**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

**FORM10-Q**

**(Mark One)**
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2007**

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

 

**For thetransition period from                          to**

**Commission File Number   000-52566**

**CORNERSTONE CORE PROPERTIES REIT,INC.**

(Exact name ofregistrant 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’stelephone number, including area code)

**Not Applicable**

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

Indicate by check markwhether the issuer (1) filed all reports required to be filed bysection 13 or 15(d) of the Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

x  Yes  o  No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

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

o  Yes  x  No

As of May 1, 2007,we had 6,411,524 shares issued and outstanding.

 

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**PART I - FINANCIAL INFORMATION**

**FORM10-Q**

**CornerstoneCore Properties REIT, Inc.**

**TABLE OF CONTENTS**
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                |   |   |
|-------------------|---------------------------------------------------------------------------------------------------------------------------|--------|--------|
|              |                                                                                                                      |   |   |
| Item 1.      | Financial Statements:                                                                                                     |   |   |
|              | Condensed Consolidated Balance Sheets as of March 31,  2007 and December 31, 2006 (unaudited)                             |   |
|              |                                                                                                                      |   |   |
|              | Condensed Consolidated Statements of Operations for  the Three Months ended March 31, 2007 and March 31, 2006 (unaudited) |   |
|              |                                                                                                                      |   |
|              | Condensed Consolidated Statement of Stockholders’  Equity for the Three Months ended March 31, 2007 (unaudited)      |   |
|              |                                                                                                                      |   |   |
|              | Condensed Consolidated Statements of Cash Flows for  the Three Months ended March 31, 2007 and March 31, 2006 (unaudited) |   |
|              |                                                                                                                      |   |   |
|              | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                         |   |
|              |                                                                                                                      |   |   |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |   |
| Item 3.      | Quantitative  and Qualitative Disclosure About Market Risk                                                                |   |
| Item 4.      | Controls and  Procedures                                                                                                  |   |
|              |                                                                                                                      |   |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                     |   |
|              |                                                                                                                      |   |   |
| Item 6.      | Exhibits                                                                                                                  |   |
|              |                                                                                                                      |   |   |
| SIGNATURES        |                                                                                                                      |

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                         |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                  | 14,531,000 |                  | $          | 11,041,000 |   |
| Investments in real  estate                                                                                                                                                        |       |               |       |                  |       |
| Land                                                                                                                                                                               |       | 22,512,000         |       | 16,310,000            |       |
| Buildings and  improvements, net                                                                                                                                                   |       | 34,951,000         |       | 18,416,000            |       |
| Intangible lease  assets, net                                                                                                                                                      |       | 1,964,000          |       | 1,331,000             |       |
|                                                                                                                                                                               |       | 59,427,000         |       | 36,057,000            |       |
| Deferred acquisition  costs and deposits                                                                                                                                           |       | 490,000            |       | 1,599,000             |       |
| Deferred financing  costs, net                                                                                                                                                     |       | 578,000            |       | 697,000               |       |
| Tenant and other  receivables, net                                                                                                                                                 |       | 179,000            |       | 206,000               |       |
| Other assets, net                                                                                                                                                                  |       | 663,000            |       | 412,000               |       |
| Total assets                                                                                                                                                                       |       | $                  | 75,868,000 |                  | $          | 50,012,000 |   |
|                                                                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES,  MINORITY INTEREST AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |               |       |                  |       |
| Liabilities:                                                                                                                                                                       |       |               |       |                  |       |
| Notes payable                                                                                                                                                                      |       | $                  | 36,580,000 |                  | $          | 20,180,000 |   |
| Accounts payable and  accrued liabilities                                                                                                                                          |       | 224,000            |       | 505,000               |       |
| Payable to related  parties                                                                                                                                                        |       | 1,936,000          |       | 1,955,000             |       |
| Prepaid rent and  security deposits                                                                                                                                                |       | 345,000            |       | 202,000               |       |
| Property taxes payable                                                                                                                                                             |       | 152,000            |       | 13,000                |       |
| Intangible lease  liability, net                                                                                                                                                   |       | 340,000            |       | 111,000               |       |
| Distribution payable                                                                                                                                                               |       | 205,000            |       | 146,000               |       |
| Total liabilities                                                                                                                                                                  |       | 39,782,000         |       | 23,112,000            |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Minority interest                                                                                                                                                                  |       | 177,000            |       | 181,000               |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Stockholders’ equity :                                                                                                                                                        |       |               |       |                  |       |
| Preferred stock, $0.001  par value; 10,000,000 shares authorized; no shares were issued  or outstanding at March 31, 2007 and December 31, 2006                               |       | —             |       | —                |       |
| Common stock, $0.001  par value; 290,000,000 shares authorized; 5,773,666 and 4,328,816  shares issued and outstanding at March 31, 2007 and December 31, 2006,  respectively |       | 6,000              |       | 4,000                 |       |
| Additional paid-in  capital                                                                                                                                                        |       | 37,829,000         |       | 28,115,000            |       |
| Accumulated deficit                                                                                                                                                                |       | (1,926,000         | )          | (1,400,000            | )          |
| Total stockholders’  equity                                                                                                                                                   |       | 35,909,000         |       | 26,719,000            |       |
| Total liabilities, minority interest and stockholders’ equity                                                                                                                 |       | $                  | 75,868,000 |                  | $          | 50,012,000 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated interim financialstatements.

