**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM10-Q**

 

**(MarkOne)**

 

**ý****        ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2006**

 

**or**

 

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

 

**For the transition period from                           to                           **

 

**Commission File Number   333-121238**

 

**CORNERSTONE CORE PROPERTIES REIT,INC.**

(Exactname 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, 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 reportsrequired to be filed by section 13 or 15(d) of the Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

ý  Yes  o  No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o  Accelerated filer o  Non-accelerated filer ý

 

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

o  Yes  ý  No

 

Asof May 5, 2006, the Company had 705,678 shares issued and outstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 
| **Item 1.**                                                                                                         | **Financial Statements (Unaudited)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|--------------------------------------|------------|
|                                                                                                                |                                 |
| **Cornerstone Core Properties REIT, Inc.**                                                                          | ** **                           |
|                                                                                                                |                                 |
| Condensed Consolidated  Balance Sheets at March 31, 2006 and December 31, 2005                                      |                                 |
|                                                                                                                |                                 |
| Condensed Consolidated  Statements of Operations for the Three Months ended March 31, 2006 and 2005                 |                                 |
|                                                                                                                |                                 |
| Condensed Consolidated  Statement of Stockholder’s Equity (Deficit) for the Three Months ended March  31, 2006 |                                 |
|                                                                                                                |                                 |
| Condensed Consolidated  Statement of Cash Flows for the Three Months ended March 31, 2006 and, 2005                 |                                 |
|                                                                                                                |                                 |
| Notes to Condensed  Consolidated Financial Statements                                                               |                                 |

 

2

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

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2006**      | ** ** | **2005**         | ** ** |
| ** **                                                                                                                                                         | ** ** | ** **    | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                                                                                         | ** ** | ** **    | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                                                                                                                          |       | $             | 2,235,150  |             | $          | 117,342 |   |
| Receivable from transfer agent                                                                                                                                     |       | 579,408       |       | —           |       |
| Receivable from related parties                                                                                                                                    |       | 8,500         |       | 14,500           |       |
| Other assets, net                                                                                                                                                  |       | 223,399       |       | 92,557           |       |
| Total assets                                                                                                                                                       |       | $             | 3,046,457  |             | $          | 224,399 |   |
|                                                                                                                                                               |       |          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                                                                           | ** ** | ** **    | ** ** | ** **       | ** ** |
| Liabilities:                                                                                                                                                       |       |          |       |             |       |
| Accounts payable and accrued liabilities                                                                                                                           |       | $             | 110,459    |             | $          | 113,592 |   |
| Dividends payable                                                                                                                                                  |       | 14,245        |       | —           |       |
| Payable to related parties                                                                                                                                         |       | 1,810,037     |       | 3,787            |       |
| Total liabilities                                                                                                                                                  |       | 1,934,741     |       | 117,379          |       |
| Minority interest                                                                                                                                                  |       | 196,391       |       | 200,350          |       |
| Commitments and contingencies                                                                                                                                      |       |          |       |             |       |
| Stockholders’ equity (deficit):                                                                                                                               |       |          |       |             |       |
| Common  stock, $.01 par value; 290,000,000 shares authorized; 418,580 and 125 shares  issued and outstanding at March 31, 2006 and December 31, 2005, respectively |       | 419           |       | —           |       |
| Additional paid-in capital                                                                                                                                         |       | 1,319,725     |       | 1,000            |       |
| Accumulated deficit                                                                                                                                                |       | (404,819      | )          | (94,330          | )          |
| Total stockholder’s equity (deficit)                                                                                                                          |       | 915,325       |       | (93,330          | )          |
| Total liabilities and stockholder’s equity                                                                                                                    |       | $             | 3,046,457  |             | $          | 224,399 |   |

 

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

 

3

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

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Expenses:                                |       |                             |       |   |   |
|                                     |       |                             |       |   |   |
| General and  administrative              |       | $                                | 315,842    |   | $ | — |   |
| Operating loss                           |       | (315,842                         | )          | — |   |
|                                     |       |                             |       |   |   |
| Other income                             |       |                             |       |   |   |
| Interest income, net                     |       | 1,394                            |       | — |   |
| Loss before minority interest            |       | (314,448                         | )          | — |   |
| Minority  interest                       |       | (3,959                           | )          | — |   |
| Net loss                                 |       | $                                | (310,489   | ) | $ | — |   |
|                                     |       |                             |       |   |   |
| Loss per share - basic and diluted       |       | $                                | (3.29      | ) | $ | — |   |
|                                     |       |                             |       |   |   |
| Weighted average number of common shares |       | 94,396                           |       | — |   |

