**UNITEDSTATES**

**SECURITIESAND 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 June 30, 2007** |
| ** **                                        |
| **or**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition period from                          to                          **

**Commission File Number  000-52566**

**CORNERSTONECORE PROPERTIES REIT, INC.**

(Exact name of registrant as specified in its charter)

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

 

**949-852-1007**

(Registrant’s telephone number, including area code)

**NotApplicable**

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

Indicateby check mark whether the issuer (1) filed all reports required to befiled by section 13 or 15(d) of the Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
| x Yes o No |
|---------------------------|

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer oNon-accelerated filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
| o Yes x No |
|---------------------------|

 

As of August 3, 2007, we had 7,967,083 shares issuedand outstanding.

 

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**PART I – FINANCIAL INFORMATION**

**FORM 10-Q**

**Cornerstone Core Properties REIT,Inc.**

**TABLE OFCONTENTS**
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                       |   |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|--------|
|              |       |                                                                                                                             |   |
| Item 1.      |       | Financial Statements:                                                                                                            |   |
|              |       | Condensed  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006  (unaudited)                                    |   |
|              |       |                                                                                                                             |   |
|              |       | Condensed  Consolidated Statements of Operations for the Three and Six Months ended June  30, 2007 and June 30, 2006 (unaudited) |   |
|              |       |                                                                                                                             |   |
|              |       | Condensed  Consolidated Statement of Stockholders’ Equity for the Six Months ended June  30, 2007 (unaudited)               |   |
|              |       |                                                                                                                             |   |
|              |       | Condensed  Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007  and June 30, 2006 (unaudited)           |   |
|              |       |                                                                                                                             |   |
|              |       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                |   |
|              |       |                                                                                                                             |   |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      |   |
| Item 3.      |       | Quantitative  and Qualitative Disclosure About Market Risk                                                                       |   |
| Item 4.      |       | Controls and  Procedures                                                                                                         |   |
|              |       |                                                                                                                             |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                            |   |
|              |       |                                                                                                                             |   |
| Item 6.      |       | Exhibits                                                                                                                         |   |
|              |       |                                                                                                                             |   |
| SIGNATURES        |       |

 

2

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

**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                        | ** ** | **June 30,  2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                        |       |                          |       |                              |       |
| Cash and cash  equivalents                                                                                                                                                        |       | $                             | 19,184,000 |                              | $          | 11,041,000 |   |
| Investments in real  estate                                                                                                                                                       |       |                          |       |                              |       |
| Land                                                                                                                                                                              |       | 23,491,000                    |       | 16,310,000                        |       |
| Buildings and  improvements, net                                                                                                                                                  |       | 38,225,000                    |       | 18,416,000                        |       |
| Intangible lease  assets, net                                                                                                                                                     |       | 1,972,000                     |       | 1,331,000                         |       |
|                                                                                                                                                                              |       | 63,688,000                    |       | 36,057,000                        |       |
| Deferred acquisition  costs and deposits                                                                                                                                          |       | 1,332,000                     |       | 1,599,000                         |       |
| Deferred financing  costs, net                                                                                                                                                    |       | 459,000                       |       | 697,000                           |       |
| Tenant and other  receivables, net                                                                                                                                                |       | 345,000                       |       | 206,000                           |       |
| Other assets, net                                                                                                                                                                 |       | 188,000                       |       | 412,000                           |       |
|  Total assets                                                                                                                                                                |       | $                             | 85,196,000 |                              | $          | 50,012,000 |   |
|                                                                                                                                                                              |       |                          |       |                              |       |
| **LIABILITIES,  MINORITY INTEREST AND STOCKHOLDERS’ EQUITY**                                                                                                                 |       |                          |       |                              |       |
| Liabilities                                                                                                                                                                       |       |                          |       |                              |       |
| Notes payable                                                                                                                                                                     |       | $                             | 34,428,000 |                              | $          | 20,180,000 |   |
| Accounts payable and  accrued liabilities                                                                                                                                         |       | 560,000                       |       | 505,000                           |       |
| Payable to related  parties                                                                                                                                                       |       | 1,141,000                     |       | 1,955,000                         |       |
| Prepaid rent and  security deposits                                                                                                                                               |       | 373,000                       |       | 202,000                           |       |
| Property taxes payable                                                                                                                                                            |       | 158,000                       |       | 13,000                            |       |
| Intangible lease  liability, net                                                                                                                                                  |       | 369,000                       |       | 111,000                           |       |
| Distribution payable                                                                                                                                                              |       | 267,000                       |       | 146,000                           |       |
| Total liabilities                                                                                                                                                                 |       | 37,296,000                    |       | 23,112,000                        |       |
|                                                                                                                                                                              |       |                          |       |                              |       |
| Minority interests                                                                                                                                                                |       | 318,000                       |       | 181,000                           |       |
|                                                                                                                                                                              |       |                          |       |                              |       |
| Commitments and  contingencies                                                                                                                                                    |       | —                        |       | —                            |       |
|                                                                                                                                                                              |       |                          |       |                              |       |
| Stockholders’ equity                                                                                                                                                         |       |                          |       |                              |       |
| Preferred stock, $0.001  par value; 10,000,000 shares authorized; no shares were issued  or outstanding at June 30, 2007 and December 31, 2006                               |       | —                        |       | —                            |       |
| Common stock, $0.001  par value; 290,000,000 shares authorized; 7,604,878 and 4,328,816  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively |       | 8,000                         |       | 4,000                             |       |
| Additional paid-in  capital                                                                                                                                                       |       | 50,081,000                    |       | 28,115,000                        |       |
| Accumulated deficit                                                                                                                                                               |       | (2,507,000                    | )          | (1,400,000                        | )          |
| Total stockholders’  equity                                                                                                                                                  |       | 47,582,000                    |       | 26,719,000                        |       |
| Total liabilities, minority interests and stockholders’ equity                                                                                                               |       | $                             | 85,196,000 |                              | $          | 50,012,000 |   |

