031,000
                
                
                
                64.47
                %1,232,839
                
                
                $
                134,278,000
                
                
                $
                38,837,000
                
                
                
                80.34
                %
  As of
March 31, 2010, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
 
 Land
                      
                      
                      Buildings
      and Improvements
                      
                      
                      Acquired
      Above-Market Leases
                      
                      
                      In-Place
      Lease Value
                      
                      
                      Acquired
      Below-Market LeasesInvestment
      in real estate
                      
                      $
                      38,604,000
                      
                      
                      $
                      94,522,000
                      
                      
                      $
                      1,666,000
                      
                      
                      $
                      1,971,000
                      
                      
                      $
                      (824,000
                      )Less:
      accumulated depreciation and amortization
                      
                      
                      —
                      
                      
                      
                      (7,568,000
                      )
                      
                      
                      (1,458,000
                      )
                      
                      
                      (1,485,000
                      )
                      
                      
                      630,000Net
      investments in real estate and related lease intangibles
                      
                      $
                      38,604,000
                      
                      
                      $
                      86,954,000
                      
                      
                      $
                      208,000
                      
                      
                      $
                      486,000
                      
                      
                      $
                      (194,000
                      )
 
 
 As of
December 31, 2009, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
 
 Land
                      
                      
                      Buildings
      and Improvements
                      
                      
                      Acquired
      Above-Market Leases
                      
                      
                      In-Place
      Lease Value
                      
                      
                      Acquired
      Below-Market LeasesInvestment
      in real estate
                      
                      $
                      38,604,000
                      
                      
                      $
                      94,513,000
                      
                      
                      $
                      1,666,000
                      
                      
                      $
                      1,971,000
                      
                      
                      $
                      (824,000
                      )Less:
      accumulated depreciation and amortization
                      
                      
                      —
                      
                      
                      
                      (6,842,000
                      )
                      
                      
                      (1,419,000
                      )
                      
                      
                      (1,414,000
                      )
                      
                      
                      607,000Net
      investments in real estate and related lease intangibles
                      
                      $
                      38,604,000
                      
                      
                      $
                      87,671,000
                      
                      
                      $
                      247,000
                      
                      
                      $
                      557,000
                      
                      
                      $
                      (217,000
                      )
  Depreciation
expense associated with buildings and improvements and site improvements for the
three months ended March 31, 2010 and 2009 was $726,000 and $738,000,
respectively.
 
 9
 Net
amortization expense associated with the lease intangible assets and liabilities
for the three months ended March 31, 2010 and 2009 was $87,000 and
$166,000, respectively.  Estimated net amortization expense for April
1, 2010 through December 31, 2010 and each of the four subsequent years is as
follows:
 
 Lease
      Intangibles AmortizationApril
      1, 2010 to December 31, 2010
                      
                      $
                      210,0002011
                      
                      $
                      164,0002012
                      
                      $
                      65,0002013
                      
                      $
                      41,0002014
                      
                      $
                      12,0002015
      and thereafter
                      
                      $
                      10,000
   The
estimated useful lives for lease intangibles range from approximately one month
to nine years.  As of March 31, 2010, the weighted-average
amortization period for in-place leases, acquired above market leases and
acquired below market leases were 4.1 years, 4.8 years and 3.5 years,
respectively.
 
 Leasing
Commissions
 
 Leasing
commissions are stated at cost and amortized on a straight-line basis over the
related lease term.  As of March 31, 2010 and December 31, 2009, we
had recorded approximately $489,000 and $466,000 in leasing commissions,
respectively. Amortization expense for the three months ended March 31, 2010 and
2009 was approximately $27,000 and $38,000, respectively.
 
 5.
              Allowance
      for Doubtful Accounts
 
 Our
allowance for doubtful accounts was $414,000 and $491,000 as of March 31, 2010
and December 31, 2009, respectively.
 
 6.
              Concentration
      of Credit Risk
 
 Financial
instruments that potentially subject us to a concentration of credit risk are
primarily cash investments.  Cash is generally invested in government
backed securities and investment-grade short-term instruments and the amount of
credit exposure to any one commercial issuer is limited.  Currently,
the Federal Deposit Insurance Corporation, or FDIC, generally insures amounts up
to $250,000 per depositor per insured bank, which is scheduled to be reduced to
$100,000 after December 31, 2013.  As of March 31, 2010, we had cash
accounts in excess of FDIC insured limits.
 
 As of
March 31, 2010, we owned three properties in the state of California, three
properties in the state of Arizona and six properties in the state of
Florida.  Accordingly, there is a geographic concentration of risk
subject to fluctuations in each State’s economy.
 
 7.
              Notes
      Receivable
 
 In May
2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two
real estate operating companies, Servant Investments, LLC and Servant Healthcare
Investments, LLC (collectively, “Servant”). In May 2010, the loan
commitment was reduced to $8.75 million.  The loans mature on May 19,
2013.  Servant is party to an alliance with the managing member of our
Advisor.  As of March 31, 2010, advances to Servant were
approximately $7.9 million.  For the three months ended March 31, 2010 and
2009, interest income from the notes receivable was $276,000 and $106,000,
respectively. On a quarterly basis, we evaluate the collectability of our notes
receivable.  Our evaluation of collectability involves judgment,
estimates and a review of the Servant business models and their future
operations.  As of March 31, 2010 and December 31, 2009, note
receivable had a balance of $3.1 million and $2.9 million,
respectively.
 
 8.
              Note
      Receivable from Related Party
 
 On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly-owned subsidiary of
Cornerstone Healthcare Plus REIT, Inc., a publicly offered, non-traded REIT
sponsored by affiliates of our sponsor. The loan was to mature on January
21, 2010 subject to the borrower's right to repay the loan, in whole or in part,
on or before January 21, 2010 without incurring any prepayment
penalty.  On December 16, 2009, Caruth Haven L.P. repaid the full loan
amount.  For the three months ended March 31, 2010 and 2009 interest
income from this note receivable was approximately $0 million and $0.2 million,
respectively.
 
