UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





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






For
the quarterly period ended June 30, 2008





or





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







For
the transition period from
                          
to





Commission
File Number   000-52566





CORNERSTONE
CORE PROPERTIES REIT, INC.


(Exact
name of registrant as specified in its charter)





MARYLAND
            73-172191(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
            92614(Address
      of principal executive offices)
            (Zip
      Code)





949-852-1007


(Registrant’s
telephone number, including area code)





Not
Applicable


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





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 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 x
Smaller reporting company o





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
July 31, 2008, we had 17,832,039 shares issued and outstanding.










PART
I - FINANCIAL INFORMATION


FORM
10-Q


Cornerstone
Core Properties REIT, Inc.


TABLE OF CONTENTS





PART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      Statements:Condensed Consolidated Balance Sheets as of June 30,
      2008 and December 31, 2007 (unaudited)
            3Condensed Consolidated Statements of Operations for the Three
      and Six Months ended June 30, 2008 and June 30, 2007
      (unaudited)
            4Condensed Consolidated Statement of Stockholders’ Equity for
      the Six Months ended June 30, 2008 (unaudited)
            5Condensed Consolidated Statements of Cash Flows for the Six
      Months ended June 30, 2008 and June 30, 2007
      (unaudited)
            6Notes to Condensed Consolidated Financial Statements
      (unaudited)
            7Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            19Item
      3.
            Quantitative and Qualitative Disclosure about Market
      Risk
            22Item
      4T.
            Controls and Procedures
            22PART
      II.
            OTHER
      INFORMATION
            23Item
      1A.
            Risk Factors
            23Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            23Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            23Item
      6.
            Exhibits
            23SIGNATURES
            24  2
 Table of Contents




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)








June
      30,
            
            
            December 31,2008
            
            
            2007ASSETSCash
      and cash equivalents
            
            $
            25,864,000
            
            
            $
            6,648,000Investments
      in real estate:Land
            
            
            38,694,000
            
            
            
            36,762,000Buildings
      and improvements, net
            
            
            92,702,000
            
            
            
            81,441,000Intangible
      lease assets, net
            
            
            2,605,000
            
            
            
            2,791,000134,001,000
            
            
            
            120,994,000Notes
      receivable
            
            
            1,875,000
            
            
            
            —Deferred
      acquisition costs and deposits
            
            
            952,000
            
            
            
            633,000Deferred
      financing costs, net
            
            
            332,000
            
            
            
            412,000Tenant
      and other receivables, net
            
            
            640,000
            
            
            
            540,000Other
      assets, net
            
            
            615,000
            
            
            
            695,000Total
      assets
            
            $
            164,279,000
            
            
            $
            129,922,000LIABILITIES,
      MINORITY INTERESTS AND STOCKHOLDERS’ EQUITYLiabilities:Notes
      payable
            
            $
            70,699,000
            
            
            $
            65,699,000Accounts
      payable and accrued liabilities
            
            
            804,000
            
            
            
            1,062,000Payable
      to related parties
            
            
            233,000
            
            
            
            899,000Prepaid
      rent and security deposits
            
            
            997,000
            
            
            
            766,000Property
      taxes payable
            
            
            527,000
            
            
            
            126,000Intangible
      lease liability, net
            
            
            538,000
            
            
            
            446,000Distributions
      payable
            
            
            545,000
            
            
            
            367,000Total
      liabilities
            
            
            74,343,000
            
            
            
            69,365,000Minority
      interests
            
            
            157,000
            
            
            
            309,000Commitments
      and contingencies (Note 10)Stockholders’
      equity :Preferred
      stock, $0.001 par value; 10,000,000 shares authorized; no shares were
      issued or outstanding at June 30, 2008 and December 31,
      2007
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value; 290,000,000 shares authorized; 14,561,257 and
      9,908,551 shares issued and outstanding at June 30, 2008 and December
      31, 2007, respectively
            
            
            15,000
            
            
            
            10,000Additional
      paid-in capital
            
            
            94,667,000
            
            
            
            64,239,000Accumulated
      deficit
            
            
            (4,903,000
            )
            
            
            (4,001,000
            )Total
      stockholders’ equity
            
            
            89,779,000
            
            
            
            60,248,000Total
      liabilities, minority interests and stockholders’ equity
            
            $
            164,279,000
            
            
            $
            129,922,000





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


3
 Table of Contents


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)








Three Months Ended June 30,
            
            
            Six Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesRental
      revenues
            
            $
            2,301,000
            
            
            $
            1,046,000
            
            
            $
            4,365,000
            
            
            $
            1,939,000Tenant
      reimbursements and other income
            
            
            605,000
            
            
            
            188,000
            
            
            
            1,105,000
            
            
            
            366,000Interest
      income from notes receivable
            
            
            25,000
            
            
            
            -
            
            
            
            26,000
            
            
            
            -2,931,000
            
            
            
            1,234,000
            
            
            
            5,496,000
            
            
            
            2,305,000ExpensesProperty
      operating and maintenance
            
            
            726,000
            
            
            
            325,000
            
            
            
            1,451,000
            
            
            
            556,000General
      and administrative
            
            
            521,000
            
            
            
            436,000
            
            
            
            929,000
            
            
            
            852,000Asset
      management fees
            
            
            336,000
            
            
            
            160,000
            
            
            
            642,000
            
            
            
            299,000Depreciation
      and amortization
            
            
            882,000
            
            
            
            326,000
            
            
            
            1,672,000
            
            
            
            579,0002,465,000
            
            
            
            1,247,000
            
            
            
            4,694,000
            
            
            
            2,286,000Operating
      income (loss)
            
            
            466,000
            
            
            
            (13,000
            )
            
            
            802,000
            
            
            
            19,000Interest
      income
            
            
            61,000
            
            
            
            160,000
            
            
            
            115,000
            
            
            
            270,000Interest
      expense
            
            
            (869,000
            )
            
            
            (729,000
            )
            
            
            (1,816,000
            )
            
            
            (1,398,000
            )Loss
      before minority interests
            
            
            (342,000
            )
            
            
            (582,000
            )
            
            
            (899,000
            )
            
            
            (1,109,000
            )Minority
      interests
            
            
            5,000
            
            
            
            (1,000
            )
            
            
            3,000
            
            
            
            (2,000
            )Net
      loss
            
            $
            (347,000
            )
            
            $
            (581,000
            )
            
            $
            (902,000
            )
            
            $
            (1,107,000
            )Net
      loss per share – basic and diluted
            
            $
            (0.03
            )
            
            $
            (0.09
            )
            
            $
            (0.08
            )
            
            $
            (0.21
            )Weighted
      average number of common shares
            
            
            12,664,848
            
            
            
            6,482,651
            
            
            
            11,238,449
            
            
            
            5,357,635








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


4
 Table of Contents


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY


For
the Six Months Ended June 30, 2008





(Unaudited)





Common StockNumber ofShares
            
            
            CommonStock ParValue
            
            
            AdditionalPaid-In Capital
            
            
            AccumulatedDeficit
            
            
            TotalBalance
      - December 31, 2007
            
            
            9,908,551
            
            
            $
            10,000
            
            
            $
            64,239,000
            
            
            $
            (4,001,000
            )
            