 

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

3

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental revenues                           |       | $                                                   | 1,049,000  |                                              | $          | 17,000 |   | $ | 1,943,000 |   | $ | 17,000 |   |
| Tenant reimbursements                     |       | 185,000                                             |       | —                                            |       | 362,000 |   | — |   |
|                                      |       | 1,234,000                                           |       | 17,000                                            |       | 2,305,000 |   | 17,000 |   |
| Expenses                                  |       |                                                |       |                                              |       |   |   |   |   |
| Property operating and maintenance        |       | 325,000                                             |       | 4,000                                             |       | 556,000 |   | 4,000 |   |
| General and administrative                |       | 436,000                                             |       | 294,000                                           |       | 852,000 |   | 610,000 |   |
| Asset management fees                     |       | 160,000                                             |       | 2,000                                             |       | 299,000 |   | 2,000 |   |
| Depreciation and amortization             |       | 326,000                                             |       | 4,000                                             |       | 579,000 |   | 4,000 |   |
|                                      |       | 1,247,000                                           |       | 304,000                                           |       | 2,286,000 |   | 620,000 |   |
| Operating (loss)  income                  |       | (13,000                                             | )          | (287,000                                          | )          | 19,000 |   | (603,000 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Interest income                           |       | 160,000                                             |       | 35,000                                            |       | 270,000 |   | 39,000 |   |
| Interest expense                          |       | (729,000                                            | )          | —                                            |       | (1,398,000 | ) | (3,000 | ) |
| Loss before  minority interests           |       | (582,000                                            | )          | (252,000                                          | )          | (1,109,000 | ) | (567,000 | ) |
| Minority interests                        |       | (1,000                                              | )          | (3,000                                            | )          | (2,000 | ) | (7,000 | ) |
| Net loss                                  |       | $                                                   | (581,000   | )                                                 | $          | (249,000 | ) | $ | (1,107,000 | ) | $ | (560,000 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Loss per share –  basic and diluted  |       | $                                                   | (0.09      | )                                                 | $          | (0.36 | ) | $ | (0.21 | ) | $ | (2.00 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number  of common shares |       | 6,482,651                                           |       | 693,711                                           |       | 5,357,635 |   | 280,021 |   |

 

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

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

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**For the Six Months Ended June 30,2007**

**(Unaudited)**
| ** **                            | ** ** | **Common Stock**            | ** ** | ** **                              | ** ** | ** **                                 | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Number of  Shares ** | ** ** | **Common  Stock Par  Value ** | ** ** | **Additional  Paid-In Capital ** | ** ** | **Accumulated  Deficit ** | ** ** | **Total ** | ** ** |
| **Balance  – December 31, 2006** | ** ** | **4,328,186**                    | ** ** | **$**                                   | **4,000**  | ** **                                 | **$**      | **28,115,000** | ** ** | **$** | **(1,400,000** | **)** | **$** | **26,719,000** | ** ** |
| Issuance of  common stock             |       | 3,279,114                        |       | 4,000                                   |       | 26,196,000                                 |       | — |   | 26,200,000 |   |
| Offering costs                        |       | —                           |       | —                                  |       | (2,960,000                                 | )          | — |   | (2,960,000 | ) |
| Redeemed shares                       |       | (2,422                           | )          | —                                  |       | (20,000                                    | )          | — |   | (20,000 | ) |
| Distributions  declared               |       | —                           |       | —                                  |       | (1,250,000                                 | )          | — |   | (1,250,000 | ) |
| Net loss                              |       | —                           |       | —                                  |       | —                                     |       | (1,107,000 | ) | (1,107,000 | ) |
| **Balance – June 30, 2007**      | ** ** | **7,604,878**                    | ** ** | **$**                                   | **8,000**  | ** **                                 | **$**      | **50,081,000** | ** ** | **$** | **(2,507,000** | **)** | **$** | **47,582,000** | ** ** |

 