 

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

 

4

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

 

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY(DEFICIT)**

**(Unaudited)**

 
| ** **                  | ** ** | **Common Stock** | ** ** | ** **    | ** ** | ** **          | ** ** |
|-----------------------------|------------|------------------|------------|---------------|------------|---------------------|------------|
| ** **                  | ** ** | ** **       | ** ** | **Common**    | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Number of**    | ** ** | **Stock Par** | ** ** | **Additional**      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Shares**       | ** ** | **Value**     | ** ** | **Paid-In Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | ** **       | ** ** | ** **    | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** |
| BALANCE - December 31, 2005 |       | 125              |       | $             | —     |                | $          | 1,000 |   | $ | (94,330 | ) | $ | (93,330 | ) |
|                        |       |             |       |          |       |                |       |   |   |   |   |
| Issuance of common stock    |       | 418,455          |       | 419           |       | 3,350,381           |       | — |   | 3,350,800 |   |
|                        |       |             |       |          |       |                |       |   |   |   |   |
| Offering costs              |       | —           |       | —        |       | (2,017,411          | )          | — |   | (2,017,411 | ) |
|                        |       |             |       |          |       |                |       |   |   |   |   |
| Dividends declared          |       | —           |       | —        |       | (14,245             | )          | — |   | (14,245 | ) |
|                        |       |             |       |          |       |                |       |   |   |   |   |
| Net loss                    |       | —           |       | —        |       | —              |       | (310,489 | ) | (310,489 | ) |
| BALANCE - March 31, 2006    |       | 418,580          |       | $             | 419        |                | $          | 1,319,725 |   | $ | (404,819 | ) | $ | 915,325 |   |

 

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

 

5

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

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Cash Flows From Operating Activities**                                     |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (310,489   | ) | $ | — |   |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                             |       |   |   |
| Minority interest expense                                                    |       | (3,959                           | )          |   |   |
| Change in operating assets and liabilities:                                  |       |                             |       |   |   |
| Accounts receivable  from related parties                                    |       | 6,000                            |       |   |   |
| Accounts  payable to related parties                                         |       | 64,621                           |       |   |   |
| Other assets                                                                 |       | (130,842                         | )          |   |   |
| Accounts  payable and accrued expenses                                       |       | (3,133                           | )          |   |   |
| **Net cash  used in operating activities**                                   | ** ** | **(377,802**                     | **)**      | **—** | ** ** |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash Flows From Financing Activities**                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Issuance of  common stock                                                    |       | 2,771,392                        |       | — |   |
| Offering  Costs                                                              |       | (275,782                         | )          |   |   |
| **Net cash  provided by financing activities**                               | ** ** | **2,495,610**                    | ** ** | **—** | ** ** |
| Net Increase in Cash and Cash Equivalents                                    |       | 2,117,808                        |       | — |   |
| Cash and Cash Equivalents - beginning of period                              |       | 117,342                          |       | — |   |
| Cash and Cash Equivalents - end of period                                    |       | $                                | 2,235,150  |   | $ | — |   |
|                                                                         |       |                             |       |   |   |
| **Supplemental Disclosure of Non-Cash Activities:**                          |       |                             |       |   |   |
| Receivable from transfer agent                                               |       | $                                | 579,408    |   | — |   |
| Offering  costs payable to related party                                     |       | $                                | 1,741,629  |   | — |   |
| Dividends  payable                                                           |       | $                                | 14,245     |   | — |   |

 

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

 

6

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

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2006**

 

**UNAUDITED**

 

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

 

Cornerstone Core Properties REIT, Inc., a Maryland corporation(the “Company”), was formed on October 22, 2004 under the GeneralCorporation Law of Maryland for the purpose of engaging in the business ofinvesting in and owning commercial real estate.  The Company is newlyformed and is subject to the general risks associated with a start-upenterprise.  The Company had not begun principal operations as of March31, 2006.

 

The Company’s advisor is Cornerstone Realty Advisors, LLC (the“advisor”) a Delaware limited liability company formed on November 30,2004 and an affiliate of the Company. The advisor is responsible for managingthe Company’s affairs on a day-to-day basis and for identifying and makingacquisitions and investments on behalf of the Company.

 

On November 9, 2004, Terry G. Roussel, an affiliate of theadvisor, purchased 125 shares of common stock for $1,000 and became the initialstockholder of the Company.  The Company’s articles of incorporationauthorize 290,000,000 shares of common stock with a par value of $.001 and10,000,000 shares of preferred stock with a par value of $0.001.