 On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the island of Nantucket, MA.  The loan
matures on January 1, 2015, with no option to extend and bears interest at a
fixed rate of 8.0% for the term of the loan.  Interest will be paid
monthly with principal due at maturity.  Under the terms of the loan,
we are entitled to receive additional interest in the form of a 40%
participation in the "shared appreciation" of the property, at loan maturity,
calculated based on the net sales proceeds if the property is sold, or the
property's appraised value, less ordinary disposition costs, if the property has
not been sold by the time the loan matures. Prepayment of the loan is not
permitted without our consent and the loan is not assumable. As of March 31,
2010, the loan balance was approximately $7.3 million. For the three months
ended March 31, 2010 and 2009, interest income from this mortgage loan
commitment was approximately $0.1 million and $0 million,
respectively.
  10
  9.
              Payable
      to Related Parties
 
 Payable
to related parties at March 31, 2010 and December 31, 2009 consists of offering
costs, acquisition fees, and expense reimbursement payable and sales commissions
and dealer manager fees incurred to the Advisor and PCC.
  10.
              Stockholders’
      Equity
 
 Common
Stock
  Our
articles of incorporation authorize the issuance of 290,000,000 shares of common
stock with a par value of $0.001 and 10,000,000 shares of preferred stock with a
par value of $0.001.  As of March 31, 2010, we had sold approximately
20.8 million shares of common stock for total gross proceeds of approximately
$166.6 million.  As of December 31, 2009, we had sold approximately
20.8 million shares of common stock for a total of approximately $165.9 million
of gross proceeds.
 
 Distributions
 
 We have
adopted a distribution reinvestment plan that allows our stockholders to have
dividends and other distributions otherwise distributable to them invested in
additional shares of our common stock.  We have registered 21,100,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan in connection with our follow-on offering.  The purchase price
per share is 95% of the price paid by the purchaser for our common stock, but
not less than $7.60 per share.  As of March 31, 2010 and December 31,
2009, approximately 1.8 million and 1.6 million shares, respectively, had been
issued under the distribution reinvestment plan.
 
 The
following are the distributions declared during the three months ended
March 31, 2010 and 2009:
 
 Distribution
      DeclaredPeriod
                            
                            Cash
                            
                            Reinvested
                            
                            TotalFirst
      quarter 2009 (1)
                            
                            
                            $
                            1,021,000
                            
                            
                            $
                            1,463,000
                            
                            
                            $
                            2,484,000First
      quarter 2010
                            
                            
                            $
                            1,221,000
                            
                            
                            $
                            1,490,000
                            
                            
                            $
                            2,711,000
 
 (1)
              Distributions
      declared represented a return of capital for tax purposes. In order to
      meet the requirements for being treated as a REIT under the Internal
      Revenue Code, we must pay distributions to our shareholders each taxable
      year equal to at least 90% of our net ordinary taxable
      income.  Some of our distributions have been paid from sources
      other than operating cash flow, such as offering
      proceeds.  Until proceeds from our offering are fully invested
      and generating operating cash flow sufficient to fully cover distributions
      to stockholders, we intend to pay a portion of our distributions from the
      proceeds of our offering or from borrowings in anticipation of future cash
      flow.
 
 The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis.  The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deems relevant.  We may amend or
terminate the distribution reinvestment plan for any reason at any time upon 10
days prior written notice to participants.
 
 Special
10% Stock Distribution
 
 Our board
of directors authorized a special 10% stock distribution to be paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering, which was achieved on July 23, 2008. All
stockholders of record on July 23, 2008 received one additional share of stock
for every 10 shares of stock they owned as of that date.  For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase price of
such shares will be deemed to be equal to the purchase price paid by the
stockholder for shares held by the stockholder immediately prior to the special
10% stock distribution.
 
 11
  Stock
Repurchase Program
 
 We have
adopted a stock repurchase program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death.  Under our current stock repurchase program, the
repurchase price will vary depending on the purchase price paid by the
stockholder and the number of years the shares are held.  Our
board of directors may amend, suspend or terminate the program at any time on 30
days prior notice to stockholders. We have no obligation to repurchase our
stockholders’ shares.  Until September 21, 2012 our stock repurchase
program limits the number of shares of stock we can redeem (other than
redemptions due to death of a stockholder) to those that we can purchase with
net proceeds from the sale of stock under our distribution reinvestment plan in
the prior calendar year. Until September 21, 2012 we do not intend to redeem
more than the lesser of (i) the number of shares that could be redeemed using
the proceeds from our distribution reinvestment plan in the prior calendar year
or (ii) 5% of the number of shares outstanding at the end of the prior calendar
year.
 
 During
the three months ended March 31, 2010, we redeemed shares pursuant to our stock
repurchase program as follows:
 
 Period
                      
                      Total
      Number of Shares Redeemed (1)
                      
                      
                      Average
      Price Paid per ShareJanuary
      2010
                      
                      
                      249,146
                      
                      
                      $
                      7.46February
      2010
                      
                      
                      100,999
                      
                      
                      $
                      7.63March
      2010
                      
                      
                      159,479
                      
                      
                      $
                      7.76509,624
 
  During
the three months ended March 31, 2009, we redeemed shares pursuant to our stock
repurchase program as follows:
  Period
                    
                    Total
      Number of Shares Redeemed (1)
                    
                    
                    Average
      Price Paid per ShareJanuary
      2009
                    
                    
                    40,873
                    
                    
                    $
                    6.77February
      2009
                    
                    
                    137,395
                    
                    
                    $
                    7.51March
      2009
                    
                    
                    152,984
                    
                    
                    $
                    7.61331,252
 
 _________________________
 (1)
              As
      long as our common stock is not listed on a national securities exchange
      or traded on an over -the-counter market, our stockholders who have held
      their stock for at least one year may be able to have all or any portion
      of their shares redeemed in accordance with the procedures outlined in the
      prospectus relating to the shares they
  purchased.
  Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.
  Employee
and Director Incentive Stock Plan
 
 We have
adopted an Employee and Director Incentive Stock Plan (“the Plan”) which
provides for the grant of awards to our directors and full-time employees, as
well as other eligible participants that provide services to us.  We
have no employees, and we do not intend to grant awards under the Plan to
persons who are not directors of ours.  Awards granted under the Plan
may consist of nonqualified stock options, incentive stock options, restricted
stock, share appreciation rights, and distribution equivalent
rights.  The term of the Plan is 10 years.  The total number
of shares of common stock reserved for issuance under the Plan is equal to 10%
of our outstanding shares of stock at any time.
 
