**UNITED STATESSECURITIES 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, 2006** |
| **or**                                                 |
| **o**                                                  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                          to**

**Commission File Number * ***333-121238

**CORNERSTONE CORE PROPERTIES REIT, INC.**

(Exact name of registrantas specified in its charter)

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

 

**949-852-1007**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

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

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

x  Yes   o  No

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large accelerated filer  o   Acceleratedfiler  o   Non-acceleratedfiler  x

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

o  Yes   x  No

Asof October 27, 2006 the Company had 2,784,624 shares issued and outstanding.

 

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**FORM 10-QCornerstone Core Properties REIT, Inc.TABLE OF CONTENTS**

 
|                   |       |                                                                                                                          |   | Page   |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                     |   |   |
|              |       |                                                                                                                          |   |   |
| Item 1.           |       | Financial Statements:  Condensed Consolidated Balance Sheets at September 30, 2006 and December 31,  2005 (unaudited)         |   |   |
|              |       |                                                                                                                          |   |   |
|              |       | Condensed Consolidated Statements of Operations for  the Three and Nine Months ended  September 30, 2006 and 2005 (unaudited) |   |   |
|              |       |                                                                                                                          |   |   |
|              |       | Condensed Consolidated Statement of Stockholders’  Equity for the Nine Months ended September 30, 2006 (unaudited)       |   |   |
|              |       |                                                                                                                          |   |   |
|              |       | Condensed Consolidated Statements of Cash Flows for  the Nine Months ended  September 30, 2006 and 2005 (unaudited)           |   |   |
|              |       |                                                                                                                          |   |   |
|              |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                             |   |   |
|              |       |                                                                                                                          |   |   |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   |   |   |
| Item 3.      |       | Quantitative  and Qualitative Disclosure About Market Risk                                                                    |   |   |
| Item 4.      |       | Controls and  Procedures                                                                                                      |   |   |
|              |       |                                                                                                                          |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                         |   |   |
|              |       |                                                                                                                          |   |   |
| Item 6.      |       | Exhibits                                                                                                                      |   |   |
|              |       |                                                                                                                          |   |   |
| SIGNATURES        |       |                                                                                                                          |   |   |

 

