**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**
| **x**                                                                                                                                                                                                                                                                                                                                                            | ** **   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                       | ** **   | ** **                                                                                    |
| **For the quarterly period ended****June 30, 2006**                                                                                                                                                                                                                                                                                                              |
| *** ***                                                                                                                                                                                                                                                                                                                                                     | *** *** | ** **                                                                                    |
| **or**                                                                                                                                                                                                                                                                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                                                       | ** **   | ** **                                                                                    |
| **o**                                                                                                                                                                                                                                                                                                                                                            | ** **   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                       | ** **   | ** **                                                                                    |
| **For the transition period from                             to                           ** |

 

**Commission File Number*** *333-121238

**CORNERSTONE CORE PROPERTIES REIT, INC.**

(Exact name of registrantas specified in its charter)
| **MARYLAND**                                                    | **73-172191**                         |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **1920  MAIN STREET, SUITE 400, IRVINE, CA**                    | **92614**                             |
| (Address of  principal executive offices)                       | (Zip Code)                            |

 

**949-852-1007**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

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

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).
|  | o  Yes | x  No |
|--|------------------|-----------------|

 

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

 

As of August 1, 2006 the Company had 1,516,067 shares issued andoutstanding.

 

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**PART I - FINANCIALINFORMATION**

**Item 1.    Financial Statements (Unaudited)**

**Cornerstone CoreProperties REIT, Inc.**
| Condensed Consolidated Balance  Sheets at June 30, 2006 and December 31, 2005                                        |   |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                 |   |   |
| Condensed Consolidated Statements  of Operations for the Three and Six Months ended June 30, 2006 and June 30,  2005 |   |   |
|                                                                                                                 |   |   |
| Condensed  Consolidated Statement of Stockholders’ Equity (Deficit) for the Six Months  ended June 30, 2006     |   |   |
|                                                                                                                 |   |   |
| Condensed  Consolidated Statements of Cash Flows for the Six Months ended June 30, 2006  and June 30, 2005           |   |   |
|                                                                                                                 |   |   |
| Notes  to Condensed Consolidated Financial  Statements                                                               |   |   |

 

2

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

**CONDENSED CONSOLIDATED BALANCESHEETS**
| ** **                                                                                                                                                            | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                            |       | $                       | 3,166,204  |                        | $          | 117,342 |   |
| Investments in real  estate                                                                                                                                           |       |                    |       |                        |       |
| Land                                                                                                                                                                  |       | 1,540,000               |       | —                      |       |
| Buildings and  improvements, net                                                                                                                                      |       | 2,982,511               |       | —                      |       |
| Intangible lease  assets, net                                                                                                                                         |       | 39,558                  |       | —                      |       |
|                                                                                                                                                                  |       | 4,562,069               |       | —                      |       |
| Deferred acquisition  costs and deposits                                                                                                                              |       | 616,071                 |       | —                      |       |
| Deferred financing  costs                                                                                                                                             |       | 890,147                 |       | —                      |       |
| Receivable from  transfer agent                                                                                                                                       |       | 25,000                  |       | —                      |       |
| Receivable from related  parties                                                                                                                                      |       | —                  |       | 14,500                      |       |
| Other assets, net                                                                                                                                                     |       | 30,308                  |       | 92,557                      |       |
| Total assets                                                                                                                                                          |       | $                       | 9,289,799  |                        | $          | 224,399 |   |
|                                                                                                                                                                  |       |                    |       |                        |       |
| **LIABILITIES,  MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT)**                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Liabilities:                                                                                                                                                          |       |                    |       |                        |       |
| Accounts payable and  accrued expenses                                                                                                                                |       | $                       | 451,010    |                        | $          | 113,592 |   |
| Real estate taxes  payable                                                                                                                                            |       | 12,662                  |       | —                      |       |
| Tenant prepaids and  security deposits                                                                                                                                |       | 34,557                  |       | —                      |       |
| Intangible lease  liability, net                                                                                                                                      |       | 9,636                   |       |                        |       |
| Dividends payable                                                                                                                                                     |       | 83,060                  |       | —                      |       |
| Payable to related  parties                                                                                                                                           |       | 1,927,171               |       | 3,787                       |       |
| Total liabilities                                                                                                                                                     |       | 2,518,096               |       | 117,379                     |       |
| Minority interest                                                                                                                                                     |       | 193,370                 |       | 200,350                     |       |
| Commitments and  contingencies (Note 9)                                                                                                                               |       |                    |       |                        |       |
| Stockholders' equity  (deficit):                                                                                                                                      |       |                    |       |                        |       |
| Common stock, $.001 par  value; 290,000,000 shares authorized; 1,279,758 and 125 shares issued and  outstanding at June 30, 2006, and December 31, 2005, respectively |       | 1,280                   |       | —                      |       |
| Additional paid-in  capital                                                                                                                                           |       | 7,232,137               |       | 1,000                       |       |
| Accumulated deficit                                                                                                                                                   |       | (655,084                | )          | (94,330                     | )          |
| Total stockholder's  equity (deficit)                                                                                                                                 |       | 6,578,333               |       | (93,330                     | )          |
| Total liabilities, minority interest and stockholders’ equity  (deficit)                                                                                         |       | $                       | 9,289,799  |                        | $          | 224,399 |   |

 