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

5

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

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                    |       |                                              |       |   |   |
| Net loss                                                                     |       | $                                                 | (1,107,000 | ) | $ | (560,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              |       |   |   |
| Amortization of  deferred financing costs                                    |       | 238,000                                           |       | — |   |
| Depreciation and  amortization                                               |       | 579,000                                           |       | 4,000 |   |
| Amortization of  acquired above (below) market leases                        |       | 59,000                                            |       | (1,000 | ) |
| Stockbased  compensation expense                                             |       | —                                            |       | 2,000 |   |
| Minority  interests                                                          |       | (2,000                                            | )          | (7,000 | ) |
| Change in  operating assets and liabilities:                                 |       |                                              |       |   |   |
| Tenant and other receivables                                                 |       | (164,000                                          | )          | 15,000 |   |
| Other assets                                                                 |       | (10,000                                           | )          | 62,000 |   |
| Accounts payable and accrued liabilities                                     |       | 202,000                                           |       | 165,000 |   |
| Payable to related parties                                                   |       | (452,000                                          | )          | — |   |
| Security deposits                                                            |       | 26,000                                            | ** ** | **—** | ** ** |
| **Net cash used in operating activities**                                    | ** ** | **(631,000**                                      | **)**      | **(320,000** | **)** |
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Real estate  acquisitions                                                    |       | (26,404,000                                       | )          | (4,555,000 | ) |
| Deferred  acquisition costs and deposits                                     |       | (516,000                                          | )          | (116,000 | ) |
| Escrow deposits                                                              |       | (750,000                                          | )          | (500,000 | ) |
| **Net  cash used investing activities**                                      | ** ** | **(27,670,000**                                   | **)**      | **(5,171,000** | **)** |
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities**                                    |       |                                              |       |   |   |
| Issuance of common stock                                                     |       | 25,552,000                                        |       | 10,211,000 |   |
| Proceeds from note payable                                                   |       | 14,378,000                                        |       | — |   |
| Offering costs                                                               |       | (3,332,000                                        | )          | (986,000 | ) |
| Deferred financing costs                                                     |       | —                                            |       | (671,000 | ) |
| Minority interest contribution                                               |       | 145,000                                           |       | — |   |
| Other receivable                                                             |       | 211,000                                           |       | — |   |
| Distributions paid to stockholders                                           |       | (502,000                                          | )          | (14,000 | ) |
| Distributions paid to minority interests                                     |       | (8,000                                            | )          | — |   |
| **Net cash provided by financing activities**                                | ** ** | **36,444,000**                                    | ** ** | **8,540,000** | ** ** |
| Net increase in  cash and cash equivalents                                   |       | 8,143,000                                         |       | 3,049,000 |   |
| Cash and cash  equivalents – beginning of period                        |       | 11,041,000                                        |       | 117,000 |   |
| Cash and cash  cquivalents – end of period                              |       | $                                                 | 19,184,000 |   | $ | 3,166,000 |   |
|                                                                         |       |                                              |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Cash paid for interest                                                       |       | $                                                 | 969,000    |   | $ | — |   |
| **Supplemental  disclosure of non-cash financing and investing activities:** | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Receivable from  transfer agent                                              |       | $                                                 | —     |   | $ | 25,000 |   |
| Distribution  declared not paid                                              |       | $                                                 | 267,000    |   | $ | 83,000 |   |
| Accrued  distribution to minority interests                                  |       | $                                                 | 2,000      |   | $ | — |   |
| Deferred  financing costs payable                                            |       | $                                                 | —     |   | $ | 219,000 |   |
| Distribution  reinvested                                                     |       | $                                                 | 628,000    |   | $ | — |   |
| Payable to  related party                                                    |       | $                                                 | 569,000    |   | $ | 1,923,000 |   |
| Security deposits  assumed upon acquisition of real estate                   |       | $                                                 | 145,000    |   | $ | — |   |

 

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

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

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**JUNE 30, 2007**

**UNAUDITED**

**1.****                                Organization**

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

OnNovember 9, 2004, Terry G. Roussel, an affiliate of the advisor, purchased125 shares of common stock for $1,000 and became our initial stockholder. Our articles of incorporation authorize 290,000,000 shares of common stock witha par value of $0.001 and 10,000,000 shares of preferred stock with a par valueof $0.001.

CornerstoneOperating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”)was formed on November 30, 2004.  At June 30, 2007, we owned a 99.66%general partner interest in the Operating Partnership while the advisor owned a0.34% limited partnership interest.  We anticipate that we will conductall or a portion of our operations through the Operating Partnership.  Our financial statements and the financialstatements of the Operating Partnership are consolidated in the accompanyingcondensed consolidated financial statements.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

**2.****                              PublicOffering**

On January 6, 2006, wecommenced a public offering of a minimum of 125,000 shares and a maximum of55,400,000 shares of our common stock, consisting of 44,400,000 shares for saleto the public (the “Primary Offering”) and 11,000,000 shares for sale pursuantto our distribution reinvestment plan (collectively, the “Offering”).  Weretained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of theadvisor, to serve as the dealer manager for the Offering.  PCC isresponsible for marketing our shares being offered pursuant to theOffering.  On February 28, 2006, offering proceeds exceeded the $1,000,000offering minimum and proceeds were released to us from escrow.

Weintend to invest the net proceeds from the Offering primarily in investmentreal estate including multi-tenant industrial real estate located in majormetropolitan markets in the United States.  As of June 30, 2007, a totalof approximately 7.5 million shares of our common stock had been sold foraggregate gross proceeds of approximately $59.9 million.

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

The summary of significant accounting policiespresented below is designed to assist in understanding our consolidated financialstatements.  These accounting policiesconform to accounting principles generally accepted in the United States ofAmerica, or GAAP, in all material respects, and have been consistently appliedin preparing the accompanying consolidated financial statements.  Such financial statements and accompanyingnotes are the representations of our management, who is responsible for theirintegrity and objectivity.

***Interim FinancialInformation***

The accompanying interim condensed financialstatements have been prepared by our management in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) and inconjunction with the rules and regulations of the Securities and ExchangeCommission (“SEC”). Certain information and footnote disclosures required forannual financial statements have been condensed or excluded pursuant to SECrules and regulations. Accordingly, the interim 

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condensedfinancial statements do not include all of the information and footnotesrequire by GAAP for complete financial statements. The accompanying financialinformation reflects all adjustments, which are, in the opinion of ourmanagement, 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 the auditedconsolidated financial statements and the notes thereto included in the 2006Annual Report on Form 10-K as filed with the Securities and ExchangeCommission. Operating results for the three and six months ended June 30, 2007are not necessarily indicative of the results that may be expected for the yearending December 31, 2007.

***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.

***Real Estate Purchase PriceAllocation***

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

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.

