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 September 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 o Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


o  Yes  x  No





As of
October 31, 2008, we had approximately 19,667,575 shares issued and
outstanding.







1





PARTI - 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 September 30, 2008 and December 31, 2007
      (unaudited)
                    3Condensed
      Consolidated Statements of Operations for the Three and Nine Months ended
      September 30, 2008 and September 30, 2007
      (unaudited)
                    4Condensed
      Consolidated Statement of Stockholders’ Equity for the Nine Months ended
      September 30, 2008 (unaudited)
                    5Condensed
      Consolidated Statements of Cash Flows for the Nine Months ended September
      30, 2008 and September 30, 2007 (unaudited)
                    6Notes to
      Condensed Consolidated Financial Statements
      (unaudited)
                    7Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    21Item
      3.
                    Quantitative and
      Qualitative Disclosure about Market Risk
                    25Item
      4T.
                    Controls and
      Procedures
                    25PART
      II.
                    OTHER
      INFORMATION
                    26Item
      1A.
                    Risk
      Factors
                    26Item
      2.
                    Unregistered Sales
      of Equity Securities and Use of Proceeds
                    26Item
      6.
                    Exhibits
                    27SIGNATURES
                    28





2
 Table of Contents





CORNERSTONECORE PROPERTIES REIT, INC. AND
SUBSIDIARIES





CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)








September
      30,
                            
                            
                            December
      31,2008
                            
                            
                            2007ASSETSCash
      and cash equivalents
                            
                            $
                            19,792,000
                            
                            
                            $
                            6,648,000Investments
      in real estate:Land
                            
                            
                            39,087,000
                            
                            
                            
                            36,762,000Buildings
      and improvements, net
                            
                            
                            92,951,000
                            
                            
                            
                            81,441,000Intangible
      lease assets, net
                            
                            
                            2,327,000
                            
                            
                            
                            2,791,000134,365,000
                            
                            
                            
                            120,994,000Notes
      receivable
                            
                            
                            2,875,000
                            
                            
                            
                            —Deferred
      acquisition costs and deposits
                            
                            
                            43,000
                            
                            
                            
                            633,000Deferred
      financing costs, net
                            
                            
                            283,000
                            
                            
                            
                            412,000Tenant
      and other receivables, net
                            
                            
                            774,000
                            
                            
                            
                            540,000Other
      assets, net
                            
                            
                            461,000
                            
                            
                            
                            695,000Total
      assets
                            
                            $
                            158,593,000
                            
                            
                            $
                            129,922,000LIABILITIES,
      MINORITY INTERESTS AND STOCKHOLDERS’ EQUITYLiabilities:Notes
      payable
                            
                            $
                            45,670,000
                            
                            
                            $
                            65,699,000Accounts
      payable and accrued liabilities
                            
                            
                            679,000
                            
                            
                            
                            1,062,000Payable
      to related parties
                            
                            
                            180,000
                            
                            
                            
                            899,000Prepaid
      rent and security deposits
                            
                            
                            887,000
                            
                            
                            
                            766,000Property
      taxes payable
                            
                            
                            803,000
                            
                            
                            
                            126,000Intangible
      lease liability, net
                            
                            
                            463,000
                            
                            
                            
                            446,000Distributions
      payable
                            
                            
                            743,000
                            
                            
                            
                            367,000Total
      liabilities
                            
                            
                            49,425,000
                            
                            
                            
                            69,365,000Minority
      interests
                            
                            
                            154,000
                            
                            
                            
                            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 September 30, 2008 and December 31,
      2007
                            
                            
                            —
                            
                            
                            
                            —Common
      stock, $0.001 par value; 290,000,000 shares authorized; 19,160,496 and
      9,908,551 shares issued and outstanding at September 30, 2008 and December
      31, 2007, respectively
                            
                            
                            19,000
                            
                            
                            
                            10,000Additional
      paid-in capital
                            
                            
                            113,964,000
                            
                            
                            
                            64,239,000Accumulated
      deficit
                            
                            
                            (4,969,000
                            )
                            
                            
                            (4,001,000
                            )Total
      stockholders’ equity
                            
                            
                            109,014,000
                            
                            
                            
                            60,248,000Total
      liabilities, minority interests and stockholders’ equity
                            
                            $
                            158,593,000
                            
                            
                            $
                            129,922,000





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





3
 Table of Contents





CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)





Three Months Ended September
      30,
                
                
                Nine Months Ended September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007RevenuesRental
      revenues
                
                $
                2,321,000
                
                
                $
                1,071,000
                
                
                $
                6,687,000
                
                
                $
                3,011,000Tenant
      reimbursements and other income
                
                
                570,000
                
                
                
                305,000
                
                
                
                1,675,000
                
                
                
                671,000Interest
      income from notes receivable
                
                
                61,000
                
                
                
                -
                
                
                
                86,000
                
                
                
                -2,952,000
                
                
                
                1,376,000
                
                
                
                8,448,000
                
                
                
                3,682,000ExpensesProperty
      operating and maintenance
                
                
                751,000
                
                
                
                335,000
                
                
                
                2,202,000
                
                
                