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

3

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                | ** ** | **Three Months Ended June 30,**                                                      | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| Revenues:                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Rental revenues                           |       | $                                                                                                        | 16,659     |                                                                                                     | $          | — |   | $ | 16,659 |   | $ | — |   |
|                                      |       | 16,659                                                                                                   |       | —                                                                                                   |       | 16,659 |   | — |   |
| Expenses:                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Property operating and maintenance        |       | 4,229                                                                                                    |       | —                                                                                                   |       | 4,229 |   | — |   |
| General and administrative                |       | 296,020                                                                                                  |       | —                                                                                                   |       | 611,860 |   | — |   |
| Depreciation and amortization             |       | 4,378                                                                                                    |       | —                                                                                                   |       | 4,378 |   | — |   |
|                                      |       | 304,627                                                                                                  |       | —                                                                                                   |       | 620,467 |   | — |   |
| Operating loss                            |       | (287,968                                                                                                 | )          | —                                                                                                   |       | (603,808 | ) | — |   |
|                                      |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Other income, net                         |       | 34,681                                                                                                   |       | —                                                                                                   |       | 36,074 |   | — |   |
|                                      |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Loss before  minority interest            |       | (253,287                                                                                                 | )          | —                                                                                                   |       | (567,734 | ) | — |   |
| Minority interest                         |       | (3,021                                                                                                   | )          | —                                                                                                   |       | (6,980 | ) | — |   |
| Net loss                                  |       | $                                                                                                        | (250,266   | )                                                                                                        | $          | — |   | $ | (560,754 | ) | $ | — |   |
|                                      |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Loss per share -  basic and diluted       |       | $                                                                                                        | (0.36      | )                                                                                                        | $          | — |   | $ | (2.00 | ) | $ | — |   |
|                                      |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Weighted average number  of common shares |       | 693,711                                                                                                  |       | —                                                                                                   |       | 280,021 |   | — |   |

 

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

4

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)For the Six Months Ended June 30, 2006**
| ** **                        | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** **               | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                        | ** ** | ** **            | ** ** | **Common**         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of**    | ** ** | **Stock Par** | ** ** | **Additional**           | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Value**          | ** ** | **Paid-In Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE -  December 31, 2005      |       | 125                   |       | $                  | —     |                     | $          | 1,000 |   | $ | (94,330 | ) | $ | (93,330 | ) |
| Issuance of  common stock         |       | 1,279,633             |       | 1,280              |       | 10,235,460               |       | — |   | 10,236,740 |   |
| Offering costs                    |       |                  |       |               |       | (2,909,218               | )          |   |   | (2,909,218 | ) |
| Stock-based  compensation expense |       | —                |       |               |       | 2,200                    |       |   |   | 2,200 |   |
| Dividends  declared               |       |                  |       |               |       | (97,305                  | )          |   |   | (97,305 | ) |
| Net loss                          |       | —                |       | —             |       | —                   |       | (560,754 | ) | (560,754 | ) |
| BALANCE - June 30, 2006           |       | 1,279,758             |       | $                  | 1,280      |                     | $          | 7,232,137 |   | $ | (655,084 | ) | $ | 6,578,333 |   |

 

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

5

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**
| ** **                                                                   | ** ** | **Six Months Ended June 30,**                                                                    | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                                                                                                    | (560,754   | ) | $ | — |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                                                                                 |       |   |   |
| Depreciation and  amortization                                               |       | 4,378                                                                                                                |       | — |   |
| Amortization of  acquired above/below market leases                          |       | (1,278                                                                                                               | )          | — |   |
| Stock-based  compensation expense                                            |       | 2,200                                                                                                                |       | — |   |
| Minority  interest                                                           |       | (6,980                                                                                                               | )          | — |   |
| Change in  operating assets and liabilities:                                 |       |                                                                                                                 |       |   |   |
| Receivable from related parties                                              |       | 14,500                                                                                                               |       | — |   |
| Other assets                                                                 |       | 62,188                                                                                                               |       | — |   |
| Accounts payable and accrued expenses                                        |       | 165,887                                                                                                              |       | — |   |
| **Net cash used in operating activities**                                    | ** ** | **(319,859**                                                                                                         | **)**      | **—** | ** ** |
|                                                                         |       |                                                                                                                 |       |   |   |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** |
| Real estate acquisitions                                                     |       | (4,555,472                                                                                                           | )          | **—** | ** ** |
| Deferred acquisition costs                                                   |       | (116,071                                                                                                             | )          | **—** | ** ** |
| Escrow deposits                                                              |       | (500,000                                                                                                             | )          | **—** | ** ** |
| **Net cash used for investing activities**                                   | ** ** | **(5,171,543**                                                                                                       | **)**      | **—** | ** ** |
|                                                                         |       |                                                                                                                 |       |   |   |
| **Cash  flows from financing activities:**                                   | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** |
| Issuance of common stock                                                     |       | 10,211,740                                                                                                           |       | — |   |
| Offering costs                                                               |       | (985,834                                                                                                             | )          | — |   |
| Dividends paid                                                               |       | (14,245                                                                                                              | )          | — |   |
| Deferred financing costs                                                     |       | (671,397                                                                                                             | )          | — |   |
| **Net cash provided by financing activities**                                | ** ** | **8,540,264**                                                                                                        | ** ** | **—** | ** ** |
| Net Increase in  Cash and Cash Equivalents                                   |       | 3,048,862                                                                                                            |       | — |   |
| Cash and Cash  Equivalents - beginning of period                             |       | 117,342                                                                                                              |       | — |   |
| Cash and Cash Equivalents-  end of period                                    |       | $                                                                                                                    | 3,166,204  |   | $ | — |   |
|                                                                         |       |                                                                                                                 |       |   |   |
| **Supplemental  Disclosure of Noncash Activities:**                          | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** |
|                                                                         |       |                                                                                                                 |       |   |   |
| Dividends  declared not paid                                                 |       | $                                                                                                                    | 83,060     |   | $ | — |   |
| Receivable from  transfer agent                                              |       | $                                                                                                                    | 25,000     |   | $ | — |   |
| Payables to  related parties                                                 |       | $                                                                                                                    | 1,923,384  |   | $ | — |   |
| Deferred financing  costs payable                                            |       | $                                                                                                                    | 218,750    |   | $ | — |   |