 Effective
January 1, 2006, we adopted the provisions of, FASB ASC 718-10, Compensation–Stock Compensation, which
requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair
values.
 
 11.
              Related
      Party Transactions
  Our
company has no employees. The Advisor is primarily responsible for managing our
business affairs and carrying out the directives of our board of
directors.  We have an advisory agreement with the Advisor and a
dealer manager agreement with PCC which entitle the Advisor and PCC to specified
fees upon the provision of certain services with regard to our offerings and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the Advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the Advisor in providing services to us.
 
 12
 Advisory
Agreement
 
 Under the
terms of the advisory agreement, the Advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors.  The advisory agreement
calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of
directors, and to perform other duties.
 
 The fees
and expense reimbursements payable to the Advisor under the advisory agreement
are described below.
 
 Organizational and Offering
Costs.  Organizational
and offering costs of our offerings are being paid by the Advisor on our behalf
and will be reimbursed to the Advisor from the proceeds of our
offerings. Organizational and offering costs consist of all expenses (other
than sales commissions and the dealer manager fee) to be paid by us in
connection with our offerings, including our legal, accounting, printing,
mailing and filing fees, charges of our escrow holder and other accountable
offering expenses, including, but not limited to, (i) amounts to reimburse the
Advisor for all marketing related costs and expenses such as salaries and direct
expenses of employees of the Advisor and its affiliates in connection with
registering and marketing our shares (ii) technology costs associated with our
offering of our shares; (iii) our costs of conducting our training and education
meetings; (iv) our costs of attending retail seminars conducted by participating
broker-dealers; and (v) payment or reimbursement of bona fide due diligence
expenses.  In no event will we have any obligation to reimburse the
Advisor for organizational and offering costs totaling in excess of 3.5% of the
gross proceeds from our initial public offering and follow-on
offering.
 
 As of
March 31, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.3 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.2 million of offering costs which reduce net proceeds of our
offerings.  Of this amount, $4.5 million reduced the net proceeds of
our initial public offering and $0.7 million reduced the net proceeds of our
follow-on offering. As of December 31, 2009, the Advisor and its affiliates
had incurred on our behalf organizational and offering costs totaling
approximately $5.2 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.1 million of
offering costs which reduced net proceeds of our offerings. Of this amount,
$4.5 million reduced the net proceeds of our initial public offering and $0.6
million reduced the net proceeds of our follow-on offering.
 
 Acquisition Fees and
Expenses.  The advisory agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2% of the gross proceeds of our
primary offering.  We will pay the acquisition fees upon receipt of
the gross proceeds from our primary offering.  However, if the
advisory agreement is terminated or not renewed, the Advisor must return
acquisition fees not yet allocated to one of our investments.  In
addition, we are required to reimburse the Advisor for direct costs the Advisor
incurs and amounts the Advisor pays to third parties in connection with the
selection and acquisition of a property, whether or not ultimately
acquired.  For the three months ended March 31, 2010 and 2009, the
Advisor earned approximately $13,000 and $172,000 of acquisition fees,
respectively, which had been expensed as incurred in accordance with our
adoption of FASB ASC 805-10 effective January 1, 2009.
 
 Management
Fees.  The advisory agreement requires us to pay the Advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
book basis carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”). For the three months ended March 31, 2010 and 2009, the
Advisor earned $382,000 and $375,000, respectively of asset management
fees, which were expensed and included in asset management fees in our condensed
consolidated statement of operations.  In addition, we will reimburse
the Advisor for the direct and indirect costs and expenses incurred by the
Advisor in providing asset management services to us, including personnel and
related employment costs related to providing asset management services on our
behalf.  These fees and expenses are in addition to management fees
that we pay to third party property managers. For the three months ended
March 31, 2010 and 2009, the Advisor earned $38,000 and $0, respectively, of
such direct and indirect costs and expenses on our behalf, which are included in
general and administrative expenses in the condensed consolidated statement of
operations.
 
 Operating Expenses. The advisory
agreement provides for reimbursement of the Advisor’s direct and indirect costs
of providing administrative and management services to us.   For
the three months ended March 31, 2010 and 2009, $209,000 and $145,000 of such
costs, respectively, were reimbursed and included in general and administrative
expenses in our condensed consolidated statement of operations. The Advisor
must pay or reimburse us the amount by which our aggregate annual operating
expenses exceed the greater of 2% of our average invested assets or 25% of our
net income unless a majority of our independent directors determine that such
excess expenses were justified based on unusual and non-recurring
factors.
 
 Disposition
Fee.  The advisory agreement provides that if the Advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the Advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties.  This disposition fee may be
paid in addition to real estate commissions paid to non-affiliates, provided
that the total real estate commissions (including such disposition fee) paid to
all persons by us for each property shall not exceed an amount equal to the
lesser of (i) 6% of the aggregate contract sales price of each property or (ii)
the competitive real estate commission for each property.  We will pay
the disposition fees for a property at the time the property is sold. For the
three months ended March 31, 2010 and 2009, we did not incur any of such
fees.
  13
  Subordinated Participation
Provisions.  The Advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or
termination of the Advisor, as follows:
 
 ·
              After
      stockholders have received cumulative distributions equal to $8.00 per
      share (less any returns of capital) plus cumulative, non-compounded annual
      returns on net invested capital, the Advisor will be paid a subordinated
      participation in net sale proceeds ranging from a low of 5% of net sales
      provided investors have earned annualized returns of 6% to a high of 15%
      of net sales proceeds if investors have earned annualized returns of 10%
      or more.
 
 ·
              Upon
      termination of the advisory agreement, the Advisor will receive the
      subordinated performance fee due upon termination.  This fee
      ranges from a low of 5% of the amount by which the sum of the appraised
      value of our assets minus our liabilities on the date the advisory
      agreement is terminated plus total distributions (other than stock
      distributions) paid prior to termination of the advisory agreement exceeds
      the amount of invested capital plus annualized returns of 6%, to a high of
      15% of the amount by which the sum of the appraised value of our assets
      minus its liabilities plus all prior distributions (other than stock
      distributions) exceeds the amount of invested capital plus annualized
      returns of 10% or more.
 