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**CORNERSTONE COREPROPERTIES REIT, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                | ** ** | ** **             | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                | ** ** |
| Cash and cash  equivalents                                                                                                                                                |       | $                      | 7,896,586  |                  | $          | 117,342 |   |
| Investments in real  estate                                                                                                                                               |       |                   |       |                  |       |
| Land                                                                                                                                                                      |       | 1,540,000              |       | —                |       |
| Buildings and  improvements, less accumulated depreciation of $22,433 for 2006                                                                                            |       | 2,983,980              |       | —                |       |
| Intangible lease  assets, net                                                                                                                                             |       | 34,306                 |       | —                |       |
|                                                                                                                                                                      |       | 4,558,286              |       | —                |       |
| Deferred acquisition  costs and deposits                                                                                                                                  |       | 1,426,844              |       | —                |       |
| Deferred financing  costs, net                                                                                                                                            |       | 806,477                |       | —                |       |
| Receivable from related  parties                                                                                                                                          |       | —                 |       | 14,500                |       |
| Other assets, net                                                                                                                                                         |       | 36,629                 |       | 92,557                |       |
| Total assets                                                                                                                                                              |       | $                      | 14,724,822 |                  | $          | 224,399 |   |
|                                                                                                                                                                      |       |                   |       |                  |       |
| **LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                                               |       |
| Liabilities:                                                                                                                                                              |       |                   |       |                  |       |
| Accounts payable and  accrued liabilities                                                                                                                                 |       | $                      | 371,090    |                  | $          | 113,592 |   |
| Payable to related  parties                                                                                                                                               |       | 2,061,863              |       | 3,787                 |       |
| Real estate taxes  payable                                                                                                                                                |       | 25,131                 |       | —                |       |
| Tenant prepaids and  security deposits                                                                                                                                    |       | 35,503                 |       | —                |       |
| Intangible lease  liability, net                                                                                                                                          |       | 7,742                  |       |                  |       |
| Dividends payable                                                                                                                                                         |       | 68,824                 |       | —                |       |
| Total liabilities                                                                                                                                                         |       | 2,570,153              |       | 117,379               |       |
|                                                                                                                                                                      |       |                   |       |                  |       |
| Minority interest                                                                                                                                                         |       | 189,458                |       | 200,350               |       |
|                                                                                                                                                                      |       |                   |       |                  |       |
| Commitments and  contingencies (Note 9)                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                      |       |                   |       |                  |       |
| Stockholders’ equity  (deficit):                                                                                                                                     |       |                   |       |                  |       |
| Common stock, $.001 par  value; 290,000,000 shares authorized; 2,127,587 and 125 shares issued and  outstanding at September 30, 2006 and December 31, 2005, respectively |       | 2,128                  |       | —                |       |
| Additional paid-in  capital                                                                                                                                               |       | 12,978,187             |       | 1,000                 |       |
| Accumulated deficit                                                                                                                                                       |       | (1,015,104             | )          | (94,330               | )          |
| Total stockholders’  equity (deficit)                                                                                                                                |       | 11,965,211             |       | (93,330               | )          |
| Total liabilities, minority interest and stockholders’ equity  (deficit)                                                                                             |       | $                      | 14,724,822 |                  | $          | 224,399 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental revenues                          |       | $                                                        | 95,566     |                                                    | $          | — |   | $ | 112,226 |   | $ | — |   |
|                                     |       | $                                                        | 95,566     |                                                    | —     |   | 112,226 |   | — |   |
| Expenses:                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Property  operating and maintenance      |       | 26,226                                                   |       | —                                                  |       | 30,537 |   | — |   |
| General and  administrative              |       | 340,636                                                  |       | 5,455                                                   |       | 952,415 |   | 5,455 |   |
| Depreciation and  amortization           |       | 24,122                                                   |       | —                                                  |       | 28,500 |   | — |   |
|                                     |       | 390,984                                                  |       | 5,455                                                   |       | 1,011,452 |   | 5,455 |   |
| Operating loss                           |       | (295,418                                                 | )          | (5,455                                                  | )          | (899,226 | ) | (5,455 | ) |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest Income                          |       | 50,339                                                   |       | —                                                  |       | 89,250 |   | — |   |
| Interest Expense                         |       | (118,853                                                 | )          | 338                                                     |       | (121,690 | ) | 338 |   |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss before minority  interest           |       | (363,932                                                 | )          | (5,117                                                  | )          | (931,666 | ) | (5,117 | ) |
| Minority  interest                       |       | (3,912                                                   | )          | —                                                  |       | (10,892 | ) | — |   |
| Net loss                                 |       | $                                                        | (360,020   | )                                                       | $          | (5,117 | ) | $ | (920,774 | ) | $ | (5,117 | ) |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss per share - basic  and diluted      |       | $                                                        | (0.23      | )                                                       | $          | (40.94 | ) | $ | (1.76 | ) | $ | (40.94 | ) |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares |       | 1,556,451                                                |       | 125                                                     |       | 522,319 |   | 125 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**CORNERSTONE CORE PROPERTIES REIT, INC. ANDSUBSIDIARYCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)(Unaudited)**
| ** **                        | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** **               | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                        | ** ** | ** **            | ** ** | **Common**         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of**    | ** ** | **Stock Par** | ** ** | **Additional**           | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Value**          | ** ** | **Paid-In Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE - December 31,  2005      |       | 125                   |       | $                  | —     |                     | $          | 1,000 |   | $ | (94,330 | ) | $ | (93,330 | ) |
| Issuance of common  stock         |       | 2,127,462             |       | 2,128              |       | 17,012,881               |       |   |   | 17,015,009 |   |
| Offering costs                    |       |                  |       |               |       | (3,773,131               | )          |   |   | (3,773,131 | ) |
| Stock-based  compensation expense |       |                  |       |               |       | 2,200                    |       |   |   | 2,200 |   |
| Dividends declared                |       |                  |       |               |       | (264,763                 | )          |   |   | (264,763 | ) |
| Net loss                          |       |                  |       |               |       |                     |       | (920,774 | ) | (920,774 | ) |
| BALANCE - September 30, 2006      |       | 2,127,587             |       | $                  | 2,128      |                     | $          | 12,978,187 |   | $ | (1,015,104 | ) | $ | 11,965,211 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. ANDSUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                   |       |                                                    |       |   |   |
| Net loss                                                                     |       | $                                                       | (920,774   | ) | $ | (5,117 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                    |       |   |   |
| Deferred financing  costs amortization                                       |       | 118,800                                                 |       |   |   |
| Depreciation and  amortization                                               |       | 28,500                                                  |       | — |   |
| Amortization of  acquired above/below market leases                          |       | (2,193                                                  | )          | — |   |
| Stock-based  compensation expense                                            |       | 2,200                                                   |       | — |   |
| Minority interest                                                            |       | (10,892                                                 | )          | — |   |
| Change in operating  assets and liabilities:                                 |       |                                                    |       |   |   |
| Accounts  receivables                                                        |       | (26,306                                                 | )          |   |   |
| Receivable from  related parties                                             |       | 14,500                                                  |       | — |   |
| Other assets                                                                 |       | 81,626                                                  |       | (125,224 | ) |
| Payable to  related parties                                                  |       | 2,264                                                   |       | — |   |
| Accounts  payable, accrued expenses and other                                |       | 99,382                                                  |       | 130,668 |   |
| **Net  cash (used in)/provided by operating activities**                     | ** ** | **(612,893**                                            | **)**      | **327** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Cash flows from investing  activities:**                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Real estate  acquisitions                                                    |       | (4,576,243                                              | )          | **—** | ** ** |
| Deferred  acquisition fees                                                   |       | (276,844                                                | )          | **—** | ** ** |
| Escrow deposits                                                              |       | (1,150,000                                              | )          | **—** | ** ** |
| **Net  cash used for investing activities**                                  | ** ** | **(6,003,087**                                          | **)**      | **—** | ** ** |
| ** **                                                                   |       |                                                    | ** ** | ** ** | ** ** |
| **Cash flows from financing  activities**                                    | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Issuance of  operating partnership units                                     |       | —                                                  |       | 200,000 |   |
| Issuance of  common stock                                                    |       | 16,925,894                                              |       | — |   |
| Offering costs                                                               |       | (1,717,319                                              | )          | — |   |
| Distributions  paid                                                          |       | (106,824                                                | )          | — |   |
| Deferred  financing costs                                                    |       | (706,527                                                | )          | — |   |
| **Net  cash provided by financing activities**                               | ** ** | **14,395,224**                                          | ** ** | **200,000** | ** ** |
| Net Increase in Cash  and Cash Equivalents                                   |       | 7,779,244                                               |       | 200,327 |   |
| Cash and Cash  Equivalents - beginning of period                             |       | 117,342                                                 |       | 1,000 |   |
| Cash and Cash  Equivalents- end of period                                    |       | $                                                       | 7,896,586  |   | $ | 201,327 |   |
|                                                                         |       |                                                    |       |   |   |
|                                                                         |       |                                                    |       |   |   |
| **Supplemental Disclosure of  Noncash Activities:**                          |       |                                                    |       |   |   |
|                                                                         |       |                                                    |       |   |   |
| Dividends declared  not paid                                                 |       | $                                                       | 68,824     |   | $ | — |   |
| Payables to  related parties                                                 |       | $                                                       | 2,056,162  |   | $ | — |   |
| Deferred  financing costs payable                                            |       | $                                                       | 218,750    |   | $ | — |   |
| Dividends reinvested                                                         |       | $                                                       | 89,115     |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