 

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

6

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2006**

**(Unaudited)**

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

Cornerstone Core PropertiesREIT, Inc. (the “CCP REIT” or the “Company”) is a Maryland corporationformed on October 22, 2004, under the General Corporation Law of Marylandfor the purpose of engaging in the business of investing in and owningcommercial real estate.  We are newly formed and are subject to thegeneral risks associated with a start-up enterprise.  We have purchasedtwo properties as of the date of this report. As used in this report, “we” “us”and “our” refer to Cornerstone Core Properties REIT, Inc.

Our advisor is Cornerstone RealtyAdvisors, LLC (the “advisor”), a Delaware limited liability company formed onNovember 30, 2004, and an affiliate of us. The advisor is responsible formanaging our affairs on a day-to-day basis and for identifying and makingacquisitions and investments on our behalf.

On November 9, 2004, Terry G.Roussel, an affiliate of the advisor, purchased 125 shares of common stock for$1,000 and became the initial stockholder of CCP REIT.  Our articles ofincorporation authorize 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.

We conduct all or a portion of ouroperations through Cornerstone Operating Partnership, L.P. (the “OperatingPartnership”), a Delaware limited partnership formed on November 30,2004.  On July 15, 2005, the advisor purchased a 99% limitedpartnership interest in the Operating Partnership for $200,000, and wepurchased a 1% general partner interest for $1,000.  At June 30, 2006, theadvisor’s limited partnership interest in the Operating Partnership was 2.3%and our general partnership interest in the Operating Partnership was 97.7%.Our financial statements and the financial statements of the OperatingPartnership are consolidated in the accompanying condensed consolidatedfinancial statements.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

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

On January 6, 2006, we commenced a public offering of a minimum of125,000 shares (the “Minimum Number of Shares”) and a maximum of 55,400,000shares of common stock, consisting of 44,400,000 shares for sale to the public(the “Primary Offering”) and 11,000,000 shares for sale pursuant to ourdividend reinvestment plan (collectively, the “Offering”).  We retainedPacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the advisor, toserve as the dealer manager for the Offering.  PCC is responsible formarketing our shares being offered pursuant to the Offering.  On February28, 2006, offering proceeds exceeded the $1,000,000 offering minimum andproceeds were released to us from escrow.

Asof June 30, 2006, a total of 1,279,758 shares of our common stock had been soldin the Offering for aggregate gross proceeds of approximately $10.2million.  We intend to invest the net proceedsfrom the Offering primarily in multi-tenant industrial real estate located inmajor metropolitan markets in the United States of America.

7

 

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**3.****                                     ****Summary of SignificantAccounting Policies**

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

***Interim Financial Information***

The accompanying interim condensed consolidated financial statementshave been prepared by our management in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) and in conjunctionwith the rules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures required for annual financialstatements have been condensed or excluded pursuant to SEC rules andregulations. Accordingly, the interim condensed consolidated financialstatements do not include all of the information and footnotes require by GAAPfor complete financial statements. The accompanying financial informationreflects all adjustments, which are, in the opinion of our management, of anormal recurring nature and necessary for a fair presentation of our financialposition, results of operations and cash flows for the interim periods. Interimresults of operations are not necessarily indicative of the results to beexpected for the full year. The accompanying condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and the notes thereto included in the 2005 Annual Reporton Form 10-K as filed with the SEC.Operating results for the three and six months ended June 30, 2006 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2006.

***Cash and Cash Equivalents***

We consider all short-term, highly liquidinvestments that are readily convertible to cash with a maturity of threemonths or less at the time of purchase to be cash equivalents.

***DeferredFinancing Costs***

Deferred financing costs consist of direct costs incurred in connectionwith a credit agreement. (See Note 8). As of June 30, 2006, we had incurredapproximately $890,000 of deferred financing costs which were capitalized and willbe amortized over the term of the credit facility.

***Real Estate***

Weaccount for all acquisitions in accordance with Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 141,“Business Combinations” (“FAS 141”).  Upon acquisition of a property,we allocate the purchase price of the property based upon the fair value of theassets acquired, which generally consist of land, buildings, tenantimprovements, leasing commissions and intangible assets including in-placeleases and above market and below market leases.  We allocate the purchaseprice to the fair value of the tangible assets of an acquired property byvaluing the property as if it were vacant. The value of the building isdepreciated over an estimated useful life of 39 years.

The purchase price is further allocated toin-place lease values based on management’s evaluation of the specificcharacteristics of each tenant’s lease and our overall relationship with therespective tenant.  The value of in-place lease intangibles, which isincluded as a component of investments in real estate, is amortized to expenseover the remaining lease term. If a lease is terminated prior to itsexpiration, the unamortized portion of the tenant improvements, leasingcommissions, above and below market leases and the in-place lease value isimmediately charged to expense.

