UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





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




For
the quarterly period ended September 30, 2010


or


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





Commission
File Number   000-52566





CORNERSTONE
CORE PROPERTIES REIT, INC.


(Exact
name of registrant as specified in its charter)





MARYLAND
              73-1721791(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
              92614(Address
      of principal executive offices)
              (Zip
      Code)





949-852-1007


(Registrant’s
telephone number, including area code)





Not
Applicable


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





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


x  Yes   ̈  No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈  Yes   ̈  No





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





Large accelerated filer  ̈
            Accelerated filer  ̈
            Non-accelerated filer  ̈
            Smaller reporting company x




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


 ̈ Yes  x  No





As
of November 12, 2010, we had 22,991,181 shares of common stock issued and
outstanding.








PART
I -FINANCIAL INFORMATION


FORM
10-Q


Cornerstone
Core Properties REIT, Inc.


TABLE
OF CONTENTS





PART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
      (unaudited)
              3Condensed
      Consolidated Statements of Operations for the Three Months and Nine months
      Ended September 30, 2010 and 2009 (unaudited)
              4Condensed
      Consolidated Statements of Equity for the Nine months Ended September 30,
      2010 and 2009 (unaudited)
              5Condensed
      Consolidated Statements of Cash Flows for the Nine months Ended September
      30, 2010 and 2009 (unaudited)
              6Notes
      to Condensed Consolidated Financial Statements (unaudited)
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              26Item
      4.
              Controls
      and Procedures
              26PART
      II.
              OTHER
      INFORMATIONItem
      1A.
              Risk
      Factors
              27Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              27Item
      6.
              Exhibits
              29SIGNATURES
              30


2





CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)




September 30, 2010
                  
                  
                  December 31, 2009ASSETSCash
      and cash equivalents
                  
                  $
                  7,703,000
                  
                  
                  $
                  18,673,000Investments
      in real estate:Land
                  
                  
                  39,430,000
                  
                  
                  
                  38,604,000Buildings
      and improvements, net
                  
                  
                  86,041,000
                  
                  
                  
                  87,671,000Intangible
      lease assets, net
                  
                  
                  548,000
                  
                  
                  
                  804,000126,019,000
                  
                  
                  
                  127,079,000Notes
      receivable, net
                  
                  
                  3,625,000
                  
                  
                  
                  2,875,000Note
      receivable from related party
                  
                  
                  8,000,000
                  
                  
                  
                  6,911,000Deferred
      costs and deposits
                  
                  
                  281,000
                  
                  
                  
                  29,000Deferred
      financing costs, net
                  
                  
                  89,000
                  
                  
                  
                  174,000Tenant
      and other receivables, net
                  
                  
                  881,000
                  
                  
                  
                  863,000Other
      assets, net
                  
                  
                  294,000
                  
                  
                  
                  648,000Total
      assets
                  
                  $
                  146,892,000
                  
                  
                  $
                  157,252,000LIABILITIES
      AND EQUITYLiabilities:Notes
      payable
                  
                  $
                  38,539,000
                  
                  
                  $
                  38,884,000Accounts
      payable and accrued liabilities
                  
                  
                  1,338,000
                  
                  
                  
                  698,000Payable
      to related parties
                  
                  
                  8,000
                  
                  
                  
                  347,000Prepaid
      rent, security deposits and deferred revenue
                  
                  
                  816,000
                  
                  
                  
                  1,010,000Intangible
      lease liability, net
                  
                  
                  148,000
                  
                  
                  
                  217,000Distributions
      payable
                  
                  
                  906,000
                  
                  
                  
                  941,000Total
      liabilities
                  
                  
                  41,755,000
                  
                  
                  
                  42,097,000Commitments
      and contingencies (Note 13)Equity:Stockholders’ Equity:Preferred
      stock, $0.001 par value; 10,000,000 shares authorized; no shares were
      issued or outstanding at September 30, 2010 and December 31,
      2009
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $0.001 par value; 290,000,000 shares
      authorized;  22,996,406 and 23,114,201 shares issued and
      outstanding at September 30, 2010 and December 31, 2009,
      respectively
                  
                  
                  25,000
                  
                  
                  
                  24,000Additional
      paid-in capital
                  
                  
                  118,991,000
                  
                  
                  
                  128,559,000Accumulated
      deficit
                  
                  
                  (14,001,000
                  )
                  
                  
                  (13,559,000
                  )Total
      stockholders’ equity
                  
                  
                  105,015,000
                  
                  
                  
                  115,024,000Noncontrolling
      interest
                  
                  
                  122,000
                  
                  
                  
                  131,000Total
      equity
                  
                  
                  105,137,000
                  
                  
                  
                  115,155,000Total
      liabilities and  equity
                  
                  $
                  146,892,000
                  
                  
                  $
                  157,252,000




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


3




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)




Three Months Ended
                    September 30,
                  
                  
                  NineMonthsEnded
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009RevenuesRental
      revenues
                  
                  $
                  1,650,000
                  
                  
                  $
                  1,880,000
                  
                  
                  $
                  5,463,000
                  
                  
                  $
                  6,011,000Tenant
      reimbursements and other income
                  
                  
                  493,000
                  
                  
                  
                  468,000
                  
                  
                  
                  1,521,000
                  
                  
                  
                  1,507,000Interest
      income from notes receivable
                  
                  
                  336,000
                  
                  
                  
                  309,000
                  
                  
                  
                  1,124,000
                  
                  
                  
                  988,0002,479,000
                  
                  
                  
                  2,657,000
                  
                  
                  
                  8,108,000
                  
                  
                  
                  8,506,000ExpensesProperty
      operating and maintenance
                  
                  
                  814,000
                  
                  
                  
                  999,000
                  
                  
                  
                  2,152,000
                  
                  
                  
                  2,700,000General
      and administrative
                  
                  
                  566,000
                  
                  
                  
                  364,000
                  
                  
                  
                  1,696,000
                  
                  
                  
                  1,173,000Asset
      management fees
                  
                  
                  368,000
                  
                  
                  
                  381,000
                  
                  
                  
                  1,116,000
                  
                  
                  
                  1,138,000Real
      estate acquisition costs
                  
                  
                  30,000
                  
                  
                  
                  28,000
                  
                  
                  
                  58,000
                  
                  
                  
                  360,000Depreciation
      and amortization
                  
                  
                  924,000
                  
                  
                  
                  989,000
                  
                  
                  
                  2,574,000
                  
                  
                  
                  2,786,000Impairment
      of notes receivable
                  
                  
                  —
                  
                  
                  
                  4,626,000
                  
                  
                  
                  —
                  
                  
                  
                  4,626,0002,702,000
                  
                  
                  
                  7,387,000
                  
                  
                  
                  7,596,000
                  
                  
                  
                  12,783,000Operating
      (loss) income
                  
                  
                  (223,000
                  )
                  
                  
                  (4,730,000
                  )
                  
                  
                  512,000
                  
                  
                  
                  (4,277,000
                  )Interest
      income
                  
                  
                  1,000
                  
                  
                  
                  3,000
                  
                  
                  
                  4,000
                  
                  
                  
                  7,000Interest
      expense
                  
                  
                  (347,000
                  )
                  
                  
                  (341,000
                  )
                  
                  
                  (958,000
                  )
                  
                  
                  (1,069,000
                  )Net
      loss
                  
                  
                  (569,000
                  )
                  
                  
                  (5,068,000
                  )
                  
                  
                  (442,000
                  )
                  
                  
                  (5,339,000
                  )Less:
      Net loss attributable to the noncontrolling interest
                  
                  
                  —
                  
                  
                  
                  (5,000
                  )
                  
                  
                  —
                  
                  
                  
                  (5,000
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (569,000
                  )
                  
                  $
                  (5,063,000
                  )
                  
                  $
                  (442,000
                  )
                  
                  $
                  (5,334,000
                  )Basic
      and diluted net loss per common share attributable to common
      stockholders
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.25
                  )Weighted
      average number of common shares
                  
                  
                  22,880,212
                  
                  
                  
                  22,584,321
                  
                  
                  
                  22,917,097
                  
                  
                  
                  21,583,192Dividend
      declared per common share
                  
                  $
                  0.12
                  
                  
                  $
                  0.12
                  
                  
                  $
                  0.36
                  
                  
                  $
                  0.36




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


4





CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY


For
the Nine Months Ended September 30, 2010 and 2009


(Unaudited)




Common StockNumber of
                                        Shares
                                      
                                      
                                      Common
                                        Stock Par
                                        Value
                                      
                                      
                                      Additional
                                        Paid-In
                                        Capital
                                      
                                      
                                      Accumulated
                                        Deficit
                                      
                                      
                                      Total
                                        Stockholders’
                                        Equity
                                      
                                      
                                      Noncontrolling
                                        Interest
                                      
                                      
                                      Total EquityBalance
      - December31,
      2009
                                      
                                      
                                      23,114,201
                                      
                                      
                                      $
                                      24,000
                                      
                                      
                                      
                                      128,559,000
                                      
                                      
                                      $
                                      (13,559,000
                                      )
                                      
                                      $
                                      115,024,000
                                      
                                      
                                      $
                                      131,000
                                      
                                      
                                      $
                                      115,155,000Issuance
      of common stock
                                      
                                      
                                      730,318
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      5,609,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      5,610,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      5,610,000Redeemed
      shares
                                      
                                      
                                      (848,113
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (6,501,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (6,501,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (6,501,000
                                      )Offering
      costs
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (470,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (470,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (470,000
                                      )Dividends
      declared
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (8,206,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (8,206,000
                                      )
                                      
                                      
                                      (9,000
                                      )
                                      
                                      
                                      (8,215,000
                                      )Net
      loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (442,000
                                      )
                                      
                                      
                                      (442,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (442,000
                                      )Balance
      – September 30, 2010
                                      
                                      
                                      22,996,406
                                      
                                      
                                      $
                                      25,000
                                      
                                      
                                      $
                                      118,991,000
                                      
                                      
                                      $
                                      (14,001,000
                                      )
                                      
                                      $
                                      105,015,000
                                      
                                      
                                      $
                                      122,000
                                      
                                      
                                      $
                                      105,137,000





Common StockNumber of
                                        Shares
                                      
                                      
                                      Common
                                        Stock Par
                                        Value
                                      
                                      
                                      Additional
                                        Paid-In
                                        Capital
                                      
                                      
                                      Accumulated
                                        Deficit
                                      
                                      
                                      Total
                                        Stockholders’
                                        Equity
                                      
                                      
                                      Noncontrolling
                                        Interest
                                      
                                      
                                      Total EquityBalance
      -December 31,
      2008
                                      
                                      
                                      20,570,120
                                      
                                      
                                      $
                                      21,000
                                      
                                      
                                      $
                                      121,768,000
                                      
                                      
                                      $
                                      (5,456,000
                                      )
                                      
                                      $
                                      116,333,000
                                      
                                      
                                      $
                                      151,000
                                      
                                      
                                      $
                                      116,484,000Issuance
      of common stock
                                      
                                      
                                      2,755,353
                                      
                                      
                                      
                                      3,000
                                      
                                      
                                      
                                      21,802,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      21,805,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      21,805,000Redeemed
      shares
                                      