            $
            60,248,000Issuance
      of common stock
            
            
            4,726,325
            
            
            
            5,000
            
            
            
            37,727,000
            
            
            
            —
            
            
            
            37,732,000Redeemed
      shares
            
            
            (73,619
            )
            
            
            —
            
            
            
            (547,000
            )
            
            
            —
            
            
            
            (547,000
            )Offering
      costs
            
            
            —
            
            
            
            —
            
            
            
            (4,011,000
            )
            
            
            —
            
            
            
            (4,011,000
            )Dividends
      declared
            
            
            —
            
            
            
            —
            
            
            
            (2,741,000
            )
            
            
            —
            
            
            
            (2,741,000
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (902,000
            )
            
            
            (902,000
            )Balance
      – June 30, 2008
            
            
            14,561,257
            
            
            $
            15,000
            
            
            $
            94,667,000
            
            
            $
            (4,903,000
            )
            
            $
            89,779,000








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


5
 Table of Contents


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)








Six Months Ended June 30,2008
            
            
            2007Cash
      flows from operating activitiesNet
      loss
            
            $
            (902,000
            )
            
            $
            (1,107,000
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Amortization
      of deferred financing costs and abandoned costs
            
            
            323,000
            
            
            
            238,000Depreciation
      and amortization
            
            
            1,672,000
            
            
            
            579,000Straight-line
      rents and amortization of acquired above (below) market
    leases
            
            
            (242,000
            )
            
            
            59,000Minority
      interest
            
            
            —
            
            
            
            (2,000
            )Change
      in operating assets and liabilities:Tenant
      and other receivables
            
            
            180,000
            
            
            
            (164,000
            )Other
      assets
            
            
            197,000
            
            
            
            16,000Payable
      and accrued liabilities
            
            
            93,000
            
            
            
            202,000Payable
      to related parties
            
            
            (27,000
            )
            
            
            (452,000
            )Net
      cash provided by (used in) operating activities
            
            
            1,294,000
            
            
            
            (631,000
            )Cash
      flows from investing activitiesReal
      estate acquisitions
            
            
            (6,840,000
            )
            
            
            (26,404,000
            )Deferred
      acquisition costs and deposits
            
            
            (657,000
            )
            
            
            (516,000
            )Escrow
      refund (deposits)
            
            
            150,000
            
            
            
            (750,000
            )Notes
      receivable
            
            
            (1,875,000
            )
            
            
            -Net
      cash used in investing activities
            
            
            (9,222,000
            )
            
            
            (27,670,000
            )Cash
      flows from financing activitiesIssuance
      of common stock
            
            
            36,199,000
            
            
            
            25,552,000Redeemed
      shares
            
            
            (547,000
            )
            
            
            —Proceeds
      from notes payable
            
            
            —
            
            
            
            14,378,000Repayment
      of notes payable
            
            
            (2,375,000
            )
            
            
            —Offering
      costs
            
            
            (4,730,000
            )
            
            
            (3,332,000
            )Minority
      interest
            
            
            (145,000
            )
            
            
            145,000Other
      receivables
            
            
            —
            
            
            
            211,000Distributions
      paid to stockholders
            
            
            (1,028,000
            )
            
            
            (502,000
            )Distributions
      paid to minority interest
            
            
            (11,000
            )
            
            
            (8,000
            )Deferred
      financing costs
            
            
            (219,000
            )
            
            
            -Net
      cash provided by financing activities
            
            
            27,144,000
            
            
            
            36,444,000Net
      increase in cash and cash equivalents
            
            
            19,216,000
            
            
            
            8,143,000Cash
      and cash equivalents - beginning of period
            
            
            6,648,000
            
            
            
            11,041,000Cash
      and cash equivalents - end of period
            
            $
            25,864,000
            
            
            $
            19,184,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
            
            $
            1,732,000
            
            
            $
            969,000Supplemental
      disclosure of non-cash financing and investing activities:Distribution
      declared not paid
            
            $
            545,000
            
            
            $
            267,000Accrued
      dividend to minority interest
            
            $
            3,000
            
            
            $
            2,000Distribution
      reinvested
            
            $
            1,532,000
            
            
            $
            628,000Payable
      to related party
            
            $
            187,000
            
            
            $
            569,000Security
      deposits and other liabilities assumed upon acquisition of real
      estate
            
            $
            127,000
            
            
            $
            145,000Assumption
      of loan in connection with property acquisition
            
            $
            7,375,000
            
            
            $
            -Accrued
      acquisition fees not paid
            
            $
            20,000
            
            
            $
            -





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


6
 Table of Contents


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





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, “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 by an affiliate, Cornerstone Realty Advisors, LLC, a Delaware limited
liability company that was formed on November 30, 2004 (the “advisor”) pursuant
to an advisory agreement.





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





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At June 30, 2008, we
owned 99.82% general partner interest in the Operating Partnership while the
advisor owned a 0.18% 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
      Offering





On
January 6, 2006, we commenced a public offering of a minimum of 125,000 shares
and a maximum of 55,400,000 shares of our 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 our distribution reinvestment plan (collectively, the
“Offering”).  We retained Pacific Cornerstone Capital, Inc. (“PCC”),
an affiliate of the advisor, to serve as the dealer manager for the
Offering.  PCC is responsible for marketing our shares being offered
pursuant to the Offering.





We intend
to invest the net proceeds from the Offering primarily in investment real estate
including multi-tenant industrial real estate located in major metropolitan
markets in the United States.  As of June 30, 2008, a total of
approximately 14.2 million shares of our common stock had been sold for
aggregate gross proceeds of approximately $113.8 million.





3.
            Summary
      of Significant Accounting Policies





The
summary of significant accounting policies presented below is designed to assist
in understanding our consolidated financial statements.  Such
financial statements and accompanying notes are the representations of our
management, who is responsible for their integrity and
objectivity.  These accounting policies conform to accounting
principles generally accepted in the United States of America, or GAAP, in all
material respects, and have been consistently applied in preparing the
accompanying consolidated financial statements.





Interim
Financial Information





The
accompanying interim condensed 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 Securities and Exchange Commission
(“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 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 2007 Annual Report on
Form 10-K as filed with the Securities and Exchange
Commission.  Operating results for the six months ended June 30, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.


7
 Table of Contents


Cash
and Cash Equivalents





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





Real
Estate Purchase Price Allocation





We
account for all acquisitions in accordance with Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”)
No.  141, “Business Combinations”.  The results of
operations of acquired properties are included in our consolidated statements of
operations after the date of acquisition.  Upon acquisition of a
property, we allocate the purchase price of the property based upon the fair
value of the assets acquired and liabilities assumed, which generally consist of
land, buildings, site improvements, tenant improvements, leasing commissions and
intangible assets including in-place leases and above market and below market
leases.  We allocate the purchase price to the fair value of the
tangible assets of an acquired property by valuing the property as if it were
vacant.  The value of the building is depreciated over an estimated
useful life of 39 years.  The value of site improvements is
depreciated over an estimated useful life of 15-20 years.  The value
of tenants improvements is depreciated over the shorter of lease term or useful
life.