 

The Company anticipates that it will conduct all or a portion of itsoperations through Cornerstone Operating Partnership, L.P. (the “OperatingPartnership”), a Delaware limited partnership formed on November 30,2004.  On July 15, 2005, the advisor purchased a 99% limitedpartnership interest in the Operating Partnership for $200,000 and the Companypurchased a 1% general partner interest for $1,000.  At March 31, 2006,the advisor’s limited partnership interest in the Operating Partnership was 6%,and the Company’s general partnership interest in the Operating Partnership was94%. The Company’s financial statements and the financial statements of theOperating Partnership are consolidated in the accompanying condensedconsolidated financial statements.  All significant intercompany accountsand transactions have been eliminated in consolidation.

 

**2.****                                      PublicOffering**

 

OnSeptember 22, 2005, the Company commenced a public offering of a minimumof 125,000 shares (the “Minimum Number of Shares”) and a maximum of 55,400,000shares of common stock, consisting of 44,400,000 shares for sale to the public(the Primary Offering”) and 11,000,000 shares for sale pursuant to theCompany’s dividend reinvestment plan (collectively, the “Offering”).  TheCompany has retained Pacific Cornerstone Capital, Inc. (“PCC”), anaffiliate of the advisor, to serve as the dealer manager for theOffering.  PCC is responsible for marketing the Company’s shares beingoffered pursuant to the Offering.  On February 28, 2006, offering proceedsexceeded the $1,000,000 offering minimum and proceeds were released to theCompany from escrow.

 

As of May 5,2006, a total of 705,678 shares of our common stock had been sold in theOffering for aggregate gross proceeds of $5.6 million.  The Company intends to invest the netproceeds from the Offering primarily in multi-tenant industrial real estatelocated in major metropolitan markets in the United States.

 

7

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**3.****                                      Summaryof Significant Accounting Policies**

 

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

* *

***Interim Financial Information***

 

The accompanying interim condensed financial statements have beenprepared by the Company’s management in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) and in conjunctionwith the rules and regulations of the Securities and Exchange Commission(“SEC”). Certain information and footnote disclosures required for annualfinancial statements have been condensed or excluded pursuant to SEC rules andregulations. Accordingly, the interim condensed financial statements do not includeall of the information and footnotes require by GAAP for complete financialstatements. The accompanying financial information reflects all adjustments,which are, in the opinion of the Company’s management, of a normal recurringnature and necessary for a fair presentation of our financial position, resultsof operations and cash flows for the interim periods. Interim results ofoperations are not necessarily indicative of the results to be expected for thefull year. The accompanying condensed consolidated financial statements shouldbe read in conjunction with the audited consolidated financial statements andthe notes thereto included in the 2005 Annual Report on Form 10-K as filed withthe Securities and Exchange Commission. Operating results for the three monthsended March 31, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006.

 

***Cash and Cash Equivalents***

 

The Company considers all short-term, highly liquid investments thatare readily convertible to cash with a maturity of three months or less at thetime of purchase to be cash equivalents.

 

***Deferred Financing Fees***

 

Deferred financing fees are recorded at cost and will be amortizedusing a method that approximates the effective interest method over the life ofthe related debt.

 

***Real Estate Purchase Price Allocation***

 

The Company will account for all acquisitionsin accordance with Financial Accounting Standards Board’s (“FASB”) Statement ofFinancial Accounting Standard No. 141, “Business Combinations”(“FAS 141”).  Upon acquisition of a property, the Company willallocate the purchase price of the property based upon the fair value of theassets acquired, which generally consist of land, buildings, tenantimprovements, leasing commissions and intangible assets including in-placeleases and above market and below market leases.  The Company willallocate the purchase price to the fair value of the tangible assets of anacquired property by valuing the property as if it were vacant.

 

The purchase price will be further allocatedto in-place lease values based on management’s evaluation of the specificcharacteristics of each tenant’s lease and the Company’s overall relationshipwith the respective tenant.  The value of in-place lease intangibles,which will be included as a component of Other Assets, will be amortized toexpense over the remaining lease term and expected renewal periods of therespective lease.  If a lease is terminated prior to its expiration, theunamortized portion of the tenant improvements, leasing commissions, above andbelow market leases and the in-place lease value will be immediately charged toexpense.

 

8

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Acquired above and below market leases willbe valued based on the present value of the difference between prevailingmarket rates and the in-place rates over the remaining lease term.  The value of acquired above and below marketleases will be amortized over the remaining non-cancelable terms of therespective leases as an adjustment to rental revenue on the Company’sconsolidated statements of operations.