                891,000General
      and administrative
                
                
                402,000
                
                
                
                411,000
                
                
                
                1,331,000
                
                
                
                1,265,000Asset
      management fees
                
                
                342,000
                
                
                
                158,000
                
                
                
                984,000
                
                
                
                457,000Depreciation
      and amortization
                
                
                948,000
                
                
                
                329,000
                
                
                
                2,620,000
                
                
                
                906,0002,443,000
                
                
                
                1,233,000
                
                
                
                7,137,000
                
                
                
                3,519,000Operating
      income
                
                
                509,000
                
                
                
                143,000
                
                
                
                1,311,000
                
                
                
                163,000Interest
      income
                
                
                105,000
                
                
                
                238,000
                
                
                
                221,000
                
                
                
                508,000Interest
      expense
                
                
                (680,000
                )
                
                
                (711,000
                )
                
                
                (2,496,000
                )
                
                
                (2,109,000
                )Loss
      before minority interests
                
                
                (66,000
                )
                
                
                (330,000
                )
                
                
                (964,000
                )
                
                
                (1,438,000
                )Minority
      interests
                
                
                -
                
                
                
                -
                
                
                
                4,000
                
                
                
                (1,000
                )Net
      loss
                
                $
                (66,000
                )
                
                $
                (330,000
                )
                
                $
                (968,000
                )
                
                $
                (1,437,000
                )Net
      loss per share – basic and diluted
                
                $
                (0.00
                )
                
                $
                (0.04
                )
                
                $
                (0.07
                )
                
                $
                (0.22
                )Weighted
      average number of common shares
                
                
                17,677,146
                
                
                
                8,864,022
                
                
                
                13,270,335
                
                
                
                6,526,076








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





4
 Table of Contents





CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


For
the Nine Months Ended September 30, 2008





(Unaudited)





Common
      StockNumber
      of
                        Shares
                      
                      
                      Common
                        Stock
      Par
                        Value
                      
                      
                      Additional
                        Paid-In
      Capital
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      TotalBalance
      - December 31, 2007
                      
                      
                      9,908,551
                      
                      
                      $
                      10,000
                      
                      
                      $
                      64,239,000
                      
                      
                      $
                      (4,001,000
                      )
                      
                      $
                      60,248,000Issuance
      of common stock
                      
                      
                      7,816,096
                      
                      
                      
                      8,000
                      
                      
                      
                      62,379,000
                      
                      
                      
                      —
                      
                      
                      
                      62,387,000Redeemed
      shares
                      
                      
                      (159,292
                      )
                      
                      
                      —
                      
                      
                      
                      (1,182,000
                      )
                      
                      
                      —
                      
                      
                      
                      (1,182,000
                      )Offering
      costs
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (6,601,000
                      )
                      
                      
                      —
                      
                      
                      
                      (6,601,000
                      )Special
      stock dividend declared and issued
                      
                      
                      1,595,141
                      
                      
                      
                      1,000
                      
                      
                      
                      (1,000
                      )
                      
                      
                      -
                      
                      
                      
                      -Dividends
      declared
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (4,870,000
                      )
                      
                      
                      —
                      
                      
                      
                      (4,870,000
                      )Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (968,000
                      )
                      
                      
                      (968,000
                      )Balance
      – September 30, 2008
                      
                      
                      19,160,496
                      
                      
                      $
                      19,000
                      
                      
                      $
                      113,964,000
                      
                      
                      $
                      (4,969,000
                      )
                      
                      $
                      109,014,000








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





5
 Table of Contents





CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September
    30,2008
                                  
                                  
                                  2007Cash
      flows from operating activitiesNet
      loss
                                  
                                  $
                                  (968,000
                                  )
                                  
                                  $
                                  (1,437,000
                                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Amortization
      of deferred financing costs
                                  
                                  
                                  371,000
                                  
                                  
                                  
                                  361,000Depreciation
      and amortization
                                  
                                  
                                  2,620,000
                                  
                                  
                                  
                                  906,000Straight-line
      rents and amortization of acquired above (below) market
    leases
                                  
                                  
                                  (293,000
                                  )
                                  
                                  
                                  89,000Minority
      interest
                                  
                                  
                                  (1,000
                                  )
                                  
                                  
                                  (1,000
                                  )Provisions
      for bad debt
                                  
                                  
                                  171,000
                                  
                                  
                                  
                                  —Change
      in operating assets and liabilities:Tenant
      and other receivables
                                  
                                  
                                  (37,000
                                  )
                                  
                                  
                                  (307,000
                                  )Other
      assets
                                  
                                  
                                  210,000
                                  
                                  
                                  
                                  (143,000
                                  )Payable
      and accrued liabilities
                                  
                                  
                                  337,000
                                  
                                  
                                  
                                  532,000Prepaid
      rents and security deposits
                                  
                                  
                                  —
                                  
                                  
                                  
                                  13,000Payable
      to related parties
                                  
                                  
                                  (26,000
                                  )
                                  
                                  
                                  (517,000
                                  )Net
      cash provided by (used in) operating activities
                                  
                                  
                                  2,384,000
                                  
                                  
                                  