8

 

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Acquiredabove and below market leases are valued based on the present value of thedifference between prevailing market rates and the in-place rates over theremaining lease term. The value of acquired above and below market leases isamortized over the remaining non-cancelable terms of the respective leases asan adjustment to rental revenue on our consolidated statements of operations.

Weamortize the value of in-place leases and above and below market leases overthe initial term of the respective leases. Should a tenant terminate its lease,the unamortized portion of the in-place lease value and above or below marketlease value would be charged to expense. The estimated useful lives for leaseintangibles range from 1 month to 4 years.

Amortizationassociated with the lease intangible assets and liabilities of our propertiesfor the six-months ended June 30, 2006 was $1,186 and $1,278 respectively.

 Anticipated amortization for the period fromJuly 1 through December 31, 2006 and for each of the four following years endedDecember 31, is as follows:

|                                        | ** ** | **Lease  Intangibles** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| July 1, 2006 –  December 31, 2006 |       | $                      | 5,555      |   |
| 2007                                   |       | 8,709                  |       |
| 2008                                   |       | 7,983                  |       |
| 2009                                   |       | 5,649                  |       |
| 2010                                   |       | 2,026                  |       |
|                                        |            |                        |            |  |

 

As of June 30, 2006, accumulated depreciation andamortization related to real estate assets and related lease intangibles wereas follows:
| ** **                           | ** ** | **Buildings and  Improvements** | ** ** | **In Place  Leases** | ** ** | **Acquired  Above- Market  Leases** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| Cost                                 |       | $                                    | 2,985,642  |                      | $          | 37,300                                   |       | $                                  | 3,414      |   | $ | 10,914 |   |
| Less:  depreciation and amortization |       | (3,131                               | )          | (1,186                    | )          | —                                   |       | (1,278                             | )          |
| Net                                  |       | $                                    | 2,982,511  |                      | $          | 36,144                                   |       | $                                  | 3,414      |   | $ | 9,636 |   |

 

***Impairment of Real Estate Assets***

Management continually monitors eventsand changes in circumstances that could indicate that the carrying amounts ofour real estate assets, including those held through joint ventures may not berecoverable. When indicators of potential impairment are present that indicatethat the carrying amounts of real estate assets may not be recoverable, we willassess the recoverability of the real estate assets by determining whether thecarrying value of the real estate assets will be recovered through theundiscounted future operating cash flows expected from the use of the asset andits eventual disposition.  In the eventthat such expected undiscounted future cash flows do not exceed the carryingvalue, we will adjust the real estate assets to the fair value and recognize animpairment loss.

9

 

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#### Projections of expected future cash flowsrequire us to estimate future market rental income amounts subsequent to theexpiration of current lease agreements, property operating expenses, discountrates, the number of months it takes to re-lease the property and the number ofyears the property is held for investment. The use of certain assumptions in the future cash flows analysis wouldresult in an incorrect assessment of the property’s future cash flows and fairvalue and could result in the overstatement of the carrying value of our realestate assets and net income if those assumptions ultimately prove to beincorrect.

### ***ConsolidationConsiderations for Investments in Joint Ventures***

The FASB issued InterpretationNo. 46 (“FIN 46R”) (revised December 2003), “Consolidation ofVariable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51”(“ARB 51”), which addresses how a business enterprise should evaluate whetherit has a controlling interest in an entity through means other than votingrights and accordingly should consolidate the entity.  Before concludingthat it is appropriate to apply the ARB 51 voting interest consolidation modelto an entity, an enterprise must first determine that the entity is not avariable interest entity (VIE).  We will evaluate, as appropriate, ourinterests, if any, in joint ventures and other arrangements to determine ifconsolidation is appropriate.

#### ***Revenue Recognition and Valuation ofReceivables***

Ourrevenues, which are comprised largely of rental income, include rents reportedon a straight-line basis over the initial term of the lease.  Because ourleases may provide for rental increases at specified intervals, we are requiredto straight-line the recognition of revenue, which results in the recording ofa deferred  rent not yet due under thelease terms.

****Organizational and Offering Costs****

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

The advisor funds organization and offering costs on our behalf.  We are required to reimburse the advisor forsuch organization and offering costs up to 3.5% of the cumulative capitalraised in the Primary Offering. Organization and offering costs include items such as legal andaccounting fees, marketing, promotional and printing costs, and specificallyexclude internal salaries.  All offeringcosts are recorded as an offset to additional paid-in capital, and allorganization costs are recorded as an expense at the time we become liable forthe payment of these amounts.

***Minority Interest in Consolidated Subsidiary***

Dueto our control through our general partnership interest in the OperatingPartnership and the limited rights of the limited partners, the OperatingPartnership is consolidated with us and the limited partner interest isreflected as minority interest in the accompanying balance sheets.

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***Income Taxes***

We expect to make an election to be taxedas a Real Estate Investment Trust (“REIT”), under Sections 856 through 860 ofthe Internal Revenue Code of 1986, as amended (the “Code”) and expect to betaxed as such beginning with our taxable year ending December 31,2006.  To qualify as a REIT, we must meet certain organizational andoperational requirements, including a requirement to currently distribute atleast 90% of the REIT’s ordinary taxable income to stockholders.  As aREIT, we generally will not be subject to federal income tax on taxable incomethat we distribute to our stockholders.  If we fail to qualify as a REITin any taxable year, we will then be subject to federal income taxes on ourtaxable income at regular corporate rates and will not be permitted to qualifyfor treatment as a REIT for federal income tax purposes for four yearsfollowing the year during which qualification is lost unless the InternalRevenue Service grants us relief under certain statutory provisions.  Suchan event could materially adversely affect our net income and net cashavailable for distribution to stockholders.  However, we believe that wewill be organized and operate in such a manner as to qualify for treatment as aREIT and intend to operate in the foreseeable future in such a manner that wewill remain qualified as a REIT for federal income tax purposes.