 

***Consolidation Considerations for theCompany’s Investments in Joint Ventures***

 

The FASB issued Interpretation No. 46 (“FIN 46R”) (revisedDecember 2003), “Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin No. 51” (“ARB 51”), whichaddresses how a business enterprise should evaluate whether it has acontrolling interest in an entity through means other than voting rights andaccordingly should consolidate the entity.  Before concluding that it isappropriate to apply the ARB 51 voting interest consolidation model to anentity, an enterprise must first determine that the entity is not a variableinterest entity (VIE).  The Company will evaluate, as appropriate, itsinterests, if any, in joint ventures and other arrangements to determine ifconsolidation is appropriate.

 

#### ***Revenue Recognitionand Valuation of Receivables***

 

The Company’s revenues, which will be comprised largely of rentalincome, will include rents reported on a straight-line basis over the initialterm of the lease.  Since the Company’s leases may provide for rentalincreases at specified intervals, the Company will be required to straight-linethe recognition of revenue, which will result in the recording of a receivablefor rent not yet due under the lease terms.

 

#### ***Depreciation ofReal Property Assets***

 

The Company will be required to make subjective assessments as to theuseful lives of the Company’s depreciable assets.  The Company willconsider the period of future benefit of the asset to determine the appropriateuseful lives.

 

Depreciation of the Company’s assets is expected to be charged toexpense 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 forsuch organization and offering costs up to 3.5% of the cumulative capitalraised in the Primary Offering. Organization and offering costs include items such as legal andaccounting fees, marketing, promotional and printing costs, and specificallyexclude internal salaries.  All offeringcosts are recorded as an offset to additional paid-in capital, and allorganization costs are recorded as an expense at the time we become liable forthe payment of these amounts.

 

***Minority Interest in Consolidated Subsidiary***

 

Due to the Company’s control through its general partnership interestin the Operating Partnership and the limited rights of the limited partners,the Operating Partnership is consolidated with the Company and the limitedpartner interest is reflected as minority interest in the accompanying balancesheets.

 

9

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**Income Taxes**

 

The Company expects to make an election to be taxed as a REIT, underSections 856 through 860 of the Internal Revenue Code of 1986, as amended (the“Code”) and expects to be taxed as such beginning with its taxable year endingDecember 31, 2006.  To qualify as a REIT, the Company must meetcertain organizational and operational requirements, including a requirement tocurrently distribute at least 90% of the REIT’s ordinary taxable income tostockholders.  As a REIT, the Company generally will not be subject tofederal income tax on taxable income that it distributes to itsstockholders.  If the Company fails to qualify as a REIT in any taxableyear, it will then be subject to federal income taxes on its taxable income atregular corporate rates and will not be permitted to qualify for treatment as aREIT for federal income tax purposes for four years following the year duringwhich qualification is lost unless the Internal Revenue Service granted theCompany relief under certain statutory provisions.  Such an event couldmaterially adversely affect the Company’s net income and net cash available fordistribution to stockholders.  However, the Company believes that it willbe organized and operate in such a manner as to qualify for treatment as a REITand intends to operate in the foreseeable future in such a manner so that theCompany will remain qualified as a REIT for federal income tax purposes.

 

Even if the Company qualifies for taxation as a REIT, it may be subjectto certain stated and local taxes of its income and property, and federalincome and excise taxes on its undistributed income.

 

During the three months ended March 31, 2006 and the year endedDecember 31, 2005, the Company generated deferred tax assets of approximately$86,000 and $20,300, respectively. Because the Company intends to qualify as aREIT in 2006 which would not allow for the realization of the deferred taxasset, a valuation allowance of a like amount was recorded.

 

***Concentration of Credit Risk***

 

Financial instruments that potentiallysubject the Company to a concentration of credit risk are primarily cashinvestments; cash is generally invested in investment-grade short-terminstruments and the amount of credit exposure to any one commercial issuer islimited. We have cash in financial institutions which is insured by the FederalDeposit Insurance Corporation, or FDIC, up to $100,000 per institution. AtMarch 31, 2006, the Company had cash accounts in excess of FDIC insuredlimits.

 

***Per Share Data***

 

TheCompany reports earnings per share pursuant to SFAS No. 128,“Earnings Per Share.”  Basic earnings pershare attributable for all periods presented are computed by dividing the netloss by the weighted average number of shares outstanding during theperiod.  Diluted earnings per share arecomputed based on the weighted average number of shares and all potentiallydilutive securities, if any. Currently, the Company has no potentially dilutivesecurities.