                                      
                                      (562,416
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (4,293,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (4,293,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (4,293,000
                                      )Offering
      costs
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,643,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,643,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,643,000
                                      )Dividends
      declared
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (7,867,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (7,867,000
                                      )
                                      
                                      
                                      (9,000
                                      )
                                      
                                      
                                      (7,876,000
                                      )Net
      loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (5,334,000
                                      )
                                      
                                      
                                      (5,334,000
                                      )
                                      
                                      
                                      (5,000
                                      )
                                      
                                      
                                      (5,339,000
                                      )Balance
      – September 30, 2009
                                      
                                      
                                      22,763,057
                                      
                                      
                                      $
                                      24,000
                                      
                                      
                                      $
                                      128,767,000
                                      
                                      
                                      $
                                      (10,790,000
                                      )
                                      
                                      $
                                      118,001,000
                                      
                                      
                                      $
                                      137,000
                                      
                                      
                                      $
                                      118,138,000





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


5


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


Nine
      Months Ended September 30,2010
                    
                    
                    2009Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (442,000
                    )
                    
                    $
                    (5,339,000
                    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Amortization
      of deferred financing costs
                    
                    
                    216,000
                    
                    
                    
                    182,000Depreciation
      and amortization
                    
                    
                    2,574,000
                    
                    
                    
                    2,786,000Straight-line
      rents and amortization of acquired above (below) market leases,
      net
                    
                    
                    29,000
                    
                    
                    
                    (29,000
                    )Provision
      for bad debt
                    
                    
                    (44,000
                    )
                    
                    
                    423,000Impairment
      of note receivable
                    
                    
                    —
                    
                    
                    
                    4,626,000Change
      in operating assets and liabilities:Tenant
      and other receivables, net
                    
                    
                    30,000
                    
                    
                    
                    (292,000
                    )Other
      assets, net
                    
                    
                    209,000
                    
                    
                    
                    177,000Accounts
      payable and accrued liabilities
                    
                    
                    565,000
                    
                    
                    
                    645,000Payable
      to related parties, net
                    
                    
                    (376,000
                    )
                    
                    
                    (95,000
                    )Prepaid
      rent, security deposit and deferred revenue
                    
                    
                    (194,000
                    )
                    
                    
                    (135,000
                    )Net
      cash provided by operating activities
                    
                    
                    2,567,000
                    
                    
                    
                    2,949,000Cash
      flows from investing activitiesReal
      estate acquisitions
                    
                    
                    (1,315,000
                    )
                    
                    
                    —Additions
      to real estate
                    
                    
                    (58,000
                    )
                    
                    
                    (136,000
                    )Escrow
      deposits
                    
                    
                    (250,000
                    )
                    
                    
                    —Notes
      receivable
                    
                    
                    (750,000
                    )
                    
                    
                    (17,038,000
                    )Notes
      receivable from related party
                    
                    
                    (1,089,000
                    )
                    
                    
                    —Net
      cash used in investing activities
                    
                    
                    (3,462,000
                    )
                    
                    
                    (17,174,000
                    )Cash
      flows from financing activitiesIssuance
      of common stock
                    
                    
                    1,151,000
                    
                    
                    
                    17,277,000Redeemed
      shares
                    
                    
                    (6,501,000
                    )
                    
                    
                    (4,293,000
                    )Repayment
      of notes payable
                    
                    
                    (344,000
                    )
                    
                    
                    (135,000
                    )Offering
      costs
                    
                    
                    (460,000
                    )
                    
                    
                    (2,358,000
                    )Distributions
      paid to stockholders
                    
                    
                    (3,781,000
                    )
                    
                    
                    (3,271,000
                    )Distributions
      paid to noncontrolling interest
                    
                    
                    (9,000
                    )
                    
                    
                    (9,000
                    )Deferred
      financing costs
                    
                    
                    (131,000
                    )
                    
                    
                    (144,000
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (10,075,000
                    )
                    
                    
                    7,067,000Net
      decrease in cash and cash equivalents
                    
                    
                    (10,970,000
                    )
                    
                    
                    (7,158,000
                    )Cash
      and cash equivalents - beginning of period
                    
                    
                    18,673,000
                    
                    
                    
                    26,281,000Cash
      and cash equivalents - end of period
                    
                    $
                    7,703,000
                    
                    
                    $
                    19,123,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                    
                    $
                    684,000
                    
                    
                    $
                    921,000Supplemental
      disclosure of non-cash financing and investing activities:Distribution
      declared not paid
                    
                    $
                    906,000
                    
                    
                    $
                    896,000Payable
      to related party
                    
                    $
                    8,000
                    
                    
                    $
                    17,000Distribution
      reinvested
                    
                    $
                    4,459,000
                    
                    
                    $
                    4,528,000Accrued
      additions to real estate
                    
                    $
                    74,000
                    
                    
                    $
                    —Accrued acquisition fees not
      paid
                    
                    $
                    —
                    
                    
                    $
                    1,000


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


6


CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010





UNAUDITED


1.
            Organization





Cornerstone
Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. Subject to certain restrictions and limitations, our
business is managed pursuant to an advisory agreement by an affiliate,
Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was
formed on November 30, 2004 (the “Advisor”).





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At September 30, 2010,
we owned a 99.88% general partner interest in the Operating Partnership while
the Advisor owned a 0.12% limited partnership interest.  We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership. Our financial statements and the financial statements of the
Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements.  All intercompany accounts and
transactions have been eliminated in consolidation.





2.
            Public
      Offerings





On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan.  On June 10,
2009, the Securities and Exchange Commission (“SEC”) declared our follow-on
offering effective and we commenced a follow-on offering of up to 77,350,000
shares of our common stock, consisting of 56,250,000 shares for sale pursuant to
a primary offering and 21,100,000 shares for sale pursuant to our dividend
reinvestment plan.





We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as our dealer manager for our offerings.  PCC is responsible
for marketing our shares being offered pursuant to the offerings. We used the
net proceeds from our initial public offering to invest primarily in investment
real estate including multi-tenant industrial real estate located in major
metropolitan markets in the United States.  We intend to use the net
proceeds from our follow-on offering to pay down temporary acquisition financing
on our existing assets and to acquire additional real estate investments. As
of September 30, 2010, a total of 20.9 million shares of our
common stock had been sold in both offerings for aggregate gross proceeds of
approximately $167.1 million, excluding approximately 2.2 million shares that
were issued pursuant to our distribution reinvestment plan and approximately 1.6
million shares issued in connection with the special 10% stock dividend related
to our initial public offering, reduced by approximately 1.7 million shares
pursuant to our stock repurchase program.





3.
            Summary
      of Significant Accounting Policies





The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more
information regarding our critical accounting policies and estimates please
refer to "Summary of Significant Accounting Policies” contained in our Annual
Report on Form 10-K for the year ended December 31, 2009. There have been no
material changes to the critical accounting policies previously disclosed in
that report except as discussed below.


7





Interim
Financial Information





The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC.  Certain information and footnote
disclosures required for annual financial statements have been condensed or
excluded pursuant to SEC rules and regulations.  Accordingly, the
interim condensed consolidated financial statements do not include all of the
information and footnotes required by GAAP for complete financial statements.
The accompanying financial information reflects all adjustments which are, in
the opinion of our management, of a normal recurring nature and necessary for a
fair presentation of our financial position, results of operations and cash
flows for the interim periods. Interim results of operations are not necessarily
indicative of the results to be expected for the full year.  The
accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the 2009 Annual Report on Form 10-K as filed with the
SEC.  Operating results for the three and nine months ended September
30, 2010 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2010.





Fair
Value of Financial Instruments




Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
825-10, Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.




We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.




Our
condensed consolidated balance sheets include the following financial
instruments: cash and cash equivalents, note receivable from related party,
tenant and other receivables, other assets, deferred costs and deposits,
deferred financing costs, payable to related parties, prepaid rent, security
deposits and deferred revenue, accounts payable and accrued liabilities, and
distributions payable. We consider the carrying values to approximate fair value
for these financial instruments because of the short period of time between
origination of the instruments and their expected payment. The fair value of the
note payable to related party is not determinable due to the related party
nature of the note payable.




The fair
value of notes payable is estimated using lending rates available to us for
financial instruments with similar terms and maturities. As of September 30,
2010 and December 31, 2009, the fair value of notes payable was approximately
$39.2 million and $38.9 million, compared to the carrying value of approximately
$38.5 million and $38.9 million, respectively.





The fair
value of note receivable is estimated using current rates at which management
believes similar loans would be made with similar terms and maturities. As of
September 30, 2010 and December 31, 2009, the fair value of notes receivable was
approximately $3.6 million and $3.0 million, compared to the carrying value of
approximately $3.6 million and $2.9 million, respectively.





Recently
Issued Accounting Pronouncements





In
June 2009, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 167, Amendments
to FASB Interpretation No. 46(R), which was primarily codified into
ASC Topic 810 Consolidations.  The new guidance impacts the
consolidation guidance applicable to variable interest entities (“VIEs”) and
among other things requires a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a VIE, continuous assessments of whether a
company is the primary beneficiary of a VIE and enhanced disclosures about a
company’s involvement with a VIE. We adopted this guidance on January 1,
2010 and it did not have a material impact on our condensed consolidated
financial statements and disclosures.




In
January 2010, the FASB issued an Accounting Standards Update (“ASU”)
2010-02, Consolidation –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification, to address implementation issues associated with the
accounting for decreases in the ownership of a subsidiary.  The new
guidance clarified the scope of the entities covered by the guidance related to
accounting for decreases in the ownership of a subsidiary and specifically
excluded in-substance real estate or conveyances of oil and gas mineral rights
from the scope.  Additionally, the new guidance expands the disclosures
required for a business combination achieved in stages and deconsolidation of a
business or nonprofit activity.  The new guidance became effective for
interim and annual periods ending on or after December 31, 2009 and must be
applied on a retrospective basis to the first period that an entity adopted the
new guidance related to noncontrolling interests.  We adopted this guidance
on January 1, 2010 and it did not have a material impact on our condensed
consolidated financial statements and disclosures.


8





In
January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements. ASU 2010-06 amends ASC Topic 820 to require
additional disclosure and clarify existing disclosure requirements about fair
value measurements. ASU 2010-06 requires entities to provide fair value
disclosures for each class of assets and liabilities, which may be a subset of
assets and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure regarding the
amounts and reasons for significant transfers in and out of Level 1 and 2 of the
fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. The
guidance clarifies existing disclosure requirements regarding the inputs and
valuation techniques used to measure fair value for measurements that fall in
either Level 2 or Level 3 of the hierarchy. ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009 except for
the disclosures about purchases, sales, issuances and settlements which is
effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. We adopted ASU 2010-06 on
January 1, 2010, which only applies to our disclosures on the fair value of
financial instruments. The adoption of ASU 2010-06 did not have a material
impact on our footnote disclosures.




In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain
Recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent
Events).  ASU 2010-09 clarifies that subsequent events should
be evaluated through the date the financial statements are issued. In addition,
this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for
financial statements issued subsequent to February 24, 2010. We adopted this
guidance on February 24, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.