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





Acquired
above and below market leases are valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term. The value of acquired above and below market leases is
amortized over the remaining non-cancelable terms of the respective leases as an
adjustment to rental revenue on our consolidated statements of operations.
Should a tenant terminate its lease, the unamortized portion of the above or
below market lease value will be charged to revenue.  If a lease is
terminated prior to its expiration, the unamortized portion of the tenant
improvements, leasing commissions, intangible lease assets or liabilities and
the in-place lease value will be immediately charged to expense.





The
estimated useful lives for lease intangibles range from 1 month to 10
years.  As of June 30, 2008, the weighted-average amortization period
for in-place leases, acquired above market leases and acquired below market
leases were 4.1 years, 4.7 years and 3.5 years, respectively.  As of
December 31, 2007, the weighted-average amortization period for in-place leases,
acquired above market leases and acquired below market leases were are 4.2
years, 5.0 years and 3.5 years, respectively.





Amortization
associated with the lease intangible assets and liabilities for the three and
six months ended June 30, 2008 were $163,000 and $339,000,
respectively.  Amortization associated with the lease intangible
assets and liabilities for the three and six months ended June 30, 2007 were
$99,000 and $184,000, respectively.  Estimated amortization for July
1, 2008 through December 31, 2008 and each of the four subsequent years is as
follows:





Lease
      IntangiblesJuly
      1, 2008 to December 31, 2008
            
            $
            321,0002009
            
            $
            630,0002010
            
            $
            568,0002011
            
            $
            394,0002012
            
            $
            85,000


8
 Table of Contents




As of
June 30, 2008, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:





Buildings and
              Improvements
            
            
            Site
              Improvements
            
            
            In-Place Lease
            
            
            Acquired Above
              Market Leases
            
            
            Acquired Below
              Market LeasesCost
            
            $
            84,948,000
            
            
            $
            10,359,000
            
            
            $
            2,009,000
            
            
            $
            1,692,000
            
            
            $
            (833,000
            )Accumulated
      depreciation and amortization
            
            
            (2,208,000
            )
            
            
            (397,000
            )
            
            
            (628,000
            )
            
            
            (468,000
            )
            
            
            295,000Net
            
            $
            82,740,000
            
            
            $
            9,962,000
            
            
            $
            1,381,000
            
            
            $
            1,224,000
            
            
            $
            (538,000
            )





As of
December 31, 2007, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:





Buildings and
              Improvements
            
            
            Site
              Improvements
            
            
            In-Place Lease
            
            
            Acquired Above
              Market Leases
            
            
            Acquired Below
              Market LeasesCost
            
            $
            74,587,000
            
            
            $
            8,127,000
            
            
            $
            1,779,000
            
            
            $
            1,613,000
            
            
            $
            (586,000
            )Accumulated
      depreciation and amortization
            
            
            (1,177,000
            )
            
            
            (96,000
            )
            
            
            (326,000
            )
            
            
            (275,000
            )
            
            
            140,000Net
            
            $
            73,410,000
            
            
            $
            8,031,000
            
            
            $
            1,453,000
            
            
            $
            1,338,000
            
            
            $
            (446,000
            )





Impairment
of Real Estate Assets





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





Projections
of expected future cash flows require us to estimate future market rental income
amounts subsequent to the expiration of current lease
agreements.  Such projections require us to make assumptions regarding
property operating expenses, discount rates, the number of months it takes to
re-lease the property and the number of years the property is held for
investment.  The use of certain assumptions in the future cash flows
analysis may result in an incorrect assessment of the property’s future cash
flows and fair value and could result in the overstatement of the carrying value
of our real estate assets and net income if those assumptions ultimately prove
to be incorrect.





Tenant
and Other Receivables, net





Tenant
and other receivables are comprised of rental and reimbursement billings due
from tenants and the cumulative amount of future adjustments necessary to
present rental income on a straight-line basis.  Tenant receivables
are recorded at the original amount earned, less an allowance for any doubtful
accounts, which approximates fair value.  Management assesses the
realizability of tenant receivables on an ongoing basis and provides for
allowances as such balances, or portions thereof, become
uncollectible.  Our allowance for doubtful accounts was approximately
$130,000 and $0 as of June 30, 2008 and December 31, 2007,
respectively.





Other
Assets





Other
assets consist primarily of leasing commissions, prepaid expenses, other
receivables and receivable from related parties.  Additionally, other
assets will be amortized to expense over their service in future
periods.  Balances without future economic benefit are expensed as
they are identified.





Deferred
Financing Costs





Costs
incurred in connection with debt financing are recorded as deferred financing
costs.  Deferred financing costs are amortized over the contractual
terms of the respective financings.  Costs without future economic
benefit are expensed as they are identified.


9
 Table of Contents


Consolidation
Considerations for Our Investments in Joint Ventures





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





Revenue
Recognition and Valuation of Receivables





Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease.  When our
leases provide for free rent, lease incentives or other rental increases at
specified intervals, we are required to straight-line the recognition of
revenue, which results in the recording of a receivable for rent not yet due
under the lease terms.





Depreciation
of Real Property Assets





We are
required to make subjective assessments as to the useful lives of our
depreciable assets.  We consider the period of future benefit of the
asset to determine the appropriate useful lives.  Depreciation of our
assets is being charged to expense on a straight-line basis over the assigned
useful lives.





Organizational
and Offering Costs





The
advisor funds organization and offering costs on our behalf.  We are
required to reimburse the advisor for such organization and offering costs up to
3.5% of the cumulative capital raised in the Primary
Offering.  Organization and offering costs include items such as legal
and accounting fees, marketing, due diligence, promotional and printing costs
and amounts to reimburse our advisor for all costs and expenses such as salaries
and direct expenses of employees of our advisor and its affiliates in connection
with registering and marketing our shares.  All offering costs are
recorded as an offset to additional paid-in capital, and all organization costs
are recorded as an expense at the time we become liable for the payment of these
amounts.





Minority
Interest in Consolidated Subsidiaries





Minority
interests relate to the interest in the consolidated entities that are not
wholly-owned by us.





Income
Taxes





We have
elected to be taxed as a REIT, under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the “Code) beginning with
our  taxable year ending December 31, 2006.  To qualify as a
REIT, we must meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90% of the REIT’s
ordinary taxable income to stockholders.  As a REIT, we generally will
not be subject to federal income tax on taxable income that we distribute to our
stockholders.  If we fail to qualify as a REIT in any taxable year, we
will then be subject to federal income taxes on our taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT for
federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service granted us relief
under certain statutory provisions.  Such an event could materially
adversely affect our net income and net cash available for distribution to
stockholders.  However, we believe that we will continue to be
organized and operate in such a manner as to qualify for treatment as a REIT and
intend to operate in the foreseeable future in such a manner so that we will
remain qualified as a REIT for federal income tax purposes.





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.  We have cash
in financial institutions which is insured by the Federal Deposit Insurance
Corporation, or FDIC, up to $100,000 per institution.  At June 30,
2008 we had cash accounts in excess of FDIC insured limits.