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**CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Revenues:                                 |       |                                                 |       |   |   |
| Rental revenues                           |       | $                                                    | 894,000    |   | $ | — |   |
| Tenant reimbursements                     |       | 177,000                                              |       | — |   |
|                                      |       | 1,071,000                                            |       | — |   |
| Expenses:                                 |       |                                                 |       |   |   |
| Property operating and maintenance        |       | 231,000                                              |       | — |   |
| General and administrative                |       | 555,000                                              |       | 316,000 |   |
| Depreciation and amortization             |       | 253,000                                              |       | — |   |
|                                      |       | 1,039,000                                            |       | (316,000 | ) |
| Operating income  (loss)                  |       | 32,000                                               |       | (316,000 | ) |
|                                      |       |                                                 |       |   |   |
| Other  income(expense):                   |       |                                                 |       |   |   |
| Interest income                           |       | 110,000                                              |       | 2,000 |   |
| Interest expense                          |       | (669,000                                             | )          | — |   |
| Loss before  minority interest            |       | (527,000                                             | )          | (314,000 | ) |
| Minority interest                         |       | 1,000                                                |       | 4,000 |   |
| Net loss                                  |       | $                                                    | (526,000   | ) | $ | (310,000 | ) |
|                                      |       |                                                 |       |   |   |
| Loss per share -  basic and diluted       |       | $                                                    | (0.11      | ) | $ | (3.29 | ) |
|                                      |       |                                                 |       |   |   |
| Weighted average number  of common shares |       | 4,814,342                                            |       | 94,396 |   |

 

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

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

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**For the Three Months Ended March 31,2007**

**(Unaudited)**
| ** **                       | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** **               | ** ** |
|----------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                       | ** ** | ** **            | ** ** | **Common**         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Number of**    | ** ** | **Stock Par** | ** ** | **Additional**           | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Shares**            | ** ** | **Value**          | ** ** | **Paid-In Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| **Balance  - December 31, 2006** | ** ** | **4,328,186**         | ** ** | **$**              | **4,000**  | ** **               | **$**      | **28,115,000** | ** ** | **$** | **(1,400,000** | **)** | **$** | **26,719,000** | ** ** |
| Issuance of  common stock        |       | 1,445,480             |       | 2,000              |       | 11,548,000               |       | — |   | 11,550,000 |   |
| Offering costs                   |       | —                |       | —             |       | (1,328,000               | )          | — |   | (1,328,000 | ) |
| Dividends  declared              |       | —                |       | —             |       | (506,000                 | )          | — |   | (506,000 | ) |
| Net loss                         |       | —                |       | —             |       | —                   |       | (526,000 | ) | (526,000 | ) |
| **Balance - March 31, 2007**     | ** ** | **5,773,666**         | ** ** | **$**              | **6,000**  | ** **               | **$**      | **37,829,000** | ** ** | **$** | **(1,926,000** | **)** | **$** | **35,909,000** | ** ** |

 

The accompanyingnotes are an integral part of these condensed consolidated interim financialstatements.

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**CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                    |       |                                                 |       |   |   |
| Net loss                                                                     |       | $                                                    | (526,000   | ) | $ | (310,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                 |       |   |   |
| Amortization of  deferred financing costs                                    |       | 119,000                                              |       | — |   |
| Depreciation and  amortization                                               |       | 253,000                                              |       | — |   |
| Amortization of  acquired above (below) market leases                        |       | 30,000                                               |       | — |   |
| Minority  interest                                                           |       | (1,000                                               | )          | (4,000 | ) |
| Change in  operating assets and liabilities:                                 |       |                                                 |       |   |   |
| Tenant and other receivables                                                 |       | (102,000                                             | )          | 6,000 |   |
| Other assets                                                                 |       | 29,000                                               |       | (131,000 | ) |
| Accounts payable and accrued expenses                                        |       | (128,000                                             | )          | (4,000 | ) |
| Accounts payable to related parties                                          |       | (88,000                                              | )          | 65,000 |   |
| **Net cash used in operating activities**                                    | ** ** | **(414,000**                                         | **)**      | **(378,000** | **)** |
| ** **                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Real estate  acquisitions                                                    | ** ** | (22,012,000                                          | )          | — |   |
| Deferred  acquisition costs and deposits                                     |       | (133,000                                             | )          | — |   |
| **Net  cash used investing activities**                                      | ** ** | **(22,145,000**                                      | **)**      | — |   |
| ** **                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities**                                    |       |                                                 |       |   |   |
| Issuance of common stock                                                     |       | 11,298,000                                           |       | 2,772,000 |   |
| Proceeds from note payable                                                   |       | 16,400,000                                           |       | — |   |
| Offering costs                                                               |       | (1,288,000                                           | )          | (276,000 | ) |
| Other receivables                                                            |       | (157,000                                             | )          | — |   |
| Distributions paid to stockholders                                           |       | (196,000                                             | )          | — |   |
| Distributions paid to minority interest                                      |       | (8,000                                               | )          | — |   |
| **Net cash provided by financing activities**                                | ** ** | **26,049,000**                                       | ** ** | **2,496,000** | ** ** |
| Net increase in  cash and cash equivalents                                   |       | 3,490,000                                            |       | 2,118,000 |   |
| Cash and cash  equivalents - beginning of period                             |       | 11,041,000                                           |       | 117,000 |   |
| Cash and cash  cquivalents - end of period                                   |       | $                                                    | 14,531,000 |   | $ | 2,235,000 |   |
|                                                                         |       |                                                 |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Cash paid for interest                                                       |       | $                                                    | 527,000    |   | $ | — |   |
| **Supplemental  disclosure of non-cash financing and investing activities:** | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Receivable from  transfer agent                                              |       | $                                                    | —     |   | $ | 579,000 |   |
| Distribution  declared not paid                                              |       | $                                                    | 203,000    |   | $ | 14,000 |   |
| Accrued dividend  to minority interest                                       |       | $                                                    | 3,000      |   | $ | — |   |
| Distribution  reinvested                                                     |       | $                                                    | 169,000    |   | $ | — |   |
| Payable to  related party                                                    |       | $                                                    | 70,000     |   | $ | 1,742,000 |   |
| Security deposits  assumed upon acquisition of real estate                   |       | $                                                    | 133,000    |   | $ | — |   |

 

The accompanyingnotes are an integral part of these condensed consolidated interim financialstatements.