Even if we qualify for taxation as aREIT, we may be subject to certain state and local taxes on our income andproperty, and federal income and excise taxes on our undistributed income.

Duringthe six months ended June 30, 2006, and the year ended December 31, 2005, wegenerated deferred tax assets of approximately $166,000 and $20,000,respectively. Because we intend to qualify as a REIT in 2006, which wouldprevent realization of the deferred tax asset, a valuation allowance of a likeamount was recorded.

***Concentration of Credit Risk***

Financial instruments that potentially subject us toa concentration of credit risk are primarily cash investments. Cash isgenerally invested in investment-grade short-term instruments and the amount ofcredit exposure to any one commercial issuer is limited. We have cash infinancial institutions, which is insured by the Federal Deposit InsuranceCorporation, or FDIC, up to $100,000 per institution. At June 30, 2006, we hadcash accounts in excess of FDIC insured limits.

***PerShare Data***

We report earnings per share pursuant to SFAS No. 128, “EarningsPer Share.” Loss per common share is calculated by dividing the net loss foreach period by the weighted average number of common shares outstanding duringsuch period. Loss per common share on a basic and diluted basis are the samebecause there are currently no potentially dilutive rights to acquire ourcommon shares outstanding.

***Use of Estimates***

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

**3.****                                     ****Investments in Real Estate**

On June 1, 2006 we purchased an existing multi-tenant industrialproperty known as 2111 South Industrial Park located in Phoenix, Arizona forapproximately $2.1 million.  The propertycontains a total of 26,800 leasable square feet. We purchased this property forall cash.

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On June 28, 2006 we purchased an existing multi-tenant industrialproperty known as the Shoemaker Industrial Buildings located in Santa FeSprings, California for approximately $2.5 million.  The property contains a total of 18,921leasable square feet in four single-story buildings. We purchased this propertyfor all cash, without debt financing.

**4.****                                     ****Receivable from and Payableto Related Party**

Receivable from related parties at December 31, 2005,resulted from payments made by us for services received that were accounted foras deferred organization and offering costs by an affiliate of the advisor.  Accordingly, these amounts paid for by us areto be reimbursed by the advisor.

Accounts payable to related parties consists oforganizational and offering costs and acquisition fees payable to the advisorand broker dealer fees payable to PCC.

**5.****                                     ****Minority Interests**

Minority interests relate to the advisor’s equityinterest in the earnings/losses of the Operating Partnership.

**6.****                                     ****Stockholders’ Equity**

***Common Stock***

Ourarticles of incorporation authorize the issuance of 290,000,000 shares ofcommon stock with a par value of $.001 and 10,000,000 shares of preferred stockwith a par value of $.001.  As of June 30, 2006, we have issued 1,279,758shares of common stock for total gross proceeds of $10.2 million.

***Dividend Reinvestment Plan***

Wehave adopted a dividend reinvestment plan that allows our stockholders to havedividends and other distributions otherwise distributable to them invested inadditional shares of our common stock.  We have registered 11,000,000shares of our common stock for sale pursuant to the dividend reinvestmentplan.  The purchase price per share is 95% of the price paid by thepurchaser for our common stock, but not less than $7.60 per share.  We mayamend or terminate the dividend reinvestment plan for any reason at any timeupon 10 days prior written notice to participants.

Until proceeds from our offering are investedand generating operating cash flow sufficient to make distributions tostockholders, we intend to pay all or a substantial portion of ourdistributions from the proceeds of such offering or from borrowings inanticipation of future cash flow.

***Employee and Director Incentive Stock Plan***

We have adopted an Employee and Director Incentive Stock Plan (“thePlan”) which provides for the grant of awards to our directors and full-timeemployees, as well as other eligible participants that provide services tous.  We have no employees, and we do notintend to grant awards under the Plan to persons who are not directors ofours.  Awards granted under the Plan may consist of nonqualified stockoptions, incentive stock options, restricted stock, share appreciation rights,and dividend equivalent rights.  The term of the Plan is 10 years. The total number of shares of common stock reserved for issuance under the Planis equal to 10% of our outstanding shares of stock at any time.  On May10, 2006, we granted our non-employee directors nonqualified stock options topurchase an aggregate of 40,000 shares of common stock at an exercise price of$8.00 per share. In accordance with the provisions of

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SFAS123(R), *“Accounting for Stock-BasedCompensation”*(as amended), we recognize the expense related tothese shares over the vesting period. For the six months ended June 30, 2006and 2005, we amortized approximately $2,200 and none, respectively, of relatedcompensation expense. Such amounts are included in general and administrativeexpenses in the accompanying condensed consolidated statements of operations

**7.****                                     ****Related Party Transactions**

We have no employees.  Our advisor is primarily responsible formanaging our business affairs and carrying out the directives of our board ofdirectors.  We have an advisory agreementwith the advisor and a dealer manager agreement with PCC, which entitle theadvisor and PCC to specified fees upon the provision of certain services withregard to the Offering and investment of funds in real estate projects, amongother services, as well as reimbursement for organizational and offering costsincurred by the advisor on our behalf and reimbursement of certain costs andexpenses incurred by the advisor in providing services to us.