                                  (504,000
                                  )Cash
      flows from investing activitiesReal
      estate acquisition costs and deposits
                                  
                                  
                                  (8,087,000
                                  )
                                  
                                  
                                  (27,118,000
                                  )Escrow
      refund (deposits)
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  (9,962,000
                                  )Notes
      receivable
                                  
                                  
                                  (2,875,000
                                  )
                                  
                                  
                                  —Net
      cash used in investing activities
                                  
                                  
                                  (10,812,000
                                  )
                                  
                                  
                                  (37,080,000
                                  )Cash
      flows from financing activitiesIssuance
      of common stock
                                  
                                  
                                  59,638,000
                                  
                                  
                                  
                                  33,872,000Redeemed
      shares
                                  
                                  
                                  (1,182,000
                                  )
                                  
                                  
                                  (110,000
                                  )Proceeds
      from notes payable
                                  
                                  
                                  —
                                  
                                  
                                  
                                  13,740,000Repayment
      of notes payable
                                  
                                  
                                  (27,404,000
                                  )
                                  
                                  
                                  —Offering
      costs
                                  
                                  
                                  (7,294,000
                                  )
                                  
                                  
                                  (4,488,000
                                  )Minority
      interest
                                  
                                  
                                  (145,000
                                  )
                                  
                                  
                                  145,000Other
      receivables
                                  
                                  
                                  —
                                  
                                  
                                  
                                  211,000Distributions
      paid to stockholders
                                  
                                  
                                  (1,787,000
                                  )
                                  
                                  
                                  (872,000
                                  )Distributions
      paid to minority interest
                                  
                                  
                                  (12,000
                                  )
                                  
                                  
                                  (9,000
                                  )Deferred
      financing costs
                                  
                                  
                                  (242,000
                                  )
                                  
                                  
                                  (63,000
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  21,572,000
                                  
                                  
                                  
                                  42,426,000Net
      increase in cash and cash equivalents
                                  
                                  
                                  13,144,000
                                  
                                  
                                  
                                  4,842,000Cash
      and cash equivalents - beginning of period
                                  
                                  
                                  6,648,000
                                  
                                  
                                  
                                  11,041,000Cash
      and cash equivalents - end of period
                                  
                                  $
                                  19,792,000
                                  
                                  
                                  $
                                  15,883,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                  
                                  $
                                  2,419,000
                                  
                                  
                                  $
                                  1,556,000Supplemental
      disclosure of non-cash financing and investing activities:Distribution
      declared not paid
                                  
                                  $
                                  743,000
                                  
                                  
                                  $
                                  308,000Receivable
      from transfer agent
                                  
                                  $
                                  45,000
                                  
                                  
                                  
                                  —Distribution
      reinvested
                                  
                                  $
                                  2,704,000
                                  
                                  
                                  $
                                  1,123,000Payable
      to related parties
                                  
                                  $
                                  126,000
                                  
                                  
                                  $
                                  814,000Security
      deposits and other liabilities assumed upon acquisition of real
      estate
                                  
                                  $
                                  127,000
                                  
                                  
                                  $
                                  145,000Accrued
      real estate addition
                                  
                                  $
                                  6,000
                                  
                                  
                                  $
                                  —Assumption
      of loan in connection with property acquisition
                                  
                                  $
                                  7,375,000
                                  
                                  
                                  $
                                  —





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





6
 Table of Contents





CORNERSTONECORE PROPERTIES REIT, INC. AND
SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
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.





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At September 30, 2008,
we owned 99.86% general partner interest in the Operating Partnership while the
advisor owned a 0.14% 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 September 30, 2008, a total of
approximately 17.2 million shares of our common stock had been sold under the
Primary Offering for aggregate gross proceeds of approximately $137.3
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 nine months ended September 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 to 20 years.  The
value of tenant 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 September 30, 2008, the weighted-average amortization
periods 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
nine months ended September 30, 2008 was $202,000 and $541,000,
respectively.  Amortization associated with the lease intangible
assets and liabilities for the three and nine months ended September 30, 2007
was $97,000 and $281,000, respectively.  Estimated amortization for
October 1, 2008 through December 31, 2008 and each of the four subsequent years
is as follows:





Lease
      Intangibles AmortizationOctober  1,
      2008 to December 31, 2008
                    
                    $
                    155,0002009
                    
                    $
                    614,0002010
                    
                    $
                    553,0002011
                    
                    $
                    389,0002012
                    
                    $
                    85,000





8
 Table of Contents





As of
September 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
                    
                    $
                    85,956,000
                    
                    
                    $
                    10,360,000
                    
                    
                    $
                    2,009,000
                    
                    
                    $
                    1,692,000
                    
                    
                    $
                    (834,000
                    )Accumulated
      depreciation and amortization
                    
                    
                    (2,795,000
                    )
                    
                    
                    (570,000
                    )
                    
                    
                    (793,000
                    )
                    
                    
                    (581,000
                    )
                    
                    
                    371,000Net
                    
                    $
                    83,161,000
                    
                    
                    $
                    9,790,000
                    
                    
                    $
                    1,216,000
                    
                    
                    $
                    1,111,000
                    
                    
                    $
                    (463,000
                    )





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
                    )





Depreciation
expense associated with buildings and improvements and site improvements for the
three months ended September 30, 2008 and 2007 was approximately $759,000 and
$254,000, respectively.  Depreciation expense associated with
buildings and improvements and site improvements for the nine months ended
September 30, 2008 and 2007 was approximately $2.1 million and $699,000,
respectively.