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**CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2007**

**UNAUDITED**

**1.****                                Organization**

Cornerstone CoreProperties REIT, Inc., a Maryland corporation, was formed onOctober 22, 2004 under the General Corporation Law of Maryland for thepurpose of engaging in the business of investing in and owning commercial realestate.  As used in thisreport, “we” “us” and “our” refer to Cornerstone Core Properties REIT,Inc.  We are newly formed and are subjectto the general risks associated with a start-up enterprise, including the riskof business failure.  Subject to certain restrictions and limitations, ourbusiness is managed by an affiliate, Cornerstone Realty Advisors, LLC, aDelaware limited liability company that was formed on November 30, 2004(the “advisor”), pursuant to an advisory agreement.

On November 9,2004, Terry G. Roussel, an affiliate of the advisor, purchased 125 shares ofcommon stock for $1,000 and became our initial stockholder.  Our articlesof incorporation authorize 290,000,000 shares of common stock with a par valueof $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001.

Cornerstone OperatingPartnership, L.P., a Delaware limited partnership (the “Operating Partnership”)was formed on November 30, 2004.  At March 31, 2007, we owned a99.54% general partner interest in the Operating Partnership while the advisorowned a 0.46% limited partnership interest.  We anticipate that we willconduct all or a portion of our operations through the Operating Partnership.  Our financial statements and the financialstatements of the Operating Partnership are consolidated in the accompanyingcondensed consolidated financial statements.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

**2.****                              PublicOffering**

On January 6, 2006, we commenced apublic offering of a minimum of 125,000 shares and a maximum of 55,400,000shares of our common stock, consisting of 44,400,000 shares for sale to thepublic (the “Primary Offering”) and 11,000,000 shares for sale pursuant to ourdistribution reinvestment plan (collectively, the “Offering”).  Weretained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of theadvisor, to serve as the dealer manager for the Offering.  PCC is responsiblefor marketing our shares being offered pursuant to the Offering.  OnFebruary 28, 2006, offering proceeds exceeded the $1,000,000 offering minimumand proceeds were released to us from escrow.

We intend to invest thenet proceeds from the Offering primarily in investment real estate includingmulti-tenant industrial real estate located in major metropolitan markets inthe United States.  As of March 31, 2007, a total of approximately 5.7million shares of our common stock had been sold for aggregate gross proceedsof approximately $45.7 million.

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

Thesummary of significant accounting policies presented below is designed toassist in understanding our consolidated financial statements.  These accounting policies conform toaccounting principles generally accepted in the United States of America, orGAAP, in all material respects, and have been consistently applied in preparingthe accompanying consolidated financial statements.  Such financial statements and accompanyingnotes are the representations of our management, who is responsible for theirintegrity and objectivity.

***Interim FinancialInformation***

The accompanyinginterim condensed financial statements have been prepared by our management inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and in conjunction with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures required for annual financial statements have been condensed orexcluded pursuant to SEC rules and regulations. Accordingly, the interimcondensed financial statements do not include all of the information andfootnotes require by GAAP for complete financial statements. The accompanyingfinancial information reflects all adjustments, which are, in the opinion ofour management, of a normal recurring nature and necessary for a fairpresentation of our financial position, results of operations and cash flowsfor the interim periods. Interim results of operations are not necessarilyindicative of the results to be expected for the full year. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe audited 

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consolidated financialstatements and the notes thereto included in the 2006 Annual Report on Form10-K as filed with the Securities and Exchange Commission. Operating resultsfor the three months ended March 31, 2007 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2007.

***Cash and Cash Equivalents***

We consider allshort-term, highly liquid investments that are readily convertible to cash witha maturity of three months or less at the time of purchase to be cashequivalents.

***Real Estate Purchase Price Allocation***

Weaccount for all acquisitions in accordance with Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”)No. 141, “Business Combinations” (“FAS 141”).  The results ofoperations of acquired properties are included in our Consolidated Statementsof Operation after the date of acquisition. Upon acquisition of a property, we allocate the purchase price of theproperty based upon the fair value of the assets acquired, which generallyconsist of land, buildings, tenant improvements, leasing commissions andintangible assets including in-place leases and above market and below marketleases.  We allocate the purchase price to the fair value of the tangibleassets 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 39years.  

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

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

Shoulda tenant terminate its lease, the unamortized portion of the in-place leasevalue and above or below market lease value would be charged to expense. Theestimated useful lives for lease intangibles range from 1 month to 10 years.

Amortizationassociated with the lease intangible assets and liabilities for the periodended March 31, 2007 were $109,000 and $24,000 respectively.

Anticipatedamortization of in-place and below market lease intangibles from April 1, 2007through December 31, 2007 and for each of the four following years afterDecember 31, 2007 is as follows:
|                                     | ** ** | **Lease  Intangibles** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| April 1, 2007 to  December 31, 2007 |       | $                      | 275,000    |   |
| 2008                                |       | 331,000                |       |
| 2009                                |       | 326,000                |       |
| 2010                                |       | 326,000                |       |
| 2011                                |       | 284,000                |       |
|                                     |            |                        |            |  |

 

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As of March 31, 2007, cost and accumulateddepreciation and amortization related to real estate assets and related leaseintangibles were as follows:  
| ** **                                 | ** ** | **Buildings and  Improvements** | ** ** | **In-Place  Lease Value** | ** ** | **Acquired Above  Market Leases** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|
| Cost                                       |       | $                                    | 35,220,000 |                           | $          | 931,000                                     |       | $                                  | 1,180,000  |   | $ | (374,000 | ) |
| Accumulated  depreciation and amortization |       | (269,000                             | )          | (76,000                        | )          | (71,000                                     | )          | 34,000                             |       |
| Net                                        |       | $                                    | 34,951,000 |                           | $          | 855,000                                     |       | $                                  | 1,109,000  |   | $ | (340,000 | ) |

 

As ofDecember 31, 2006, cost and accumulated depreciation and amortization relatedto real estate assets and related lease intangibles were as follows: 
| ** **                                 | ** ** | **Buildings and  Improvements** | ** ** | **In-Place Lease** | ** ** | **Acquired Above  Market Leases** | ** ** | **Acquired Below  Market Leases** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Cost                                       |       | $                                    | 18,492,000 |                    | $          | 397,000                                     |       | $                                           | 971,000    |   | $ | (121,000 | ) |
| Accumulated  depreciation and amortization |       | (76,000                              | )          | (20,000                 | )          | (17,000                                     | )          | 10,000                                      |       |
| Net                                        |       | $                                    | 18,416,000 |                    | $          | 377,000                                     |       | $                                           | 954,000    |   | $ | (111,000 | ) |

 

***Impairment of Real Estate Assets***

Managementcontinually monitors events and changes in circumstances that could indicatethat the carrying amounts of our real estate assets, including those heldthrough joint ventures may not be recoverable. When indicators of potentialimpairment are present that indicate that the carrying amounts of real estateassets may not be recoverable, we will assess the recoverability of the realestate assets by determining whether the carrying value of the real estate assetswill be recovered through the undiscounted future operating cash flows expectedfrom 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 of expected futurecash flows require us to estimate future market rental income amountssubsequent to the expiration of current lease agreements, property operatingexpenses, discount rates, the number of months it takes to re-lease theproperty 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.