As of
June 30, 2008, we owned three properties in 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.


10
 Table of Contents


Per
Share Data





We report
earnings per share pursuant to SFAS No. 128, “Earnings Per
Share.”  Basic earnings per share attributable for all periods
presented are computed by dividing the net loss by the weighted average number
of shares outstanding during the period.  Diluted earnings per share
are computed based on the weighted average number of shares and all potentially
dilutive securities, if any.





Stock
Based Compensation





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





Use
of Estimates





The
preparation of our financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
the assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the reporting period.  Actual results could
materially differ from those estimates.





Segment
Disclosure





SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information,”
establishes standards for reporting financial and descriptive information about
an enterprise’s reportable segments.  Our current business consists of
acquiring and operating  of real estate assets.  Management
evaluates operating performance on an individual property
level.  However, as each of our properties has similar economic
characteristics, our properties have been aggregated into one reportable
segment.





Recently
Issued Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures required for fair value measurements under GAAP.
SFAS 157 emphasizes that fair value is a market-based measurement, as opposed to
a transaction-specific measurement. On February 8, 2008, the FASB issued Staff
Position No. SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under Statement 13 (“FSP
157-1”). FSP 157-1, which is effective upon the initial adoption of SFAS 157,
excludes SFAS Statement No. 13, Accounting for Leases (“SFAS 13”), as well as
other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13, from the scope of SFAS
157.  On February 12, 2008, the FASB issued Staff Position No. SFAS
157-2 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all
nonrecurring nonfinancial assets and liabilities until fiscal years beginning
after November 15, 2008. Accordingly, FSP 157-2 will be effective beginning
January 1, 2009, and all other aspects of SFAS 157 were effective as of
January 1, 2008.  We adopted SFAS 157 and FSP 157-1 on January 1, 2008
and the adoption had no material impact on our consolidated financial
statements.


11
 Table of Contents


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair
value.  The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007.  Although the Company adopted
SFAS 159 as of January 1, 2008, the Company has not yet elected the fair value
option for any items permitted under SFAS 159.





In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations”  (“SFAS 141(R)”).  In summary, SFAS 141(R)
requires the acquirer of a business combination to measure at fair value the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, with limited exceptions.  The
standard is effective for fiscal years beginning after December 15, 2008, and is
to be applied prospectively, with no earlier adoption permitted.  The
adoption of this standard may have an impact on the accounting for certain costs
related to our future acquisitions.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment to Accounting Research Board No.
51 (“SFAS 160”).  SFAS 160’s objective is to improve the relevance,
comparability and transparency of financial information that a reporting entity
provides in its consolidated financial statements.  The key aspects of
SFAS 160 are (i) the minority interests in subsidiaries should be presented in
the consolidated balance sheet within equity of the consolidated group, separate
from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of
noncontrolling interests in a subsidiary that do not result in a change of
control should be accounted for as equity transactions, (iii) a parent
recognizes a gain or loss in net income when a subsidiary is deconsolidated,
measured using the fair value of the non-controlling equity investment, (iv) the
acquirer should attribute net income and each component of other comprehensive
income between controlling and non-controlling interests based on any
contractual arrangements or relative ownership interests, and (v) a
reconciliation of beginning to ending total equity is required for both
controlling and non-controlling interests. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008 and should be applied
prospectively.  We are currently evaluating the provisions for SFAS
160 to determine the potential impact, if any, the adoption will have on our
consolidated financial statements.





In April
2008, the FASB issued FASB Staff Position SFAS No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 intends to
improve the consistency between the useful life of recognized intangible assets
under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of
expected cash flows used to measure the fair value of the assets under SFAS No.
141(R). FSP FAS 142-3 amends the factors an entity should consider in developing
renewal or extension assumptions in determining the useful life of recognized
intangible assets.  It requires an entity to consider its own
historical experience in renewing or extending similar arrangements, or to
consider market participant assumptions consistent with the highest and best use
of the assets if relevant historical experience does not exist.  In
addition to the required disclosures under SFAS No. 142, FSP FAS 142-3 requires
disclosure of the entity’s accounting policy regarding costs incurred to renew
or extend the term of recognized intangible assets, the weighted average period
to the next renewal or extension, and the total amount of capitalized costs
incurred to renew or extend the term of recognized intangible assets. FSP FAS
142-3 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008.  While the standard for
determining the useful life of recognized intangible assets is to be applied
prospectively only to intangible assets acquired after the effective date, the
disclosure requirements shall be applied prospectively to all recognized
intangible assets as of, and subsequent to, the effective date. Early adoption
is prohibited.  The adoption of FSP FAS 142-3 is not expected to have
a material impact on our consolidated financial statements.


12
 Table of Contents


4.
            Investments
      in Real Estate





As of
June 30, 2008, our portfolio consists of twelve properties which were
approximately 95.2% leased.  The following table provides summary
information regarding our properties.





Property
            
            Location
            
            Date Purchased
            
            Square
              Footage
            
            
            Purchase
              Price
            
            
            Associated
      Debt
            
            
            June 30, 2008
              % Leased2111
      South Industrial Park
            
            North
      Tempe, AZ
            
            June 1,
      2006
            
            
            26,800
            
            
            $
            1,975,000
            
            
            $
            —
            
            
            
            80.6
            %Shoemaker
      Industrial Buildings
            
            Santa
      Fe Springs, CA
            
            June 30,
      2006
            
            
            18,921
            
            
            
            2,400,000
            
            
            
            —
            
            
            
            100.0
            %15172
      Goldenwest Circle
            
            Westminster,
      CA
            
            December 1,
      2006
            
            
            102,200
            
            
            
            11,200,000
            
            
            
            7,250,000
            
            
            
            100.0
            %20100
      Western Avenue
            
            Torrance,
      CA
            
            December 1,
      2006
            
            
            116,434
            
            
            
            19,650,000
            
            
            
            12,072,000
            
            
            
            100.0
            %Mack
      Deer Valley
            
            Phoenix,
      AZ
            
            January 21,
      2007
            
            
            180,985
            
            
            
            23,150,000
            
            
            
            9,933,000
            
            
            
            80.2
            %Marathon
      Center
            
            Tampa
      Bay, FL
            
            April 2,
      2007
            
            
            52,020
            
            
            
            4,450,000
            
            
            
            —
            
            
            
            84.5
            %Pinnacle
      Park Business Center
            
            Phoenix,
      AZ
            
            October 2,
      2007
            
            
            159,661
            
            
            
            20,050,000
            
            
            
            11,691,000
            
            
            
            100.0
            %Orlando
      Small Bay PortfolioCarter
            
            Winter
      Garden, FL
            
            November 15,
      2007
            
            
            49,125
            
            
            
            
            
            
            
            
            
            
            
            96.2
            %Goldenrod
            
            Orlando,
      FL
            
            November 15,
      2007
            
            
            78,646
            
            
            
            
            
            
            
            
            
            
            
            97.2
            %Hanging
      Moss
            
            Orlando,
      FL
            
            November 15,
      2007
            
            
            94,200
            
            
            