In
July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. The amendments in this update require additional disclosure about
the credit quality of financing receivables, such as aging information and
credit quality indicators. Both new and existing disclosures must be
disaggregated by portfolio segment or class. The disaggregation of information
is based on how allowances for credit losses are developed and how credit
exposure is managed. ASC 2010-20 is effective for interim periods and fiscal
years ending after December 15, 2010. The Company does not expect the
adoption of ASC 2010-20 on December 31, 2010 to have an impact on its
consolidated financial position or results of operations.





4.
            Investments
      in Real Estate





As of
September 30, 2010, our portfolio consists of thirteen properties which were
approximately 79.09% leased.  The following table provides summary
information regarding our properties.





Property
                                  
                                  Location
                                  
                                  Date
      Purchased
                                  
                                  Square
                                    Footage
                                  
                                  
                                  Purchase
                                    Price
                                  
                                  
                                  Associated
                                    Debt
                                  
                                  
                                  September
                                    30,
      2010
                                    %
      Leased2111
      South Industrial Park
                                  
                                  North
      Tempe, AZ
                                  
                                  June
      1, 2006
                                  
                                  
                                  26,800
                                  
                                  
                                  $
                                  1,975,000
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  
                                  73.13
                                  %Shoemaker
      Industrial Buildings
                                  
                                  Santa
      Fe Springs, CA
                                  
                                  June
      30, 2006
                                  
                                  
                                  18,921
                                  
                                  
                                  
                                  2,400,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  100.00
                                  %15172
      Goldenwest Circle (1)
                                  
                                  Westminster,
      CA
                                  
                                  December
      1, 2006
                                  
                                  
                                  102,200
                                  
                                  
                                  
                                  11,200,000
                                  
                                  
                                  
                                  2,789,000
                                  
                                  
                                  
                                  100.00
                                  %20100
      Western Avenue
                                  
                                  Torrance,
      CA
                                  
                                  December
      1, 2006
                                  
                                  
                                  116,433
                                  
                                  
                                  
                                  19,650,000
                                  
                                  
                                  
                                  4,642,000
                                  
                                  
                                  
                                  74.23
                                  %Mack Deer Valley
                                  
                                  Phoenix,
      AZ
                                  
                                  January
      21, 2007
                                  
                                  
                                  180,985
                                  
                                  
                                  
                                  23,150,000
                                  
                                  
                                  
                                  3,819,000
                                  
                                  
                                  
                                  100.00
                                  %Marathon Center
                                  
                                  Tampa
      Bay, FL
                                  
                                  April
      2, 2007
                                  
                                  
                                  52,020
                                  
                                  
                                  
                                  4,450,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  24.00
                                  %Pinnacle Park Business Center
                                  
                                  Phoenix,
      AZ
                                  
                                  October
      2, 2007
                                  
                                  
                                  159,661
                                  
                                  
                                  
                                  20,050,000
                                  
                                  
                                  
                                  4,495,000
                                  
                                  
                                  
                                  100.00
                                  %Orlando Small Bay
      PortfolioCarter
                                  
                                  Winter
      Garden, FL
                                  
                                  November
      15, 2007
                                  
                                  
                                  49,125
                                  
                                  
                                  
                                  4,624,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  73.28
                                  %Goldenrod
                                  
                                  Orlando,
      FL
                                  
                                  November
      15, 2007
                                  
                                  
                                  78,646
                                  
                                  
                                  
                                  7,402,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  66.15
                                  %Hanging
      Moss
                                  
                                  Orlando,
      FL
                                  
                                  November
      15, 2007
                                  
                                  
                                  94,200
                                  
                                  
                                  
                                  8,866,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  93.42
                                  %Monroe
      South
                                  
                                  Sanford,
      FL
                                  
                                  November
      15, 2007
                                  
                                  
                                  172,500
                                  
                                  
                                  
                                  16,236,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  69.18
                                  %394,471
                                  
                                  
                                  
                                  37,128,000
                                  
                                  
                                  
                                  15,860,000
                                  
                                  
                                  
                                  74.90
                                  %Monroe North
      CommerCenter
                                  
                                  Sanford,
      FL
                                  
                                  April
      17, 2008
                                  
                                  
                                  181,348
                                  
                                  
                                  
                                  14,275,000
                                  
                                  
                                  
                                  6,934,000
                                  
                                  
                                  
                                  59.14
                                  %1830
      Santa Fe
                                  
                                  Santa
      Ana, CA
                                  
                                  August
      5, 2010
                                  
                                  
                                  12,200
                                  
                                  
                                  
                                  1,315,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100.00
                                  %1,245,039
                                  
                                  
                                  $
                                  135,593,000
                                  
                                  
                                  $
                                  38,539,000
                                  
                                  
                                  
                                  79.09
                                  %


9





(1)
            On September 27, 2010, the United
      States Bankruptcy Court for the District of Delaware granted the motion of
      debtor Universal Building Products, the parent company of the single
      tenant occupying 15172 Goldenwest Circle, to set aside the tenant’s lease
      of 15172 Goldenwest Circle. Rental income from this tenant represents
      7.25% of total revenue for the nine months ended September 30, 2010. The
      tenant vacated the property on October 1, 2010 and we have engaged an
      experienced broker to re-lease the
  property.





As of
September 30, 2010, cost and accumulated depreciation and amortization related
to real estate assets and related lease intangibles were as
follows:





Land
                        
                        
                        Buildings and
                          Improvements
                        
                        
                        Acquired
                          Above-
                          Market
                          Leases
                        
                        
                        In-Place
                          Lease Value
                        
                        
                        Acquired
                          Below-
                          Market
                          LeasesInvestment
      in real estate
                        
                        $
                        39,430,000
                        
                        
                        $
                        95,078,000
                        
                        
                        $
                        1,700,000
                        
                        
                        $
                        1,992,000
                        
                        
                        $
                        (823,000
                        )Less:
      accumulated depreciation and amortization
                        
                        
                        —
                        
                        
                        
                        (9,037,000
                        )
                        
                        
                        (1,522,000
                        )
                        
                        
                        (1,622,000
                        )
                        
                        
                        675,000Net
      investments in real estate and related lease intangibles
                        
                        $
                        39,430,000
                        
                        
                        $
                        86,041,000
                        
                        
                        $
                        178,000
                        
                        
                        $
                        370,000
                        
                        
                        $
                        (148,000
                        )





As of
December 31, 2009, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:





Land
                      
                      
                      Buildings and
                        Improvements
                      
                      
                      Acquired
                        Above-
                        Market
                        Leases
                      
                      
                      In-Place
                        Lease Value
                      
                      
                      Acquired
                        Below-
                        Market
                        LeasesInvestment
      in real estate
                      
                      $
                      38,604,000
                      
                      
                      $
                      94,513,000
                      
                      
                      $
                      1,666,000
                      
                      
                      $
                      1,971,000
                      
                      
                      $
                      (824,000
                      )Less:
      accumulated depreciation and amortization
                      
                      
                      —
                      
                      
                      
                      (6,842,000
                      )
                      
                      
                      (1,419,000
                      )
                      
                      
                      (1,414,000
                      )
                      
                      
                      607,000Net
      investments in real estate and related lease intangibles
                      
                      $
                      38,604,000
                      
                      
                      $
                      87,671,000
                      
                      
                      $
                      247,000
                      
                      
                      $
                      557,000
                      
                      
                      $
                      (217,000
                      )





Depreciation
expense associated with buildings and improvements and site improvements for the
three months ended September 30, 2010 and 2009 was approximately $740,000 and
$781,000, respectively. Depreciation expense associated with buildings and
improvements and site improvements for the nine months ended September 30, 2010
and 2009 was approximately $2.2 million and $2.3 million,
respectively.





Net
amortization expense associated with the lease intangible assets and liabilities
for the three months ended September 30, 2010 and 2009 was approximately
$76,000 and $141,000, respectively.  Net amortization expense
associated with the lease intangible assets and liabilities for the nine months
ended September 30, 2010 and 2009 was approximately $241,000 and
$363,000, respectively. Estimated net amortization expense for October 1,
2010 through December 31, 2010 and each of the subsequent years is as
follows:





Lease Intangibles
    AmortizationOctober
      1, 2010 to December 31, 2010
                  
                  $
                  66,0002011
                  
                  $
                  180,0002012
                  
                  $
                  82,0002013
                  
                  $
                  51,0002014
                  
                  $
                  12,0002015
      and thereafter
                  
                  $
                  9,000




The
estimated useful lives for lease intangibles range from approximately one month
to six years.  As of September 30, 2010, the weighted-average
amortization period for in-place leases, acquired above market leases and
acquired below market leases were 4.1 years, 4.7 years and 3.5 years,
respectively.


10





Leasing
Commissions





Leasing
commissions are stated at cost and amortized on a straight-line basis over the
related lease term.  As of September 30, 2010 and December 31, 2009,
net leasing commissions were approximately $355,000 and $466,000, respectively.
Amortization expense for the three months ended September 30, 2010 and 2009 was
approximately $114,000 and $69,000, respectively. Amortization expense for the
nine months ended September 30, 2010 and 2009 was approximately $170,000 and
$139,000, respectively.




5.
            Allowance
      for Doubtful Accounts





Our
allowance for doubtful accounts was $418,000 and $491,000 as of September 30,
2010 and December 31, 2009, respectively.





6.
            Concentration
      of Credit Risk





Financial
instruments that potentially subject the Company to a concentration of credit
risk are primarily cash investments; cash is generally invested in
investment-grade short-term instruments. On July 21, 2010, President Obama
signed into law the sweeping financial regulatory reform act entitled the
“Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements
far-reaching changes to the regulation of the financial services industry,
including provisions that made permanent the $250,000 limit for federal deposit
insurance and increase the cash limit of Securities Investor Protection
Corporation protection from $100,000 to $250,000, and provide unlimited federal
deposit insurance until January 1, 2013, for non-interest bearing demand
transaction accounts at all insured depository institutions. As of September 30,
2010 we had cash accounts in excess of FDIC insured limits. We believe this risk
is not significant.




As of
September 30, 2010, we owned four properties in the state of California, three
properties in the state of Arizona and six properties in the state of
Florida.  Accordingly, there is a geographic concentration of risk
subject to fluctuations in each State’s economy.





7.
            Notes
      Receivable





In May
2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two
real estate operating companies, Servant Investments, LLC and Servant Healthcare
Investments, LLC (collectively, “Servant”). In May 2010, the loan commitments
were reduced to $8.75 million. The loans mature on May 19, 2013. Servant is
party to an alliance with the managing member of our Advisor. As of September
30, 2010, our aggregate advances to Servant under the loan commitment were
approximately $8.4 million. On a quarterly basis, we evaluate the collectability
of our notes receivable. Our evaluation of collectability involves judgment,
estimates and a review of the Servant business plans and their operating
projections. During the quarter ended September 30, 2009, we concluded that the
collectability of one note cannot be reasonably assured and therefore, we
recorded a note receivable reserve of approximately $4.8 million against the
balance of that note. The amount of this reserve has been included in our
consolidated statements of operations under impairment of note receivable, which
was recorded for the quarter ended September 30, 2009. As of September 30, 2010
and December 31, 2009, the impaired notes receivable had a net zero balance. It
is our policy to recognize interest income on the reserved loan advances on a
cash basis. For the three months ended September 30, 2010 and 2009, interest
income related to the impaired note receivable was approximately $80,000 and $0,
respectively. For the nine months ended September 30, 2010 and 2009, interest
income related to the impaired note receivable was approximately $402,000 and
$152,000, respectively. As of September 30, 2010 and December 31, 2009, the
other note receivable had a balance of approximately $3.6 million and $2.9
million, respectively. Interest income related to the other note receivable for
the three months ended September 30, 2010 and 2009, was approximately $88,000
and $59,000, respectively. Interest income related to the other note receivable
for the nine months ended September 30, 2010 and 2009, was approximately
$246,000 and $148,000, respectively.