6

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

CornerstoneCore Properties REIT, Inc. (the “CCP REIT” or the “Company”) is a Marylandcorporation formed on October 22, 2004, under the General Corporation Lawof Maryland for the purpose of engaging in the business of investing in andowning commercial real estate.  We are newly formed and are subject to thegeneral risks associated with a start-up enterprise.  We have purchasedtwo properties as of September 30, 2006. As used in this report, “we” “us” and “our”refer to Cornerstone Core Properties REIT, Inc.

Ouradvisor is Cornerstone Realty Advisors, LLC (the “advisor”), a Delaware limitedliability company formed on November 30, 2004, and an affiliate of us. Theadvisor is responsible for managing our affairs on a day-to-day basis and foridentifying and making acquisitions and investments on our behalf.

OnNovember 9, 2004, Terry G. Roussel, our President and Chief ExecutiveOfficer, purchased 125 shares of common stock for $1,000 and became the initialstockholder of CCP REIT.  Our articles of incorporation authorize290,000,000 shares of common stock with a par value of $0.001 and 10,000,000shares of preferred stock with a par value of $0.001.

Weconduct all or a portion of our operations through Cornerstone OperatingPartnership, L.P. (the “Operating Partnership”), a Delaware limited partnershipformed on November 30, 2004.  On July 15, 2005, the advisorpurchased a 99% limited partnership interest in the Operating Partnership for$200,000, and we purchased a 1% general partner interest for $1,000.  AtSeptember 30, 2006, the advisor’s limited partnership interest in the OperatingPartnership was 1.3% and our general partnership interest in the OperatingPartnership was 98.7%. Our financial statements and the financial statements ofthe Operating Partnership are consolidated in the accompanying condensedconsolidated financial statements.  All significant intercompany accountsand transactions have been eliminated in consolidation.

**2.****                                     ****Public Offering**

On January 6, 2006, we commenced apublic offering of a minimum of 125,000 shares (the “Minimum Number of Shares”)and a maximum of 55,400,000 shares of our common stock, consisting of44,400,000 shares for sale to the public (the “Primary Offering”) and11,000,000 shares for sale pursuant to our dividend reinvestment plan(collectively, the “Offering”).  We retained Pacific CornerstoneCapital, Inc. (“PCC”), an affiliate of the advisor, to serve as the dealermanager for the Offering.  PCC is responsible for marketing our sharesbeing offered pursuant to the Offering.  On February 28, 2006, offeringproceeds exceeded the $1,000,000 offering minimum and proceeds were released tous from escrow.

Asof September 30, 2006, a total of 2,127,587 shares of our common stock had beensold in the Offering for aggregate gross proceeds of approximately $17million.  We intend to invest the netproceeds from the Offering primarily in multi-tenant industrial real estatelocated in major metropolitan markets in the United States of America.

**3.****                                     ****Summary of SignificantAccounting Policies**

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

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***Interim Financial Information***

The accompanying interim condensed consolidatedfinancial statements have been prepared by our management in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)and in conjunction with the rules and regulations of the Securities andExchange Commission (“SEC”). Certain information and footnote disclosuresrequired for annual financial statements have been condensed or excludedpursuant to SEC rules and regulations. Accordingly, the interim condensedconsolidated financial statements do not include all of the information andfootnotes require by GAAP for complete financial statements. The accompanyingfinancial information reflects all adjustments, which are, in the opinion ofour management, of a normal recurring nature and necessary for a fair presentationof our financial position, results of operations and cash flows for the interimperiods. Interim results of operations are not necessarily indicative of theresults to be expected for the full year. The accompanying condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and the notes thereto included in the2005 Annual Report on Form 10-K as filed with the SEC.Operating results for the three and ninemonths ended September 30, 2006 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2006.

***Cash and Cash Equivalents***

Weconsider all short-term, highly liquid investments that are readily convertibleto cash with a maturity of three months or less at the time of purchase to becash equivalents.

***Deferred Financing Costs***

Deferred financing costs consist of direct costsincurred in connection with a credit agreement. (See Note 8). As ofSeptember  30, 2006, we had incurredapproximately $925,000 of deferred financing costs which were capitalized andwill be amortized over the term of the credit facility.  For the three and nine month period endedSeptember 30, 2006, approximately $119,000 has been expensed.

***Real Estate***

We account for all acquisitions inaccordance with Financial Accounting Standards Board’s (“FASB”) Statement ofFinancial Accounting Standard (“SFAS”) No. 141, “Business Combinations” (“FAS 141”). Upon acquisition of a property, we allocate the purchase price of theproperty based upon the fair value of the assets acquired, which generallyconsist of land, buildings, tenant improvements, leasing commissions andintangible assets including in-place leases and above market and below marketleases.  We allocate the purchase price to the fair value of the tangibleassets of an acquired property by valuing the property as if it were vacant.The value of the building is depreciated over an estimated useful life of 39years.

The purchase price is further allocated to in-placelease values based on management’s evaluation of the specific characteristicsof each tenant’s lease and our overall relationship with the respective tenant. The value of in-place lease intangibles, which is included as a componentof investments in real estate, is amortized to expense over the remaining leaseterm. If a lease is terminated prior to its expiration, the unamortizedportion of the tenant improvements, leasing commissions, above and below marketleases and the in-place lease value is immediately charged to expense.