***Other Assets***

Other assets consisted primarily of amounts receivablefrom a lender in connection with the financing of three properties.  Other assets also includes net leasingcommissions and interest receivable from cash invested in government backedsecurities and investment-grade short-term instruments.

***Deferred Financing Costs***

Deferred financing costs consist of direct costsincurred in connection with a credit agreement. At March 31, 2007 and December31, 2006, deferred financing costs amounted to approximately $934,000. Suchcosts are amortized over the term of the credit facility.  For the three months ended March 31, 2007,approximately $119,000 was amortized to interest expense. 

***Consolidation Considerations for the Company’s Investments in JointVentures***

The FASB issuedInterpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidationof Variable Interest Entities, an Interpretation of Accounting ResearchBulletin No. 51” (“ARB 51”), which addresses how a business enterpriseshould evaluate whether it has a controlling interest in an entity through meansother than voting rights and accordingly 

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should consolidate theentity.  Before concluding that it is appropriate to apply the ARB 51voting interest consolidation model to an entity, an enterprise must firstdetermine that the entity is not a variable interest entity (VIE).  Weevaluate, as appropriate, our interests, if any, in joint ventures and otherarrangements to determine if consolidation is appropriate.

#### ***Revenue Recognition and Valuation of Receivables***

Ourrevenues, which comprised largely of rental income, include rents reported on astraight-line basis over the initial term of the lease.  Since our leasesprovide for rental increases at specified intervals, we are required tostraight-line the recognition of revenue, which results in the recording of areceivable for rent not yet due under the lease terms.

#### ***Depreciation of Real Property Assets***

Weare required to make subjective assessments as to the useful lives of ourdepreciable assets.  We consider the period of future benefit of the assetto determine the appropriate useful lives. Depreciation of our assets is expected to be charged to expense on astraight-line basis over the assigned useful lives.

***Organizational and Offering Costs***

The advisor funds organization and offering costs onour behalf.  We are required to reimbursethe advisor for such organization and offering costs up to 3.5% of thecumulative capital raised in the Primary Offering.  Organization and offering costs include itemssuch as legal and accounting fees, marketing, due diligence, promotional andprinting costs and amounts to reimburse our advisor for all costs and expensessuch as salaries and direct expenses of employees of our advisor and itsaffiliates in connection with registering and marketing our shares. All offeringcosts are recorded as an offset to additional paid-in capital, and allorganization costs were recorded as an expense at the time we become liable forthe payment of these amounts.

***Minority Interest in Consolidated Subsidiary***

Due to our controlthrough our general partnership interest in the Operating Partnership and thelimited rights of the limited partners, the Operating Partnership isconsolidated with the Company and the limited partner interest is reflected asminority interest in the accompanying balance sheets.

***Income Taxes***

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

During the threemonths ended March 31, 2007 and the year ended December 31, 2006, we generateda deferred tax assets of $148,000 and $448,000. Because we intended to qualify as a REIT which would not allow for therealization of the deferred tax asset, a valuation allowance of a like amountwas recorded.

***Concentration of Credit Risk***

Financialinstruments that potentially subject us to a concentration of credit risk areprimarily cash investments. Cash is generally invested in government backedsecurities and investment-grade short-term instruments and the amount of creditexposure to any one commercial issuer is limited. We have cash in financialinstitutions which is insured by the Federal Deposit Insurance Corporation, orFDIC, up to $100,000 per institution. At March  31, 2007, we had cashaccounts in excess of FDIC insured limits.

Wehave two tenants each of whom accounted more than 10% of annualized rentalrevenue.  One tenant accounted for 19% ofannualized rental revenue while the other tenant accounted for 13% ofannualized rental revenue.  

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As ofMarch 31, 2007, we owned three properties in the state of California (SouthernCalifornia) and two properties in the state of Arizona (North Tempe).  Accordingly, there is a geographicconcentration of risk subject to fluctuations in each State’s economy.

***Fair Value of Financial Instruments***

TheSFAS No. 107, *Disclosures AboutFair Value of Financial Instruments,* whether or not recognized onthe face of the balance sheet, for which it is practical to estimate thatvalue. SFAS 107 defines fair value as the quoted market prices for thoseinstruments that are actively traded in financial markets. In cases wherequoted market prices are not available, fair values are estimated using presentvalue or other valuation techniques such as discounted cash flow analysis. Thefair value estimates are made at the end of each year based on available marketinformation and judgments about the financial instrument, such as estimates oftiming and amount of expected future cash flows. Such estimates do not reflectany premium or discount that could result from offering for sale at one timeour entire holdings of a particular financial instrument, nor do they considerthat tax impact of the realization of unrealized gains or losses. In manycases, the fair value estimates cannot be substantiated by comparison toindependent markets, nor can the disclosed value be realized in immediatesettlement of the instrument.

Ourconsolidated balance sheets include the following financial instruments: cashand cash equivalents, deferred acquisition costs and deposits, other assets,prepaid rent and security deposits, amounts due from/to related parties,accounts payable and accrued expenses, property tax payable and notes payable.We consider the carrying values of cash and cash equivalents, deferredacquisition costs and deposits, other assets, due from/to related parties,accounts payable and accrued expenses, prepaid rent and security deposits, andnotes payable to approximate fair value for these financial instruments becauseof the short period of time between origination of the instruments and theirexpected realization as well as the variable interest rate for notes payable.