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
$171,000 and $0 as of September 30, 2008 and December 31, 2007,
respectively.





Other
Assets, net





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.





9
 Table of Contents





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.





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
interest relates to the interest in the consolidated entity that is 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 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.  As of September 30, 2008 we had cash accounts in excess
of FDIC insured limits.  On October 3, 2008, President George W. Bush
signed the Emergency Economic Stabilization Act of 2008, which temporarily
raises the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor.  The temporary increase in deposit insurance
coverage became effective upon the President's signature.  The
legislation provides that the basic deposit insurance limit will return to
$100,000 after December 31, 2009.





10
 Table of Contents





As of
September 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.





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.  All per share computations
have been adjusted to reflect the common stock dividends for all periods
presented.  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.





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.





11
 Table of Contents





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
September 30, 2008, our portfolio consists of twelve properties which were
approximately 94.9% leased.  The following table provides summary
information regarding our properties.





Property
                                  
                                  Location
                                  
                                  Date
      Purchased
                                  
                                  Square
                                    Footage
                                  
                                  
                                  Purchase
                                    Price
                                  
                                  
                                  Associated
      Debt
                                  
                                  
                                  September
      30, 2008
                                    %
      Leased2111
      South Industrial Park
                                  
                                  North
      Tempe, AZ
                                  
                                  June
      1, 2006
                                  
                                  
                                  26,800
                                  
                                  
                                  $
                                  1,975,000
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  
                                  67.2
                                  %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
                                  
                                  
                                  
                                  2,824,000
                                  
                                  
                                  
                                  100.0
                                  %20100
      Western Avenue
                                  
                                  Torrance,
      CA
                                  
                                  December
      1, 2006
                                  
                                  
                                  116,433
                                  
                                  
                                  
                                  19,650,000
                                  
                                  
                                  
                                  4,702,000
                                  
                                  
                                  
                                  100.0
                                  %Mack
      Deer Valley
                                  
                                  Phoenix,
      AZ
                                  
                                  January
      21, 2007
                                  
                                  
                                  180,985
                                  
                                  
                                  
                                  23,150,000
                                  
                                  
                                  
                                  3,868,000
                                  
                                  
                                  
                                  80.2
                                  %Marathon
      Center
                                  
                                  Tampa
      Bay, FL
                                  
                                  April
      2, 2007
                                  
                                  
                                  52,020
                                  
                                  
                                  
                                  4,450,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  81.9
                                  %Pinnacle
      Park Business Center
                                  
                                  Phoenix,
      AZ
                                  
                                  October
      2, 2007
                                  
                                  
                                  159,661
                                  
                                  
                                  
                                  20,050,000
                                  
                                  
                                  
                                  4,553,000
                                  
                                  
                                  
                                  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
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  97.1
                                  %394,471
                                  
                                  
                                  
                                  37,128,000
                                  
                                  
                                  
                                  22,420,000
                                  
                                  
                                  
                                  97.7
                                  %Monroe
      North CommerCenter
                                  
                                  Sanford,
      FL
                                  
                                  April
      17, 2008
                                  
                                  
                                  181,348
                                  
                                  
                                  
                                  14,275,000
                                  
                                  
                                  
                                  7,303,000
                                  
                                  
                                  
                                  100.0
                                  %1,232,839
                                  
                                  
                                  $
                                  134,278,000
                                  
                                  
                                  $
                                  45,670,000
                                  
                                  
                                  
                                  94.9
                                  %








5.
            Notes
      Receivable





In May
2008, we agreed to loan up to $5.0 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 September 30, 2008, advances to
the borrowing entities were approximately $2.9 million.





6.
            Payable to Related
      Parties





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





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 September 30, 2008, we have issued
approximately 17.2 million shares of common stock for total gross proceeds of
approximately $137.3 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 September 30, 2008 and December 31, 2007, approximately 609,000 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, second and third
quarters 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
                        
                        
                        
                        744,000Third
      quarter 2007 (1)
                        
                        
                        385,000
                        
                        
                        
                        523,000
                        
                        
                        
                        908,000First
      quarter 2008
                        
                        
                        485,000
                        
                        
                        
                        719,000
                        
                        
                        
                        1,204,000Second
      quarter 2008
                        
                        
                        611,000
                        
                        
                        
                        926,000
                        
                        
                        
                        1,537,000Third
      quarter 2008
                        
                        
                        831,000
                        
                        
                        
                        1,298,000
                        
                        
                        
                        2,129,000








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


In
      order to meet the requirements for being treated as a REIT under the
      Internal Revenue Code, we must pay distributions to our shareholders each
      taxable year equal to at least 90% of our net ordinary taxable
      income.  Some of our distributions have been paid from sources
      other than operating cash flow, such as offering
      proceeds.  Until proceeds from our offering are fully invested
      and generating operating cash flow sufficient to fully cover distributions
      to stockholders, we intend to pay a portion of our distributions from the
      proceeds of our offering or from borrowings in anticipation of future cash
      flow.