 ·
              In
      the event we list our stock for trading, the Advisor will receive a
      subordinated incentive listing fee instead of a subordinated participation
      in net sales proceeds.  This fee ranges from a low of 5% of the
      amount by which the market value of our common stock plus all prior
      distributions (other than stock distributions) exceeds the amount of
      invested capital plus annualized returns of 6%, to a high of 15% of the
      amount by which the sum of the market value of our stock plus all prior
      distributions (other than stock distributions) exceeds the amount of
      invested capital plus annualized returns of 10% or
  more.
 
 Dealer
Manager Agreement
 
 PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in our primary offerings.  PCC, as dealer manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in our primary offerings.  The dealer manager is
also entitled to receive a reimbursement of bona fide due diligence
expenses up to 0.5% of the gross proceeds from sales in our primary
offerings.  The advisory agreement requires the Advisor to reimburse
us to the extent that offering expenses including sales commissions, dealer
manager fees and organization and offering expenses (but excluding acquisition
fees and acquisition expenses discussed above) in excess of 13.5% of gross
proceeds from our offerings.  For the three months ended March
31, 2010 and 2009, our dealer manager earned sales commission and dealer manager
fees of approximately $53,000 and $849,000, respectively. Dealer manager
fees and sales commissions paid to PCC are a cost of capital raised and, as
such, are included as a reduction of additional paid in capital in the
accompanying condensed consolidated balance sheets.
 
 12.
              Notes
      Payable
 
 On June
30, 2006, we entered into a credit agreement with HSH Nordbank AG, New York
Branch, for a temporary credit facility that we will use during our offering
period to facilitate our acquisitions of properties in anticipation of the
receipt of offering proceeds.  As of March 31, 2010 and December 31,
2009, we had net borrowings of approximately $15.9 million, under the credit
agreement.
 
 The
credit agreement permits us to borrow up to $50.0 million secured by real
properties at a borrowing rate based on 30-day LIBOR plus a margin ranging from
115 to 135 basis points and requires payment of a usage premium of up to 15
basis points and an annual administrative fee.  We may use the entire
credit facility to acquire real estate investments and we may use up to 10% of
the credit facility for working capital.  We are entitled to prepay
the borrowings under the credit facility at any time without
penalty.  This credit agreement will mature on June 30, 2010. The
repayment of obligations under the credit agreement may be accelerated in the
event of a default, as defined in the credit agreement. The facility contains
various covenants including financial covenants with respect to consolidated
interest and fixed charge coverage and secured debt to secured asset
value.  As of March 31, 2010, we were in compliance with all these
financial covenants.  During the three months ended March 31, 2010 and
2009, we incurred $53,000 and $64,000 of interest expense, respectively, related
to the credit agreement. As of March 31, 2010 and December 31, 2009, we had net
borrowings of approximately $15.9 million, under the credit
agreement.
 
 On
November 13, 2007, we entered into a loan agreement with Wachovia Bank, National
Association to facilitate the acquisition of properties during our offering
period.  Pursuant to the terms of the loan agreement, we may borrow
$22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured
by specified real estate properties.  The loan agreement has a
maturity date of November 13, 2010, and may be prepaid without
penalty.  The entire $22.4 million available under the terms of the
loan was used to finance an acquisition of properties that closed on November
15, 2007.  During the three months ended March 31, 2010 and 2009, we
incurred $64,000 and $104,000 of interest expense, respectively, related to the
loan agreement. As of March 31, 2010 and December 31, 2009, we had net
borrowings of approximately $15.9 million, under the credit
agreement.
  Our HSH
Nordbank credit facility will mature on June 30, 2010 and our loan from Wachovia
Bank will mature on November 13, 2010. We anticipate repaying our existing debt
obligations with cash on hand, proceeds from a new credit facility that will
allow us to consolidate our existing acquisition financing facilities, and
proceeds raised from our offering. We are currently in discussions with lenders
that have expressed an interest in providing our new credit
facility.
  14
  In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”).  Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan.  The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum.  During the
three months ended March 31, 2010 and 2009, we incurred $104,000 and $106,000 of
interest expense, respectively, related to this loan agreement. As of March
31, 2010 and December 31, 2009, we had net borrowings of approximately $7.0
million and $7.1 million, respectively, under the Loan Assumption
Agreement.
  The
principal payments due on Monroe North CommerCenter mortgage loan for April
1, 2010 to December 31, 2010 and each of the subsequent years is as
follows:
 
 Year
                    
                    Principal
      amountApril
      1, 2010 to December 31, 2010
                    
                    $
                    146,0002011
                    
                    $
                    204,0002012
                    
                    $
                    217,0002013
                    
                    $
                    230,0002014
      and thereafter
                    
                    $
                    6,234,000
  In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.6 million as of March 31, 2010 and December 31, 2009,
respectively.  These financing costs have been capitalized and are
being amortized over the life of the agreements.  For the three months
ended March 31, 2010 and 2009, $53,000 and $64,000, respectively, of deferred
financing costs were amortized and included in interest expense in the condensed
consolidated statements of operations. Consistent with our borrowing
policies, during our offering period, we will borrow periodically to acquire
properties and for working capital.  We will determine whether to use
the proceeds of our offerings to repay amounts borrowed under the credit
agreement and loan agreements depending on a number of factors, including the
investments that are available to us for purchase at the time and the cost of
the credit facility.  Following the closing of our offering period, we
will endeavor to repay all amounts owing under the credit agreement and loan
agreements or that are secured by our properties and which have not previously
been paid.  To the extent sufficient proceeds from our
offering are unavailable to repay the indebtedness secured by properties
within a reasonable time following the closing of our offering period as
determined by our board of directors, we may sell properties or raise equity
capital to repay the secured debt, so that we will own our properties with no
permanent acquisition financing.
 
 13.
              Commitments
      and Contingencies
 
 In May
2008, we committed to fund up to $5.0 million to Servant Healthcare Investments
LLC and Servant Investments LLC, two entities that are parties to an alliance
agreement with the managing member of our Advisor.  On January 22,
2009, our board of directors increased our commitment to loan funds up to $10.0
million. On May 10, 2010, this commitment was reduced to $8.75 million. As of
March 31, 2010, we had funded approximately $7.9 million pursuant to this
commitment.
 