***Per Share Data***

Wereport earnings per share pursuant to SFAS No. 128, “Earnings PerShare.” Basic earnings per share attributable for all periods presented arecomputed by dividing the net loss by the weighted average number of sharesoutstanding during the period. Diluted earnings per share are computed based onthe weighted average number of shares and all potentially dilutive securities,if any.

***Shock Based Compensation***

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

***Use of Estimates***

Thepreparation of our financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof the assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses for the reporting period. Actual results could materially differ from those estimates.

***Segment Disclosure***

We internally evaluate allof our properties as one industry segment and, accordingly, do not reportsegment information.

***Recently IssuedAccounting Pronouncements***

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, (“FIN 48”), which clarifiesthe relevant criteria and approach for the recognition, derecognition, andmeasurement of uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006.  The adoption of thisinterpretation in the first quarter of 2007 did not have a material impact onour consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures 

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about fair valuemeasurements. In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOptions for Financial Assets and Financial Liabilities”. This Statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS 157 and 159 areeffective for financial statements issued for fiscal periods beginning afterNovember 15, 2007 (our fiscal year beginning January 1, 2008), and interimperiods within those fiscal years. Management is currently evaluating theimpact of adopting SFAS No. 157 and SFAS No. 159 on the consolidated financialstatements.

**4.****                                    ****Investments in Real Estate**

On January 22, 2007, we completed the purchase of the Mack Deer Valleyproperty.  The purchase price of theproperty was funded with net proceeds raised from our public offering and $16.4million of borrowings under our credit agreement with HSH Nordbank AG, New YorkBranch.

**5.****             AccountsPayable to Related Parties**

The payable to relatedparties at March 31, 2007 and December 31, 2006 consists of organizational andoffering costs and acquisition fees and expense reimbursements payable to theadvisor and broker dealer fees payable to PCC.

**6.****                                     MinorityInterests**

Minorityinterests relate to the advisor’s equity interest in the earnings/losses of theOperating Partnership.

**7.****                                     Stockholders’Equity**

***Common Stock***

Ourarticles of incorporation authorize the issuance of 290,000,000 shares ofcommon stock with a par value of $0.001 and 10,000,000 shares of preferredstock with a par value of $0.001.  As of March 31, 2007, we have issuedapproximately 5.8 million shares of common stock for a total gross proceeds ofapproximately $46.1 million.

***Dividend Reinvestment Plan***

Wehave adopted a distribution reinvestment plan that allows our stockholders tohave dividends and other distributions otherwise distributable to them investedin additional shares of our common stock.  We have registered 11,000,000 shares of our common stock for salepursuant to the distribution reinvestment plan.  The purchase price per shareis 95% of the price paid by the purchaser for our common stock, but not lessthan $7.60 per share.  At March 31, 2007, approximately 61,400 shares hadbeen issued under the distribution reinvestment plan.  We may amend or terminate the distributionreinvestment plan for any reason at any time upon 10 days prior written noticeto participants.

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

Wehave adopted an Employee and Director Incentive Stock Plan (“the Plan”) whichprovides for the grant of awards to our directors and full-time employees, aswell as other eligible participants that provide services to us. We have noemployees, and we do not intend to grant awards under the Plan to persons whoare not directors of ours. 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 Plan is 10years. The total number of shares of common stock reserved for issuance underthe Plan is equal to 10% of our outstanding shares of stock at any time.

EffectiveJanuary 1, 2006, we adopted the provisions of Statement of FinancialAccounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment,” whichrequires the measurement and recognition of compensation expense for allshare-based payment awards to employees and directors based on estimated fairvalues.  On May 10, 2006, we granted ournonemployee directors nonqualified stock options to purchase an aggregate of40,000 shares of common stock at an exercise price of $8.00 per share.  Outstanding stock options became immediatelyexercisable in full on the grant date, expire in ten years after the grantdate, and have no intrinsic value as of March 31, 2007.  For the year ended three months ended March 31,2007 and 2006, we did not incur any non-cash compensation expenses. .

We record compensationexpense for nonemployee stock options based on the estimated fair value of theoptions on the date of grant using the Black-Scholes option-pricing model.These assumptions include the risk-free interest rate, the expected life of theoptions, the expected stock price volatility over the expected life of theoptions, and the expected 

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dividend yield.Compensation expense for employee stock options is recognized ratably over thevesting term. The assumptions used to estimate the fair value of optionsgranted during year ended December 31, 2006 using the Black-Scholesoption-pricing model were 5% dividend yield, a 4.99% risk-free interest ratebased on the 10-year U.S. Treasury Bond, an expected life of 5 years, anda volatility rate of 1.02%. No stock options were granted, exercised orcanceled during the three months March 31, 2007.

The expected lifeof the options is based on evaluations of expected future exercisebehavior. The risk free interest rate is based on the U.S. Treasury yieldcurve at the date of grant with maturity dates approximately equal to theexpected term of the options at the date of the grant. Volatility is basedon historical volatility of our stock. The valuation model applied in thiscalculation utilizes highly subjective assumptions that could potentiallychange over time, including the expected stock price volatility and theexpected life of an option. Therefore, the estimated fair value of an optiondoes not necessarily represent the value that will ultimately be realized by anonemployee director.

**8.****                                     RelatedParty Transactions**

We have no employees.Our advisor is primarily responsible for managing our business affairs andcarrying out the directives of our board of directors.  We have an advisory agreement with theadvisor and a dealer manager agreement with PCC which entitle the advisor andPCC to specified fees upon the provision of certain services with regard to theOffering and investment of funds in real estate projects, among other services,as well as reimbursement for organizational and offering costs incurred by theadvisor and PCC on our behalf and reimbursement of certain costs and expensesincurred by the advisor in providing services to us.