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

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

Amortizationassociated with the lease intangible assets and liabilities for the three andsix months ended June 30, 2007 were $98,000 and $184,000 respectively.   Amortization associated with the leaseintangible assets and liabilities for three and six months ended June 30, 2006were $1,000 and $1,000 respectively.

Anticipated netamortization of in-place and net market lease intangibles from July 1, 2007through December 31, 2007 and for each of the four following years afterDecember 31, 2007 is as follows:
|                                    | ** ** | **Lease  Intangibles** | ** ** |
|------------------------------------|------------|------------------------|------------|
| July 1, 2007 to  December 31, 2007 |       | $                      | 196,000    |   |
| 2008                               |       | 357,000                |       |
| 2009                               |       | 338,000                |       |
| 2010                               |       | 334,000                |       |
| 2011                               |       | 292,000                |       |
|                                    |            |                        |            |  |

 

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As of June 30, 2007, cost and accumulated depreciationand amortization related to real estate assets and related lease intangibleswere as follows:  
| ** **                                 | ** ** | **Buildings and  Improvements** | ** ** | **In-Place  Lease Value** | ** ** | **Acquired Above  Market Leases** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|
| Cost                                       |       | $                                    | 38,746,000 |                           | $          | 1,041,000                                   |       | $                                  | 1,206,000  |   | $ | (433,000 | ) |
| Accumulated  depreciation and amortization |       | (521,000                             | )          | (144,000                       | )          | (131,000                                    | )          | 64,000                             |       |
| Net                                        |       | $                                    | 38,225,000 |                           | $          | 897,000                                     |       | $                                  | 1,075,000  |   | $ | (369,000 | ) |

 

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

 

***Impairment ofReal Estate Assets***

Management continually monitors events and changes incircumstances that could indicate that the carrying amounts of our real estateassets, including those held through joint ventures may not be recoverable.When indicators of potential impairment are present that indicate that thecarrying amounts of real estate assets may not be recoverable, we will assessthe recoverability of the real estate assets by determining whether thecarrying value of the real estate assets will be recovered through the undiscountedfuture operating cash flows expected from the use of the asset and its eventualdisposition.  In the event that suchexpected undiscounted future cash flows do not exceed the carrying value, wewill adjust the real estate assets to the fair value and recognize animpairment loss.

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

***Other Assets***

As of December 31, 2006,other assets consisted primarily of amounts receivable from a lender inconnection with the financing of three properties.  As of June 30, 2007, other assets includesnet leasing commissions, prepaid insurance and interest receivable.

***Deferred Financing Costs***

Deferred financing costsconsist of direct costs incurred in connection with a credit agreement. At June30, 2007 and December 31, 2006, deferred financing costs amounted toapproximately $934,000. Such costs are amortized over the term of the creditfacility.  For the three and six monthsended June 30, 2007, approximately $119,000 and $238,000 was amortized tointerest expense respectively.

***Consolidation Considerations forthe Company’s Investments in 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 evaluate, as 

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appropriate, ourinterests, if any, in joint ventures and other arrangements to determine ifconsolidation is appropriate. If consolidation is not appropriate, we willaccount for our interests using the equity method of accounting.

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

Our revenues, which comprised largely of rentalincome, include rents reported on a straight-line basis over the initial termof the lease.  When our leases provide for free rent, lease incentives orother rental increases at specified intervals, we are required to straight-linethe recognition of revenue, which results in the recording of a receivable forrent not yet due under the lease terms.

#### ***Depreciation of RealProperty Assets***

We are required to make subjective assessmentsas to the useful lives of our depreciable assets.  We consider the periodof future benefit of the asset to determine the appropriate useful lives.  Depreciation of our assets is expected to becharged to expense on a straight-line basis over the assigned useful lives.

***Organizational and Offering Costs***

The advisor fundsorganization and offering costs on our behalf. We are required to reimburse the advisor for such organization andoffering costs up to 3.5% of the cumulative capital raised in the PrimaryOffering.  Organization and offeringcosts include items such as legal and accounting fees, marketing, duediligence, promotional and printing costs and amounts to reimburse our advisorfor all costs and expenses such as salaries and direct expenses of employees ofour advisor and its affiliates in connection with registering and marketing ourshares. All offering costs are recorded as an offset to additional paid-incapital, and all organization costs were recorded as an expense at the time we becomeliable for the payment of these amounts.

***Minority Interests***

Minority interests relate to the interest in theconsolidated entities that are not wholly-owned by us.

***Income Taxes***

Wehave elected to be taxed as a REIT, under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code) beginning with ourtaxable year ending December 31, 2006.  To qualify as a REIT, we mustcontinue to meet certain organizational and operational requirements, includinga requirement to currently distribute at least 90% of the REIT’s ordinarytaxable income to stockholders.  As a REIT, we generally are not subjectto federal income tax on taxable income that we distribute to ourstockholders.  If we fail to qualify as a REIT in any taxable year, wewill then be subject to federal income taxes on our taxable income at regularcorporate rates and will not be permitted to qualify for treatment as a REITfor federal income tax purposes for four years following the year during whichqualification is lost unless the Internal Revenue Service granted us reliefunder certain statutory provisions.  Such an event could materiallyadversely affect our net income and net cash available for distribution tostockholders.  However, we believe that we will be organized and operatein such a manner as to qualify for treatment as a REIT and intend to operate inthe foreseeable future in such a manner so that we will remain qualified as aREIT for federal income tax purposes.