 On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA.  As of March 31, 2010, we had funded approximately $7.3 million
pursuant to this commitment.
 
 We
monitor our properties for the presence of hazardous or toxic
substances.  While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows.  Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.
  Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion
of management, these matters are not expected to have a material impact on our
consolidated financial position, results of operations, and cash flows. We are
not presently subject to any material litigation nor, to our knowledge, any
material litigation threatened against us which if determined unfavorably to us
would have a material adverse effect on our cash flows, financial condition or
results of operations.
 
 14.
              Subsequent
      Event
 
 Sale
of Shares of Common Stock
 
 As of
May 12, 2010, we had raised approximately $166.8 million through the
issuance of approximately 20.9 million shares of our common stock under our
initial public offering and follow-on offering, excluding approximately 1.9
million shares that were issued pursuant to our distribution reinvestment plan
and approximately 1.6 million shares issued in connection with the special 10%
stock dividend related to our initial public offering, reduced by approximately
1.5 million shares redeemed pursuant to our stock repurchase
program.
  15
 As
further described in Note 13 above, on May 10, 2010, our board of directors
reduced our commitment to loan funds to $8.75 million from $10.0 million to
entities that are parties to an alliance agreement with the managing member of
our advisor.
  16
  Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.
 
 This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based.  These forward-looking statements generally are identified by
the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar
expressions.  Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements.  Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false.  We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.  All
forward-looking statements should be read in light of the risks identified in
Part II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K
for the year ended December 31, 2009 filed with the Securities and Exchange
Commission (the “SEC”).
 
 Overview
 
 Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. We have no paid employees and are externally managed
pursuant to an advisory agreement by an affiliate, Cornerstone Realty Advisors,
LLC, a Delaware limited liability company that was formed on November 30, 2004
(the “Advisor”).
 
 Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At March 31, 2010, we
owned 99.88% general partner interest in the Operating Partnership while the
Advisor owned a 0.12 % limited partnership interest.  We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership.  Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements.  All intercompany accounts and
transactions have been eliminated in consolidation.
 
 On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan.  On June 10,
2009, we commenced a follow-on offering of up to 77,350,000 shares of our
common stock, consisting of 56,250,000 shares for sale pursuant to a primary
offering and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan.  We retained Pacific Cornerstone Capital, Inc. (“PCC”), an
affiliate of the Advisor, to serve as the dealer manager for our
offerings.  PCC is responsible for marketing our shares currently
being offered pursuant to the follow-on offering.
 
 We used
the net proceeds from our initial public offering to invest primarily in
investment real estate including multi-tenant industrial real estate located in
major metropolitan markets in the United States.  We intend to use the
net proceeds from our follow-on offering to pay down temporary acquisition
financing on our existing assets and to acquire additional real estate
investments.
 
 As of
March 31, 2010, we had raised approximately $166.6 million of gross proceeds
from the sale of approximately 20.8 million shares of our common stock in our
initial public offering and follow-on offering and had acquired twelve
properties.
 
 Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to increase rental income and other earned income from
leases by increasing rental rates and occupancy levels and control operating and
other expenses. Our operations are impacted by property specific, market
specific, general economic and other conditions.
  Market
Outlook – Real Estate and Real Estate Finance Markets
 
 In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.
  As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults are on the rise,
while demand for commercial real estate space is contracting, resulting in a
highly competitive leasing environment, downward pressure on both occupancy and
rental rates, and an increase in leasing incentives. Mortgage delinquencies and
defaults have trended upward, with many industry analysts predicting significant
credit defaults, foreclosures and principal losses.
  17
 From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed-rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.
 
 Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.
  The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our
tenants’ businesses. As a result, our tenants are finding it more difficult to
meet current lease obligations and forcing them to negotiate favorable lease
terms upon renewal in order for their businesses to remain viable. Lower lease
rates, increased rent concessions and higher occupancy have resulted in lower
current cash flow. Additional declines in rental rates, slower or potentially
negative net absorption of leased space and additional rental concessions,
including free rent, would result in additional decreases in cash
flows.
  Based on
these market outlooks, we may limit capital expenditures during 2010 compared to
prior years by focusing on those capital expenditures that preserve value.
However, if we experience an increase in vacancies, we may incur costs to
re-lease properties and pay leasing commissions.
  Our cash
position remains strong. Despite the current economic crisis, we expect to have
sufficient cash available from operations and the proceeds of our offerings and
borrowings to fund distributions and capital improvements in the next twelve
months.
 
 Critical
Accounting Policies
  There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC.
 
 Results
of Operations
 
 Our
results of operations are not indicative of those expected in future periods as
we expect that rental income, tenant reimbursements, operating expenses, asset
management fees, depreciation, amortization, and net income will each increase
in future periods as a result of assets acquired since inception and
anticipation of future acquisition of real estate assets.
 
 As of
March 31, 2010, we owned twelve properties.  These properties were
acquired from June of 2006 through April 2008.
 
 In
January 2009, we made a $14.0 million mortgage loan to Caruth Haven L.P, a
wholly-owned subsidiary of Cornerstone Healthcare Plus REIT, Inc., sponsored by
affiliates of our sponsor.  The loan was to mature on January 21,
2010.  On December 16, 2009, Caruth Haven L.P. fully repaid the
loan.
 
 On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the island of Nantucket, MA.  The loan
matures on January 1, 2015, with no option to extend and bears interest at a
fixed rate of 8.0% for the term of the loan.  Interest will be paid
monthly with principal due at maturity.  Under the terms of the loan,
we are entitled to receive additional interest in the form of a 40%
participation in the "shared appreciation" of the property, at loan maturity,
calculated based on the net sales proceeds if the property is sold, or the
property's appraised value, less ordinary disposition costs, if the property has
not been sold by the time the loan matures. Prepayment of the loan is not
permitted without our consent and the loan is not assumable.
 
 18
  Three
months ended March 31, 2010 and 2009
 
 Rental
revenues and tenant reimbursements decreased to $2.4 million for the first
quarter of 2010 from $2.6 million for the first quarter of 2009. The decrease is
primarily due to lower occupancy rates, lower lease rental rates and longer
lease up periods for vacant units as a result of the current economic
environment partially offset by termination payments from former
tenants.
 