***Advisory Agreement***

Under the terms of the advisoryagreement, our advisor will use commercially reasonable efforts to present tous investment opportunities to provide a continuing and suitable investmentprogram consistent with the investment policies and objectives adopted by ourboard of directors.  The advisoryagreement calls for our advisor to provide for our day-to-day management and toretain property managers and leasing agents, subject to the authority of ourboard of directors, and to perform other duties.

The fees and expense reimbursementspayable to our advisor under the advisory agreement are described below.

Organizational and Offering Costs.  Organizationaland offering costs of the Offering are being paid by the advisor on our behalfand will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theoffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our advisor for allmarketing related costs and expenses such as salaries and direct expenses ofemployees of or advisor and its affiliates in connection with registering andmarketing our shares; (ii) technology costs associated with the offeringof our shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering.  As of June 30, 2006,approximately $2.0 million of organization and offering costs had been incurredby the advisor and its affiliates on behalf of us, of which $358,000 had beenreimbursed by us, and the balance of approximately $1.6 million has beenaccrued as a payable to affiliates. Of the approximately $2.0 million oforganization and offering costs incurred through June 30, 2006  approximately $1.9 million was recorded as areduction of additional paid in capital and $109,932 has been expensed as organizationcosts. No organization and offering costs were reimbursed or recorded by us in2005 because the Offering had not commenced.

Acquisition Fees and Expenses.  The advisory agreement requires us to pay theadvisor acquisition fees in an amount equal to 2% of the gross proceeds of thePrimary Offering.  We will pay the acquisition fees upon receipt of thegross proceeds from the Offering.  However, if the advisory

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agreement is terminated or not renewed, theadvisor must return acquisition fees not yet allocated to one of ourinvestments.  In addition, we are required to reimburse the advisor fordirect costs the advisor incurs and amounts the advisor pays to third partiesin connection with the selection and acquisition of a property, whether or notultimately acquired.  For the six months ended June 30, 2006, the advisorearned $204,000 in acquisition fees, which will be capitalized as part of thecost our real estate investments. No acquisition fees were earned in priorperiods.

Management Fees.  The advisory agreement requires us to pay theadvisor a monthly asset management fee of one-twelfth of 1.0% of the sum of theaggregate basis book carrying values of the our assets invested, directly orindirectly, in equity interests in and loans secured by real estate beforereserves for depreciation or bad debts or other similar non-cash reserves,calculated in accordance with GAAP.  In addition, we will reimburse theadvisor for the direct costs and expenses incurred by the advisor in providingasset management services to us.  These fees and expenses are in additionto management fees that we expect to pay to third party propertymanagers.  For the six months ended June 30, 2006, $2,000 of assetmanagement fees were expensed.  No assetmanagement fees were incurred in prior periods.

Operating Expenses.The advisory agreement provides for reimbursement of our advisor’s direct andindirect costs of providing administrative and management services to us.  For the six months ended June 30, 2006,$196,000 of such costs were reimbursed. The advisor must reimburse us the amount by which our aggregate annualoperating expenses exceed the greater of 2% of our average invested assets or25% of our net income unless a majority of our independent directors determinethat such excess expenses were justified based on unusual and non-recurringfactors.

Disposition Fee.  The advisory agreement provides that if theadvisor or its affiliate provides a substantial amount of the services (asdetermined by a majority of our directors, including a majority of ourindependent directors in connection with the sale of one or more properties, wewill pay the advisor or such affiliate at closing a disposition fee up to 3% ofthe sales price of such property or properties.  This disposition fee maybe paid in addition to real estate commissions paid to non-affiliates, providedthat the total real estate commissions (including such disposition fee) we payto all persons for each property shall not exceed an amount equal to the lesserof (i) 6% of the aggregate contract sales price of each property or(ii) the competitive real estate commission for each property.  Wewill pay the disposition fees for a property at the time the property is sold.

SubordinatedParticipation Provisions.  The advisor is entitled to receive asubordinated participation fee upon the sale of our properties of 5%, 10% or15% of the amount of net sale proceeds upon sale of our properties depending onwhether annualized returns to our stockholders exceed 6%, 8% or 10%. In theevent of the listing of our common stock or termination of the advisor prior tothe sale of our properties, the advisor is instead entitled to receive feesbased on the market value of our common stock or the appreciation of theproperties we own.

***Dealer Manager Agreement***

PCC, as dealer manager, is entitled toreceive a sales commission of up to 7% of gross proceeds from sales in thePrimary Offering and a dealer manager fee equal to up to 3% of gross proceedsfrom sales in the Primary Offering.  PCC is also entitled to receive areimbursement of bona fide due diligence expenses up to 0.5% of the grossproceeds from sales in the Primary Offering.  The advisory agreementrequires the advisor to reimburse us to the extent that offering expensesincluding sales commissions, dealer manager fees and organization and offeringexpenses (but excluding acquisition fees and acquisition expenses discussedabove) are in excess of 13.5% of gross proceeds from the Offering. For the sixmonths ended June 30, 2006, PCC earned approximately $1.0 million incommissions and dealer manager fees.