As ofJune 30, 2007 and December 31, 2006, we generated a deferred tax asset of$448,000.  Because we intended to qualifyas a REIT for tax year 2006, which would not allow for the realization of thedeferred tax asset, a valuation allowance of a like amount was recorded.  In May 2007, we filed our 2006 tax return andqualified for REIT status.  Therefore, wehave not realized any deferred tax assets or liabilities for financialreporting purposes as of June 30, 2007.

***Concentration of Credit Risk***

Financial instruments that potentially subject us to aconcentration of credit risk are primarily cash investments. Cash is generallyinvested in government backed securities and investment-grade short-terminstruments and the amount of credit exposure to any one commercial issuer islimited. We have cash in financial institutions which is insured by the FederalDeposit Insurance Corporation, or FDIC, up to $100,000 per institution. At June 30, 2007, we had cash accounts in excess of FDIC insured limits.

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As of June 30, 2007, we have two tenants each of whomaccounted more than 10% of annualized rental revenue.  One tenant accounted for 12.3% of annualizedrental revenue while the other tenant accounted for 17.7% of annualized rentalrevenue.

As of June 30, 2007, we owned three properties in theState of California (Southern California), two properties in the State ofArizona (North Tempe) and one property in the State of Florida (TampaBay).  Accordingly, there is a geographicconcentration of risk subject to fluctuations in each State’s economy.

***Fair Value of Financial Instruments***

The SFAS No. 107, *Disclosures About Fair Value of Financial Instruments,*requires the disclosure of fair value information about financial instruments,whether or not recognized in the balance sheet, for which it is practicable toestimate that value. SFAS No.107 defines fair value as the quoted marketprices for those instruments that are actively traded in financial markets. Incases where quoted market prices are not available, fair values are estimatedusing present value or other valuation techniques such as discounted cash flowanalysis. The fair value estimates are made at the end of each year based onavailable market information and judgments about the financial instrument, suchas estimates of timing and amount of expected future cash flows. Such estimatesdo not reflect any premium or discount that could result from offering for saleat one time our entire holdings of a particular financial instrument, nor dothey consider that tax impact of the realization of unrealized gains or losses.In many cases, the fair value estimates cannot be substantiated by comparisonto independent markets, nor can the disclosed value be realized in immediatesettlement of the instrument.

Our consolidated balance sheets include the followingfinancial instruments: cash and cash equivalents, deferred acquisition costsand deposits, other assets, prepaid rent and security deposits, amounts duefrom/to related parties, accounts payable and accrued expenses, property taxpayable and notes payable. We consider the carrying values of cash and cashequivalents, deferred acquisition costs and deposits, other assets, due from/torelated parties, accounts payable and accrued expenses, prepaid rent andsecurity deposits, and notes payable to approximate fair value for thesefinancial instruments because of the short period of time between originationof the instruments and their expected realization as well as the variableinterest rate for notes payable.

***PerShare Data***

We report earnings per share pursuant toSFAS No. 128, “Earnings Per Share.” Basic earnings per shareattributable for all periods presented are computed by dividing the netloss by the weighted average number of shares outstanding during theperiod. Diluted earnings per share are computed based on the weighted averagenumber of shares and all potentially dilutive securities, if any.

***StockBased Compensation***

We follow SFASNo. 123(R),*Share-Based Payment*,to account for our stock compensation pursuant to our 2006 Employee andDirector Incentive Stock Plan. See Note 7, Stockholders’ Equity.

***Useof Estimates***

The preparation of our financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of the assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses for the reporting period.  Actual results could materially differ fromthose estimates.

***Segment Disclosure***

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

***Recently Issued Accounting Pronouncements***

In June 2007, the American Institute of CertifiedPublic Accountants  (AICPA) issuedStatement of Position (SOP) 07-1, *Clarification of the Scopeof the Audit and Accounting Guide* Investment Companies *and Accounting for Parent*

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*Companiesand Equity Method Investors for Investments in Investment Companies.*ThisSOP provides guidance for determining whether an entity is within the scope ofthe AICPA Audit and Accounting Guide *Investment Companies*(theGuide).  Entities that are within thescope of the Guide are required, among other things, to carry their investmentsat fair value, with changes in fair value included in earnings. The provisionsof this SOP are effective for us on January 1, 2008. We are currentlyevaluating this new guidance and has not determined whether it will be requiredto apply the provisions of the Guide in presenting our consolidated financialstatements.

In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”),which clarifies the relevant criteria and approach for the recognition,derecognition, and measurement of uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006.  Theadoption of this interpretation in the first quarter of 2007 did not have amaterial impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. In February 2007, theFASB issued SFAS No. 159, “The Fair Value Options for Financial Assets andFinancial Liabilities”. This Statement permits entities to choose to measuremany financial instruments and certain other items at fair value. The objectiveis to improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. SFAS 157 and 159 are effective for financial statements issued forfiscal periods beginning after November 15, 2007 (our fiscal year beginningJanuary 1, 2008), and interim periods within those fiscal years. Management iscurrently evaluating the impact of adopting SFAS No. 157 and SFAS No. 159 onthe consolidated financial statements.

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

On January 22, 2007, we completed the purchase ofthe Mack Deer Valley property.  Thepurchase price of the property was funded with net proceeds raised from ourpublic offering and $16.4 million of borrowings under our credit agreement withHSH Nordbank AG, New York Branch.

On April 2, 2007, we acquired an existing multi-tenantindustrial property known as Marathon Center from Marathon Venture ofPinnellas, LLC, a non-related party, for a purchase price of $4.5 million. We acquired the property in a joint venture with JBK Capital, LLC. We are the managing partner of  the venture and own a 97% interestin the venture.  The property was purchased with no debt financing.