 Interest
income from notes receivable increased to $0.4 million for the first
quarter of 2010 from $0.3 million for the first quarter of 2009. The increase is
due to the higher notes receivable balances for the Servant notes receivable and
the new note receivable to Nantucket Acquisition LLC, offset by the
repayment of the mortgage loan to Caruth Haven L.P.in December
2009.
  Property
operating and maintenance expense decreased to $0.7 million for the first
quarter of 2010 from $0.9 million for the first quarter of 2009. The decrease is
primarily due to lower bad debt expense resulting from recovery of prior year
delinquent payments partially offset by an increase in property taxes and
repair and maintenance costs.
 
 General
and administrative expense increased to $0.6 million for the first quarter
of 2010 from $0.5 million for the first quarter of 2009. The increase is
primarily due to increased accounting and audit fees, administrative and
management services provided by the Advisor and board of director
expenses.
 
 Asset
management fees were comparable for the first quarter of 2010 and
2009.
 
 Real
estate acquisition costs decreased to $6,000 for the first quarter of 2010 from
$172,000 for the first quarter of 2009.  The decrease is due to a
reduction in the amount of equity raised in our public offering, resulting in
reduced acquisition fee reimbursement to the Advisor.
 
 Depreciation
and amortization decreased to $ 0.8 million for the first quarter of
2010 from $0.9 million for the first quarter of 2009.  The
decrease is due to prior year acceleration of in-place lease amortization
due to early lease terminations and prior year end real estate impairment
resulting in a lower depreciation cost basis.
 
 Interest
expense decreased to $0.3 million for the first quarter of 2010 from $0.4
million for the first quarter of 2009.  The decrease is primarily due
to a lower debt balance as a result of a $6.6 million principal reduction in the
fourth quarter of 2009.
 
 Liquidity
and Capital Resources
 
 We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations.  We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements and leasing
commissions, operating expenses, interest expense on any outstanding
indebtedness, cash distributions, and for the repayment of notes payable.
In addition, we will continue to use temporary debt financing to facilitate our
acquisitions of properties in anticipation of receipt of offering
proceeds.
  On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009.  On June 10, 2009, we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares
for sale pursuant to our dividend reinvestment plan. As of March 31, 2010, a
total of approximately 20.8 million shares of our common stock had been sold in
our combined offerings for aggregate gross proceeds of approximately $166.6
million.
 
 As of
March 31, 2010, we had approximately $14.6 million in cash and cash equivalents
on hand and approximately $34.1 million available under our acquisition credit
facility with HSH Nordbank.
  Our HSH
Nordbank credit facility will mature on June 30, 2010 and our loan from Wachovia
Bank will mature on November 13, 2010. We anticipate repaying our existing debt
obligations with cash on hand, proceeds from a new credit facility that will
allow us to consolidate our existing acquisition financing facilities, and
proceeds raised from an offering.  We are currently in discussions
with lenders that have expressed an interest in providing our new credit
facility. Our liquidity will increase as additional subscriptions are accepted
and decrease as net offering proceeds are expended in connection with the
acquisition and operation of properties.
 
 There may
be a delay between the sale of our shares and the purchase of
properties.  During this period, net offering proceeds will be
temporarily invested in short-term, liquid investments that could yield lower
returns than investments in real estate.
 
 Until
proceeds from our offerings are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a
portion of our distributions from the proceeds of our offering or from
borrowings in anticipation of future cash flow.  For the three months
ended March 31, 2010, cash distributions to stockholders were paid from a
combination of cash flow from operations and net proceeds raised from our
offerings.
 
 19
 Distributions
paid for the three months ended March 31, 2010 were approximately $2.7 million.
Of this amount, approximately $1.5 million was reinvested through our dividend
reinvestment plan and approximately $1.2 million was paid in cash to
stockholders. Of the total cash distributions paid for the three months ended
March 31, 2010, 91.0% was funded from cash flow from operations and 9.0% of the
total cash amount distributed was funded from proceeds from our
offerings.
 
 As of
March 31, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.3 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.2 million of offering costs which reduce net proceeds of our
offerings.  Of this amount, $4.5 million reduced the net proceeds of
our initial public offering and $0.7 million reduced the net proceeds of our
follow-on offering.
 
 In no
event will we have any obligation to reimburse the Advisor for these costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering and follow-on public offering.  As of March 31, 2010, we had
reimbursed to the Advisor a total of $4.5 million for our initial public
offering and $0.7 million for our follow-on offering.
  At times
during our offering stage, the amount of organization and offering expenses that
we incur, or that the Advisor and its affiliates incur on our behalf, may exceed
3.5% of the gross offering proceeds then raised, but our Advisor has agreed to
reimburse us to the extent that our organization and offering expenses exceed
this 3.5% limitation at the conclusion of our offerings. In addition, the
Advisor will pay all of our organization and offering expenses that, when
combined with the sales commissions and dealer manager fees that we incur exceed
13.5% of the gross proceeds from our public offerings.
  We will
not rely on advances from the Advisor to acquire properties but the Advisor and
its affiliates may loan funds to special purpose entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our public
offerings to purchase the properties from the special purpose
entity.
 
 We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our offerings.  To the extent sufficient proceeds from
our offerings are unavailable to repay such debt financing within a reasonable
time as determined by our board of directors, we will endeavor to raise
additional equity or sell properties to repay such debt so that we will own our
properties with no permanent financing. Other than the market conditions
discussed above under the caption “Market Outlook—Real Estate and Real Estate
Finance Markets”, we are not aware of any material trends or uncertainties,
favorable or unfavorable, affecting real estate generally, which we anticipate
may have a material impact on either capital resources or the revenues or income
to be derived from the operation of real estate properties.
 
 Financial
markets have recently experienced unusual volatility and uncertainty. Liquidity
has tightened in all financial markets, including the debt and equity
markets.  Our ability to fund property acquisitions or development
projects, as well as our ability to repay or refinance debt maturities could be
adversely affected by an inability to secure financing at reasonable terms, if
at all.
 