The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis.  The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deems relevant.  We may amend or
terminate the distribution reinvestment plan for any reason at any time upon 10
days prior written notice to participants.





Special
10% Stock Distribution





Our board
of directors authorized a special 10% stock distribution to be paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering, which was achieved on July 23,
2008.    All stockholders of record on July 23, 2008
received one additional share of stock for every 10 shares of stock they owned
as of that date.  This special 10% stock distribution has the effect
of lowering the effective purchase price per share paid by these investors by
approximately 10%.  The price at which we would redeem stock pursuant
to our stock repurchase program is based on the actual purchase price paid for
shares and is not affected by the special 10% stock distribution.  We
intend to treat these distributions as adjustments to the per share price for
stock.





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





14
 Table of Contents





During
the nine months ended September 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
                          )July
      2008
                          
                          
                          56,504
                          
                          
                          
                          7.59
                          
                          
                          
                          (1
                          )August
      2008
                          
                          
                          22,569
                          
                          
                          
                          7.15
                          
                          
                          
                          (1
                          )September
      2008
                          
                          
                          6,600
                          
                          
                          
                          6.76
                          
                          
                          
                          (1
                          )159,292


_________________________


(1)
            As long as our common stock is
      not listed on a national securities exchange or traded on an over
      -the-counter market, our stockholders who have held their stock for at
      least one year may be able to have all or any portion of their shares
      redeemed in accordance with the procedures outlined in the prospectus
      relating to the shares they purchased.  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.





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 6, 2008 and August 8, 2007, we granted our non-employee directors
nonqualified stock options to purchase an aggregate of 20,000
and  20,000 shares of common stock, respectively, at an exercise price
of $8.00 per share.  Of these options, 15,000 are due to lapse on
November 8, 2008 due to the resignation of Joseph Holland from the board of
directors on August 6, 2008.  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 September 30, 2008.  For
the three and nine months ended September 30, 2008 and 2007, we did not incur
any non-cash compensation expenses.  No stock options were exercised
or canceled during the nine months ended September 30, 2008. 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 on August 7,
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 assumptions used to
estimate the fair value of options granted on August 6, 2008 using the
Black-Scholes option-pricing model were 6.0% distribution yield, a 4.05%
risk-free interest rate based on the 10-year U.S.Treasury Bond, an expected life
of 5 years and a volatility rate of 1.03%.





15
 Table of Contents





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 September 30, 2008 was as
follows:





Plan
      Category
                      
                      Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights(1)
                      
                      
                      Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
                      
                      
                      Number
      of Securities Remaining Available for Future IssuanceEquity
      compensation plans approved by security holders
                      
                      
                      80,000
                      
                      
                      $
                      8.00
                      
                      
                      
                      (2
                      )Equity
      compensation plans not approved by security holders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      80,000
                      
                      
                      $
                      8.00
                      
                      
                      
                      (2
                      )


_________________________





(1)
            Of these options, 15,000 are due
      to lapse on November 8, 2008 due to the resignation of Joseph Holland
      from the board of directors, which was effective August 6,
      2008.


(2)
            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
      September 30, 2008, there were approximately 19.2 million shares of our
      common stock issued and
outstanding.





Our
equity compensation plan information as of December 31, 2007 was as
follows:





Plan
      Category
                      
                      Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights(1)
                      
                      
                      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
                      
                      
                      
                      (2
                      )Equity
      compensation plans not approved by security holders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      60,000
                      
                      
                      $
                      8.00
                      
                      
                      
                      (2
                      )


_________________________





(1)
            Of these options, 15,000 are due
      to lapse on November 8, 2008 due to the resignation of Joseph Holland from
      the board of directors, which was effective August 6,
      2008.


(2)
            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
      December 31, 2007, there were approximately 9.9 million shares of our
      common stock issued and
outstanding.




16
 Table of Contents





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.





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 September 30, 2008, the advisor and its affiliates
had incurred on our behalf organizational and offering costs totaling
approximately $4.2 million, including approximately $110,000 of organizational
costs that have been expensed and approximately $4.1 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 September 30, 2008 and 2007, the advisor earned approximately
$469,000 and $166,000 of acquisition fees, respectively.  For the nine
months ended September 30, 2008 and 2007, the advisor earned approximately $1.2
million and $677,000 of 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 September 30, 2008 and 2007, the advisor earned approximately
$342,000 and $158,000 of asset management fees, respectively, which were
expensed.  For the nine months ended September 30, 2008 and 2007, the
advisor earned approximately $984,000 and $457,000 of asset management fees,
respectively, which were expensed.




17
 Table of Contents




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 September 30, 2008 and 2007,
approximately $177,000 and $90,000 of such costs, respectively, were reimbursed
and included in general and administrative expenses in our condensed
consolidated statement of operations.  For the nine months ended
September 30, 2008 and 2007, approximately $610,000 and $443,000 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.