***Advisory Agreement***

Under the terms ofthe advisory agreement, our advisor will use commercially reasonable efforts topresent to us investment opportunities to provide a continuing and suitableinvestment program consistent with the investment policies and objectivesadopted by our board of directors.  Theadvisory agreement calls for our advisor to provide for our day-to-daymanagement and to retain property managers and leasing agents, subject to theauthority of our board of directors, and to perform other duties.

The fees and expensereimbursements payable to our advisor under the advisory agreement aredescribed below.

Organizational andOffering Costs.  Organizationaland offering costs of the Offering are being paid by the advisor on our behalfand will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theoffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our advisor for allmarketing related costs and expenses such as salaries and direct expenses ofemployees of or advisor and its affiliates in connection with registering andmarketing our shares (ii) technology costs associated with the offering ofour shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering. As of March 31, 2007 and December 31, 2006, the advisor andits affiliates had incurred on our behalf offering costs of approximately $2.7and $2.5 million respectively, which we have recorded as an offset toadditional paid in capital.  For thethree months ended March 31, 2007 and 2006, we did not expense any organizationcosts. 

Acquisition Fees andExpenses.  The advisory agreement requires us to pay theadvisor acquisition fees in an amount equal to 2% of the gross proceeds of thePrimary Offering.  We will pay the acquisition fees upon receipt of thegross proceeds from the Offering.  However, if the advisory agreement isterminated or not renewed, the advisor must return acquisition fees not yetallocated to one of our investments.  In addition, we are 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.  As of March 31, 2007and December 31, 2006, the advisor earned approximately $923,000 and $690,000respectively, of acquisition fees, which are to be capitalized as part of thecost of real estate investment. 

Management Fees.  The advisory agreement requires us to pay theadvisor a monthly asset management fee of one-twelfth of 1.0% of the sum of theaggregate basis book carrying values of our assets invested, directly orindirectly, in equity interests in and loans secured by real estate beforereserves for depreciation or bad debts or other similar non-cash reserves,calculated in accordance with generally accepted accounting principals in theUnited States of America (GAAP).  In addition, we will reimburse the advisorfor the direct costs and expenses incurred by the advisor in providing assetmanagement 

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services to us. These fees and expenses are in addition to management fees that we expect topay to third party property managers.  For the three months ended March 31,2007 and 2006, the advisor earned approximately $139,000 and $0 respectively ofasset management fees, which were expensed. 

Operating Expenses.The advisory agreement provides for reimbursement of our advisor’s direct andindirect costs of providing administrative and management services to us.  For three months ended March 31, 2007 and2006, approximately $182,000 and $44,000 of such costs respectively, werereimbursed.  The advisor must pay orreimburse us the amount by which our aggregate annual operating expenses exceedthe greater of 2% of our average invested assets or 25% of our net incomeunless a majority of our independent directors determine that such excessexpenses 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 our directors, including a majority of ourindependent directors) in connection with the sale of one or more properties,we will pay the advisor or such affiliate shall receive at closing adisposition fee up to 3% of the sales price of such property orproperties.  This disposition fee may be paid in addition to real estatecommissions paid to non-affiliates, provided that the total real estatecommissions (including such disposition fee) paid to all persons by us for eachproperty shall not exceed an amount equal to the lesser of (i) 6% of theaggregate contract sales price of each property or (ii) the competitivereal estate commission for each property.  We will pay the dispositionfees for a property at the time the property is sold.

SubordinatedParticipation Provisions. The advisor is entitled to receive a subordinated participation upon thesale of our properties, listing of our common stock or termination of theadvisor, as follows:

·                  Afterstockholders have received cumulative distributions equal to $8 per share(less any returns of capital) plus cumulative, non-compounded annual returns onnet invested capital, the advisor will be paid a subordinated participation innet sale proceeds ranging from a low of 5% of net sales provided investors haveearned annualized returns of 6% to a high of 15% of net sales proceeds ifinvestors have earned annualized returns of 10% or more.

·                  Upontermination of the advisory agreement, the advisor will receive thesubordinated performance fee due upon termination. This fee ranges from a lowof 5% of the amount by which the sum of the appraised value of our assets minusour liabilities on the date the advisory agreement is terminated plus totaldividends (other than stock dividends) paid prior to termination of theadvisory agreement exceeds the amount of invested capital plus annualizedreturns of 6%, to a high of 15% of the amount by which the sum of the appraisedvalue of our assets minus its liabilities plus all prior dividends (other thanstock dividends) exceeds the amount of invested capital plus annualized returnsof 10% or more.

·                  Inthe event we list our stock for trading, the advisor will receive asubordinated incentive listing fee instead of a subordinated participation innet sales proceeds. This fee ranges from a low of 5% of the amount by which themarket value of our common stock plus all prior dividends (other than stockdividends) exceeds the amount of invested capital plus annualized returns of6%, to a high of 15% of the amount by which the sum of the market value of ourstock plus all prior dividends (other than stock dividends) exceeds the amountof invested capital plus annualized returns of 10% or more.

***DealerManager Agreement***

PCC, as dealer manager,is entitled to receive a sales commission of up to 7% of gross proceeds fromsales in the Primary Offering.  PCC, as Dealer Manager, is also entitledto receive a dealer manager fee equal to up to 3% of gross proceeds from salesin the Primary Offering.  The Dealer Manager 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) to the extent are in excess of 13.5% of gross proceeds from theOffering. At March 31, 2007 and December 31, 2006, we had incurredapproximately $4.5 million and $3.4 million payable to PCC for dealer managerfees and sales commissions, respectively. Much of this amount was reallowed byPCC to third party broker dealers. Dealer manager fees and sales commissionspaid to PCC are a cost of capital raised and, as such, are included as areduction of additional paid in capital in the accompanying consolidatedbalance sheets.

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**9.****              CreditFacility**

On June 30, 2006, we entered into a Credit Agreementwith HSH Nordbank AG, New York Branch, for a temporary credit facility that wewill use during the offering period to facilitate our acquisitions of propertiesin anticipation of the receipt of offering proceeds.  As of March 31, 2007 and December 31,2006, we had borrowed $36.6 and $20.2 million respectively, under thecredit agreement.