 Funds
from Operations and Modified Funds from Operations
 
 Funds
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance.  We compute FFO
in accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”).  NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures, noncontrolling interests and
subsidiaries.  Our FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do.  We believe that FFO is helpful to investors and our management as
a measure of operating performance because it excludes depreciation and
amortization, gains and losses from property dispositions, and extraordinary
items, and as a result, when compared year to year, reflects the impact on
operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income.  Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate diminishes predictably over time.  Since
real estate values have historically risen or fallen with market conditions,
many industry investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting
alone to be insufficient.  As a result, our management believes that
the use of FFO, together with the required GAAP presentations, provide a more
complete understanding of our performance.  Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on
cash held in accounts pending investment, income from portfolio properties and
other portfolio assets, interest rates on acquisition financing and operating
expenses.  FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions.
 
 Changes
in the accounting and reporting rules under GAAP have prompted a significant
increase in the amount of non-cash and non-operating items included in FFO, as
defined. Therefore, we use modified funds from operations (“MFFO”), which
excludes from FFO acquisition expenses to further evaluate our operating
performance. We believe that MFFO, like those already included in FFO, are
helpful as a measure of operating performance because it excludes costs that
management considers more reflective of investing activities or non-operating
changes. We believe that MFFO reflects the overall operating performance of our
real estate portfolio, which is not immediately apparent from reported net loss.
As such, we believe MFFO, in addition to net loss and cash flows from operating
activities, each as defined by GAAP, is a meaningful supplemental performance
measure and is useful in understanding how our management evaluates our ongoing
operating performance.
  20
 Our
calculations of FFO and MFFO for the three months ended March 31, 2010 and 2009
are presented below:
 
 
  Three
      months endedMarch
      31,2010
                    
                    
                    2009Net
      loss
                    
                    $
                    20,000
                    
                    
                    $
                    (225,000
                    )Adjustments:Real
      estate assets depreciation and amortization
                    
                    
                    824,000
                    
                    
                    
                    931,000Funds
      from operations (FFO)
                    
                    
                    844,000
                    
                    
                    
                    706,000Adjustments:Real
      estate acquisition costs
                    
                    
                    6,000
                    
                    
                    
                    172,000Modified
      funds from operations (MFFO)
                    
                    $
                    850,000
                    
                    
                    $
                    878,000Weighted
      average shares outstanding
                    
                    
                    23,003,489
                    
                    
                    
                    20,931,999
 
 
 In
addition, FFO and MFFO may be used to fund all or a portion of certain
capitalizable items that are excluded from these measures, such as capital
expenditures and payments of principal on debt, each of which may impact the
amount of cash available for distribution to our stockholders.
 
 Our
directors have authorized distributions to our stockholders at an annualized
rate of 6.0% based on an $8.00 per share purchase price. Some or all of our
distributions have been paid from sources other than operating cash flow, such
as offering proceeds, cash advanced to us or reimbursements of expenses from the
Advisor and proceeds from loans including those secured by our
assets.  Given the uncertainty arising from numerous factors,
including both the raising and investing of capital in the current financing
environment, ultimate FFO and MFFO performance cannot be predicted with
certainty.  Currently, a portion of our distributions are being paid
from capital in anticipation of future cash flow from our investments. Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to continue to pay a
portion of our distributions from the proceeds of our offering or from
borrowings in anticipation of future cash flow, reducing the amount of funds
that would otherwise be available for investment.
 
 Distributions
      Declared
                  
                  
                  Cash
      Flow fromPeriod
                  
                  Cash
                  
                  
                  Reinvested
                  
                  
                  Total
                  
                  
                  Operations
                  
                  
                  FFO
                  
                  
                  MFFOFirst
      quarter 2009
                  
                  $
                  1,021,000
                  
                  
                  $
                  1,463,000
                  
                  
                  $
                  2,484,000
                  
                  
                  $
                  1,090,000
                  
                  
                  $
                  706,000
                  
                  
                  $
                  878,000First
      quarter 2010
                  
                  $
                  1,221,000
                  
                  
                  $
                  1,490,000
                  
                  
                  $
                  2,711,000
                  
                  
                  $
                  1,103,000
                  
                  
                  $
                  844,000
                  
                  
                  $
                  850,000
 
 
 Contractual
Obligations
 
 The
following table reflects our contractual obligations as of March 31, 2010,
specifically our obligations under long-term debt agreements and notes
receivable:
 
 Payment
      due by periodContractual
      Obligations
                  
                  Total
                  
                  Less
      than 1 year
                  
                  
                  1-3
      years
                  
                  
                  3-5
      years
                  
                  More
      than 5 yearsLong-Term
      Debt Obligations (1)
                  
                  $
                  38,837,000
                  
                  
                  $
                  32,002,000
                  
                  
                  $
                  427,000
                  
                  
                  $
                  6,408,000
                  
                  
                  $
                  -Interest
      expense related to long term debt (2)
                  
                  $
                  2,034,000
                  
                  
                  $
                  642,000
                  
                  
                  $
                  781,000
                  
                  
                  $
                  611,000
                  
                  
                  $
                  -Note
      receivable (3)
                  
                  $
                  850,000
                  
                  
                  $
                  850,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Note
      receivable from related party (4)
                  
                  $
                  700,000
                  
                  
                  $
                  700,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
 _________________________
 
 (1) This
represents the sum of a credit agreement with HSH Nordbank, AG and loan
agreements with Wachovia Bank National Association and Transamerica Life
Insurance Company.
  21
  (2)
Interest expense related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wachovia Bank National Association are calculated based on the
loan balances outstanding at March 31, 2010, one month LIBOR at March 31, 2010
plus appropriate margin ranging from 1.15% and 1.40%.  Interest
expense related to loan agreement with Transamerica Life Insurance Company is
based on a fixed rate of 5.89% per annum.
 
 (3) We
have committed to funding $8.75 million to entities that are parties to an
alliance with the managing member of the Advisor.  As of March 31,
2010, we had funded approximately $7.9 million of this commitment.
 
 (4) On
December 14, 2009, we committed to fund an $8.0 million first mortgage to a
related party, an affiliate of our Advisor.  As of March 31, 2010, we
had funded approximately $7.3 million of this commitment.
 