**5.****             Payable toRelated Parties**

The payable to relatedparties at June 30, 2007 and December 31, 2006 consists of organizational andoffering costs and acquisition fees and expense reimbursements payable to theadvisor and broker dealer fees payable to PCC.

**6.****                                     MinorityInterests**

As of June 30, 2007, minority interests relate to theadvisor’s equity interest of 0.34% in the earnings/losses of the OperatingPartnership and JBK Capital, LLC’s equity interest of 3% in the earnings/lossesof the Marathon subsidiary.

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

***CommonStock***

Our articles of incorporation authorize theissuance of 290 million shares of common stock with a par value of $0.001 and10 million shares of preferred stock with a par value of $0.001.  As of June 30,2007, we have issued approximately 7.6 million shares of common stockfor a total gross value of approximately $60.8 million.

***Distribution Reinvestment Plan***

We have adopted a distribution reinvestment plan(the “DRIP”) that allows our stockholders to have distributions and otherdistributions otherwise distributable to them invested in additional shares ofour common stock.   We haveregistered 11 

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millionshares of our common stock for sale pursuant to the distribution reinvestmentplan.  The purchase price per share is 95% of the price paid by thepurchaser for our common stock, but not less than $7.60 per share.  AtJune 30, 2007, approximately 111,800 shares had been issued under the distributionreinvestment plan.  We may amend orterminate the distribution reinvestment plan for any reason at any time upon 10days prior written notice to participants.

***Employee and Director IncentiveStock Plan***

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

Effective January 1,2006, we adopted the provisions of Statement of Financial Accounting StandardsNo. 123R (“SFAS 123R”), “Share-Based Payment,” which requires themeasurement and recognition of compensation expense for all share-based paymentawards to employees and directors based on estimated fair values.  On May 10, 2006, we granted our nonemployeedirectors nonqualified stock options to purchase an aggregate of 40,000 sharesof common stock at an exercise price of $8.00 per share.  Outstanding stock options became immediatelyexercisable in full on the grant date, expire in ten years after the grantdate, and have no intrinsic value as of June 30, 2007.  For the year ended three and six months endedJune 30, 2007, we did not incur any non-cash compensation expenses.  For the year ended three and six months endedJune 30, 2006, we incurred $2,000 of non-cash compensation expenses.

Werecord compensation expense for nonemployee stock options based on theestimated fair value of the options on the date of grant using theBlack-Scholes option-pricing model. These assumptions include the risk-freeinterest rate, the expected life of the options, the expected stock pricevolatility over the expected life of the options, and the expected distributionyield. Compensation expense for employee stock options is recognized ratablyover the vesting term. The assumptions used to estimate the fair value ofoptions granted during year ended December 31, 2006 using the Black-Scholesoption-pricing model were 5% distribution yield, a 4.99% risk-free interestrate based on the 10-year U.S. Treasury Bond, an expected life of 5 years,and a volatility rate of 1.02%. No stock options were granted, exercised orcanceled during the six months June 30, 2007.

Theexpected life of the options is based on evaluations of expected futureexercise behavior. The risk free interest rate is based on the U.S.Treasury yield curve at the date of grant with maturity dates approximatelyequal to the expected term of the options at the date of thegrant. Volatility is based on historical volatility of our stock. Thevaluation model applied in this calculation utilizes highly subjectiveassumptions that could potentially change over time, including the expectedstock price volatility and the expected life of an option. Therefore, theestimated fair value of an option does not necessarily represent the value thatwill ultimately be realized by a nonemployee director.

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

Wehave no employees. Our advisor is primarily responsible for managing ourbusiness affairs and carrying out the directives of our board ofdirectors.  We have an advisory agreementwith the advisor and a dealer manager agreement with PCC which entitle theadvisor and PCC to specified fees upon the provision of certain services withregard to the Offering and investment of funds in real estate projects, amongother services, as well as reimbursement for organizational and offering costsincurred by the advisor and PCC on our behalf and reimbursement of certaincosts and expenses incurred by the advisor in providing 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.

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Organizational andOffering Costs.  Organizationaland offering costs of the Offering are being paid by the advisor on our behalfand will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theOffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our advisor for allmarketing related costs and expenses such as salaries and direct expenses ofemployees of the advisor and its affiliates in connection with registering andmarketing our shares (ii) technology costs associated with the offering ofour shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering. As of June 30, 2007 and December 31, 2006, the advisor andits affiliates had incurred on our behalf offering costs of approximately $2.9million  and $2.5 million respectively,which we have recorded as an offset to additional paid in capital.  For the three and six months ended June 30,2007 and 2006, we did not expense any organization costs.

Acquisition Fees andExpenses.  The advisory agreement requires us to pay theadvisor acquisition fees in an amount equal to 2% of the gross proceeds of thePrimary Offering.  We will pay the acquisition fees upon receipt of thegross proceeds from the Offering.  However, if the advisory agreement isterminated or not renewed, the advisor must return acquisition fees not yet allocatedto one of our investments.  In addition, we are required to reimburse theadvisor for direct costs the advisor incurs and amounts the advisor pays tothird parties in connection with the selection and acquisition of a property,whether or not ultimately acquired.  As of June 30, 2007 and December 31,2006, the advisor earned approximately $1,215,000 and $690,000 respectively, ofacquisition fees, which have been or are to be capitalized as part of the costof real estate investment.