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**8.****              Credit Facility**

On June 30, 2006, we entered into a Credit Agreement with HSH NordbankAG, New York Branch, for a temporary credit facility that we will use duringthe offering period to facilitate our acquisitions of properties inanticipation of the receipt of offering proceeds.  The Credit Agreement permits us to borrow upto $50,000,000 secured by real property at a borrowing rate based on LIBOR plusa margin ranging from 1.15% to 1.35% and requires payment of a usage premium ofup to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investmentsand we may use up to 10% of the credit facility for working capital.  We are entitled to prepay the borrowingsunder the credit facility at any time without penalty.  The principal balance is due on June 30,2008.  The repayment of obligations underthe Credit Agreement may be accelerated in the event of a default, as definedin the Credit Agreement.  In connectionwith documentation and closing the Credit Agreement, we have incurred expensestotaling approximately $890,000. As of June 30, 2006, no borrowings wereoutstanding under the credit facility.

Consistent with our borrowing policies, during our Primary Offering, wewill borrow periodically to acquire properties and for working capital.  We will determine whether to use the proceedsof our Offering to repay amounts borrowed under the Credit Agreement dependingon a number of factors, including the investments that are available to us forpurchase at the time and the cost of the credit facility.  Following the closing of our PrimaryOffering, we will endeavor to repay all amounts owing under the CreditAgreement or that are secured by our properties and which have not previouslybeen paid.  To the extent sufficientproceeds from our Offering are unavailable to repay the indebtedness secured byproperties within a reasonable time following the closing of our PrimaryOffering as determined by our board of directors, we may sell properties orraise equity capital to repay the secured debt, so that we will own ourproperties with no permanent acquisition financing.

**9.****              Commitments andContingencies**

We have entered into a definitive agreement (the “Agreement”) topurchase an existing multi-tenant industrial park, known as Mack Deer Valley,for a purchase price of $23,150,000. As of May 15, 2006, our right to terminatethe agreement without penalty expired, and our initial deposit became non-refundable.

The property is newly constructed and consists of approximately 180,985square feet of leasable space in two single-story buildings located in Phoenix,Arizona.

In connection with the Agreement, as of June 30, 2006, we have paid a$500,000 deposit to an escrow agent, and we are obligated to pay additionalescrow deposits of $250,000 each in July, September and November 2006, andJanuary 2007.

Under the terms of the Agreement, in addition to the investmentdescribed above, we are obligated to pay certain closing costs, including, butnot limited to attorney fees, certain title insurance premiums, survey costs,recording costs and one-half of the escrow charges.  The Agreement closing date is January 22,2007.  Although substantially allcontingencies have been satisfied and we expect to close in accordance with theterms of the Agreement, there can be no assurance that events will not arisethat could prevent us from acquiring the property.

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

The following “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” should be read in conjunction with ourfinancial 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 expectedoperating 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,” andsimilar expressions.  Forward-lookingstatements are based on current expectations and assumptions that are subjectto risks and uncertainties which may cause actual results to differ materiallyfrom the forward-looking statements. Forward-looking statements that were true at the time made mayultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise

# **Overview**

We are a Maryland corporation 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.  We our newly formed and are subject to the general risks associated with a start-up enterprise, including the risk of business failure.  We intend to qualify as a real estate investment trust for federal tax purposes commencing with its taxable year ending December 31, 2006.

On January 6, 2006, we commenced apublic offering of 55,400,000 shares of common stock, consisting of 44,400,000shares for sale to the public at $8.00 per share (the Primary Offering”) and11,000,000 shares for sale pursuant to our dividend reinvestment plan(collectively, the “Offering”). Net proceeds from the Offering will be usedprimarily to acquire real estate properties, pay organizational and offeringexpenses, and pay various fees and expenses. We have purchased two properties as of the date of this report.

# **CriticalAccounting Policies**

Our condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the date of the financial statements and the reported amount of revenue andexpenses during the reporting period. Actual results could differ materially from the estimates in the nearterm.

Below is a discussion of the accounting policies that weconsider to be critical in that they may require complex judgment in theirapplication or require estimates about matters that are inherently uncertain.

***Real Estate.***

Weaccount for all acquisitions in accordance with Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standard No. 141,“Business Combinations” (“FAS 141”).  Upon acquisition of a property,we allocate the purchase price of the property based upon the fair value of theassets acquired, which generally consist of land, buildings, tenantimprovements, leasing commissions and intangible assets including in-placeleases and above market and below market leases.  We allocate the purchaseprice to the fair value of the tangible assets of an acquired property byvaluing the property as if it were vacant. The value of the building is depreciated over an estimated useful lifeof 39 years.

Thepurchase price is further allocated to in-place lease values based onmanagement’s evaluation of the specific characteristics of each tenant’s leaseand our overall relationship with the respective tenant.  The value ofin-place lease intangibles, which is included as a component of Investments inreal estate, is amortized to expense over the remaining lease term. If alease is terminated prior to its expiration, the unamortized portion of thetenant improvements, leasing commissions, above and below market leases and thein-place lease value is immediately charged to expense.

Acquiredabove and below market leases are valued based on the present value of thedifference between prevailing market rates and the in-place rates over theremaining lease term. The value of acquired above and below market leases isamortized over the remaining non-cancelable terms of the respective leases asan adjustment to rental revenue on our consolidated statements of operations. 

***Impairment ofReal Estate Assets***

Management will continuallymonitor events and changes in circumstances that could indicate that thecarrying amounts of our real estate assets, including those held through jointventures may not be recoverable. When indicators of potential impairment arepresent that indicate that the carrying amounts of real estate assets may notbe recoverable, we will assess the recoverability of the real estate assets bydetermining whether the carrying value of the real estate assets will berecovered through the undiscounted future operating cash flows expected fromthe use of the asset and its eventual disposition.  In the event that such expected undiscountedfuture cash flows do not exceed the carrying value, we will adjust the realestate assets to the fair value and recognize an impairment loss. 