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

We amortize the value of in-place leasesand above and below market leases over the initial term of the respectiveleases. Should a tenant terminate its lease, the unamortized portion of thein-place lease value and above or below market lease value would be charged toexpense. The estimated useful lives for lease intangibles range from 1 month to4 years.

Amortization associated with the leaseintangible assets and liabilities for the nine-months ended September 30, 2006were $6,438 and $3,172, respectively. Amortization associated with the lease intangible assets and liabilitiesfor the three-months ended September 30, 2006 were $5,252 and $1,894,respectively.

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Anticipated amortization for the periodfrom October 1 through December 31, 2006 and for each of the four followingyears ended December 31, is as follows:

|                                      | ** ** | **Lease  Intangibles** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| October 1, 2006 -  December 31, 2006 |       | $                      | 2,197      |   |
| 2007                                 |       | 8,709                  |       |
| 2008                                 |       | 7,983                  |       |
| 2009                                 |       | 5,649                  |       |
| 2010                                 |       | 2,026                  |       |
|                                      |            |                        |            |  |

 

As ofSeptember 30, 2006, cost and accumulated depreciation and amortization relatedto real estate assets and related lease intangibles were as follows: 
| ** **                                 | ** ** | **Buildings and  Improvements** | ** ** | **In-Place Lease** | ** ** | **Acquired Above  Market Leases** | ** ** | **Acquired Below  Market Leases** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Cost                                       |       | $                                    | 3,006,413  |                    | $          | 37,330                                      |       | $                                           | 3,414      |   | $ | (10,914 | ) |
| Accumulated  depreciation and amortization |       | (22,433                              | )          | (5,459                  | )          | (979                                        | )          | 3,172                                       |       |
| Net                                        |       | $                                    | 2,983,980  |                    | $          | 31,871                                      |       | $                                           | 2,435      |   | $ | (7,742 | ) |

 

***Impairment of Real Estate Assets***

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

#### Projections of expected future cash flows require us to estimate futuremarket rental income amounts subsequent to the expiration of current lease agreements,property operating expenses, discount rates, the number of months it takes tore-lease the property and the number of years the property is held forinvestment.  The use of certainassumptions in the future cash flows analysis would result in an incorrectassessment of the property’s future cash flows and fair value and could resultin the overstatement of the carrying value of our real estate assets and netincome if those assumptions ultimately prove to be incorrect.

### ***Consolidation Considerations for Investmentsin Joint Ventures***

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

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

Our revenues, which are comprised largely ofrental income, include rents reported on a straight-line basis over the initialterm of the lease.  Because our leases may provide for rental increases atspecified intervals, we are required to straight-line the recognition ofrevenue, which results in the recording of a deferred  rent not yet due under the lease terms.

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****Organizationaland Offering Costs****

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

The advisor funds organization and offering costs onour behalf.  We are required to reimbursethe advisor for such organization and offering costs up to 3.5% of thecumulative capital raised in the Primary Offering.  Organization and offering costs include itemssuch as legal and accounting fees, marketing, promotional and printing costs,and specifically exclude internal salaries. All offering costs are recorded as an offset to additional paid-incapital, and all organization costs are recorded as an expense at the time webecome liable for the payment of these amounts.

***MinorityInterest in Consolidated Subsidiary***

Due to our control through our generalpartnership interest in the Operating Partnership and the limited rights of thelimited partners, the Operating Partnership is consolidated with us and thelimited partner interest is reflected as minority interest in the accompanyingbalance sheets.

***Income Taxes***

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

Evenif we qualify for taxation as a REIT, we may be subject to certain state andlocal taxes on our income and property, and federal income and excise taxes onour undistributed income.

Duringthe nine months ended September 30, 2006, and the year ended December 31, 2005,we generated deferred tax assets of approximately $313,000 and $20,000,respectively. Because we intend to qualify as a REIT in 2006, which wouldprevent realization of the deferred tax asset, a valuation allowance of a likeamount was recorded.

***Concentrationof Credit Risk***

Financial instruments thatpotentially subject us to a concentration of credit risk are primarily cashinvestments. Cash is generally invested in investment-grade short-terminstruments and the amount of credit exposure to any one commercial issuer islimited. We have cash in financial institutions, which is insured by theFederal Deposit Insurance Corporation, or FDIC, up to $100,000 per institution.At September 30, 2006, we had cash accounts in excess of FDIC insured limits.

***Per Share Data***

We report earnings per share pursuant toSFAS No. 128, “Earnings Per Share.” Loss per common share iscalculated by dividing the net loss for each period by the weighted averagenumber of common shares outstanding during such period. Loss per common shareon a basic and diluted basis are the same because there are currently nopotentially dilutive rights to acquire our common shares outstanding.

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***Use of Estimates***

The preparation of ourfinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of the assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesfor the reporting period.  Actual resultscould materially differ from those estimates.

***Segment Disclosure***

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

***Recently Issued AccountingPronouncements***

In July 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB StatementNo. 109, (“FIN 48”), which clarifies the relevant criteria andapproach for the recognition, derecognition, and measurement of uncertain taxpositions. FIN 48 is effective for fiscal years beginning after December15, 2006.  We are currently in theprocess of assessing the provisions of FIN 48; however, we do not expectthe adoption of this interpretation to have a material impact on our consolidatedfinancial statements.

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal periodsbeginning after November 15, 2007 (the Company’s fiscal year beginning January1, 2008), and interim periods within those fiscal years. The company iscurrently evaluating the impact of adopting SFAS No. 157 on the consolidatedfinancial statements.