Subordinated Participation
Provisions.  The advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or
termination of the advisor, as follows:





·
            After stockholders have received
      cumulative distributions equal to $8.00 per share (less any returns of
      capital) plus cumulative, non-compounded annual returns on net invested
      capital, the advisor will be paid a subordinated participation in net sale
      proceeds ranging from a low of 5% of net sales provided investors have
      earned annualized returns of 6% to a high of 15% of net sales proceeds if
      investors have earned annualized returns of 10% or
      more.





·
            Upon termination of the advisory
      agreement, the advisor will receive the subordinated performance fee due
      upon termination.  This fee ranges from a low of 5% of the
      amount by which the sum of the appraised value of our assets minus our
      liabilities on the date the advisory agreement is terminated plus total
      distributions (other than stock distributions) paid prior to termination
      of the advisory agreement exceeds the amount of invested capital plus
      annualized returns of 6%, to a high of 15% of the amount by which the sum
      of the appraised value of our assets minus its liabilities plus all prior
      distributions (other than stock distributions) exceeds the amount of
      invested capital plus annualized returns of 10% or
      more.





·
            In the event we list our stock
      for trading, the advisor will receive a subordinated incentive listing fee
      instead of a subordinated participation in net sales
      proceeds.  This fee ranges from a low of 5% of the amount by
      which the market value of our common stock plus all prior distributions
      (other than stock distributions) exceeds the amount of invested capital
      plus annualized returns of 6%, to a high of 15% of the amount by which the
      sum of the market value of our stock plus all prior distributions (other
      than stock distributions) exceeds the amount of invested capital plus
      annualized returns of 10% or
more.





Dealer
Manager Agreement





PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in 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
September 30, 2008 and 2007, our dealer manager earned sales commission and
dealer manager fees of approximately $2.3 million and $825,000,
respectively.  For the nine months ended September 30, 2008 and 2007,
our dealer manager earned sales commissions and dealer manager fees of
approximately $5.9 million and $3.3 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.





18
 Table of Contents





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 September 30, 2008 and December
31, 2007, we had net borrowings of approximately $15.9 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 September 30,
2008, we were in compliance with all these financial
covenants.  During the three months ended September 30, 2008 and 2007,
we incurred approximately $260,000 and $572,000 of interest expense,
respectively, related to the credit agreement.  During the nine months
ended September 30, 2008 and 2007, we incurred approximately $1.2 million and
$1.7 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 September 30, 2008 and 2007,
we incurred approximately $228,000 and $0 of interest expense, respectively,
related to the loan agreement.  During the nine months ended September
30, 2008 and 2007, we incurred approximately $719,000 and $0 of interest
expense, respectively, related to the loan agreement.





In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”).  Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan.  The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum.  During the
three months ended September 30, 2008 and 2007, we incurred approximately
$108,000 and $0 of interest expense, respectively, related to the loan
agreement.  During the nine months ended September 30, 2008 and 2007,
we incurred approximately $197,000 and $0 of interest expense, respectively,
related to the Loan Assumption Agreement.





In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.4 million and $1.2 million, as of September 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 September 30, 2008 and 2007,
approximately $63,000 and $124,000, respectively, of deferred financing costs
were amortized and included in interest expense in the consolidated statements
of operations.  For the nine months ended September 30, 2008 and 2007,
approximately $371,000 and $361,000, 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.





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10.           Commitments and
Contingencies





We have
committed to funding $5.0 million to entities that are parties to an alliance
with the managing member of our advisor.  As of September 30, 2008, we
have funded approximately $2.9 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 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.





20
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Item2.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.





This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based.  These forward-looking statements generally are identified by
the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar
expressions.  Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements.  Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false.  We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.  All
forward-looking statements should be read in light of the risks identified in
Part II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K
for the year ended December 31, 2007 filed with the SEC.





Overview





Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, “we,” “us” and “our” refer to Cornerstone Core Properties
REIT, Inc. and its consolidated subsidiaries except where the context otherwise
requires. We have no paid employees and are externally managed 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.





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At September 30, 2008,
we owned 99.86% general partner interest in the Operating Partnership while the
advisor owned a 0.14% limited partnership interest.  We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership.  Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements.  All intercompany accounts and
transactions have been eliminated in consolidation.





On
January 6, 2006, we commenced 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
September 30, 2008, we raised approximately $137.3 million of gross proceeds
from the sale of approximately 17.2 million shares of our common stock and had
acquired twelve properties.





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 three and nine months ended September 30, 2008 and September
30, 2007 are not comparable.





Our
results of operations for the three and nine months ended September 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.





21
 Table of Contents





Three
months ended September 30, 2008 and 2007





We owned
twelve and six properties during the three months ended September 30, 2008 and
2007, respectively.  As a result of the acquisitions, total revenues
increased to $3.0 million from $1.4 million, property operating and maintenance
expenses, which include bad debt expenses, increased to $751,000 from $335,000,
asset management fees increased to $342,000 from $158,000, and depreciation and
amortization increased to $948,000 from $329,000 from the comparable 2007
period.    General and administrative for the three months
ended September 30, 2008 is comparable to the same period of 2007.