Management Fees.  The advisory agreement requires us to pay theadvisor a monthly asset management fee of one-twelfth of 1.0% of the sum of theaggregate basis book carrying values of our assets invested, directly orindirectly, in equity interests in and loans secured by real estate beforereserves for depreciation or bad debts or other similar non-cash reserves,calculated in accordance with generally accepted accounting principals in theUnited States of America (GAAP).  In addition, we will reimburse 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 six months ended June 30, 2007, the advisorearned approximately $160,000 and $299,000 respectively of asset managementfees, which were expensed.  For three andsix months ended June 30, 2006, $2,000 of asset management fees were expensed.  

Operating Expenses.The advisory agreement provides for reimbursement of our advisor’s direct andindirect costs of providing administrative and management services to us.  For three and six months ended June 30, 2007,approximately $171,000 and $353,000 of such costs respectively, werereimbursed. For three and six months ended June 30, 2006 approximately $44,000and  $196,000 of such costs respectively,were reimbursed.  The advisor must pay orreimburse us the amount by which our aggregate annual operating expenses exceedthe greater of 2% of our average invested assets or 25% of our net incomeunless a majority of our independent directors determine that such excessexpenses were justified based on unusual and non-recurring factors.

Disposition Fee. The advisory agreement provides that if the advisor or its affiliateprovides a substantial amount of the services (as determined by a majority ofour directors, including a majority of our independent directors) in connectionwith the sale of one or more properties, we will pay the advisor or such affiliateshall receive at closing a disposition fee up to 3% of the sales price of suchproperty or properties.  This disposition fee may be paid in addition toreal estate commissions paid to non-affiliates, provided that the total realestate commissions (including such disposition fee) paid to all persons by usfor 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) thecompetitive real estate commission for each property.  We will pay thedisposition fees for a property at the time the property is sold.

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

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

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

·                  In the event welist our stock for trading, the advisor will receive a subordinated incentivelisting fee instead of a subordinated participation in net sales proceeds. Thisfee ranges from a low of 5% of the amount by which the market value of ourcommon stock plus all prior distributions (other than stock distributions) exceedsthe 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 priordistributions (other than stock distributions) exceeds the amount of investedcapital plus annualized returns of 10% or more.

***DealerManager Agreement***

PCC,as dealer manager, is entitled to receive a sales commission of up to 7% ofgross proceeds from sales in the Primary Offering.  PCC, as DealerManager, is also entitled to receive a dealer manager fee equal to up to 3% ofgross proceeds from sales in the Primary Offering.  The Dealer Manager isalso entitled to receive a reimbursement of bona fide due diligence expenses upto 0.5% of the gross proceeds from sales in the Primary Offering.  The advisoryagreement requires the advisor to reimburse us to the extent that offeringexpenses including sales commissions, dealer manager fees and organization andoffering expenses (but excluding acquisition fees and acquisition expensesdiscussed above) to the extent are in excess of 13.5% of gross proceeds fromthe Offering. As of  June 30, 2007 andDecember 31, 2006, we had incurred approximately $5.9 million and $3.4 millionrespectively, to PCC for dealer manager fees and sales commissions,respectively. Much of this amount was reallowed by PCC to third party brokerdealers. Dealer manager fees and sales commissions paid to PCC are a cost ofcapital raised and, as such, are included as a reduction of additional paid incapital in the accompanying consolidated balance sheets.

**9.****                                CreditFacility**

On June 30, 2006, we enteredinto a Credit Agreement with HSH Nordbank AG, New York Branch, for a temporarycredit facility that we will use during the offering period to facilitate ouracquisitions of properties in anticipation of the receipt of offeringproceeds.  As of June 30, 2007 andDecember 31, 2006, we had borrowed $34.4 million and $20.2 millionrespectively, under the credit agreement.

The Credit Agreement permitsus to borrow up to $50 million secured by real property at a borrowing ratebased on LIBOR plus a margin ranging from 1.15% to 1.35% and requires paymentof a usage premium of up to 0.15% and an annual administrative fee.  We may use the entire credit facility toacquire real estate investments and we may use up to 10% of the credit facilityfor working capital.  We are entitled toprepay the borrowings under the credit facility at any time withoutpenalty.  The principal balance is due onJune 30, 2008.  The repayment ofobligations under the Credit Agreement may be accelerated in the event of adefault, as defined in the Credit Agreement. The facility containsvarious covenants including financial covenants with respect to consolidatedinterest and fixed charge coverage and secured debt to secured assetvalue.  As of June 30, 2007, we are in compliance with all these covenants.

During the three and six months ended June 30, 2007,we incurred and paid approximately $527,000 and $1,121,000 of interest expenserelated to the Credit Agreement.

In connection withdocumentation and closing the Credit Agreement, we have incurred financingcosts totaling approximately $934,000. These financing costs have been capitalized and are being amortized overthe life of the agreement. For the three and six months ended June 30, 2007,$119,000 and $238,000, respectively, of deferred financing costs were amortizedand included in interest expense in the consolidated statements of operations.

Consistent with our borrowing policies, during ourPrimary Offering, we will borrow periodically to acquire properties and forworking capital.  We will determine whether to use the proceeds of ourOffering to repay amounts borrowed under the Credit Agreement depending on anumber of factors, including the investments that are available to us forpurchase at the 

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timeand the cost of the credit facility.  Following the closing of our PrimaryOffering, 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 sufficient proceeds from our Offering areunavailable to repay the indebtedness secured by properties within a reasonabletime following the closing of our Primary Offering as determined by our boardof directors, we may sell properties or raise equity capital to repay thesecured debt, so that we will own our properties with no permanent acquisitionfinancing.