                InSeptember 2006, the Securities and Exchange Commission (“SEC”) issuedStaff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB No. 108”). SAB No. 108 provides guidanceon the consideration of effects of the prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SABNo. 108 is effective for the first annual period ending afterNovember 15, 2006. The Company is currently evaluating the impact ofadopting SAB No. 108 on the consolidated financial statements.

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

On June 1, 2006 we purchased an existingmulti-tenant industrial property known as 2111 South Industrial Park located inPhoenix, Arizona for approximately $2.1 million.  The property contains a total of 26,800 leasablesquare feet. We purchased this property for all cash.

On June 28, 2006 we purchased an existingmulti-tenant industrial property known as the Shoemaker Industrial Buildingslocated in Santa Fe Springs, California for approximately $2.5 million.  The property contains a total of 18,921 leasablesquare feet in four single-story buildings. We purchased this property for allcash, without debt financing.

**5.****                                     ****Receivable from and Payableto Related Parties**

Receivable from relatedparties at December 31, 2005, resulted from payments made by us for servicesreceived that were accounted for as deferred organization and offering costs byan affiliate of the advisor. Accordingly, these amounts were reimbursed by the advisor.

Accounts payable to relatedparties consists of organizational and offering costs and acquisition feespayable to the advisor and broker dealer fees payable to PCC.

**6.****                                     ****Minority Interests**

Minority interests relate to the advisor’s equityinterest in the earnings/losses of the Operating Partnership.

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

***Common Stock***

Our articles of incorporation authorize theissuance of 290,000,000 shares of common stock with a par value of $.001 and10,000,000 shares of preferred stock with a par value of $.001.  As of September30, 2006, we have issued 2,127,587 shares of common stock for totalgross proceeds of approximiately $17 million.

***DividendReinvestment Plan***

We have adopted a dividend reinvestment planthat allows our stockholders to have dividends and other distributionsotherwise distributable to them invested in additional shares of our commonstock.  We have registered 11,000,000 shares of our common stock for salepursuant to the dividend reinvestment plan.  The purchase price per shareis 95% of the price paid by the purchaser for our common stock, but not lessthan $7.60 per share.  We may amend or terminate the dividend reinvestmentplan for any reason at any time upon 10 days prior written notice toparticipants.

Untilproceeds from our offering are invested and generating operating cash flowsufficient to make distributions to stockholders, we intend to pay all or asubstantial portion of our distributions from the proceeds of such offering orfrom borrowings in anticipation of future cash flow.

***Employee andDirector Incentive Stock Plan***

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

Effective January 1, 2006, the we adopted theprovisions of Statement of Financial Accounting Standards No. 123R (“SFAS123R”), “Share-Based Payment,” which requires the measurement and recognitionof compensation expense for all share-based payment awards to employees anddirectors based on estimated fair values. On May 10, 2006, we granted our nonemployee directors nonqualified stockoptions to purchase an aggregate of 40,000 shares of common stock at anexercise price of $8.00 per share. Outstanding stock options became immediately exerciseable in full on thegrant date,  expire in ten years afterthe grant date, and have no intrinsic value as of September 30, 2006.  For the nine months ended September 30, 2006and 2005, we amortized approximately $2,200 and none, respectively, of relatedcompensation expense. For the three months ended September 30, 2006 and 2005,we did not incur any related compensation expense.  Such amounts are included in general andadministrative expenses in the accompanying condensed consolidated statementsof operations

The Company records compensation expense for nonemployeestock options based on the estimated fair value of the options on the date ofgrant using the Black-Scholes option-pricing model. These assumptions includethe risk-free interest rate, the expected life of the options, the expectedstock price volatility over the expected life of the options, and the expecteddividend yield. Compensation expense for employee stock options is recognizedratably over the vesting term. The assumptions used to estimate the fair valueof options granted during the three and nine months ended September 30, 2006and 2005 using the Black-Scholes option-pricing model were 5% dividend yield, a4.99% risk-free interest rate based on the 10-year U.S. Treasury Bond, anexpected life of 5 years, and a volatility rate of 1.02%. There were 40,000stock options granted on May 10, 2006 and none exercised during the nine monthsended September 30, 2006. There were no stock options granted during the ninemonths ended September 30, 2005.

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

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**8.****                                     ****Related Party Transactions**

Wehave no employees.  Our advisor isprimarily responsible for managing our business affairs and carrying out thedirectives of our board of directors.  Wehave an advisory agreement with the advisor and a dealer manager agreement withPCC, which entitle the advisor and PCC to specified fees upon the provision ofcertain services with regard to the Offering and investment of funds in realestate projects, among other services, as well as reimbursement fororganizational and offering costs incurred by the advisor on our behalf andreimbursement of certain costs and expenses incurred by the advisor inproviding services to us.

***Advisory Agreement***

Underthe terms of the advisory agreement, our advisor will use commerciallyreasonable efforts to present to us investment opportunities to provide acontinuing and suitable investment program consistent with the investmentpolicies and objectives adopted by our board of directors.  The advisory agreement calls for our advisorto provide for our day-to-day management and to retain property managers andleasing agents, subject to the authority of our board of directors, and toperform other duties.

Thefees and expense reimbursements payable to our advisor under the advisoryagreement are described below.