Interest
income decreased to $105,000 from $238,000 for the comparable period of
2007.  The decrease is due primarily to lower investment rates on
short term investments during the three months ended September 30,
2008.  Interest expense decreased to $680,000 from $711,000 for the
comparable period of 2007 primarily due to lower debt balance and interest rates
on our credit agreement with HSH Nordbank as a result of $25.0 million in
principal paydowns during the three months ended September 30,
2008.





Nine
months ended September 30, 2008 and 2007





We owned
twelve and six properties during the nine months ended September 2008 and 2007,
respectively.  As a result of the acquired properties, total revenues
for the nine months ended September 30, 2008 increased to $8.4 million from $3.7
million, property operating and maintenance expenses, which include bad debt
expenses, increased to $2.2 million from $891,000, asset management fees
increased to $984,000 from $457,000 and depreciation and amortization increased
to $2.6 million from $906,000.  General and administrative expenses
for the nine months 2008 approximated the nine months 2007 amount.





Interest
income decreased to $221,000 from $508,000 for the comparable nine months of
2007.  The decrease is due primarily to lower investment rates on
short term investments in 2008 slightly offset by a higher cash balance
resulting in more investments during the same period.  Interest
expense increased to $2.5 million in the first nine months of 2008 from $2.1
million in the comparable period of 2007.  The increase is primarily
due to loans on six new acquisitions partially offset by lower interest rate
charges and repayments on our credit facility agreement with HSH
Nordbank.





Liquidity
and Capital Resources





We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations.  We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements and leasing
commissions, operating expenses, including interest expense on any outstanding
indebtedness, distributions and for the repayment of notes payable. In addition,
we will continue to use temporary debt financing to facilitate our acquisitions
of properties in anticipation of receipt of offering proceeds.





As of
September 30, 2008, a total of approximately 17.2 million shares of our common
stock had been sold in our Primary Offering for aggregate gross proceeds of
approximately $137.3 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 initial offering period. Under no circumstances will the initial
offering period be extended beyond June 1, 2009.





As of
September 30, 2008, we had approximately $19.8 million in cash and cash
equivalents on hand and approximately $34.1 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.




The credit agreement with
HSH Nordbank AG is due to mature on June 30, 2009. We anticipate paying down the
existing debt obligation with proceeds raised from our offering or we will
exercise the second option to extend the credit agreement upon satisfaction of
conditions as defined in the credit agreement.




There may be a
delay between the sale of our shares and the purchase of
properties.  During this period, net offering proceeds will be
temporarily invested in short-term, liquid investments that could yield lower
returns than investments in real estate.




Until
proceeds from our 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 nine
months ended September 30, 2008, distributions to stockholders were paid from
funds from operations and proceeds of our offering and borrowings in
anticipation of future cash flow.





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As of
September 30, 2008, our advisor had incurred $4.2 million of organization and
offering costs on our behalf.  Of this amount, we have reimbursed $4.1
million to our advisor.  Our advisor advances us money for these
organization and offering expenses or pays these expenses on our
behalf.  Our advisor does 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 of  this 3.5%
limitation.  At September 30, 2008, organization and offering costs
incurred by and reimbursed to our advisor are approximately 3% of the gross
proceeds of our primary offering.  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.





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 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.





Financial
markets have recently experienced unusual volatility and
uncertainty. Liquidity has tightened in all financial markets, including
the debt and equity markets.  Our ability to fund property
acquisitions or development projects, as well as our ability to repay or
refinance debt maturities could be adversely affected by an inability to secure
financing at reasonable terms, if at all. While we currently do not expect
any difficulties, it is possible, in these unusual and uncertain times, that our
revolving credit agreement with HSH Nordbank could fail to fund a borrowing
request. Such an event could adversely affect our ability to access funds
from the revolving credit facility when needed.





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 nine months ended September 30, 2008 and
2007 are presented below (in thousands):





23
 Table of Contents




Three
      months ended
                      
                      
                      Nine
      months endedSeptember
      30,
                      
                      
                      September
      30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Net
      loss
                      
                      $
                      (66,000
                      )
                      
                      $
                      (330,000
                      )
                      
                      $
                      (968,000
                      )
                      
                      $
                      (1,437,000
                      )Real
      estate assets depreciation and amortization
                      
                      
                      948,000
                      
                      
                      
                      329,000
                      
                      
                      
                      2,620,000
                      
                      
                      
                      906,000Funds
      from operations (FFO)
                      
                      $
                      882,000
                      
                      
                      
                      (1,000
                      )
                      
                      
                      1,652,000
                      
                      
                      
                      (531,000
                      )Weighted
      average shares outstanding
                      
                      
                      17,677,146
                      
                      
                      
                      8,864,022
                      
                      
                      
                      13,270,335
                      
                      
                      
                      6,526,076





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
financing  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.




For the nine months ended
September 30, 2008, we paid distributions of $4,870,000, $2,384,000 of which
were paid from cash flow from operations. The distributions paid in excess of
our cash flow from operations were paid using proceeds from our
offering.