 

Net loss per share is calculated asfollows:

 
| ** **                                                                   | ** ** | **Three Months Ended March 31, 2006** | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Net loss                                                                     |       | $                                          | (310,489   | )                                          | $          | — |   |
| Net loss per share — basic and diluted                             |       | $                                          | (3.29      | )                                          | $          | — |   |
| Weighted average number of shares outstanding — basic and  diluted |       | 94,396                                     |       | 125                                        |       |

 

10

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***Use of Estimates***

 

The preparation of the Company’s financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of the assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses for thereporting period.  Actual results couldmaterially differ from those estimates.

 

**4.****                                      AccountsReceivable From and Accounts Payable to Related Party**

 

Accounts receivable from related partiesresults from payments made by the Company for services received that wereaccounted for as deferred organization and offering costs by an affiliate ofthe advisor.  Accordingly, these amountspaid for by the Company are to be reimbursed by the advisor.

 

Accounts payable to related parties consistsof organizational and offering costs and acquisition fees payable to theadvisor and broker dealer fees payable to PCC.

 

**5.****                                      MinorityInterests**

 

Minority interests relate to the advisor’sequity interest in the earnings/losses of the Operating Partnership.

 

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

 

***Common Stock***

 

The Company’s articles of incorporation authorize 290,000,000 shares ofcommon stock with a par value of $.001 and 10,000,000 shares of preferred stockwith a par value of $.001.  As of March 31, 2006, we have issued 418,580shares of common stock for a total gross proceeds of $3.4 million.

 

***Dividend Reinvestment Plan***

 

The Company has adopted a dividend reinvestment plan that will allowits stockholders to have dividends and other distributions otherwisedistributable to them invested in additional shares of the Company’s commonstock.  The Company has registered 11,000,000 shares of its common stockfor sale pursuant to the dividend reinvestment plan.  The purchase priceper share is to be 95% of the price paid by the purchaser for the Company’scommon stock, but not less than $7.60 per share.  The Company may amend orterminate the dividend reinvestment plan for any reason at any time upon 10days prior written notice to participants.

 

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

 

The Company has adopted an Employee and Director Incentive Stock Plan(“the Plan”) which provides for the grant of awards to the Company’s directors andfull-time employees, as well as other eligible participants that provideservices to the Company.  The Companydoes not intend to grant awards under the Plan to persons who are not directorsor employees of the Company.  Awards granted under the Plan may consist ofnonqualified stock options, incentive stock options, restricted stock, shareappreciation rights, and dividend equivalent rights.  The term of the Planis 10 years.  The total number of shares of common stock reserved forissuance under the Plan is equal to 10% of the Company’s outstanding shares ofstock at any time.  On May 10, 2006, the Company granted to itsnon-employee directors nonqualified stock options to purchase an aggregate of40,000 shares of common stock at an exercise price of $8.00 per share.

 

11

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**7.****                                      RelatedParty Transactions**

 

Our company has no employees. Our advisor is primarily responsible for managing our business affairsand carrying out the directives of our board of directors.  The Company has an advisory agreement withthe advisor and a dealer manager agreement with PCC which entitle the advisorand PCC to specified fees upon the provision of certain services with regard tothe Offering and investment of funds in real estate projects, among otherservices, as well as reimbursement for organizational and offering costsincurred by the advisor on behalf of the Company and reimbursement of certaincosts and expenses incurred by the advisor in providing services to the Company.

 

***Advisory Agreement***

 

Under the terms of the advisory agreement, our advisor will usecommercially reasonable efforts to present to us investment opportunities toprovide a continuing and suitable investment program consistent with theinvestment policies and objectives adopted by our board of directors.  The advisory agreement calls for our advisorto provide for our day-to-day management and to retain property managers andleasing agents, subject to the authority of our board of directors, and toperform other duties.