Organizational and Offering Costs.  Organizationaland offering costs of the Offering are being paid by the advisor on our behalfand will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theoffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our advisor for allmarketing related costs and expenses such as salaries and direct expenses ofemployees of or advisor and its affiliates in connection with registering andmarketing our shares; (ii) technology costs associated with the offeringof our shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering.  As of September 30,2006, approximately $2.2 million of organization and offering costs had beenincurred by the advisor and its affiliates on behalf of us, of which $593,000had been reimbursed by us, and the balance of approximately $1.6 million hasbeen accrued as a payable to affiliates. Of the approximately $2.2 million oforganization and offering costs incurred through September 30, 2006  approximately $2.1 million was recorded as areduction of additional paid in capital and $109,932 has been expensed asorganization costs. No organization and offering costs were reimbursed orrecorded by us in 2005 because the Offering had not commenced.

Acquisition Fees and Expenses.  The advisory agreement requires us to pay theadvisor acquisition fees in an amount equal to 2% of the gross proceeds of thePrimary Offering.  We will pay the acquisition fees upon receipt of thegross proceeds from the Offering.  However, if the advisory agreement isterminated or not renewed, the advisor must return acquisition fees not yetallocated to one of our investments.  In addition, we are required toreimburse the advisor for direct costs the advisor incurs and amounts theadvisor pays to third parties in connection with the selection and acquisitionof a property, whether or not ultimately acquired.  For the three and ninemonths ended September 30, 2006, the advisor earned $135,000 and $339,000respectively in acquisition fees, which are capitalized as part of the cost ourreal estate investments.

Management Fees.  The advisory agreement requires us to pay theadvisor a monthly asset management fee of one-twelfth of 1.0% of the sum of theaggregate basis book carrying values of the our assets invested, directly orindirectly, in equity interests in and loans secured by real estate beforereserves for depreciation or bad debts or other similar non-cash reserves,calculated in accordance with GAAP.  In addition, we will reimburse theadvisor for the direct costs and expenses incurred by the advisor in providingasset management services to us.  These fees and expenses are in additionto management fees that we expect to pay to third party propertymanagers.  For the three and nine months ended September 30, 2006, $11,000and $13,000 respectively of asset management fees were expensed.  No asset management fees were incurred inprior periods.

Operating Expenses.The advisory agreement provides for reimbursement of our advisor’s direct andindirect costs of providing administrative and management services to us.  For the three and nine months ended September30, 2006, $175,000 and $371,000 respectively of such costs were reimbursed.  The advisor must reimburse us the amount bywhich our aggregate annual operating expenses exceed the greater of 2% of ouraverage invested assets or 25% of our net income 

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unlessa majority of our independent directors determine that such excess expenses werejustified based on unusual and non-recurring factors.

Disposition Fee.  The advisory agreement provides that if theadvisor or its affiliate provides a substantial amount of the services (asdetermined by a majority of our directors, including a majority of ourindependent directors in connection with the sale of one or more properties, wewill pay the advisor or such affiliate at closing a disposition fee up to 3% ofthe sales price of such property or properties.  This disposition fee maybe paid in addition to real estate commissions paid to non-affiliates, providedthat the total real estate commissions (including such disposition fee) we payto all persons for each property shall not exceed an amount equal to the lesserof (i) 6% of the aggregate contract sales price of each property or(ii) the competitive real estate commission for each property.  Wewill pay the disposition fees for a property at the time the property is sold.

Subordinated Participation Provisions.  The advisor is entitled to receive asubordinated participation fee upon the sale of our properties of 5%, 10% or15% of the amount of net sale proceeds upon sale of our properties depending onwhether annualized returns to our stockholders exceed 6%, 8% or 10%. In theevent of the listing of our common stock or termination of the advisor prior tothe sale of our properties, the advisor is instead entitled to receive feesbased on the market value of our common stock or the appreciation of theproperties we own.

***Dealer Manager Agreement***

PCC,as dealer manager, is entitled to receive a sales commission of up to 7% ofgross proceeds from sales in the Primary Offering and a dealer manager feeequal to up to 3% of gross proceeds from sales in the Primary Offering. PCC is also entitled to receive a reimbursement of bona fide due diligenceexpenses up to 0.5% of the gross proceeds from sales in the PrimaryOffering.  The advisory agreement requires the advisor to reimburse us tothe extent that offering expenses including sales commissions, dealer managerfees and organization and offering expenses (but excluding acquisition fees andacquisition expenses discussed above) are in excess of 13.5% of gross proceedsfrom the Offering. For the nine months ended September 30, 2006, PCC earnedapproximately $1.7 million in commissions and dealer manager fees.

**9.****                                      CreditFacility**

On June 30, 2006, we entered into a Credit Agreementwith HSH Nordbank AG, New York Branch, for a temporary credit facility that wewill use during the offering period to facilitate our acquisitions ofproperties in anticipation of the receipt of offering proceeds.  The Credit Agreement permits us to borrow upto $50,000,000 secured by real property at a borrowing rate based on LIBOR plusa margin ranging from 1.15% to 1.35% and requires payment of a usage premium ofup to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investmentsand we may use up to 10% of the credit facility for working capital.  We are entitled to prepay the borrowingsunder the credit facility at any time without penalty.  The principal balance is due on June 30,2008.  The repayment of obligations underthe Credit Agreement may be accelerated in the event of a default, as definedin the Credit Agreement.  In connectionwith documentation and closing the Credit Agreement, we have incurred financingcosts totaling approximately $925,000. These financing costs have been capitalized and will be amoritized overthe life of the agreement.  For the threeand  nine months ending September 30,2006, $119,0000 of deferred financing costs have been expensed and included ininterest expense in the condensed consolidated statements of operations.  As of September 30, 2006, no borrowings wereoutstanding under the credit facility.