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#### Projectionsof expected future cash flows require us to estimate future market rentalincome amounts subsequent to the expiration of current lease agreements,property operating expenses, discount rates, the number of months it takes tore-lease the property and the number of years the property is held forinvestment.  The use of certainassumptions in the future cash flows analysis would result in an incorrectassessment of the property’s future cash flows and fair value and could resultin the overstatement of the carrying value of our real estate assets and netincome if those assumptions ultimately prove to be incorrect.

#### ***RevenueRecognition and Valuation of Receivables***

Our revenues are comprised largely of rental income, which includerents reported on a straight-line basis over the initial term of thelease.  Since our leases may provide for rental increases at specifiedintervals, we are required to straight-line the recognition of revenue, whichresults in the recording of a receivable for rent not yet due under the leaseterms.

 

# **Results of Operations**

We acquired our first real estate investment property on June 1, 2006,and our second property on June 28, 2006. Revenue and property expenses related to these acquisitions totaled$17,000 and $9,000, respectively. Operating results in future periods will be afunction of the results of the operation of real estate investment propertiesthat we acquire.  For the six monthsended June, 2006, we engaged primarily in activities related to our stockoffering and incurred general and administrative expenses of $612,000.

Interest income, net for the six monthsended June 30, 2006 includes $39,000 of interest earned from the short-terminvestment of net offering proceeds which were available between the sale ofour shares and purchase of our properties.

**Liquidityand Capital Resources**

Asof June 30, 2006, we had issued 1,279,758 shares of common stock for totalgross proceeds of approximately $10.2 million. Our principal demands for fundsare expected to be for property acquisitions and for the payment of operatingexpenses and dividends.  Our liquiditywill increase as additional subscriptions are accepted and decrease as netoffering proceeds are expended in connection with the acquisition and operationof properties.

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Theremay be a delay between the sale of our shares and the purchase ofproperties.  During this period, netoffering proceeds will be temporarily invested in short-term, liquidinvestments that could yield lower returns than investment in real estate.

Generally, cash needs for items other than property acquisitions willbe met from operations, and cash needs for property acquisitions will be metfrom public offerings of our shares or from borrowings on our credit facility.

Until proceeds from our Offering are investedand generating operating cash flow sufficient to make distributions tostockholders, we intend to pay all or a substantial portion of ourdistributions from the proceeds of our Offering or from borrowings inanticipation of future cash flow.

The advisor has agreed to pay all of our organization and offering costs, subject to its right to be reimbursed for such costs by us in an amount up to 3.5% of gross offering proceeds.

The number of properties that we are able to acquire will depend primarily on the amount of funds raised in the offering.  We may also use acquisition financing to fund the purchase price of real estate properties.  Any acquisition financing will be repaid from Offering proceeds or 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 Primary Offering 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 all-cash, with no permanent acquisition financing.

We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national or regional economic conditions 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.

**ContractualObligations**

Thefollowing table sets forth our contractual obligations or commercialcommitments as of June 30, 2006.
| ** **                       | ** ** | **Payments due by period** | ** ** | ** **                      | ** ** | ** **         | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|--------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|                             |       |                                      |       |                            |       |               |       |   |   |   |   |
| Purchase  Obligations            |       | $                                         | 23,150,000 |                            | $          | 23,150,000         |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 23,150,000 |                            | $          | 23,150,000         |       |   |   |   |   |   |   |

 

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

We invest our cash and cash equivalents in short-term, highly liquidinvestments including government obligations, bank certificates of deposit andinterest-bearing accounts which, by their nature, are subject to interest ratefluctuations.

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

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our senior management, including our Chief Executive Officerand Chief Financial

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Officer,as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  Our Chief Executive Officer and the ChiefFinancial Officer have reviewed the effectiveness of our disclosure controlsand procedures and have concluded that the disclosure controls and procedureswere effective as of the end of the period covered by this report.

Weare in the process of developing and implementing a formal set of internalcontrols and procedures for financial reporting as required by theSarbanes-Oxley Act of 2002.  The efficacyof the steps we have taken to date and steps we still are in the process ofcompleting are subject to continued management review supported by confirmationand testing by management.  We anticipate that additional changes may bemade to our internal controls and procedures.  Other than the foregoinginitiatives, no change in our internal control over financial reportingoccurred during the period ended June 30, 2006 that has materially affected, oris reasonably likely to affect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item 6.   Exhibits**

31.1                    Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2                    Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32                             Certification of Chief Executive Officer andChief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this quarterly report tobe signed on its behalf by the undersigned, thereunto duly authorized this 11th day of August, 2006.
|          | CORNERSTONE CORE PROPERTIES REIT, INC. |
|----------|----------------------------------------|
|     |                                   |
|     | By:                                    | /s/ Terry G. Roussel |   |
| * * |                                   | *Terry G. Roussel, Chief Executive Officer* |
| * * |                                   | * * |
| * * |                                   | * * |
|     | By:                                    | /s/ Sharon C. Kaiser |   |
| * * |                                   | *Sharon  C. Kaiser, Chief Financial Officer* |
| * * |                                   | *(Principal Financial Officer and* |
| * * |                                   | *  Principal Accounting Officer)* |

 

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