            
            
            
            
            
            
            
            
            100.0
            %Monroe
      South
            
            Sanford,
      FL
            
            November 15,
      2007
            
            
            172,500
            
            
            
            
            
            
            
            
            
            
            
            96.5
            %394,471
            
            
            
            37,128,000
            
            
            
            22,420,000
            
            
            
            95.9
            %Monroe
      North CommerCenter
            
            Sanford,
      FL
            
            April
      17, 2008
            
            
            181,348
            
            
            
            14,275,000
            
            
            
            7,333,000
            
            
            
            100.0
            %1,232,840
            
            
            $
            134,278,000
            
            
            $
            70,699,000
            
            
            
            95.2
            %








5.
            Notes
      Receivable





As of
June 30, 2008, we had agreed to loan up to $5 million at a rate of 10% per year
to two real estate operating companies.  The loans mature on May 19,
2013.  The borrowing entities are parties to an alliance with the
managing member of our advisor.  As of June 30, 2008, advances to the
borrowing entities were approximately $1.9 million.





6.
            Payable
      to Related Parties





Payable
to related parties at June 30, 2008 and December 31, 2007 consists of offering
costs, acquisition fees, and expense reimbursement payable to PCC and sales
commissions and dealer manager fees.





7.
            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 June 30, 2008, we have issued
approximately 14.2 million shares of common stock for total gross proceeds of
approximately $113.8 million.  As of December 31, 2007, we have issued
approximately 9.7 million shares of common stock for a total of approximately
$77.7 million of gross proceeds.





Distribution
Reinvestment Plan





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 11,000,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan.  The purchase price per share is 95% of the price paid by the
purchaser for our common stock, but not less than $7.60 per share.  As
of June 30, 2008 and December 31, 2007, approximately 455,000 and 253,000
shares, respectively, had been issued under the distribution reinvestment
plan.


13
 Table of Contents


The
following are the distributions declared during the first and second quarter of
2007 and 2008:





Distribution DeclaredPeriod
            
            Cash
            
            
            Reinvested
            
            
            TotalFirst
      quarter 2007 (1)
            
            $
            223,000
            
            
            $
            283,000
            
            
            $
            506,000Second
      quarter 2007 (1)
            
            
            322,000
            
            
            
            422,000
            
            
            
            744,000First
      quarter 2008
            
            
            485,000
            
            
            
            719,000
            
            
            
            1,204,000Second
      quarter 2008
            
            
            611,000
            
            
            
            926,000
            
            
            
            1,537,000







(1)
            Distributions
      declared represented a return of capital for tax
  purposes.





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.





Stock
Repurchase Program





We have
adopted a share repurchase  program for investors who have held their
shares for at lease 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 were held.  Our
board of directors may amend, suspend or terminate the program at any time on 30
days prior notice to stockholders





During
the six months ended June 30, 2008, 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
      2008
            
            
            12,500
            
            
            $
            7.20
            
            
            
            (1
            )February
      2008
            
            
            12,484
            
            
            
            7.36
            
            
            
            (1
            )March
      2008
            
            
            2,016
            
            
            
            7.15
            
            
            
            (1
            )April
      2008
            
            
            396
            
            
            
            7.09
            
            
            
            (1
            )May
      2008
            
            
            14,616
            
            
            
            7.61
            
            
            
            (1
            )June
      2008
            
            
            31,607
            
            
            
            7.51
            
            
            
            (1
            )73,619


_________________________


(1)
            As
      long as our common stock is not listed on a national securities exchange
      or traded on an other-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.  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 were held.  During our offering and each of the first
      five years following the closing of our offering, 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 or
      (ii) 5% of the number of shares outstanding at the end of the prior
      calendar year.  Beginning five years after termination of this
      offering, the number of shares that we redeem under the stock repurchase
      program is not expected to exceed 10% of the number outstanding at the end
      of the prior year.





Our board
of directors may modify our stock repurchase program so that we 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.


14
 Table of Contents


Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123R “Share-Based Payment”, (“SFAS 123R”), which requires the
measurement and recognition of compensation expense for all share-based payment
awards to employees and directors based on estimated fair values.  On
August 8, 2007 and May 10, 2006, we granted our non-employee directors
nonqualified stock options to purchase an aggregate of 20,000 and 40,000 shares
of common stock, respectively, at an exercise price of $8.00 per
share.  Outstanding stock options became immediately exercisable in
full on the grant date, expire in ten years after the grant date, and have no
intrinsic value as of June 30, 2008.  We did not incur any non-cash
compensation expenses for the three and six months ended June 30, 2008 and 2007,
respectively. No stock options were exercised or canceled during the three and
six months ended June 30, 2008 and year ended December 31, 2007.





We record
compensation expense for non-employee stock options based on the estimated fair
value of the options on the date of grant using the Black-Scholes option-pricing
model.  These assumptions include the risk-free interest rate, the
expected life of the options, the expected stock price volatility over the
expected life of the options, and the expected distribution yield. Compensation
expense for employee stock options is recognized ratably over the vesting
term.  The assumptions used to estimate the fair value of options
granted during the year ended December 30, 2007 using the Black-Scholes
option-pricing model were 5.5% distribution yield, a 4.86% risk-free interest
rate based on the 10-year U.S.  Treasury Bond, an expected life of 5
years and a volatility rate of 1.02%.





The
expected life of the options is based on evaluations of expected future exercise
behavior.  The risk free interest rate is based on the U.S. Treasury
yield curve at the date of grant with maturity dates approximately equal to the
expected term of the options at the date of the
grant.   Volatility is based on historical volatility of our
stock.  The valuation model applied in this calculation utilizes
highly subjective assumptions that could potentially change over time, including
the expected stock price volatility and the expected life of an
option.  Therefore, the estimated fair value of an option does not
necessarily represent the value that will ultimately be realized by a
non-employee director.





Equity
Compensation Plan Information





Our
equity compensation plan information as of June 30, 2008 and December 31, 2007
was as follows:





Plan
      Category
            
            Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            
            Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
            
            
            Number
      of Securities Remaining Available for Future IssuanceEquity
      compensation plans approved by security holders
            
            
            60,000
            
            
            $
            8.00
            
            
            
            (1
            )Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            60,000
            
            
            $
            8.00
            
            
            
            (1
            )


_________________________





(1)
            Our
      Employee and Director Incentive Stock Plan was approved by our security
      holders and provides that the total number of shares issuable under the
      plan is a number of shares equal to ten percent (10%) of our outstanding
      common stock.  The maximum number of shares that may be granted
      under the plan with respect to “incentive stock options” within the
      meaning of Section 422 of the Internal Revenue Code is
      5,000,000.  As of June 30, 2008 and December 31, 2007, there
      were approximately 14.6 million and 9.9 million shares of our common stock
      issued and outstanding,
respectively.





8.
            Related
      Party Transactions





Our
company has no employees. Our 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 the Offering and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the advisor in providing services to us.





Advisory
Agreement





Under the
terms of the advisory agreement, our 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 our 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.