Consistent with our borrowing policies, during ourPrimary Offering, we will borrow periodically to acquire properties and forworking capital.  We will determinewhether to use the proceeds of our Offering to repay amounts borrowed under theCredit Agreement depending on a number of factors, including the investmentsthat are available to us for purchase at the time and the cost of the creditfacility.  Following the closing of ourPrimary Offering, we will endeavor to repay all amounts owing under the CreditAgreement or that are secured by our properties and which have not previouslybeen paid.  To the extent sufficientproceeds from our Offering are unavailable to repay the indebtedness secured byproperties within a reasonable time following the closing of our PrimaryOffering as determined by our board of directors, we may sell properties orraise equity capital to repay the secured debt, so that we will own ourproperties with no permanent acquisition financing.

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**10.          Commitments and Contingencies**

We have entered into a definitive agreement (the “MackAgreement”) to purchase an existing multi-tenant industrial park, known as MackDeer Valley, for a purchase price of $23,150,000. As of May 15, 2006, our rightto terminate the agreement without penalty expired, and our initial depositbecame non-refundable.The property is newly constructed and consists ofapproximately 180,985 square feet of leasable space in two single-storybuildings located in Phoenix, Arizona.In connection with the Mack Agreement, asof September 30, 2006, we have paid a $1 million deposit to an escrow agent,and we are obligated to pay additional escrow deposits of $250,000 each inNovember 2006 and January 2007. Under the terms of the Mack Agreement,in addition to the investment described above, we are obligated to pay certainclosing costs, including, but not limited to attorney fees, certain titleinsurance premiums, survey costs, recording costs and one-half of the escrowcharges.  The Mack Agreement closing dateis January 22, 2007.  Althoughsubstantially all contingencies have been satisfied and we expect to close inaccordance with the terms of the Mack Agreement, there can be no assurance thatevents will not arise that could prevent us from acquiring the property.

***Environment Matters***

Wefollow the policy of monitoring our properties for the presence of hazardous ortoxic substances.  While there can be noassurance that a material environment liability does not exist, we  are not currently aware of any environmentalliability with respect to the properties that would have a material effect onour financial condition, results of operations and cash flows.  Further, we are not aware of anyenvironmental liability or any unasserted claim or assessment with respect toan environmental liability that we believe would require additional disclosureor the reording of a loss contingency.

***Other***

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

**11.          Subsequent Events**

We have enteredinto a definitive agreement (the “Goldenwest Agreement”) to purchase anexisting industrial property known as 15172 Goldenwest Circle from  a non-related party, for a purchase price of$11,200,000.  As of October 11, 2006, our right to terminate the agreementwithout penalty expired and our initial deposit became non-refundable.Theproperty consists of approximately 102,200 square feet of leasable space in onesingle-story building located on approximately 5.4 acres of land inWestminster, California.  The property is currently 100% leased to asingle tenant. In connection with the Goldenwest Agreement, we paid a $300,000deposit to an escrow, and under the terms of the Agreement, we are obligated topay certain closing costs, including, but not limited to attorney fees, certaintitle insurance premiums, survey costs, recording costs and one-half of theescrow charges.

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

The following “Management’s Discussion and Analysisof Financial Condition and Results of Operations” should be read in conjunctionwith our financial statements and notes thereto contained elsewhere in thisreport.

# 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 thosestatements are based. These forward-looking statements generally are identifiedby the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,”“strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “willlikely result,” and similar expressions. Forward-looking statements are based on current expectations andassumptions that are subject to risks and uncertainties which may cause actualresults to differ materially from the forward-looking statements.  Forward-looking statements that were true atthe time made may ultimately prove to be incorrect or false.  We undertake no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise.

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# **Overview**

We are a Maryland corporation 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.  We our newly formed and are subject to the general risks associated with a start-up enterprise, including the risk of business failure.  We intend to qualify as a real estate investment trust for federal tax purposes commencing with its taxable year ending December 31, 2006.

OnJanuary 6, 2006, we commenced a public offering of 55,400,000 shares ofcommon stock, consisting of 44,400,000 shares for sale to the public at $8.00per share (the Primary Offering”) and 11,000,000 shares for sale pursuant toour dividend reinvestment plan (collectively, the “Offering”). Net proceedsfrom the Offering will be used primarily to acquire real estate properties, payorganizational and offering expenses, and pay various fees and expenses.  We have purchased two properties as of thedate of this report.

# **CriticalAccounting Policies**

Ourcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thefinancial statements and the reported amount of revenue and expenses during thereporting period.  Actual results coulddiffer materially from the estimates in the near term.

Belowis a discussion of the accounting policies that we consider to be critical inthat they may require complex judgment in their application or requireestimates about matters that are inherently uncertain.

***Real Estate.***

Weaccount for all acquisitions in accordance with Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standard No. 141, “BusinessCombinations” (“FAS 141”).  Upon acquisition of a property, we allocatethe purchase price of the property based upon the fair value of the assetsacquired, which generally consist of land, buildings, tenant improvements,leasing commissions and intangible assets including in-place leases and abovemarket and below market leases.  We allocate the purchase price to thefair value of the tangible assets of an acquired property by valuing theproperty as if it were vacant.  The valueof the building is depreciated over an estimated useful life of 39 years.

Thepurchase price is further allocated to in-place lease values based onmanagement’s evaluation of the specific characteristics of each tenant’s leaseand our overall relationship with the respective tenant.  The value ofin-place lease intangibles, which is included as a component of Investments inreal estate, is amortized to expense over the remaining lease term. If alease is terminated prior to its expiration, the unamortized portion of thetenant improvements, leasing commissions, above and below market leases and thein-place lease value is immediately charged to expense.