8.
            Note
      Receivable from Related Party





On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly-owned subsidiary of
Cornerstone Healthcare Plus REIT, Inc., a publicly offered, non-traded REIT
sponsored by affiliates of our sponsor, Cornerstone Realty Advisors, LLC. The
loan was to mature on January 21, 2010 subject to the borrower's right to repay
the loan, in whole or in part, on or before January 21, 2010 without incurring
any prepayment penalty. On December 16, 2009, Caruth Haven L.P. repaid the full
loan amount. For the three months ended September 30, 2010 and 2009 interest
income from this note receivable was approximately $0 and $224,000,
respectively. For the nine months ended September 30, 2010 and 2009 interest
income from this note receivable was approximately $0 million and $615,000,
respectively.


11


On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
owned by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the island of Nantucket, MA. The loan matures on
January 1, 2015, with no option to extend and bears interest at a fixed rate of
8.0% for the term of the loan. Interest is to be paid monthly with principal due
at maturity. Under the terms of the loan, we are entitled to receive additional
interest in the form of a 40% participation in the "shared appreciation" of the
property, at loan maturity, calculated based on the net sales proceeds if the
property is sold, or the property's appraised value, less ordinary disposition
costs, if the property has not been sold by the time the loan matures.
Prepayment of the loan is not permitted without our consent and the loan is not
assumable. During the third quarter of 2010, we fully funded the $8.0 million
commitment. For the three months ended September 30, 2010 and 2009, interest
income from this mortgage loan commitment was approximately $164,000 and $0,
respectively. For the nine months ended September 30, 2010 and 2009, interest
income from this mortgage loan commitment was approximately $464,000 and $0
million, respectively.





Nantucket
Acquisition LLC is considered a variable interest entity because the equity
owners of the Nantucket Acquisition LLC do not have sufficient equity at risk,
and our mortgage loan commitment was determined to be a variable interest. We
have determined that we are not the primary beneficiary of this VIE since we do
not have the power to direct the activities of this VIE.




9.
            Payable
      to Related Parties





Payable
to related parties at September 30, 2010 and December 31, 2009 consists of
offering costs, acquisition fees, and expense reimbursement payable and sales
commissions and dealer manager fees incurred to the Advisor and PCC.




10.
            Stockholders’
      Equity





Common
Stock





Our
articles of incorporation authorize the issuance of 290,000,000 shares of common
stock with a par value of $0.001. As of September 30, 2010, we had sold
approximately 20.9 million shares of common stock for total gross proceeds of
approximately $167.1 million. As of December 31, 2009, we had sold approximately
20.8 million shares of common stock for a total of approximately $165.9 million
of gross proceeds.





Distributions





We have
adopted a distribution reinvestment plan that allows our stockholders to have
dividends and other distributions otherwise distributable to them invested in
additional shares of our common stock. We have registered 21,100,000 shares of
our common stock for sale pursuant to the distribution reinvestment plan in
connection with our follow-on offering.  The purchase price per share
is 95% of the price paid by the purchaser for our common stock, but not less
than $7.60 per share.  As of September 30, 2010 and December 31, 2009,
approximately 2.2 million and 1.6 million shares, respectively, had been issued
under the distribution reinvestment plan.





The
following are the distributions declared during the nine months ended September
30, 2010 and 2009:





Distribution
      DeclaredPeriod
                          
                          Cash
                          
                          
                          Reinvested
                          
                          
                          TotalFirst
      quarter 2009 (1)
                          
                          $
                          1,021,000
                          
                          
                          $
                          1,463,000
                          
                          
                          $
                          2,484,000Second
      quarter 2009 (1)
                          
                          $
                          1,125,000
                          
                          
                          $
                          1,523,000
                          
                          
                          $
                          2,648,000Third
      quarter 2009 (1)
                          
                          $
                          1,181,000
                          
                          
                          $
                          1,554,000
                          
                          
                          $
                          2,735,000First
      quarter 2010
                          
                          $
                          1,221,000
                          
                          
                          $
                          1,490,000
                          
                          
                          $
                          2,711,000Second
      quarter 2010
                          
                          $
                          1,256,000
                          
                          
                          $
                          1,468,000
                          
                          
                          $
                          2,724,000Third
      quarter 2010
                          
                          $
                          1,323,000
                          
                          
                          $
                          1,448,000
                          
                          
                          $
                          2,771,000





(1)
            Distributions declared
      represented a return of capital for tax purposes. In order to meet the
      requirements for being treated as a REIT under the Internal Revenue Code,
      we must pay distributions to our shareholders each taxable year equal to
      at least 90% of our net ordinary taxable income.  Some of our
      distributions have been paid from sources other than operating cash flow,
      such as offering proceeds.  Until proceeds from our offering are
      fully invested and generating operating cash flow sufficient to fully
      cover distributions to stockholders, we intend to pay a portion of our
      distributions from the proceeds of our offering or from borrowings in
      anticipation of future cash
flow.


12





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





Special
10% Stock Distribution





Our board
of directors authorized a special 10% stock distribution to be paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering, which was achieved on July 23, 2008. All
stockholders of record on July 23, 2008 received one additional share of stock
for every 10 shares of stock they owned as of that date.  For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase price of
such shares will be deemed to be equal to the purchase price paid by the
stockholder for shares held by the stockholder immediately prior to the special
10% stock distribution.





Stock
Repurchase Program





We have
adopted a stock repurchase program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death.  Under our current stock repurchase program, the
repurchase price will vary depending on the purchase price paid by the
stockholder and the number of years the shares are held.  Our
board of directors may amend, suspend or terminate the program at any time on 30
days prior notice to stockholders. We have no obligation to repurchase our
stockholders’ shares.





Pursuant
to our charter, on or prior to September 21, 2012, our board of directors will
take action to provide enhanced liquidity for our stockholders. Among the
various plans that our board of directors will consider is a modification to our
stock repurchase program to increase the number of shares that can be redeemed
under the program during a given period. The implementation of any plan to
increase liquidity will be at the board’s discretion.





During
the nine months ended September 30, 2010, we redeemed shares pursuant to our
stock repurchase program as follows:





Period
                  
                  Total Number of
                    Shares
                    Redeemed (1)
                  
                  
                  Average Price
                    Paid per ShareJanuary
                  
                  
                  249,146
                  
                  
                  $
                  7.46February
                  
                  
                  100,999
                  
                  
                  $
                  7.63March
                  
                  
                  159,479
                  
                  
                  $
                  7.76April
                  
                  
                  161,356
                  
                  
                  $
                  7.82May
                  
                  
                  123,561
                  
                  
                  $
                  7.64June (2)
                  
                  
                  39,822
                  
                  
                  $
                  7.98July
                  
                  
                  13,750
                  
                  
                  $
                  8.00August
                  
                  
                  —
                  
                  
                  $
                  —September
                  
                  
                  —
                  
                  
                  $
                  —848,113


13





During
the nine months ended September 30, 2009, we redeemed shares pursuant to our
stock repurchase program as follows:





Period
                  
                  Total Number of
                    Shares
                    Redeemed (1)
                  
                  
                  Average Price
                    Paid per ShareJanuary
                  
                  
                  40,873
                  
                  
                  $
                  6.77February
                  
                  
                  137,395
                  
                  
                  $
                  7.51March
                  
                  
                  152,984
                  
                  
                  $
                  7.61April
                  
                  
                  83,284
                  
                  
                  $
                  7.55May
                  
                  
                  43,057
                  
                  
                  $
                  7.51June
                  
                  
                  65,453
                  
                  
                  $
                  7.67July
                  
                  
                  23,079
                  
                  
                  $
                  7.39August
                  
                  
                  8,113
                  
                  
                  $
                  7.99September
                  
                  
                  8,178
                  
                  
                  $
                  7.98562,416





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





(2)
            As
      of June 30, 2010, we had met the threshold of available distribution
      reinvestment plan proceeds, accordingly, we do not expect to make further
      ordinary redemptions for the remainder of
2010.





Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.





Employee
and Director Incentive Stock Plan





We have
adopted an Employee and Director Incentive Stock Plan (the “Plan”) which
provides for the grant of awards to our directors and full-time employees, as
well as other eligible participants that provide services to us.  We
have no employees, and we do not intend to grant awards under the Plan to
persons who are not directors of ours.  Awards granted under the Plan
may consist of nonqualified stock options, incentive stock options, restricted
stock, share appreciation rights, and distribution equivalent
rights.  The term of the Plan is 10 years.  The total number
of shares of common stock reserved for issuance under the Plan is equal to 10%
of our outstanding shares of stock at any time.





Effective
January 1, 2006, we adopted the provisions of, FASB ASC 718-10, Compensation – Stock
Compensation, which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. On August 6, 2008 and August 8, 2007,
we granted our non-employee directors nonqualified stock options to purchase an
aggregate of 20,000 and 20,000 shares of common stock, respectively, at an
exercise price of $8.00 per share.  Of these options, 15,000 lapsed on
November 8, 2008 due to the resignation of one director from the board of
directors on August 6, 2008.  Outstanding stock options became fully
vested on the grant date, expire ten years after the grant date, and have no
intrinsic value as of September 30, 2010.  For the three and nine
months ended September 30, 2010 and 2009, we did not incur any non-cash
compensation expenses.  No stock options were exercised or canceled
during the three and nine months ended September 30, 2010. In connection with
the registration of the shares in our follow-on offering, we have suspended the
issuance of options to our independent directors under the Plan, and we do not
expect to issue additional options to our independent directors until we cease
offering shares pursuant to our offering.





11.
            Related
      Party Transactions





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


14





Advisory
Agreement





Under the
terms of the advisory agreement, the Advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors.  The advisory agreement
calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of
directors, and to perform other duties.





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





Organizational and Offering
Costs.  Organizational and offering costs of our offerings are
being paid by the Advisor on our behalf and will be reimbursed to the Advisor
from the proceeds of our offerings. Organizational and offering costs
consist of all expenses (other than sales commissions and the dealer manager
fee) to be paid by us in connection with our offerings, 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 the Advisor for all marketing related costs and expenses such as
salaries and direct expenses of employees of the Advisor and its affiliates in
connection with registering and marketing our shares (ii) technology costs
associated with our offering of our shares; (iii) our costs of conducting our
training and education meetings; (iv) our costs of attending retail seminars
conducted by participating broker-dealers; and (v) payment or reimbursement of
bona fide due diligence expenses.  In no event will we have any
obligation to reimburse the Advisor for organizational and offering costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering and follow-on offering.