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





Organizational and Offering
Costs.  Organizational and offering costs of the Offering are
being paid by the advisor on our behalf and will be reimbursed to the advisor
from the proceeds of the Offering.  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 the offering, 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 all marketing related costs and expenses such as
salaries and direct expenses of employees of or advisor and its affiliates in
connection with registering and marketing our shares (ii) technology costs
associated with the 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 the Primary
Offering.  As of June 30, 2008, the advisor and its affiliates had
incurred on our behalf organizational and offering costs totaling approximately
$3.9 million, including approximately $110,000 of organizational costs that have
been expensed and approximately $3.8 million of offering costs which reduce net
proceeds of our offering.  As of December 31, 2007, the advisor and
its affiliates had incurred on our behalf organizational and offering costs
totaling approximately $3.5 million, including approximately $110,000 of
organizational costs that have been expensed and approximately $3.4 million of
offering costs which reduce net proceeds of our 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
the Primary Offering.  We will pay the acquisition fees upon receipt
of the gross proceeds the Offering.  However, if the advisory
agreement is terminated or not renewed, the advisor must return acquisition fees
not yet allocated to one of our investments.  In addition, we are
required to reimburse the advisor for direct costs the advisor incurs and
amounts the advisor pays to third parties in connection with the selection and
acquisition of a property, whether or not ultimately
acquired.   For the three months ended June 30, 2008 and 2007,
the advisor earned approximately $464,000 and $285,000 acquisition fees,
respectively.  For the six months ended June 30, 2008 and 2007, the
advisor earned approximately $723,000 and $511,000 acquisition fees,
respectively.




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 principals in the United States of
America (GAAP).  In addition, we will reimburse the advisor for the
direct costs and expenses incurred by the advisor in providing asset management
services to us.  These fees and expenses are in addition to management
fees that we pay to third party property managers.  For the three
months ended June 30, 2008 and 2007, the advisor earned approximately $336,000
and $160,000 of asset management fees, respectively, which were
expensed.  For the six months ended June 30, 2008 and 2007, the
advisor earned approximately $642,000 and $299,000 of asset management fees,
respectively, which were expensed.




Operating Expenses.
The advisory agreement provides for reimbursement of our advisor’s direct and
indirect costs of providing administrative and management services to
us.  For the three months ended June 30, 2008 and 2007, approximately
$238,000 and $171,000 of such costs, respectively, were reimbursed and included
in general and administrative expenses on our condensed consolidated statement
of operations.  For the six months ended June 30, 2008 and 2007,
approximately $433,000 and $353,000 of such costs, respectively, were reimbursed
and included in general and administrative expenses on 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.


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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 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 the Primary Offering.  PCC, as Dealer Manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in the Primary Offering.  The Dealer Manager is
also entitled to receive a reimbursement of bona fide due diligence expenses up
to 0.5% of the gross proceeds from sales in the Primary Offering.  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) to the extent are in excess of 13.5% of
gross proceeds from the Offering.  For the three months ended June 30,
2008 and 2007, our dealer manager earned sales commission and dealer manager fee
of approximately $2.3 million and $1.4 million, respectively.  For the
six months ended June 30, 2008 and 2007, our dealer manager earned sales
commissions and dealer manager fee of approximately $3.6 million and $2.5
million.  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 consolidated balance sheets.





9.
            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 the offering
period to facilitate our acquisitions of properties in anticipation of the
receipt of offering proceeds.  As of June 30, 2008 and December 31,
2007, we had net borrowings of approximately $40.9 million and $43.3 million,
respectively, under the Credit Agreement.





The
credit agreement permits us to borrow up to $50,000,000 secured by real property
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 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 borrowings under
the credit facility at any time without penalty.   On March 26, 2008,
we notified the lender of our intention of exercising the first of two one-year
options to extend the loan maturity date.  On June 30, 2008, we
satisfied conditions expressed by the lender and extended our loan maturity date
to June 30, 2009.  The repayment of obligations under the credit
agreement may be accelerated in the event of a default, as defined in the credit
agreement.  The facility contains various covenants including
financial covenants with respect to consolidated interest and fixed charge
coverage and secured debt to secured asset value.  As of June 30,
2008, we were in compliance with all these financial
covenants.  During the three months ended June 30, 2008 and 2007, we
incurred approximately $391,000 and $594,000 of interest expense, respectively,
related to the credit agreement.  During the six months ended June 30,
2008 and 2007, we incurred approximately $904,000 and $1.1 million of interest
expense, respectively, related to the credit agreement.





On
November 13, 2007, we entered into a loan agreement with Wachovia Bank, National
Association to facilitate the acquisition of properties during our offering
period.  Pursuant to the terms of the loan agreement, we may borrow
$22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured
by specified real estate properties.  The loan agreement has a
maturity date of November 13, 2009, and may be prepaid without
penalty.  The entire $22.4 million available under the terms of the
loan was used to finance an acquisition of properties that closed on November
15, 2007.  During the three months ended June 30, 2008 and 2007, we
incurred approximately $222,000 and $0 of interest expense, respectively,
related to the loan agreement.  During the six months ended June 30,
2008 and 2007, we incurred approximately $491,000 and $0 of interest expense,
respectively, related to the loan agreement.


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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.





In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.4 million and $1.2 million, as of June 30, 2008 and
December 31, 2007, respectively.  These financing costs have been
capitalized and are being amortized over the life of the
agreements.  For the three months ended June 30, 2008 and 2007,
approximately $155,000 and $119,000, respectively, of deferred financing costs
were amortized and included in interest expense in the consolidated statements
of operations.  For the six months ended June 30, 2008 and 2007,
approximately $308,000 and $238,000, respectively, of deferred financing costs
were amortized and included in interest expense in the consolidated statements
of operations.





Consistent
with our borrowing policies, during our Primary Offering, we will borrow
periodically to acquire properties and for working capital.  We will
determine whether to use the proceeds of our Offering 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 Primary
Offering, 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 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 with no permanent
acquisition financing.





10.
            Commitments
      and Contingencies




We have
committed to funding $5 million to entities that are parties to an alliance with
the managing member of our advisor.  As of June 30, 2008, we have
funded approximately $1.9 million.




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, cash flows and results of
operations.  We are not presently subject to any material litigation
nor, to our knowledge, is any material litigation threatened against the Company
which if determined unfavorably to us would have a material adverse effect on
our cash flows, financial condition or results of operations.





Our
Advisor has informed us that the Financial Industry Regulatory Authority
(“FINRA”, formerly, NASD) is conducting a non-public inquiry of Pacific
Cornerstone Capital, Inc. (“PCC”), our affiliated dealer manager, that is, we
understand, focused on the private placements conducted by PCC during the period
from January 1, 2004 through October 31, 2007.  FINRA’s correspondence
requesting document production states, “This inquiry should not be construed as
an indication that the Enforcement Department or its staff has determined that
any violations of federal securities laws or NASD, NYSE or MSRB rules have
occurred.”  We have been advised that PCC is responding to FINRA’s
request for information and intends to continue to cooperate in the
inquiry.  Although we cannot, at this time, assess either the duration
or the likely outcome or consequences of this inquiry, FINRA has the authority
to impose sanctions on PCC that could adversely affect its effectiveness and
ability to raise funds in our offering.