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

***Impairment of Real Estate Assets***

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

#### Projections of expected future cash flows require us to estimate futuremarket rental income amounts subsequent to the expiration of current leaseagreements, property operating expenses, discount rates, the number of monthsit takes to re-lease the property and the number of years the property is heldfor investment.  The use of certainassumptions in the future 

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#### cashflows analysis would result in an incorrect assessment of the property’s futurecash flows and fair value and could result in the overstatement of the carryingvalue of our real estate assets and net income if those assumptions ultimatelyprove to be incorrect.

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

Ourrevenues are comprised largely of rental income, which include rents reportedon a straight-line basis over the initial term of the lease.  Since ourleases may provide for rental increases at specified intervals, we are requiredto straight-line the recognition of revenue, which results in the recording ofa receivable for rent not yet due under the lease terms.

# **Results of Operations**

We acquired our first real estate investmentproperty on June 1, 2006, and our second property on June 28, 2006.  Revenue and property expenses related tothese acquisitions totaled $112,000 and $59,000 for the nine months endedSeptermber 30, 2006,  respectively.Operating results in future periods will be a function of the results of theoperation of real estate investment properties that we acquire.  For the three and nine months ended September  2006, we engaged primarily in activitiesrelated to our stock offering and incurred general and administrative expensesof $340,000 and $952,000 respectively. In 2005 , the company had not commenced operating activities.

Interestexpense of $118,853 and $121,690 for the three and nine months ended September30, 2006 respectively  consisted primaryof amortization of deferred  financingcosts .  Interest income of  $50,000 and $89,000 was earned fromshort-term investment of net offering proceeds which were available between thesale of our shares and purchase of our properties.

**Liquidity and Capital Resources**

As ofSeptember 30, 2006, we had issued 2,127,587 shares of common stock for totalgross proceeds of approximately $ 17 million. Our principal demands for fundsare expected to be for property acquisitions and for the payment of operatingexpenses and dividends.  Our liquiditywill increase as additional subscriptions are accepted and decrease as netoffering proceeds are expended in connection with the acquisition and operationof properties.

There may be a delaybetween the sale of our shares and the purchase of properties.  During this period, net offering proceedswill be temporarily invested in short-term, liquid investments that could yieldlower returns than investment in real estate.

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

Untilproceeds from our Offering are invested and generating operating cash flowsufficient to make distributions to stockholders, we intend to pay all or asubstantial portion of our distributions from the proceeds of our Offering orfrom borrowings in anticipation of future cash flow.

The advisor has agreed to pay all of our organization and offering costs, subject to its right to be reimbursed for such costs by us in an amount up to 3.5% of gross offering proceeds.

The number of properties that we are able to acquire will depend primarily on the amount of funds raised in the offering.  We may also use acquisition financing to fund the purchase price of real estate properties.  Any acquisition financing will be repaid from Offering proceeds or to the extent sufficient proceeds from our Offering are unavailable to repay the indebtedness secured by properties within a reasonable time following the closing of our Primary Offering as determined by our board of directors, we may sell properties or raise equity capital to repay the secured debt so that we will own our properties all-cash, with no permanent acquisition financing.

We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national or regional economic conditions affecting real estate generally, which we anticipate may have a material impact on either capital resources or the revenues or income to be derived from the operation of real estate properties.

 

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**ContractualObligations**

Thefollowing table sets forth our contractual obligations or commercialcommitments as of September 30, 2006.
| ** **                       | ** ** | **Payments due by period** | ** ** | ** ** | ** ** | ** **                      | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Contractual obligations** | ** ** | ** **                                | ** ** | **Total**  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|                             |       |                                      |       |       |       |                            |       |   |   |   |   |
| Purchase Obligations             |       | $                                         | 34,350,000 |       | $          | 34,350,000                      |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 34,350,000 |       | $          | 34,350,000                      |       |   |   |   |   |   |   |
|                                  |            |                                           |            |            |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk**

We invest our cash and cash equivalents inshort-term, highly liquid investments including government obligations, bankcertificates of deposit and interest-bearing accounts which, by their nature,are subject to interest rate fluctuations.

**Item 4.****   ****Controls and Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our senior management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our Chief Executive Officerand the Chief Financial Officer have reviewed the effectiveness of ourdisclosure controls and procedures and have concluded that the disclosure controlsand procedures were effective as of the end of the period covered by thisreport.

We arein the process of developing and implementing a formal set of internal controlsand procedures for financial reporting as required by the Sarbanes-Oxley Act of2002.  The efficacy of the steps we havetaken to date and steps we still are in the process of completing are subjectto continued management review supported by confirmation and testing bymanagement.  We anticipate that additional changes may be made to ourinternal controls and procedures.  Other than the foregoing initiatives,no change in our internal control over financial reporting occurred during theperiod ended September 30, 2006 that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

**PART II -OTHER INFORMATION**

**Item 6.   Exhibits**
|        | 31.1   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                           |
|   | 31.2   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
|   |   |                                                                                                                                                                           |
|   | 32     | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis quarterly report to be signed on its behalf by the undersigned, thereuntoduly authorized this 10th  dayof November, 2006.
|          |     | CORNERSTONE CORE PROPERTIES REIT, INC.       |
|----------|----------|----------------------------------------------|
|     |     |                                         |
|     |     |                                         |
|     |     | By:                                          | /s/ Terry G. Roussel |
| * * | * * | *Terry  G. Roussel, Chief Executive Officer* |
| * * | * * | * *                                     |
| * * | * * | * *                                     |
|     |     | By:                                          | /s/ Sharon C. Kaiser |
| * * | * * | *Sharon  C. Kaiser, Chief Financial Officer* |
| * * | * * | *(Principal  Financial Officer and*          |
| * * | * * | *Principal  Accounting Officer)*             |

 

 

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