The Credit Agreement permits us to borrow up to $50milion secured by real property at a borrowing rate based on LIBOR plus amargin ranging from 1.15% to 1.35% and requires payment of a usage premium ofup to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investmentsand we may use up to 10% of the credit facility for working capital.  We are entitled to prepay the borrowingsunder the credit facility at any time without penalty.  The principal balance is due on June 30,2008.  The repayment of obligations underthe Credit Agreement may be accelerated in the event of a default, as definedin the Credit Agreement. The facility contains various covenantsincluding financial covenants with respect to consolidated interest and fixedcharge coverage and secured debt to secured asset value. As of March 31,2007, we were not in compliance with one of these financial covenants, and inaccordance with the terms of the loan agreement, we plan to reduce the amountof the loan outstanding by up to $3.4 million before June 6, 2007 to avoiddefaulting on the borrowing.  Duringquarter ended March 31, 2007, we incurred and paid approximately $527,000 ofinterest expense related to the Credit Agreement.  

In connection with documentation and closing theCredit Agreement, we have incurred financing costs totaling approximately$934,000.  These financing costs havebeen capitalized and are being amortized over the life of the agreement.  For the three months ended March 31, 2007 and2006, $119,000 and $0, respectively, of deferred financing costs were amortizedand included in interest expense in the consolidated statements of operations.

Consistentwith our borrowing policies, during our Primary Offering, we will borrowperiodically to acquire properties and for working capital.  We willdetermine whether to use the proceeds of our Offering to repay amounts borrowedunder the Credit Agreement depending on a number of factors, including theinvestments that are available to us for purchase at the time and the cost ofthe credit facility.  Following the closing of our Primary Offering, wewill endeavor to repay all amounts owing under the Credit Agreement or that aresecured by our properties and which have not previously been paid.  To theextent sufficient proceeds from our Offering are unavailable to repay theindebtedness secured by properties within a reasonable time following theclosing of our Primary Offering as determined by our board of directors, we maysell properties or raise equity capital to repay the secured debt, so that wewill own our properties with no permanent acquisition financing.

**10.****                              Commitmentsand Contingencies**

***Environment Matters***

Wefollow the policy of monitoring our properties for the presence of hazardous ortoxic substances.  While there can be noassurance that a material environment liability does not exist, we are notcurrently aware of any environmental liability with respect to the propertiesthat would have a material effect on our financial condition, results ofoperations and cash flows.  Further, weare not aware of any environmental liability or any unasserted claim orassessment with respect to an environmental liability that we believe wouldrequire additional disclosure or the reording of a loss contingency.

***Other***

Ourcommitments and contingencies include the usual obligations of real estateowners and operators in the normal course of business.  In the opinion of management, these mattersare not expected to have a material impact on our consolidated financialposition and results of operations.

**11.****                              SubsequentEvents**

On April 2, 2007,we acquired Marathon Business Center, a 52,020 square foot property located inLargo, Flordia, from a non-related party, for a purchase price of approximately$4.5 million, including closing costs (which are not fully determinable at thistime).  We acquired the property in ajoint venture with JBK Capital, LLC.  We are the managing partnerof the venture and own a 97% interest in the venture.  The propertywas purchased with no debt financing. 

On April 30, 2007 we entered into a definitveagreement to purchase annewly constructed multi-tenant industrial property known Classic Business Parkfrom CP 215 Business Park, LLC, a non-related party, for a purchase price of$9.8 million. As of May 1, 2007, our right to terminate the agreement withoutpenalty expired and our initial deposits became non refundable.  The acquisition is expected to close in thefirst quarter of 2008.

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

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

# 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 likely result,” and similarexpressions.  Forward-looking statementsare based on current expectations and assumptions that are subject to risks anduncertainties which may cause actual results to differ materially from theforward-looking statements. Forward-looking statements that were true at the time made mayultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise

**Overview**

We were incorporated onOctober 22, 2004 for the purpose of engaging in the business of investingin and owning commercial real estate. Prior to commencing our initial public offering on January 6, 2006, wehad approximately $200,000 in assets and no real estate operations. In February2006, we received the minimum offering amount of $1,000,000 and in June 2006,we began acquiring real estate assets. At March 31, 2007, we raised approximately $45.7 million of grossproceeds from the sale of approximately 5.7 million shares of our commonstock and had acquired five properties. Two properties were acquired in June 2006, two were acquired in December2006 and one was acquired at the end of January 2007.  Accordingly, our results of operations forthe quarters ended March 31, 2007 and March 31, 2006 are not comparable.   

Wehave no paid employees and are externally advised and managed by CornerstoneRealty Advisors, LLC.

**Critical Accounting Policies**

The completelisting of our Critical Accounting Policies was previously disclosed in our2006 Annual Report on Form 10-K, as filed with the SEC.

# **Resultsof Operations**

Our results of operations for the quarters ended March31, 2007 and 2006 are not indicative of those expected in future periods as weexpect that rental income, tenant reimbursements, operating expenses, assetmanagement fees, depreciation, amortization, and net income will each increasein future periods as a result of assets acquired during 2006 and the quarterended March 31, 2007 and as a result of anticipated future acquisitions of realestate assets.

Total revenues increased to $1,071,000, property operating and maintenceexpenses increased to $231,000 and depreciation and amortization increased to$253,000 in the first quarter of 2007. There was no comparable revenue or expenses in the first quarter ofMarch 31, 2006.

General and administrative expenses increased to $555,000 in the firstquarter of 2007 from $316,000 in the comparable period of 2006.  The increase is primarily attributable tohigher professional fees and advisor administrative expense reimbursementsassociated with the increase in operating activities in the first quarter of2007.

Interest income of $110,000 in the first quarter of 2007 compares to$2,000 in the first quarter of 2006.  Theincrease is due to cash available for investment from net proceeds of ourOffering. .  Interest expense increasedto $669,000 in the first quarter of 2007 from $0 in the comparable period of2006.  The increase in expense is due tofinancing used to facilitate property acquisitions.