As of
September 30, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.5 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.4 million of offering costs which reduce net proceeds of our
offerings.  Of this amount, $4.5 million reduced the net proceeds of
our initial public offering and $1.0 million reduced the net proceeds of our
follow-on offering. As of December 31, 2009, the Advisor and its affiliates
had incurred on our behalf organizational and offering costs totaling
approximately $5.2 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.1 million of
offering costs which reduced net proceeds of our offerings. Of this amount,
$4.4 million reduced the net proceeds of our initial public offering and $0.7
million reduced the net proceeds of our follow-on offering.





Acquisition Fees and
Expenses.  The advisory agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2% of the gross proceeds of our
primary offering.  We will pay the acquisition fees upon receipt of
the gross proceeds from our primary offering.  However, if the
advisory agreement is terminated or not renewed, the Advisor must return
acquisition fees not yet allocated to one of our investments.  In
addition, we are required to reimburse the Advisor for direct costs the Advisor
incurs and amounts the Advisor pays to third parties in connection with the
selection and acquisition of a property, whether or not ultimately
acquired.  For the three months ended September 30, 2010 and 2009, the
Advisor earned approximately $1,200 and $18,000 of acquisition fees,
respectively, which had been expensed as incurred in accordance with our
adoption of FASB ASC 805-10 effective January 1, 2009.   For the nine
months ended September 30, 2010 and 2009, the Advisor earned approximately
$23,000 and $0.3 million of acquisition fees, respectively, which had been
expensed as incurred in accordance with our adoption of FASB ASC 805-10
effective January 1, 2009.





Management
Fees.  The advisory agreement requires us to pay the Advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
book basis carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with GAAP.  For the three months ended September 30, 2010 and
2009, the Advisor earned approximately $0.4 million and $0.4
million, respectively of asset management fees, which were expensed and
included in asset management fees in our condensed consolidated statement of
operations.  For the nine months ended September 30, 2010 and 2009,
the Advisor earned approximately $1.1 million and $1.1
million, respectively of asset management fees, which were expensed and
included in asset management fees in our condensed consolidated statement of
operations.  In addition, we reimburse the Advisor for the direct and
indirect costs and expenses incurred by the Advisor in providing asset
management services to us, including personnel and related employment costs
related to providing asset management services on our behalf.  These
fees and expenses are in addition to management fees that we pay to third party
property managers.  For the three months ended September 30, 2010 and 2009,
the Advisor was reimbursed approximately $45,000 and $0, respectively, of such
direct and indirect costs and expenses incurred on our behalf, which are
included in general and administrative expenses in the condensed consolidated
statement of operations. For the nine months ended September 30, 2010 and 2009,
the Advisor was reimbursed approximately $124,000 and $0, respectively, of such
direct and indirect costs and expenses incurred on our behalf, which are
included in general and administrative expenses in the condensed consolidated
statement of operations.


15





Operating Expenses.
The advisory agreement provides for reimbursement of the Advisor’s direct and
indirect costs of providing administrative and management services to
us.   For the three months ended September 30, 2010 and 2009,
approximately $0.3 million and $0.1 million of such costs, respectively, were
reimbursed and included in general and administrative expenses in our condensed
consolidated statement of operations.  For the nine months ended September
30, 2010 and 2009, approximately $0.8 million and $0.4 million of such costs,
respectively, were reimbursed and included in general and administrative
expenses in our condensed consolidated statement of operations.  The
Advisor must pay or reimburse us the amount by which our aggregate annual
operating expenses exceed the greater of 2% of our average invested assets or
25% of our net income unless a majority of our independent directors determine
that such excess expenses were justified based on unusual and non-recurring
factors.





Disposition
Fee.  The advisory agreement provides that if the Advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the Advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties.  This disposition fee may be
paid in addition to real estate commissions paid to non-affiliates, provided
that the total real estate commissions (including such disposition fee) paid to
all persons by us for each property shall not exceed an amount equal to the
lesser of (i) 6% of the aggregate contract sales price of each property or (ii)
the competitive real estate commission for each property.  We will pay
the disposition fees for a property at the time the property is sold. For the
three and nine months ended September 30, 2010 and 2009, we did not incur any of
such fees.





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





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





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





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





Dealer
Manager Agreement





PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in our primary offerings.  PCC, as dealer manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in our primary offerings.  The dealer manager is
also entitled to receive a reimbursement of bona fide due diligence
expenses up to 0.5% of the gross proceeds from sales in our primary
offerings.  The advisory agreement requires the Advisor to reimburse
us to the extent that offering expenses including sales commissions, dealer
manager fees and organization and offering expenses (but excluding acquisition
fees and acquisition expenses discussed above) in excess of 13.5% of gross
proceeds from our offerings.  For the three months ended
September 30, 2010 and 2009, our dealer manager earned sales commissions and
dealer manager fees of approximately $6,000 and $82,000, respectively.  For
the nine months ended September 30, 2010 and 2009, our dealer manager earned
sales commissions and dealer manager fees of approximately $0.1 and $1.7
million, respectively. Dealer manager fees and sales commissions paid to
PCC are a cost of capital raised and, as such, are included as a reduction of
additional paid in capital in the accompanying condensed consolidated balance
sheets.


16





12.
            Notes
      Payable





On June
30, 2006, we entered into a credit agreement with HSH Nordbank AG, New York
Branch, for a temporary credit facility that we will use during our offering
period to facilitate our acquisitions of properties in anticipation of the
receipt of offering proceeds.  As of September 30, 2010 and December
31, 2009, we had net borrowings of approximately $15.7 million and $15.9
million, respectively, under the credit agreement.





On
September 30, 2010, we amended the June 30, 2006 credit agreement with HSH
Nordbank AG, New York Branch, which extended the credit facility maturity date
to October 31, 2010. As a part of the amendment to the credit agreement we made
a principal reduction payment of approximately $200,951. The other terms of the
credit agreement remain in full force and effect. This credit agreement was
further extended as of October 29, 2010 and November 12, 2010. Please refer to
below and Note 15, Subsequent Event, for the extension entered on November 12,
2010.




The
credit agreement with HSH Nordbank AG, New York Branch, is secured by real
properties at a borrowing rate based on 30-day LIBOR plus a margin ranging from
115 to 135 basis points and requires payment of a usage premium of up to 15
basis points and an annual administrative fee.   We are entitled to
prepay the borrowings under the credit facility at any time without
penalty. The repayment of obligations under the credit agreement may be
accelerated in the event of a default, as defined in the credit agreement. The
facility contains various covenants including financial covenants with respect
to consolidated interest and fixed charge coverage and secured debt to secured
asset value.  As of September 30, 2010, we were in compliance with all
financial covenants.  During the three months ended September 30, 2010
and 2009, we incurred $59,000 and $58,000 of interest expense, respectively,
related to the credit agreement. During the nine months ended September 30, 2010
and 2009, we incurred $170,000 and $185,000 of interest expense, respectively,
related to the credit agreement.




On
November 13, 2007, we entered into a loan agreement with Wells Fargo Bank,
National Association, successor by merger to Wachovia Bank, N.A to facilitate
the acquisition of properties during our offering period.  Pursuant to
the terms of the loan agreement, we may borrow $22.4 million at an interest rate
of 140 basis points over 30-day LIBOR, secured by specified real estate
properties.  The loan agreement had a maturity date of November 13,
2010, and may be prepaid without penalty. On October 22, 2010, we amended the
loan agreement to extend the maturity date from November 13, 2010 to February
13, 2011.  The entire $22.4 million available under the terms of the
loan was used to finance an acquisition of properties that closed on November
15, 2007.  During the three months ended September 30, 2010 and 2009,
we incurred $68,000 and $96,000 of interest expense, respectively, related to
the loan agreement. During the nine months ended September 30, 2010 and 2009, we
incurred $202,000 and $300,000 of interest expense, respectively, related to the
loan agreement. As of September 30, 2010 and December 31, 2009, we had net
borrowings of approximately $15.9 million, under the credit
agreement.





We
anticipate repaying our existing debt obligations with cash on hand and the
proceeds from (1) new credit facilities, (2) asset financing and/or (3) sale of
real estate assets. We have extended the HSH Nordbank loan to November 30, 2010
and have received a term sheet from HSH Nordbank that will take the extension
further out to September 30, 2011. We anticipate executing this extension on or
before November 30, 2010 as well as making a principal paydown of $2.0 million.
Please refer to Note 15, Subsequent Event. In addition, on October 22, 2010 we
extended the Wells Fargo Bank loan maturity date from November 13, 2010 to
February 13, 2011. Between now and February 13, 2011, we are implementing a plan
that may include one or a combination of further extension of the loan
refinancing, and or sale of real estate assets, or a combination of the both.
Management believes that there is sufficient liquidity available to the Company
to be able to meet all debt obligations and continue to fund ongoing operations
over the next twelve months. However, given the continued weakness of the retail
and credit markets, there can be no assurance that we can obtain such
refinancing or additional capital on satisfactory terms, and we could be
required to consider additional assets sales or less attractive sources of
capital for refinancing.




In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”).  Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan.  The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum.  During the
three months ended September 30, 2010 and 2009, we incurred $102,000 and
$105,000 of interest expense, respectively, related to this loan
agreement.  During the nine months ended September 30, 2010 and 2009, we
incurred $309,000 and $317,000 of interest expense, respectively, related to
this loan agreement.  As of September 30, 2010 and December 31, 2009, we
had net borrowings of approximately $6.9 million and $7.1 million, respectively,
under the Loan Assumption Agreement.


17





The
principal payments due on Monroe North CommerCenter mortgage loan for
October 1, 2010 to December 31, 2010 and each of the subsequent years is as
follows:





Year
                    
                    Principal
                      amountOctober
      1, 2010 to December 31, 2010
                    
                    $
                    49,0002011
                    
                    
                    204,0002012
                    
                    
                    217,0002013
                    
                    
                    230,0002014
                    
                    
                    6,234,000$
                    6,934,000





As of
September 30, 2010 and December 31, 2009 we had incurred net financing costs
totaling approximately $255,000 and $584,000, respectively.  These
financing costs have been capitalized and are being amortized over the life of
the agreements.  For the three months ended September 30, 2010 and
2009, $110,000 and $54,000, respectively, of deferred financing costs were
amortized and included in interest expense in the condensed consolidated
statements of operations.  For the nine months ended September 30, 2010 and
2009, $215,000 and $182,000, respectively, of deferred financing costs were
amortized and included in interest expense in the condensed consolidated
statements of operations. Consistent with our borrowing policies, during our
offering period, we will borrow periodically to acquire properties and for
working capital.  We will determine whether to use the proceeds of our
offerings to repay amounts borrowed under the credit agreement and loan
agreements depending on a number of factors, including the investments that are
available to us for purchase at the time and the cost of the credit
facility.  Following the closing of our offering period, we will
endeavor to repay all amounts owing under the credit agreement and loan
agreements or that are secured by our properties and which have not previously
been paid.  To the extent sufficient proceeds from our
offering are unavailable to repay the indebtedness secured by properties
within a reasonable time following the closing of our offering period as
determined by our board of directors, we may sell properties or raise equity
capital to repay the secured debt, so that we will own our properties with no
permanent acquisition financing.