Contractual
Obligations





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





Payment due by
      periodContractual
      Obligations
                                                                  
                                                                  Total
                                                                  
                                                                  Less
      than 1 year
                                                                  
                                                                  
                                                                  1-3
      years
                                                                  
                                                                  
                                                                  3-5
      years
                                                                  
                                                                  More
      than 5 yearsLong-Term
      Debt Obligations (1)
                                                                  
                                                                  $
                                                                  45,670,000
                                                                  
                                                                  
                                                                  $
                                                                  16,125,000
                                                                  
                                                                  
                                                                  $
                                                                  22,812,000
                                                                  
                                                                  
                                                                  $
                                                                  440,000
                                                                  
                                                                  
                                                                  $
                                                                  6,293,000Interest
      expense related to long term debt (2)
                                                                  
                                                                  $
                                                                  4,354,000
                                                                  
                                                                  
                                                                  $
                                                                  2,233,000
                                                                  
                                                                  
                                                                  $
                                                                  958,000
                                                                  
                                                                  
                                                                  $
                                                                  769,000
                                                                  
                                                                  
                                                                  $
                                                                  394,000Note
      receivable (3)
                                                                  
                                                                  $
                                                                  2,100,000
                                                                  
                                                                  
                                                                  $
                                                                  2,100,000
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -


_________________________


(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 September 30, 2008, one month LIBOR at September
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 $5.0 million to entities that are parties to an
alliance with the managing member of our advisor.  As of September 30,
2008, we have funded approximately $2.9 million.





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 Table of Contents





Item3.
            Quantitative and Qualitative
      Disclosures about Market
Risk





We invest
our cash and cash equivalents in short-term, highly liquid investments including
government backed obligations, bank certificates of deposit and interest-bearing
accounts which, by their nature, are subject to interest rate
fluctuations.  As of September 30, 2008, we had borrowed approximately
$45.7 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 September 30, 2008,
a 1% change in interest rates would result in a change in interest expense of
approximately $457,000 per year.  During the period from January 1,
2008 through September 30, 2008, 30-day LIBOR experienced a steady decrease then
a steep increase towards the end of September 2008.  There can be no
assurance whether this rate will increase or decrease.





Item4(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.





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.





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 Table of Contents





PART
II - OTHER INFORMATION





Item1A.
            Risk
      Factors





The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2007.





Recent
disruptions in the financial markets and deteriorating economic conditions could
adversely affect the values of our investments and our ongoing results
operations.





Turmoil
in the capital markets has constrained equity and debt capital available for
investment in commercial real estate, resulting in fewer buyers seeking to
acquire commercial properties and consequent reductions in property
values.  Furthermore, the current state of the economy and the
implications of future potential weakening may negatively impact commercial real
estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our current portfolio.  The current downturn may
impact our tenants’ business operations directly, reducing their ability to pay
base rent, percentage rent or other charges due to us.





Liquidity
in the global credit market has been significantly contracted by market
disruptions, making it costly to obtain new lines of credit or refinance
existing debt, when debt financing is available at all.





The
occurrence of these events could have the following negative effects on
us:





·
            the
      values of our investments in commercial properties could decrease below
      the amounts we paid for the investments;
and





·
            revenues
      from our properties could decrease due to lower occupancy rates, reduced
      rental rates and potential increases in uncollectible
      receivables;





·
            we
      may not be able to refinance our existing indebtedness or to obtain
      additional debt financing on attractive
terms.





These
factors could impair our ability to make distributions to you and decrease the
value of your investment in us.





Item2.
            Unregistered
      Sales of Equity Securities and Use of
  Proceeds





On August
6, 2008, we granted our non-employee directors nonqualified stock options to
purchase an aggregate of 20,000 shares of common stock at an exercise price of
$8.00 per share under our Employee and Director Incentive Stock Plan pursuant to
an exemption from registration under Section 4(2) of the Securities Act of
1933.  Other than these option grants, we did not sell any equity
securities that were not registered under the Securities Act of 1933 during the
period covered by this Form 10-Q.





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
September 30, 2008, excluding issuance of approximately 0.6 million shares under
our distribution reinvestment plan, we had sold approximately 17.2 million
shares of common stock in our ongoing offering, raising gross offering proceeds
of approximately $137.3 million.  From this amount, we incurred
approximately $13.5 million in selling commissions and dealer manager fees
payable to our dealer manager and approximately $2.7 million in acquisition fees
payable to our advisor.  We have used approximately $92.1 million of
the net offering proceeds to acquire properties and reduce balance on the credit
agreement with HSH Nordbank as of September 30, 2008.  As of September
30, 2008, the advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $4.2 million, including
approximately $110,000 of organizational costs that have been expensed and
approximately $4.1 million of offering costs which reduce net proceeds of our
offering.




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 Table of Contents





Item6.               Exhibits




10
              Amendment
      No. 3 to Credit Agreement with HSH Nordbank AG, New York Branch dated as
      of June 30, 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.





27
 Table of Contents





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 11th day of November
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)







28