 
 Item
      3.
              Quantitative
      and Qualitative Disclosures about Market
Risk
 
 Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments.  We invest our cash and cash
equivalents in government backed securities and FDIC insured savings account
which, by its nature, are subject to interest rate
fluctuations.  However, we believe that the primary market risk to
which we will be exposed is interest rate risk relating to our credit
facilities.
 
 Our
credit facility with HSH Nordbank AG, permits us to borrow up to $50,000,000
secured by real property at a borrowing rate based on LIBOR plus a margin
ranging from 1.15% to 1.35% and requires payment of a usage premium of up to
0.15% and an annual administrative fee.  We may use the entire credit
facility to acquire real estate investments and we may use up to 10% of the
credit facility for working capital.  We are entitled to prepay the
obligations at any time without penalty.  The repayment of obligations
under the credit agreement may be accelerated in the event of a default, as
defined in the credit agreement.  The credit facility will mature on
June 30, 2010. As of March 31, 2010, we had a balance of approximately $15.9
million outstanding on this credit facility.
 
 Our loan
agreement entered with Wachovia Bank, National Association permits us to borrow
$22.4 million at an interest rate 140 basis points over 30-day LIBOR, secured by
specified real estate properties.  The loan agreement will mature on
November 13, 2010. As of March 31, 2010, we had a balance of
approximately $15.9 million outstanding under this loan agreement. The loan
may be prepaid without penalty.
 
 As of
March 31, 2010, we had borrowed approximately $31.8 million under our variable
rate credit facility and loan agreement.  An increase in the variable
interest rate on the facilities constitutes a market risk as a change in rates
would increase or decrease interest incurred and therefore cash flows available
for distribution to shareholders.  Based on the debt outstanding as of
March 31, 2010, a 1% change in interest rates would result in a change in
interest expense of approximately $318,000 per year.
 
 In
addition to changes in interest rates, the value of our real estate is subject
to fluctuations based on changes in the real estate capital markets, market
rental rates for office space, local, regional and national economic conditions
and changes in the credit worthiness of tenants.  All of these factors
may also affect our ability to refinance our debt if necessary.
 
 22
 
 
 Item
      4(T).
              Controls
      and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.  Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
 
 In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 23
 
 PART
II - OTHER INFORMATION
 
 Item
      1A.
              Risk
      Factors
 
 The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2009.
  We
have, and may in the future, pay distributions from sources other than cash
provided from operations.
  Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a substantial
portion of our distributions from the proceeds of our offerings or from
borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced. The distributions paid
for the four quarters ended March 31, 2010 were approximately $10.8
million.  Of this amount approximately $6.1 million was reinvested
through our dividend reinvestment plan and approximately $4.7 million was paid
in cash to stockholders. For the four quarters ended March 31, 2010 cash flow
from operations and FFO were approximately $2.9 million and a loss of $4.3
million, respectively.  Accordingly, for the four quarters ended March
31, 2010, total distributions exceeded cash flow from operations and FFO for the
same period. During the four quarters ended March 31, 2010, total distributions
paid in cash exceeded cash flow from operations and FFO for the same period. We
used offering proceeds to pay cash distributions in excess of cash flow from
operations during the fourth quarters ended March 31, 2010.
  Item
      2.
              Unregistered
      Salesof
      Equity Securities and Use of
Proceeds
 
 (a ) We
did not sell any equity securities that were not registered under the Securities
Act of 1933 during the period covered by this Form 10-Q.
 
 (b) Not
applicable
 
 (c)
During the three months ended March 31, 2010, we redeemed shares pursuant to our
stock repurchase program as follows:
 
 Period
                    
                    Total
      Number of Shares Redeemed (1)
                    
                    
                    Average
      Price Paid per Share
                    
                    
                    Approximate
      Dollar Value of Shares Available That May Yet Be Redeemed Under the
      ProgramJanuary
      2010
                    
                    
                    249,146
                    
                    
                    $
                    7.46
                    
                    
                    $
                    4,198,238February
      2010
                    
                    
                    100,999
                    
                    
                    $
                    7.63
                    
                    
                    $
                    3,427,898March
      2010
                    
                    
                    159,479
                    
                    
                    $
                    7.76
                    
                    
                    $
                    2,190,491509,624
  
 (1)
              As
      long as our common stock is not listed on a national securities exchange
      or traded on an over –the-counter market, our stockholders who have held
      their stock for at least one year may be able to have all or any portion
      of their shares redeemed in accordance with the procedures outlined in the
      prospectus relating to the shares they
  purchased.
 
 On March
23, 2009, our board of directors voted to clarify certain terms of the stock
redemption program purchase limitation.  Until September 21, 2012 our
stock repurchase program limits the number of shares of stock we can redeem
(other than redemptions due to death of a stockholder) to those that we can
purchase with net proceeds from the sale of stock under our distribution
reinvestment plan in the prior calendar year. Until September 21, 2012 we do not
intend to redeem more than the lesser of (i) the number of shares that could be
redeemed using the proceeds from our distribution reinvestment plan in the prior
calendar year or (ii) 5% of the number of shares outstanding at the end of
the prior calendar year.
 
 24
 
 Item
      6.
              Exhibits
  Ex.
                
                Description3.1
                
                Articles
      of Amendment and Restatement of Articles of Incorporation (incorporated by
      reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2005)3.2
                
                Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.3 to
      Post-Effective Amendment No. 1 to the Registration Statement on Form S-11
      (No. 333-121238) filed on December 23, 2005)4.1
                
                Form
      of Subscription Agreement (incorporated by reference to Appendix A to the
      prospectus dated April 16, 2010)4.2
                
                Statement
      regarding restrictions on transferability of shares of common stock (to
      appear on stock certificate or to be sent upon request and without charge
      to stockholders issued shares without certificates) (incorporated by
      reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No.
      333-121238) filed on December 14, 2004)4.3
                
                Distribution
      Reinvestment Plan (incorporated by reference to Appendix B to the
      prospectus dated April 16, 2010)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.
 
 25
 
 SIGNATURES
  
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 17th day of May,
2010.
 
 CORNERSTONE
      CORE PROPERTIES REIT, INC.By:
              /s/
      Terry G. RousselTerry
      G. Roussel,Chief
      Executive OfficerBy:
              /s/
      Sharon C. KaiserSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)
  26