13.
            Commitments
      and Contingencies





In May
2008, we committed to fund up to $5.0 million to Servant Healthcare Investments
LLC and Servant Investments LLC, two entities that are parties to an alliance
agreement with the managing member of our Advisor.  On January 22,
2009, our board of directors increased our commitment to loan funds up to $10.0
million. On May 10, 2010, this commitment was reduced to $8.75 million. As of
September 30, 2010, we had $375,000 remaining commitment to fund.





On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA.  As of September 30, 2010, we had fully funded the $8.0 million
pursuant to this commitment.





We
monitor our properties for the presence of hazardous or toxic
substances.  While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows.  Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.





Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion
of management, these matters are not expected to have a material impact on our
consolidated financial position, results of operations, and cash flows. We are
not presently subject to any material litigation nor, to our knowledge, any
material litigation threatened against us which if determined unfavorably to us
would have a material adverse effect on our cash flows, financial condition or
results of operations.


18





14.
            Business
      Combinations





On August
5, 2010, we completed the purchase of the 1830 Santa Fe property. The following
summary provides the preliminary allocation of the assets acquired and
liabilities assumed as of the dates of acquisition. We have accounted for all
2010 acquisitions as a business combination under U.S. GAAP. Under business
combination accounting, the assets and liabilities of acquisitions were recorded
as of the acquisition date, at their respective fair values, and consolidated in
our condensed consolidated financial statements. The break-down of the purchase
prices of our 2010 acquisitions are as follows:





Nine
      Months EndedSeptember 30,2010
                    
                    
                    2009Land
                    
                    $
                    825,000
                    
                    
                    $
                    —Buildings
      & improvements
                    
                    
                    370,000
                    
                    
                    
                    ——Site
      improvements
                    
                    
                    36,000
                    
                    
                    
                    —Tenant
      improvements
                    
                    
                    29,000
                    
                    
                    
                    —In
      place lease value
                    
                    
                    21,000
                    
                    
                    
                    —Above
      market value
                    
                    
                    34,000
                    
                    
                    
                    —Real
      estate acquisition
                    
                    $
                    1,315,000
                    
                    
                    $
                    —Acquisition
      expenses
                    
                    $
                    39,000
                    
                    
                    $
                    —





The
following unaudited pro forma information for the three and nine months ended
September 30, 2009 has been prepared to reflect the incremental effect of the
acquisitions as if such transaction had occurred on January 1,
2009.  As this acquisition is assumed to have been made on January 1,
2009, the shares raised during our offering needed to purchase the property are
assumed to have been sold and outstanding as of January 1, 2009 for purposes of
calculating per share data.





Three Months ended September
      30,
                  
                  
                  Nine Months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenues
                  
                  $
                  2,489,000
                  
                  
                  $
                  2,687,000
                  
                  
                  $
                  8,108,000
                  
                  
                  $
                  8,506,000Net
      loss attributable to common stockholders
                  
                  $
                  (565,000
                  )
                  
                  $
                  (5,048,000
                  )
                  
                  $
                  (442,000
                  )
                  
                  $
                  (5,344,000
                  )Basic
      and diluted net loss per common share attributable to common
      stockholders
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.25
                  )





15.
            Subsequent
      Event





Notes
Payable – Wells Fargo Bank, National Association





On
October 22, 2010, we amended our promissory note with Wells Fargo Bank, National
Association, to extend the maturity date from November 13, 2010 to February 13,
2011. All other terms of the promissory note remain in full force and
effect.




Notes
Payable – HSH Nordbank, AG, New York Branch





On
October 29, 2010 we amended our credit agreement with HSH Nordbank AG, New York
Branch entered on June 30, 2006 to extend the maturity date of the loan to
November 14, 2010. As a part of the amendment to the credit agreement we
made a principal reduction payment of $200,000. On November 12, 2010, we further
extended our credit agreement from November 14, 2010 to November 30, 2010. The
other terms of the credit agreement remain in full force and
effect.




19




Sale
of Shares of Common Stock


As of
November 5, 2010, we had raised approximately $167.1 million through the
issuance of approximately 20.9 million shares of our common stock under our
initial public offering and follow-on offering, excluding approximately 2.2
million shares that were issued pursuant to our distribution reinvestment plan
and approximately 1.6 million shares issued in connection with the special 10%
stock dividend related to our initial public offering, reduced by approximately
1.7 million shares redeemed pursuant to our stock repurchase
program.





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





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





This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based.  These forward-looking statements generally are identified by
the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar
expressions.  Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements.  Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false.  We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.  All
forward-looking statements should be read in light of the risks identified in
Part II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K
for the year ended December 31, 2009 filed with the Securities and Exchange
Commission (the “SEC”).





Overview





Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. We have no paid employees and are externally managed
pursuant to an advisory agreement by an affiliate, Cornerstone Realty Advisors,
LLC, a Delaware limited liability company that was formed on November 30, 2004
(the “Advisor”).





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At September 30, 2010,
we owned 99.88% general partner interest in the Operating Partnership while the
Advisor owned a0.12% limited partnership interest.  We anticipate that
we will conduct all or a portion of our operations through the Operating
Partnership.  Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements.  All intercompany accounts and
transactions have been eliminated in consolidation.





We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as the dealer manager for our initial and follow-on public
offerings.  PCC is responsible for marketing our shares currently
being offered pursuant to the follow-on offering. We used the net proceeds from
our initial public offering to invest primarily in investment real estate
including multi-tenant industrial real estate located in major metropolitan
markets in the United States.  We intend to use the net proceeds from
our follow-on offering to pay down temporary acquisition financing on our
existing assets and to acquire additional real estate investments. As of
September 30, 2010, we had raised approximately $167.1 million of gross proceeds
from the sale of approximately 20.9 million shares of our common stock in our
initial public offering and follow-on offering and had acquired thirteen
properties.





Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to increase rental income and other earned income from
leases by increasing rental rates and occupancy levels and control operating and
other expenses. Our operations are impacted by property specific, market
specific, general economic and other conditions.





Market
Outlook – Real Estate and Real Estate Finance Markets





In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify
it.


20


As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults have risen, while
demand for commercial real estate space is contracting, resulting in a highly
competitive leasing environment, downward pressure on both occupancy and rental
rates, and an increase in leasing incentives. Mortgage delinquencies and
defaults continue to trend upward, with many industry analysts predicting the
continuation of significant credit defaults, foreclosures and principal
losses.





From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, was inactive during 2009 and
early 2010 that had left a void in the market for long-term, affordable,
fixed-rate debt. Though, recently there has been a gradual improvement in
capital market conditions, including new issuance of commercial mortgage-backed
securities debt. During that time the void in the commercial mortgage-backed
securities debt market was partially filled by portfolio lenders such as
insurance companies, but at very different terms than were available in the past
five years. These remaining lenders have generally increased credit spreads,
lowered the amount of available proceeds, required recourse security and credit
enhancements, and otherwise tightened underwriting standards considerably, while
simultaneously generally limiting lending to existing relationships with
borrowers that invest in high quality assets in top tier markets. In addition,
lenders have limited the amount of financing available to existing relationships
in an effort to manage and mitigate the risk of overconcentration in certain
borrowers.




The
factors discussed above have translated into declining real estate values and a
corresponding rise in required investment returns and capitalization rates.
Overall transaction activity has slowly increased during the last three quarters
as the gap between “ask” and “bid” has contracted; however, the volume is well
below that of two years ago.





Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.





The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our
tenants’ businesses. As a result, our tenants are finding it more difficult to
meet current lease obligations and forcing them to negotiate favorable lease
terms upon renewal in order for their businesses to remain viable. Lower lease
rates, increased rent concessions and higher occupancy have resulted in lower
current cash flow. Additional declines in rental rates, slower or potentially
negative net absorption of leased space and additional rental concessions,
including free rent, would result in additional decreases in cash
flows.





Based on
this market outlook, we may limit capital expenditures over the remaining months
of 2010 compared to prior years by focusing on capital expenditures that
preserve our properties value. However, if we experience an increase in
vacancies, we may incur costs to re-lease properties and pay leasing
commissions.





Critical
Accounting Policies





There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC other than as described under Note 2 to the
accompanying condensed financial statements.




Results
of Operations





As of
September 30, 2010, we owned thirteen properties.  These properties
were acquired from June of 2006 through August 2010.





Three
months ended September 30, 2010 and 2009





Rental
revenues decreased to $1.7 million for the third quarter of 2010 from $1.9
million for the third quarter of 2009. The decrease is primarily due to lower
occupancy rates, lower lease rental rates and longer lease up periods for vacant
units as a result of the current economic environment partially offset by
termination payments from former tenants.





Tenant reimbursement and
other income increased to $493,000 for the third quarter 2010 from $468,000 for
the third quarter 2009. The increase is primarily due to reimbursements based on
estimated 2010 property taxes. Tenant reimbursements are reconciled
to reimbursable expenses prior to year-end and any adjustment will be reflected
in the fourth quarter.




21




Interest
income from notes receivable increased to $336,000 for the third quarter of 2010
from $309,000 for the third quarter of 2009, primarily due to higher average
outstanding note balances in 2010 compared to 2009.





Property
operating and maintenance expense decreased to $0.8 million for the third
quarter of 2010 from $1.0 million for the third quarter of 2009. The decrease is
primarily due to lower bad debt expense resulting from recovery of prior year
delinquencies, as well as lower legal fees associated with tenant turnover and
lower property taxes.





General
and administrative expense increased to $0.6 million for the third quarter
of 2010 from $0.4 million for the third quarter of 2009. The increase is
primarily due to higher costs for operational, management, financial and
administrative services provided by the Advisor and increased accounting and
audit fees, legal fees and board of director expenses, partially offset by a
decrease in other professional and Sarbanes-Oxley related consulting
fees.





Asset
management fees decreased to $368,000 for the third quarter of 2010 from
$381,000 compared to the third quarter of 2009 primarily due the repayment of
the $14.0 million related party note receivable during the first quarter of
2009, partially offset by the property acquired during the third quarter of
2010.





Real
estate acquisition costs increased to $30,000 for the third quarter of 2010 from
$28,000 for the third quarter of 2009.  The increase is due to higher
costs related to the purchase of the 1830 Santa Fe property acquired during the
third quarter, offset by lower acquisition fee reimbursement to the Advisor due
to the lower amount of equity raised.





Depreciation
and amortization decreased to $0.9 million for the third quarter of
2010 from $1.0 million for the third quarter of 2009.  The
decrease is due to prior year acceleration of in-place lease amortization
due to early lease terminations and prior year end real estate impairment
resulting in a lower depreciation cost basis.





Interest
expense was comparable for the third quarter of 2010 and 2009.





Nine
months ended September 30, 2010 and 2009





Rental
revenues decreased to $5.5 million for the nine months ended September 30, 2010
from $6.0 million for the comparable period of 2009. The decrease is primarily
due to lower occupancy rates, lower lease rental rates and longer lease up
periods for vacant units as a result of the current economic environment
partially offset by termination payments from former tenants.