**Liquidity and Capital Resources**

We expect thatprimary sources of capital over the long term will include net proceeds fromthe sale of our common stock and net cash flows from operations.  We expect that our primary uses of capitalwill be for property acquisitions, for the payment of tenant improvements andleasing commissions, for the payment of operating expenses, including interestexpense on any outstanding indebtedness, and for the payment of distributions.

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As of March 31,2007 a total of 5,712,277 shares of our common stock had been sold in ourOffering for aggregate gross proceeds of approximately $45.7million.   As of March 31,2007, wehad approximately $14.5 million in cash and cash equivalents on hand andapproximately $13.4 million available under our acquisition credit facilitywith HSH Nordbank.  Our liquidity willincrease as additional subscriptions are accepted and decrease as net offeringproceeds are expended in connection with the acquisition and operation ofproperties.

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

Generally, cash needs for items other than propertyacquisitions will be met from operations, and cash needs for propertyacquisitions will be met from public offerings of our shares or from borrowingson our credit facility.

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

We are currentlydependent on our advisor to fund a portion of our organization and offeringactivities because the amount we can spend on organization and offeringexpenses is limited by our charter.  AtMarch 31, 2007, our advisor had incurred $2.7 million of organization andoffering costs on our behalf.  Of thisamount, $1.7 million had been reimbursed to our advisor.  Our advisor advances us money for theseorganization and offering expenses or pays these expenses on our behalf.  Our advisor will not charge us interest onthese advances.  We will repay theseadvances and reimburse our advisor for expenses paid on our behalf using the grossproceeds of our initial public offering, but in no event will we have anyobligation 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 ofour organization and offering expenses described above that are in excess this3.5% limitation.  In addition, ouradvisor will pay all of our organization and offering expenses that, whencombined 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 relyon advances from our advisor to acquire properties but our advisor and itsaffiliates may loan funds to special purposes entities that may acquireproperties on our behalf pending our raising sufficient proceeds from ourinitial public offering to purchase the properties from the special purposeentity.

Our advisor isnewly formed, has limited capitalization, has incurred losses since itsinception and is continuing to incur losses. Our advisor must obtain financialsupport from its affiliates or sole member or raise funds through the sale ofits own debt or equity securities to obtain the cash necessary to provide theseadvances. There can be no assurance as to the amount or timing of our advisor’sreceipt of funds. Adverse changes in the financial condition of our advisorcould adversely affect us. If our advisor’s financial condition affects theamount of funds available to us for offering and organizational activities, ourability to raise funds in our initial public offering could be adverselyaffected. Cornerstone Industrial Properties, LLC, the sole member of ouradvisor, has limited capitalization, has incurred significant losses since itsinception and is continuing to incur significant losses.

We will endeavorto repay any temporary acquisition debt financing promptly upon receipt ofproceeds in our initial public offering. To the extent sufficient proceeds from our offering are unavailable torepay such debt financing within a reasonable time as determined by our boardof directors, we will endeavor to raise additional equity or sell properties torepay such debt so that we will own our properties all-cash with no permanentfinancing.  In the event that our initialpublic offering is not fully sold, our ability to diversify our investments maybe diminished.

We are not awareof any material trends or uncertainties, favorable or unfavorable, other thannational economic conditions affecting real estate generally, which itanticipates may have a material impact on either capital resources or therevenues or income to be derived from the operation of real estate properties.

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**Contractual Obligations**

Thefollowing table reflects our contractual obligations as of March 31, 2007,specifically our obligations under long-term debt agreements and purchaseobligations:  
| ** **                                     | ** ** | **Payment due by period** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**               | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt  Obligations                    |       | $                                        | 36,580,000 | ** ** | **—** |   | $ | 36,580,000 | ** ** | **—** | ** ** | **—** | ** ** |
| Purchase  Obligations (1)                      |       | $                                        | 4,500,000  |   | $ | 4,500,000 | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Interest Expense  related to long term debt(2) |       | $                                        | 3,031,000  |   | 2,425,000 |   | $ | 606,000 |   |   |   |   |   |
|                                                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) As of March31, 2007 we had an agreement to puchase Marathon Business Center for a purchaseprice of $4.5 million. The acquisition was completed on April 2, 2007.

(2) Interestexpense is calculated based on the loan balance outstanding at March 31, 2007,one month LIBOR at March 31, 2007 plus margin of 1.25%.

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

Weinvest our cash and cash equivalents in short-term, highly liquid investmentsincluding government obligations, bank certificates of deposit andinterest-bearing accounts which, by their nature, are subject to interest ratefluctuations.  As of March 31, 2007, wehad borrowed approximately $36.6 million under our credit facility. This andfuture borrowing on the credit facility is subject to a variable rate throughits maturity date of June 30, 2008. An increase in the variable interest rateon the facility constitutes a market risk as a change in rates would increaseor decrease interest incurred and therefore cash flows available fordistribution to shareholders. During the period from January 1, 2007through March 12, 2007, 30-day LIBOR has remained flat. However, there canbe no assurance that this rate will not increase. Based on the debt outstandingas of March 31, 2007, a 1% change in interest rates would result in a change ininterest expense of approximately $ 366,000 per year.

**Item 4.****            Controls andProcedures**

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to oursenior management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  Our Chief Executive Officer and the ChiefFinancial Officer have reviewed the effectiveness of our disclosure controlsand procedures and have concluded that the disclosure controls and procedureswere effective as of the end of the period covered by this report.

We are in theprocess of developing and implementing a formal set of internal controls andprocedures for financial reporting as required by the Sarbanes-Oxley Act of2002.  The efficacy of the steps we havetaken to date and steps we are still in the process of completing are subjectto continued management review supported by confirmation and testing bymanagement.  We anticipate that additional changes may be made to ourinternal controls and procedures.  Other than the foregoing initiatives,no change in our internal control over financial reporting occurred during theperiod ended March 31, 2007 that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

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

31.1                           Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2                           Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

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

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this quarterly report to be signed on its behalf bythe undersigned, thereunto duly authorized this 11th day of May, 2007.
|          | 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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