 

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

 

Organizational and Offering Costs. Organizational and offering costs of the Offering are being paid by theadvisor on behalf of the Company and will be reimbursed to the advisor from theproceeds of the Offering.  Organizational and offering costs consist ofall expenses (other than sales commissions and the dealer manager fee) to bepaid by us in connection with the offering, including our legal, accounting,printing, mailing and filing fees, charges of our escrow holder and otheraccountable offering expenses, including, but not limited to, (i) amounts toreimburse our advisor for all marketing related costs and expenses such as salariesand direct expenses of employees of or advisor and its affiliates in connectionwith registering and marketing our shares (ii) technology costs associatedwith the offering of our shares; (iii) our costs of conducting ourtraining and education meetings; (iv) our costs of attending retailseminars conducted by participating broker-dealers; and (v) payment orreimbursement of bona fide due diligence expenses.  In no event will the Company have anyobligation to reimburse the advisor for organizational and offering coststotaling in excess of 3.5% of the gross proceeds from the PrimaryOffering.  As of March 31, 2006, $1.8million of organization and offering costs had been incurred by the advisor andits affiliates on behalf of the Company of which $117,168 had been reimbursedby the Company and the balance of  $1.7million has been accrued as a payable to affiliates. Of the $1.8 million oforganization and offering costs incurred through March 31, 2006, $1.7 were recordedas a reduction of additional paid in capital and $109,932 has been expensed asorganization costs. For the three months ended March 31, 2005, no organizationand offering costs were reimbursed or recorded by the Company because theOffering had not commenced.

 

Acquisition Fees and Expenses.  The advisory agreementrequires the Company to pay the advisor acquisition fees in an amount equal to2% of the gross proceeds of the Primary Offering.  The Company will paythe acquisition fees upon receipt of the gross proceeds from theOffering.  However, if the advisory agreement is terminated or notrenewed, the advisor must return acquisition fees not yet allocated to one ofthe Company’s investments.  In addition, the Company is required toreimburse the advisor for direct costs the advisor incurs and amounts theadvisor pays to third parties in connection with the selection and acquisitionof a property, whether or not ultimately acquired.  For the three monthsended March 31, 2006, the advisor earned $66,953 in acquisition fees which willbe capitalized as part of the cost our real estate investments. No acquisitionfees were earned for the three months ended March 31, 2005.

 

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Management Fees.  The advisory agreement requires the Companyto pay the advisor a monthly asset management fee of one-twelfth of 1.0% of thesum of the aggregate basis book carrying values of the Company’s assetsinvested, directly or indirectly, in equity interests in and loans secured byreal estate before reserves for depreciation or bad debts or other similarnon-cash reserves, calculated in accordance with generally accepted accountingprincipals in the United States of America (GAAP).  In addition, theCompany will reimburse the advisor for the direct costs and expenses incurredby the advisor in providing asset management services to the Company. These fees and expenses are in addition to management fees that the Companyexpects to pay to third party property managers.  No asset management feeswere earned in the three month periods ended March 31, 2006 and 2005.

 

Operating Expenses. The advisory agreement provides for reimbursement of our advisor’sdirect and indirect costs of providing administrative and management servicesto the Company.  For the three months endedMarch 31, 2006, $43,776 of such costs were reimbursed.  The advisor must reimburse the Company theamount by which the Company’s aggregate annual operating expenses exceed thegreater of 2% of Company’s average invested assets or 25% of the Company’s netincome unless a majority of the Company’s independent directors determine thatsuch excess expenses were justified based on unusual and non-recurring factors.

 

Disposition Fee.  The advisory agreement provides that if theadvisor or its affiliate provides a substantial amount of the services (asdetermined by a majority of the directors of the Company, including a majorityof the independent directors of the Company) in connection with the sale of oneor more properties, the Company will pay the advisor or such affiliate shallreceive at closing a disposition fee up to 3% of the sales price of suchproperty or properties.  This disposition fee may be paid in addition toreal estate commissions paid to non-affiliates, provided that the total realestate commissions (including such disposition fee) paid to all persons by thecompany 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.  TheCompany will pay the disposition fees for a property at the time the propertyis sold.

 

Subordinated Participation Provisions.  Theadvisor is entitled to receive a subordinated participation upon the sale ofthe Company’s properties, listing of the Company’s common stock or terminationof the advisor, as follows:

 

•                  After stockholders have received cumulativedistributions equal to $8 per share (less any returns of capital) pluscumulative, non-compounded annual returns on net invested capital, the advisorwill be paid a subordinated participation in net sale proceeds ranging from alow 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 returnsof 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 theappraised value of the Company’s assets minus its liabilities on the date theadvisory agreement is terminated plus total dividends (other than stockdividends) paid prior to termination of the advisory agreement exceeds theamount of invested capital plus annualized returns of 6%, to a high of 15% ofthe amount by which the sum of the appraised value of the Company’s assetsminus its liabilities plus all prior dividends (other than stock dividends)exceeds the amount of invested capital plus annualized returns of 10% or more.