Tenant
reimbursement and other income were comparable for the third quarter of 2010 and
2009.





Interest
income from notes receivable increased to $1.1 million for the nine months ended
September 30, 2010 from $1.0 million for the comparable period of 2009,
primarily due to higher average outstanding note balances in 2010 compared to
2009.





Property
operating and maintenance expenses decreased to $2.2 million for the
nine months ended September 30, 2010 from $2.7 million for the comparable period
of 2009. The decrease is primarily due to lower bad debt expense
in 2010 resulting from recovery of prior year delinquencies and lower legal
expenses associated with tenant turnover.





General
and administrative expenses increased to $1.7 million in the nine months
ended September 30, 2010 from $1.2 million for the comparable period of
2009.  The increase is primarily due to higher costs for operational,
management, financial and administrative services provided by the Advisor and
increased accounting and audit fees, legal fees and board of director expenses,
partially offset by a decrease in other professional and Sarbanes-Oxley related
consulting fees.





Asset
management fees were comparable for the third quarter of 2010 and
2009.





Real
estate acquisition costs decreased to $58,000 in the nine months ended September
30, 2010 from $360,000 for the comparable period of 2009.  The
decrease is due to a reduction in the amount of equity raised in our public
offering, resulting in reduced acquisition fee reimbursement to the Advisor,
partially offset by an increase related to the purchase of the 1830 Santa Fe
property.





Depreciation
and amortization decreased to $2.6 million from $2.8 million from the
comparable period primarily due to prior year acceleration of in-place lease
amortization due to early lease terminations and prior year end real
estate impairment resulting in a lower depreciation cost
basis.





Interest
expense decreased to $0.9 million from $1.0 million for the comparable
period of 2009 primarily due to a lower principal debt balance on our credit
agreement with Wells Fargo Bank and an impairment of notes receivable taken
during the third quarter of 2009.


22





Liquidity
and Capital Resources





We expect
our primary uses of cash to include payment of operating expenses, debt
repayment, including principal and interest, capital improvements, tenant
allowance, leasing commissions and cash distributions.  Our primary sources
of cash are rental revenues and tenant reimbursements and other income. To the
extent cash flow from operations is not enough to satisfy debt obligations and
that we are not able to refinance or obtain new financing, we may have to raise
cash by selling one or more properties.




On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public offering on
June 1, 2009. On June 10, 2009, we commenced a follow-on offering of up to
77,350,000 shares of our common stock, consisting of 56,250,000 shares for sale
pursuant to a primary offering and 21,100,000 shares for sale pursuant to our
dividend reinvestment plan. As of September 30, 2010, a total of approximately
20.9 million shares of our common stock had been sold in our combined offerings
for aggregate gross proceeds of approximately $167.1 million. During the three
month period ended September 30, 2010 we sold 7,500 shares in our follow-on
offering for gross proceeds of$60,000. Our board of directors is currently
evaluating strategic alternatives for our follow-on offering, but we do not
expect our follow-on offering to be a material source of capital until such
evaluation is completed.





As of
September 30, 2010, we had approximately $7.7 million in cash and cash
equivalents on hand.





We
anticipate repaying our existing debt obligations with cash on hand and the
proceeds from (1) new credit facilities, (2) asset financing and/or (3) sale of
real estate assets. We have extended the HSH Nordbank loan to November 30, 2010
and have received a term sheet from HSH Nordbank that will take the extension
further out to September 30, 2011. We anticipate executing this extension on or
before November 30, 2010 as well as making a principal paydown of $2.0 million.
In addition, on October 22, 2010 we extended the Wells Fargo Bank loan maturity
date from November 13, 2010 to February 13, 2011. Between now and February 13,
2011, we are implementing a plan that may include one or a combination of
further extension of the loan refinancing, and or sale of real estate assets.
Management believes that there is sufficient liquidity available to the Company
to be able to meet all debt obligations and continue to fund ongoing operations
over the next twelve months. However, given the continued weakness of the retail
and credit markets, there can be no assurance that we can obtain such
refinancing or additional capital on satisfactory terms, and we could be
required to consider additional assets sales or less attractive sources of
capital for refinancing.




Until
proceeds from our offerings are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a portion of
our distributions from the proceeds of our offering or from borrowings in
anticipation of future cash flow. For the three and nine months ended September
30, 2010, cash distributions to stockholders were paid from a combination of
cash flow from operations and net proceeds raised from our
offerings.





Distributions
paid to stockholders for the three months ended September 30, 2010 were
approximately $2.8 million. Of this amount, approximately $1.5 million was
reinvested through our dividend reinvestment plan and approximately $1.3 million
was paid in cash to stockholders. Of the total cash distributions paid for the
three months ended September 30, 2010, 77% was funded from cash flow from
operations and 23% of the total cash amount distributed was funded from proceeds
from our offerings. Distributions paid for the nine months ended September 30,
2010 were approximately $8.2 million. Of this amount, approximately $4.4 million
was reinvested through our dividend reinvestment plan and approximately $3.8
million was paid in cash to stockholders. Of the total cash distributions paid
for the nine months ended September 30, 2010, 67.9% was funded from cash flow
from operations and 32.1% of the total cash amount distributed was funded from
proceeds from our offerings.





As of
September 30, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.5 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.4 million of offering costs which reduce net proceeds of our
offerings. Of this amount, $4.5 million reduced the net proceeds of our initial
public offering and $1.0 million reduced the net proceeds of our follow-on
offering.





In no
event will we have any obligation to reimburse the Advisor for these costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering and our follow-on public offering. As of September 30, 2010, we had
reimbursed to the Advisor a total of $4.5 million for our initial public
offering and $1.0 million for our follow-on offering.


23





At times
during our offering stage, the amount of organization and offering expenses that
we incur, or that the Advisor and its affiliates incur on our behalf, may exceed
3.5% of the gross offering proceeds then raised, but our Advisor has agreed to
reimburse us to the extent that our organization and offering expenses exceed
this 3.5% limitation at the conclusion of our offerings. In addition, the
Advisor will pay all of our organization and offering expenses that, when
combined with the sales commissions and dealer manager fees that we incur exceed
13.5% of the gross proceeds from our public offerings.





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





We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our offerings.  To the extent sufficient proceeds from
our offerings are unavailable to repay such debt financing within a reasonable
time as determined by our board of directors, we will endeavor to raise
additional equity or sell properties to repay such debt so that we will own our
properties with no permanent financing. Other than the market conditions
discussed above under the caption “Market Outlook—Real Estate and Real Estate
Finance Markets”, we are not aware of any material trends or uncertainties,
favorable or unfavorable, affecting real estate generally, which we anticipate
may have a material impact on either capital resources or the revenues or income
to be derived from the operation of real estate properties.





Financial
markets have recently experienced unusual volatility and uncertainty. Liquidity
has tightened in all financial markets, including the debt and equity
markets.  Our ability to fund property acquisitions or development
projects, as well as our ability to repay or refinance debt maturities could be
adversely affected by an inability to secure financing at reasonable terms, if
at all.





Funds
from Operations and Modified Funds from Operations





A fund
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance.  We compute FFO
in accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”).  NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by the accounting principles generally accepted in the United States of
America (“GAAP”) , and gains (or losses) from sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships, joint ventures, noncontrolling interests and
subsidiaries.  Our FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do.  We believe that FFO is helpful to investors and our management as
a measure of operating performance because it excludes depreciation and
amortization, gains and losses from property dispositions, and extraordinary
items, and as a result, when compared year to year, reflects the impact on
operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income.  Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate diminishes predictably over time.  Since
real estate values have historically risen or fallen with market conditions,
many industry investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting
alone to be insufficient.  As a result, our management believes that
the use of FFO, together with the required GAAP presentations, provide a more
complete understanding of our performance.  Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on
cash held in accounts pending investment, income from portfolio properties and
other portfolio assets, interest rates on acquisition financing and operating
expenses.  FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions.





Changes
in the accounting and reporting rules under GAAP have prompted a significant
increase in the amount of non-cash and non-operating items included in FFO, as
defined. Therefore, we use modified funds from operations (“MFFO”), which
excludes from FFO acquisition expenses to further evaluate our operating
performance. We believe that MFFO, like those already included in FFO, are
helpful as a measure of operating performance because it excludes costs that
management considers more reflective of investing activities or non-operating
changes. In evaluating investments in real estate, management differentiates
costs to acquire the investment from the operations derived from the investment;
therefore, based on these economic considerations management believes that by
excluding acquisition expenses in its evaluation of our operating performance
MFFO provides information that is consistent with management’s analysis of the
investing and operating performance of our properties.  We believe that
MFFO reflects the overall operating performance of our real estate portfolio,
which is not immediately apparent from reported net loss under GAAP. As such, we
believe MFFO, in addition to net loss and cash flows from operating activities,
each as defined by GAAP, is a meaningful supplemental performance measure and
provides our investors useful information to evaluate our ongoing operating
performance consistent with management’s analysis of the
same.




24




MFFO
should not be considered as an alternative to net income (loss) or to cash flows
from operating activities and is not intended to be used as a liquidity measure
indicative of cash flow available to fund our cash needs. Additionally, please
note the following limitation associated with the use of MFFO as compared to net
income (loss):




·
            MFFO
      excludes real estate acquisition expenses.  Although these amounts
      reduce net income, we exclude them from MFFO because we believe doing so
      more appropriately presents the operating performance of our real estate
      investments on a comparative
basis.




Our
calculations of FFO and MFFO for the three and nine months ended September 30,
2010 and 2009 are presented below:





Three
      months ended
                        
                        
                        Nine
      months endedSeptember
      30,
                        
                        
                        September
      30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Net loss
                        
                        $
                        (569,000
                        )
                        
                        $
                        (5,068,000
                        )
                        
                        $
                        (442,000
                        )
                        
                        $
                        (5,339,000
                        )Adjustments:Net
      loss attributable to noncontrolling interest
                        
                        
                        —
                        
                        
                        
                        (5,000
                        )
                        
                        
                        —
                        
                        
                        
                        (5,000
                        )Real
      estate assets depreciation and amortization
                        
                        
                        924,000
                        
                        
                        
                        989,000
                        
                        
                        
                        2,574,000
                        
                        
                        
                        2,786,000Funds
      from operations (FFO) (1)
                        
                        $
                        355,000
                        
                        
                        $
                        (4,074,000
                        )
                        
                        $
                        2,132,000
                        
                        
                        $
                        (2,548,000
                        )Adjustments:Real
      estate acquisition costs
                        
                        
                        30,000
                        
                        
                        
                        28,000
                        
                        
                        
                        58,000
                        
                        
                        
                        360,000Modified
      funds from operations (MFFO) (1)
                        
                        $
                        385,000
                        
                        
                        $
                        (4,046,000
                        )
                        
                        $
                        2,190,000
                        
                        
                        $
                        (2,188,000
                        )Weighted
      average common shares outstanding
                        
                        
                        22,880,212
                        
                        
                        
                        22,584,321
                        
                        
                        
                        22,917,097
                        
                        
                        
                        21,583,192Modified
      funds from operation per weighted average common shares
      outstanding
                        
                        $
                        0.02
                        
                        
                        $
                        (0.18
                        )
                        
                        $
                        0.10
                        
                        
                        $
                        (0.10
                        )





(1)
            Reported
      amounts are attributable to our common
  stockholders





In
addition, FFO and MFFO may be used to fund all or a portion of certain
capitalizable items that are excluded from these measures, such as capital
expenditures and payments of principal on debt, each of which may impact the
amount of cash available for distribution to our stockholders.