11.
            Subsequent
      Events





As of
July 23, 2008, we had received gross proceeds of $125.0 million from the
sale of common stock in our initial public offering.   Our board of
directors authorized a special 10% stock distribution paid to the stockholders
of record on July 23, 2008.  All stockholders of record on July 23,
2008 will receive one additional share of stock for every 10 shares of stock
they owned as of that date.





On July
15, 2008, using cash generated from the sale of our offering, we paid down $10.0
million of the credit agreement with HSH Nordbank, AG.


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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 I, Item 1A of our annual report on Form 10-K for the year ended December
31, 2007 filed with the SEC.





Overview





We were
incorporated on October 22, 2004 for the purpose of engaging in the business of
investing in and owning commercial real estate.  Our articles of
incorporation 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.





As of
June 30, 2008, we raised approximately $113.8 million of gross proceeds from the
sale of approximately 14.2 million shares of our common stock and had acquired
twelve properties.





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





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,
2007, as filed with the SEC.





Results
of Operations





We
acquired four properties during 2006, one property in January 2007, one property
in April 2007, one property in October 2007, four properties in November 2007
and one property in April 2008.  Accordingly, our results of
operations for the quarters ended June 30, 2008 and June 30, 2007 are not
comparable.





Our
results of operations for the three and six months ended June 30, 2008 and 2007
are not indicative of those expected in future periods as we expect that rental
income, tenant reimbursements, operating expenses, asset management fees,
depreciation and amortization will each increase in future periods as a result
of anticipated future acquisitions of real estate assets.





Three
months ended June 30, 2008 and 2007





We owned
twelve and six properties during the three months ended June 30, 2008 and 2007,
respectively. As a result of the acquisitions, total revenues increased to $2.9
million from $1.2 million, property operating and maintenance expenses increased
to $726,000 from $325,000, asset management fees increased to $336,000 from
$160,000, and depreciation and amortization increased to $882,000 from $326,000
from the comparable 2007 period.





General
and administrative expenses increased to $521,000 from $436,000 for the
comparable period of 2007.  The increase is due primarily to additional
professional fees and advisor administration expense reimbursements resulting
from a higher level of activity in three months ended June 30,
2008.





Interest
income decreased to $61,000 from $160,000 for the comparable period of
2007.  The decrease is due primarily to lower investment rates on
short term investments during the three months ended June 30,
2008.  Interest expense increased to $869,000 from $729,000 for the
comparable period of 2007 primarily due to higher debt balances on our credit
agreement at HSH Nordbank, the loan agreement with Wachovia entered into in
November 2007 and the loan with Transamerica assumed in April 2008 as a result
on the newer acquisitions partially offset by a lower interest rate
charge.





Six
months ended June 30, 2008 and 2007





We owned
twelve and six properties during the six months ended June 2008 and 2007,
respectively.  As a result of the acquired properties, total revenues
for the six months ended June 30, 2008 increased to $5.5 million from $2.3
million, property operating and maintenance expenses increased to $1.5 million
from $556,000, asset management fees increased to $642,000 from $299,000 and
depreciation and amortization increased to $1.7 million from $579,000, from the
comparable period.  General and administrative expenses increased to
$929,000 from $852,000 from the comparable 2007 period.  The increase
is due primarily to additional professional fees and advisor administration
expense reimbursements associated with the higher level of activity during the
six months ended June 30, 2008.


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 Table of Contents


Interest
income decreased to $115,000 from to $270,000 for the comparable six months of
2007.  The decrease is due primarily to lower investment rates on short
term investments in 2008 offset by a higher cash balance resulting in more
investments during the same period.  Interest expense increased to
$1.8 million in the first six months of 2008 from $1.4 million in the comparable
period of 2007.  The increase is primarily due to a higher debt balances on
our credit facilities as a result of the newer acquisitions partially offset by
lower interest rate charges.





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, for the payment of operating expenses, including interest expense
on any outstanding indebtedness, for the payment of distributions and for the
repayment of notes payable.





As of
June 30, 2008, a total of approximately 14.2 million shares of our common stock
had been sold in our Offering for aggregate gross proceeds of approximately
$113.8 million.  Because we did not raise the maximum offering
proceeds of $355.2 million in our initial public offering prior to the
previously scheduled September 21, 2007 offering termination date, we have
extended the offering period until the earlier of September 21, 2008 or until
the maximum primary offering amount is raised, although we reserve the right to
extend this offering period. Under no circumstances will the initial offering
period be extended beyond June 1, 2009.





As of
June 30, 2008, we had approximately $25.9 million in cash and cash equivalents
on hand and approximately $9.1 million available under our acquisition credit
facility with HSH Nordbank.  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.





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





Until
proceeds from our Offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay all or a
substantial portion of our distributions from the proceeds of our Offering or
from borrowings in anticipation of future cash flow.  For the six
months ended June 30, 2008, distributions to stockholders were paid from funds
from operations and proceeds of our offering and borrowings in anticipation
of future cash flow.





As of
June 30, 2008, our advisor had incurred $3.9 million of organization and
offering costs on our behalf.  Of this amount, we have reimbursed $3.8
million to our advisor.  Our advisor advances us money for these
organization and offering expenses or pays these expenses on our
behalf.  Our advisor will not charge us interest on these
advances.  We will repay these advances and reimburse our advisor for
expenses paid on our behalf using the gross proceeds of our initial public
offering, but in no event will we have any obligation to reimburse our advisor
for these costs totaling in excess of 3.5% of the gross proceeds from our
primary offering. Our advisor will pay all of our organization and offering
expenses described above that are in excess this 3.5% limitation.  In
addition, our 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 initial public
offering.





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





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





We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our initial public offering.  To the extent sufficient
proceeds from our offering 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 all-cash with no permanent financing.  In the event
that our initial public offering is not fully sold, our ability to diversify our
investments may be diminished.  We are not aware of any material
trends or uncertainties, favorable or unfavorable, other than national 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.


20
 Table of Contents


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 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.  Our
calculations of FFO for the three and six months ended June 30, 2008 and 2007
are presented below (in thousands):





Three months ended
            
            
            Six months endedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      loss
            
            $
            (347,000
            )
            
            $
            (581,000
            )
            
            $
            (902,000
            )
            
            $
            (1,107,000
            )Real
      estate assets depreciation
            
            
            710,000
            
            
            
            252,000
            
            
            
            1,332,000
            
            
            
            445,000Real
      estate intangible assets amortization
            
            
            172,000
            
            
            
            74,000
            
            
            
            340,000
            
            
            
            134,000Funds
      from operations (FFO)
            
            $
            535,000
            
            
            
            (255,000
            )
            
            
            770,000
            
            
            
            (528,000
            )Weighted
      average shares outstanding
            
            
            12,664,848
            
            
            
            6,482,651
            
            
            
            11,238,449
            
            
            
            5,357,635








In
addition, FFO may be used to fund all or a portion of certain capitalizable
items that are excluded from FFO, 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.