 

•                  In the event the Company lists its stock fortrading, the advisor will receive a subordinated incentive listing fee insteadof a subordinated participation in net sales proceeds. This fee ranges from alow of 5% of the amount by which the market value of the Company’s common stockplus all prior dividends (other than stock dividends) exceeds the amount ofinvested capital plus annualized returns of 6%, to a high of 15% of the amountby which the sum of the market value of the Company’s stock plus all priordividends (other than stock dividends) exceeds the amount of invested capitalplus annualized returns of 10% or more.

 

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***Dealer Manager Agreement***

 

PCC, as dealer manager, is entitled to receive a sales commission of upto 7% of gross proceeds from sales in the Primary Offering.  PCC is alsoentitled to receive a dealer manager fee equal to up to 3% of gross proceedsfrom sales in the Primary Offering.  PCC is also entitled to receive areimbursement of bona fide due diligence expenses up to 0.5% of the grossproceeds from sales in the Primary Offering.  The advisory agreementrequires the advisor to reimburse us to the extent that offering expensesincluding sales commissions, dealer manager fees and organization and offeringexpenses (but excluding acquisition fees and acquisition expenses discussedabove are in excess of 13.5% of gross proceeds from the Offering. For the threemonths ended March 31, 2006, PCC earned $330,566 in commissions and dealermanager fees.

 

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

 

The following “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” should be read in conjunction with theCompany’s financial statements and notes thereto contained elsewhere in thisreport.

 

# This sectioncontains forward-looking statements, including estimates, projections,statements relating to our business plans, objectives and expected operatingresults, and the assumptions upon which those statements are based. Theseforward-looking statements generally are identified by the words “believes,”“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,”“plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likelyresult,” and similar expressions. Forward-looking statements are based on current expectations andassumptions that are subject to risks and uncertainties which may cause actualresults to differ materially from the forward-looking statements.  Forward-looking statements that were true atthe time made may ultimately prove to be incorrect or false.  We undertake no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise

 

**Overview**

 

Cornerstone Core Properties REIT, Inc., a Maryland corporation (the“Company”), was formed on October 22, 2004 under the General CorporationLaw of Maryland for the purpose of engaging in the business of investing in andowning commercial real estate.  TheCompany is newly formed and is subject to the general risks associated with astart-up enterprise, including the risk of business failure.  The Company intends to qualify as a realestate investment trust for federal tax purposes commencing with its taxableyear ending December 31, 2006.

 

On September 22, 2005, the Company commenced a public offering of44,400,000 shares of its common stock at a price of $8 per share.  Net proceeds from the offering will be usedprimarily to acquire real estate properties, pay organizational and offeringexpenses, and pay various fees and expenses.

 

As of the date of this report, the Company had engaged only inorganizational and offering activities and no real estate properties had beenacquired.

 

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**CriticalAccounting Policies**

 

The Company’s condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported amount of revenue andexpenses during the reporting period. Actual results could differ materially from the estimates in the nearterm.

 

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

 

***Real Estate Purchase Price Allocation.***

 

The Company will account for all acquisitionsin accordance with Financial Accounting Standards Board’s (“FASB”) Statement ofFinancial Accounting Standard No. 141, “Business Combinations”(“FAS 141”).  Upon acquisition of a property, the Company willallocate the purchase price of the property based upon the fair value of theassets acquired, which generally consist of land, buildings, tenant improvements,leasing commissions and intangible assets including in-place leases and abovemarket and below market leases.  The Company will allocate the purchaseprice to the fair value of the tangible assets of an acquired property byvaluing the property as if it were vacant.

 

The purchase price will be further allocatedto in-place lease values based on management’s evaluation of the specificcharacteristics of each tenant’s lease and the Company’s overall relationshipwith the respective tenant.  The value of in-place lease intangibles,which will be included as a component of Other Assets, will be amortized toexpense over the remaining lease term and expected renewal periods of therespective lease.  If a lease is terminated prior to its expiration, theunamortized portion of the tenant improvements, leasing commissions, above andbelow market leases and the in-place lease value will be immediately charged toexpense.

 

Acquired above and below market leases willbe valued based on the present value of the difference between prevailingmarket rates and the in-place rates over the remaining lease term. The value ofacquired above and below market leases will be amortized over the remainingnon-cancelable terms of the respective leases as an adjustment to rentalrevenue on the Company’s consolidated statements of operations.