Our
directors have authorized distributions to our stockholders at an annualized
rate of 6.0% based on an $8.00 per share purchase price. Some or all of our
distributions have been paid from sources other than operating cash flow, such
as offering proceeds, cash advanced to us or reimbursements of expenses from the
Advisor and proceeds from loans including those secured by our
assets.  Given the uncertainty arising from numerous factors,
including both the raising and investing of capital in the current financing
environment, ultimate FFO and MFFO performance cannot be predicted with
certainty.  Currently, a portion of our distributions are being paid
from capital in anticipation of future cash flow from our investments. Until we
are able to generate operating cash flow sufficient to fully fund distributions
to stockholders, we intend to continue to pay a portion of our distributions
from the proceeds of our offering or from borrowings in anticipation of future
cash flow, reducing the amount of funds that would otherwise be available for
investment.





Distributions Declared
                  
                  
                  Cash
      Flow
                    fromPeriod
                  
                  Cash
                  
                  
                  Reinvested
                  
                  
                  Total
                  
                  
                  Operations
                  
                  
                  FFO
                  
                  
                  MFFOFirst
      quarter 2009
                  
                  $
                  1,020,000
                  
                  
                  $
                  1,464,000
                  
                  
                  $
                  2,484,000
                  
                  
                  $
                  1,090,000
                  
                  
                  $
                  706,000
                  
                  
                  $
                  878,000Second
      quarter 2009
                  
                  $
                  1,124,000
                  
                  
                  $
                  1,524,000
                  
                  
                  $
                  2,648,000
                  
                  
                  $
                  733,000
                  
                  
                  $
                  819,000
                  
                  
                  $
                  979,000Third
      quarter 2009
                  
                  $
                  1,181,000
                  
                  
                  $
                  1,554,000
                  
                  
                  $
                  2,735,000
                  
                  
                  $
                  1,126,000
                  
                  
                  $
                  (4,074,000
                  )
                  
                  $
                  (4,046,000
                  )First
      quarter 2010
                  
                  $
                  1,221,000
                  
                  
                  $
                  1,490,000
                  
                  
                  $
                  2,711,000
                  
                  
                  $
                  1,103,000
                  
                  
                  $
                  844,000
                  
                  
                  $
                  850,000Second
      quarter 2010
                  
                  $
                  1,256,000
                  
                  
                  $
                  1,468,000
                  
                  
                  $
                  2,724,000
                  
                  
                  $
                  461,000
                  
                  
                  $
                  933,000
                  
                  
                  $
                  955,000Third
      quarter 2010
                  
                  $
                  1,323,000
                  
                  
                  $
                  1,448,000
                  
                  
                  $
                  2,771,000
                  
                  
                  $
                  1,003,000
                  
                  
                  $
                  355,000
                  
                  
                  $
                  385,000


25


Contractual
Obligations





The
following table reflects our contractual obligations as of September 30, 2010,
specifically our obligations under long-term debt agreements and notes
receivable:


Payment due by periodContractual Obligations
                      
                      Total
                      
                      Less than 1 year
                      
                      
                      1-3 years
                      
                      
                      3-5 years
                      
                      More than 5
                        yearsLong-Term
      Debt Obligations (1)
                      
                      $
                      38,539,000
                      
                      
                      $
                      31,806,000
                      
                      
                      $
                      440,000
                      
                      
                      $
                      6,293,000
                      
                      
                      $
                      -Interest
      expense related to long term debt (2)
                      
                      $
                      1,713,000
                      
                      
                      $
                      521,000
                      
                      
                      $
                      769,000
                      
                      
                      $
                      423,000
                      
                      
                      $
                      -Note
      receivable (3)
                      
                      $
                      375,000
                      
                      
                      $
                      375,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -





(1) This
represents the sum of a credit agreement with HSH Nordbank, AG and loan
agreements with Wells Fargo Bank and Transamerica Life Insurance
Company.





(2)
Interest expense related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wells Fargo Bank are calculated based on the loan balances
outstanding at September 30, 2010, one month LIBOR at September 30, 2010 plus
appropriate margin ranging from 1.15% and 1.40%.  Interest expense
related to loan agreement with Transamerica Life Insurance Company is based on a
fixed rate of 5.89% per annum.





(3) We
have committed to funding $8.75 million to entities that are parties to an
alliance with the managing member of the Advisor.  As of September 30,
2010, we had funded approximately $8.4 million of this commitment.




Item 3.
            Quantitative
      and Qualitative Disclosures about Market
Risk




Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. We are exposed to the effects of interest
rate changes as a result of borrowings used to maintain liquidity and to fund
the acquisition, expansion and refinancing of our real estate investment
portfolio and operations. Our profitability and the value of our investment
portfolio may be adversely affected during any period as a result of interest
rate changes. We invest our cash and cash equivalents in government backed
securities and FDIC insured savings account which, by its nature, are subject to
interest rate fluctuations.  However, we believe that the primary
market risk to which we will be exposed is interest rate risk relating to our
credit facilities.




We borrow
funds and make investments at a combination of fixed and variable rates.
Interest rate fluctuations will generally not affect our future earnings or cash
flows on our fixed rate debt or fixed rate loans receivable unless such
instruments mature or are otherwise terminated. Conversely, movements in
interest rates on variable rate debt would change our future earnings and cash
flows, but not significantly affect the fair value of those instruments.
However, changes in required risk premiums would result in changes in the fair
value of floating rate instruments.




As of
September 30, 2010, we had borrowed approximately $31.6 million under our
variable rate credit facility and loan agreement.  An increase in the
variable interest rate on the facilities constitutes a market risk as a change
in rates would increase or decrease interest incurred and therefore cash flows
available for distribution to shareholders.  Based on the debt
outstanding as of September 30, 2010, a 1% change in interest rates would result
in a change in interest expense of approximately $316,000 per
year.





In
addition to changes in interest rates, the value of our real estate is subject
to fluctuations based on changes in the real estate capital markets, market
rental rates for office space, local, regional and national economic conditions
and changes in the credit worthiness of tenants.  All of these factors
may also affect our ability to refinance our debt if necessary.





Item
      4.
            Controls
      and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.  Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.


26





In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





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





PART
II - OTHER INFORMATION





Item
      1A.
              Risk
Factors





The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2009.





We
have, and may in the future, pay distributions from sources other than cash
provided from operations.





Until we
are able to generate operating cash flow sufficient to fully fund distributions
to stockholders, we intend to pay a substantial portion of our distributions
from the proceeds of our offerings or from borrowings in anticipation of future
cash flow. To the extent that we use offering proceeds to fund
distributions to stockholders, the amount of cash available for investment in
properties will be reduced. The distributions paid for the four quarters ended
September 30, 2010 were approximately $11.0 million.  Of this amount
approximately $6.0 million was reinvested through our dividend reinvestment plan
and approximately $5.0 million was paid in cash to stockholders. For the four
quarters ended September 30, 2010 cash flow from operations and FFO were
approximately $2.5 million and approximately $0.2 million,
respectively.  Accordingly, during the four quarters ended September
30, 2010, total distributions paid in cash exceeded cash flow from operations
and FFO for the same period. We used offering proceeds to pay cash distributions
in excess of cash flow from operations during the three quarters ended September
30, 2010.





We may not be
able to refinance, extend or repay our substantial indebtedness, which could
have a materially adverse affect on our business, financial
conditionandresults of
operations




As of
September 30, 2010, we had an aggregate consolidated indebtedness outstanding of
$38.5 million (Note 12) which are secured by our
properties.




There can
be no assurance that we will be able to refinance or extend our debt on
acceptable terms or otherwise. Our ability to refinance our debt is negatively
affected by the current condition of the credit markets, which have
significantly reduced levels of commercial lending. We may not be able to
refinance, extend or repay our substantial indebtedness, which could have a
materially adverse affect on our business, financial condition and results of
operations. In the event that we are unable to refinance our debt on a timely
basis and on acceptable terms, we will be required to take further steps to
acquire the funds necessary to satisfy our short term cash needs, including
additional assets sales or considering less attractive sources of capital for
refinancing.




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





(a ) We
did not sell any equity securities that were not registered under the Securities
Act of 1933 during the period covered by this Form 10-Q.





(b) Not
applicable





(c)
During the three months ended September 30, 2010, we redeemed shares pursuant to
our stock repurchase program as follows:


27





Period
                
                Total Number of Shares
                  Redeemed (1)(2)
                
                
                Average Price Paid per
                  Share
                
                
                Approximate Dollar Value of
                  Shares Available That May Yet
                  Be Redeemed Under the
                  ProgramJuly
      2010
                
                
                13,750
                
                
                $
                8.00
                
                
                $
                -August
      2010
                
                
                -
                
                
                $
                -
                
                
                $
                -September
      2010
                
                
                -
                
                
                $
                -
                
                
                $
                -13,750





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





(2)
            As
      of June 30, 2010, we had met the threshold of available distribution
      reinvestment plan proceeds, accordingly, we do not expect to make further
      ordinary redemptions for the remainder of
2010.





Pursuant
to our charter, on or prior to September 21, 2012, our board of directors will
take action to provide enhanced liquidity for our stockholders. Among the
various plans that our board of directors will consider is a modification to our
stock repurchase program to increase the number of shares that can be redeemed
under the program during a given period. The implementation of any plan to
increase liquidity will be at the board’s discretion.


28







Item
      6.
              Exhibits




Ex.
            
            Description3.1
            
            Articles
      of Amendment and Restatement of Articles of Incorporation (incorporated by
      reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2005)3.2
            
            Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.3 to
      Post-Effective Amendment No. 1 to the Registration Statement on Form S-11
      (No. 333-121238) filed on December 23, 2005)4.1
            
            Form
      of Subscription Agreement (incorporated by reference to Appendix A to the
      prospectus dated April 16, 2010)4.2
            
            Statement
      regarding restrictions on transferability of shares of common stock (to
      appear on stock certificate or to be sent upon request and without charge
      to stockholders issued shares without certificates) (incorporated by
      reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No.
      333-121238) filed on December 14, 2004)4.3
            
            Distribution
      Reinvestment Plan (incorporated by reference to Appendix B to the
      prospectus dated April 16, 2010)10.1
            
            Amendment
      No. 5 to Credit Agreement with HSH Nordbank AG, New York Branch dated as
      of September 2, 201010.2
            
            Amendment
      No. 6 to Credit Agreement with HSH Nordbank AG, New York Branch dated as
      of September 30, 201010.3
            
            Amendment
      No. 7 to Credit Agreement with HSH Nordbank AG, New York Branch dated as
      of October 29, 201010.4
            
            Amendment
      No. 8 to Credit Agreement with HSH Nordbank AG, New York Branch dated
      November 12, 201031.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
            
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.


29





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 15th day of November,
2010.





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


30