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 our 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 real estate
environment, ultimate FFO performance cannot be predicted with
certainty.  Currently, we make cash distributions to our stockholders
from capital at an annualized rate of 6.0%, based on an $8.00 per share purchase
price. These distributions are being paid 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 pay a substantial 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.


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Contractual
Obligations





The
following table reflects our contractual obligations as of June 30, 2008,
specifically our obligations under long-term debt agreements and notes
receivables:





Payment
      due by periodContractual
      Obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsLong-Term
      Debt Obligations (1)
            
            $
            70,699,000
            
            
            $
            41,123,000
            
            
            $
            23,020,000
            
            
            $
            6,556,000
            
            
            $
            —Interest
      expense related to long term debt  (2)
            
            $
            3,231,000
            
            
            $
            2,013,000
            
            
            $
            320,000
            
            
            $
            898,000
            
            
            $
            —Notes
      receivable (3)
            
            $
            3,125,000
            
            
            $
            3,125,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -


_________________________


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





(2)  Interest
expenses related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wachovia Bank National Association are calculated based on the
loan balances outstanding at June 30, 2008, one month LIBOR at June 30, 2008
plus appropriate margin ranging from 1.15% and
1.40%.    Interest expenses 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 $5 million to entities that are parties to an alliance
with the managing member of our advisor.  As of June 30, 2008, we have
funded approximately $1.9 million.





Item
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk





We invest
our cash and cash equivalents in short-term, highly liquid investments including
government obligations, bank certificates of deposit and interest-bearing
accounts which, by their nature, are subject to interest rate
fluctuations.  As of June 30, 2008, we had borrowed approximately
$70.7 million under our credit facility and loan agreements.





The
credit facility with HSH Nordbank and future borrowing on the credit facility is
subject to a variable rate through its maturity date.  Under the terms
of the amended agreement, the principal balance will be due on June 30,
2009.  The loan agreement with Wachovia Bank, National Association is
subject to a variable rate through its maturity date of November 13,
2009.  The loan agreement with Transamerica Life Insurance Company is
based on a fixed rate of 5.89% per annum and therefore is not subject to any
interest rate fluctuations.





An
increase in the variable interest rate on the facilities constitutes a market
risk as a change in rates would increase or decrease interest incurred and
therefore cash flows available for distribution to
shareholders.  Based on the debt outstanding as of June 30, 2008, a 1%
change in interest rates would result in a change in interest expense of
approximately $707,000 per year.  During the period from January 1,
2008 through June 30, 2008, 30-day LIBOR has remained flat.  However,
there can be no assurance that this rate will not increase or
decrease.





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 reviewed 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.





Our Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f).  Under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.


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 Table of Contents


Based on
their evaluation as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that we maintained
effective internal control over financial reporting as of June 30,
2008.





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





PART
II - OTHER INFORMATION





Item
      1A.
            Risk
      Factors





There
have been no material changes to the risks factors disclosed under Part I, Item
1A of our annual report on Form 10-K for the year ended December 31,
2007.





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





Our
registration statement (SEC File No.  333-121238) for our initial
public offering of up to 44,400,000 shares of our common stock at $8.00 per
share and up to 11,000,000 additional shares at $7.60 per share pursuant to our
distribution reinvestment plan was declared effective on September 22,
2005.  The aggregate offering amount of the shares registered for sale
in our initial public offering, assuming the maximum number of shares is sold,
is $438,800,000.  The offering commenced on January 13, 2006 and has
not terminated.





As of
June 30, 2008, excluding issuance of approximately 0.5 million shares under our
distribution reinvestment plan, we had sold approximately 14.2 million shares of
common stock in our ongoing offering, raising gross offering proceeds of
approximately $113.8 million.  From this amount, we incurred
approximately $11.2 million in selling commissions and dealer manager fees
payable to our dealer manager and approximately $2.3 million in acquisition fees
payable to our advisor.  We have used approximately $66.2 million of
the net offering proceeds to acquire properties as of June 30, 2008. As of June
30, 2008, the advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $3.9 million, including
approximately $110,000 of organizational costs that have been expensed and
approximately $3.8 million of offering costs which reduce net proceeds of our
offering.





Item
      4.
            Submission of Matters to a Vote of Security
      Holders





On May 7,
2008, we held our annual meeting of stockholders at our executive office in
Irvine, California.  Our stockholders elected Paul Danchik, Daniel L.
Johnson, Terry G. Roussel and Lee Powell Stedman to the board of
directors.  The following table sets forth the number of votes cast for,
withheld, and the number of abstentions with respect to each nominee for
director.  There were no broker non-votes.


Name
            
            Votes For
            
            Votes withheld
            
            AbstentionsPaul
      Danchik
            
            5,747,198
            
            3,600
            
            -Daniel
      L. Johnson
            
            5,745,947
            
            4,851
            
            -Terry
      G. Roussel
            
            5,748,548
            
            2,250
            
            -Lee
      Powell Stedman
            
            5,748,548
            
            2,250
            
            -





Item
      6.
            Exhibits


10.1
              
              Purchase
      and Sale Agreement, by and between Cornerstone Operating Partnership, L.P.
      and Realvest-Monroe Commercenter LLC, a Florida limited Liability company,
      dated November 29, 2007  (incorporated by reference to Exhibit
      10.1 to the registrant’s current report on Form 8-K filed with the SEC on
      April 23, 2008).10.2
              
              First
      Amendment to Purchase and Sale Agreement, by and between Cornerstone
      Operating Partnership, L.P. and Realvest-Monroe Commercenter LLC, a
      Florida limited Liability company, dated January 15, 2008 (incorporated by
      reference to Exhibit 10.2 to the registrant’s current report on Form 8-K
      filed with the SEC on April 23, 2008).10.3
              
              Second
      Amendment to Purchase and Sale Agreement, as amended, by and between
      Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
      LLC, a Florida limited Liability company, dated January 28, 2008
      (incorporated by reference to Exhibit 10.3 to the registrant’s current
      report on Form 8-K filed with the SEC on April 23,
  2008).10.4
              
              Third
      Amendment to Purchase and Sale Agreement, as amended, by and between
      Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
      LLC, a Florida limited Liability company, dated February 20, 2008
      (incorporated by reference to Exhibit 10.4 to the registrant’s current
      report on Form 8-K filed with the SEC on April 23,
  2008).10.5
              
              Fourth
      Amendment to Purchase and Sale Agreement, as amended, by and between
      Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
      LLC, a Florida limited Liability company, dated April 1, 2008
      (incorporated by reference to Exhibit 10.5 to the registrant’s current
      report on Form 8-K filed with the SEC on April 23,
  2008).10.6
              
              Assumption
      and Amendment of Note, Mortgage and Other Loan Documents, by and between
      Cornerstone Operating Partnership, L.P. and TransAmerica Life Insurance
      Company, an Iowa corporation, dated April 17, 2008 (incorporated by
      reference to Exhibit 10.6 to the registrant’s current report on Form 8-K
      filed with the SEC on April 23, 2008).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.


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SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 13th day of August,
2008.





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






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