 

***Evaluation of Possible Impairment of RealProperty Assets***

 

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

 

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

 

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#### ***Revenue Recognitionand Valuation of Receivables***

 

The Company’s revenues, which will be comprised largely of rentalincome, will include rents reported on a straight-line basis over the initialterm of the lease.  Since the Company’s leases may provide for rentalincreases at specified intervals, the Company will be required to straight-linethe recognition of revenue, which will result in the recording of a receivablefor rent not yet due under the lease terms.

 

# **Resultsof Operations**

 

The Company had not commenced significant active operations as of thedate of this report.  Operating resultsin future periods will be a function of the results of the operation of thereal estate properties that are acquired by the Company.  For the three months ended March 31, 2006,the company engaged only in activities related to its stock offering andincurred general and administrative expense of $315,842. For the three monthsended March 31, 2005 the Company did not engage in any operations and,accordingly, had no income or expenses.

 

**Liquidityand Capital Resources**

 

As of March 31, 2006, the Company has issued 418,580 shares of commonstock for a total gross proceeds of $3.4 million. The Company’s principaldemands for funds are expected to be for property acquisitions and for thepayment of operating expenses and dividends. The Company’s liquidity will increase as additional subscriptions areaccepted and decrease as net offering proceeds are expended in connection withthe acquisition and operation of properties.

 

There may be a delay between the sale of the Company’s shares and itspurchase of properties.  During thisperiod, net offering proceeds will be temporarily invested in short-term,liquid investments that could yield lower returns than investment in realestate.

 

Generally, cash needs for items other than property acquisitions willbe met from operations, and cash needs for property acquisitions will be metfrom public offerings of the Company’s shares.

 

Until proceeds from the Company’s offering are invested and generatingoperating cash flow sufficient to make distributions to stockholders, theCompany intends to pay all or a substantial portion of our distributions fromthe proceeds of such offering or from borrowings in anticipation of future cashflow.

 

The advisor has agreed to pay all of the Company’s organization andoffering costs, subject to its right to be reimbursed for such costs by theCompany in an amount up to 3.5% of gross offering proceeds.

 

As of the date of this report, the Company had not entered into anyarrangements creating a reasonable probability that it would acquire anyspecific property.  The number ofproperties that the Company is able to acquire will depend primarily on theamount of funds raised in the offering. The Company may also use acquisition financing to fund the purchaseprice of real estate properties.  Anyacquisition financing will be repaid from offering proceeds.

 

The Company is not aware of any material trends or uncertainties,favorable or unfavorable, other than national economic conditions affectingreal estate generally, which it anticipates may have a material impact oneither capital resources or the revenues or income to be derived from the operationof real estate properties.

 

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**Contractual Obligations**

 

As of March 31, 2006, the Company had no significant contractualobligations or commercial commitments.

 

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

 

The Company invests its cash and cash equivalents in short-term, highlyliquid investments including government obligations, bank certificates ofdeposit and interest-bearing accounts which, by their nature, are subject tointerest rate fluctuations.

 

**Item 4.****                                   Controlsand Procedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in its ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to its senior management, including its chiefexecutive officer and chief financial officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  The Company’s ChiefExecutive Officer and the Chief Financial Officer have reviewed the effectivenessof the Company’s disclosure controls and procedures and have concluded that thedisclosure controls and procedures were effective as of the end of the periodcovered by this report.

 

The Company is in the process of developing and implementing a formalset of internal controls and procedures for financial reporting as required bythe Sarbanes-Oxley Act of 2002.  Theefficacy of the steps the Company has taken to date and steps it is still inthe process of completing are subject to continued management review supportedby confirmation and testing by management.  The Company anticipates thatadditional changes may be made to its internal controls and procedures. Other than the foregoing initiatives, no change in the Company’s internal controlover financial reporting occurred during the period ended March 31, 2006 thathas materially affected, or is reasonably likely to affect, the Company’sinternal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 6.****                                  ****Exhibits**

 

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

 

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

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this quarterly report tobe signed on its behalf by the undersigned, thereunto duly authorized this 11thday of May, 2006.

 
|     | CORNERSTONE CORE PROPERTIES REIT, INC. |
|----------|----------------------------------------|
|     |                                   |
|     | By:                                    | /s/ Terry G. Roussel |   |
|     |                                   | Terry G. Roussel, *Chief Executive  Officer* |   |
|     |                                   |
|     |                                   |
|     | By:                                    |  /s/ Sharon C. Kaiser |   |
|     |                                   |  Sharon C. Kaiser, *Chief Financial Officer* |   |
| * * | * *                               | * * | *(Principal Financial Officer and* |
| * * | * *                               | * * | * Principal Accounting Officer)* |
|          |                                        |  |  |  |  |  |

 

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