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

***Commitments***

On March 16, 2007, we entered into adefinitive agreement to purchase an newly constructed multi-tenant industrialproperty known Classic Business Park from CP215 Business Park, LLC, anon-related party, for a purchase price of $9.8 million.  As of May 1,2007, our right to terminate the agreement without penalty expired and ourinitial deposits of $500,000 became non-refundable. The property will consistof approximately 79,042 square feet of leasable space in two single-storybuildings located on approximately 4.9 acres of land in Perris,California.  The property is currently under development and expected tobe completed and ready for occupancy in the first quarter of 2008, at whichtime the purchase is expected to close.

On May 2, 2007, we entered into a different definitiveagreement  to purchase newly constructedindustrial show room building and three free-standing industrial buildings inClassic Pacific Business Park from CP215 Business Park, LLC, a non-relatedparty, for a purchase price of $10.2 million.  As of May 18, 2007, ourright to terminate the Agreement without penalty expired and our deposits of$250,000 became non-refundable.  The property is currently underdevelopment and expected to be completed and ready for occupancy by the secondquarter of 2008, at which time the purchase is expected to close.

***Environment Matters***

We follow the policy of monitoring our properties forthe presence of hazardous or toxic substances. While there can be no assurance that a material environment liabilitydoes not exist, we are not currently aware of any environmental liability withrespect to the properties that would have a material effect on our financialcondition, 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***

Our commitments and contingencies include the usualobligations of real estate owners and operators in the normal course ofbusiness.  In the opinion of management,these matters are not expected to have a material impact on our consolidatedfinancial position and results of operations.

**11.****                              SubsequentEvents**

***Status of our Offering***

As of August 3, 2007, we had received and acceptedsubscriptions in our Offering for 7,967,083 shares of our common stock, orapproximately $63.7 million, excluding shares issued under the DRIP.

****

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

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

# This section containsforward-looking statements, including estimates, projections, statementsrelating to our business plans, objectives and expected operating results, andthe assumptions upon which those statements are based. These forward-lookingstatements 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 oncurrent expectations and assumptions that are subject to risks anduncertainties which may cause actual results to differ materially from theforward-looking statements.  Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We undertake no obligation toupdate or revise publicly any forward-looking statements, whether as a resultof new information, future events or otherwise

**Overview**

We were incorporated on October 22, 2004 for the purpose ofengaging in the business of investing in and owning commercial realestate.  Prior to commencing our initialpublic offering on January 6, 2006, we had approximately $200,000 in assets andno real estate operations. In February 2006, we received the minimum offeringamount of $1,000,000 and in June 2006, we began acquiring real estateassets.  At June 30, 2007, we raisedapproximately $59.9 million of gross proceeds from the sale ofapproximately 7.5 million shares of our common stock and had acquired sixproperties. We acquired two properties in June 2006, two properties in December2006, one property at the end of January 2007 and one property in April 2007.  Accordingly, our results of operations forthe quarters and six months ended June 30, 2007 and June 30, 2006 are notcomparable.

Our results of operations for the three and six monthsended June 30, 2007 and 2006 are not indicative of those expected in futureperiods as we expect that rental income, tenant reimbursements, operatingexpenses, asset management fees, depreciation, amortization, and net incomewill each increase in future periods as a result of anticipated futureacquisitions of real estate assets.

We have no paid employees and are externally advisedand managed by Cornerstone Realty Advisors, LLC.

**CriticalAccounting Policies**

The complete listing of our Critical AccountingPolicies was previously disclosed in our 2006 Annual Report on Form 10-K, asfiled with the SEC.

# **Results of Operations**

***Three months ended June 30, 2007 and 2006***

We owned six properties forthe full three months ended June 30, 2007. We acquired our first two propertiesin June 2006. As a result of the acquisitions, total revenues increased to$1,234,000 from $17,000, property operating and maintenance expenses increasedto $325,000 from $4,000 and depreciation and amortization increased to $326,000from $4,000 from the comparable 2006 period.

General and administrativeexpenses increased to $436,000 from $294,000 for the comparable period of2006.  The increase is due primarily toadditional professional fees and advisor administration expense reimbursementsresulting from a higher level of activity in three months ended June 30, 2007.

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Interest income of $160,000in the second quarter of 2007 compares to $35,000 in the second quarter of2006.  The increase is due to cashavailable for investment from net proceeds of our Offering. Interest expenseincreased to $729,000 in the second quarter of 2007 from $0 in the comparableperiod of 2006.  The increase in expenseis due to interest associated with our credit facility arrangement which closedat the end of June 2006.

*** Six months ended June 30, 2007 and 2006***

We owned four properties forthe entire six months ended June 2007, one property for five months during 2007period and one property during three months of the 2007 period. We acquired ourfirst two properties in June 2006. As a result of the acquired properties,total revenues for the second quarter of 2007 increased to $2,305,000 from$17,000, property operating and maintenance expenses increased to $556,000 from$4,000 and depreciation and amortization increased to $579,000 from $4,000,from the comparable period. General and administrative expenses increased to$852,000 from $610,000 from the comparable 2006 period. The increase is dueprimarily to additional professional fees and advisor administration expensereimbursements associated with the higher level of activity during the secondquarter of 2007.

Interest income of $270,000in the first six months of 2007 compares to $39,000 in the first six months of2006.  The increase is due to cashavailable for investment from net proceeds of our Offering. Interest expenseincreased to $1,398,000 in the first six months of 2007 from $3,000 in thecomparable period of 2006.  The increasein expense is due to interest associated with our credit facility which closedat the end of June 2006.

**Liquidityand Capital Resources**

We expect that primary sources of capital over thelong term will include net proceeds from the sale of our common stock and netcash flows from operations.  We expectthat our primary uses of capital will be for property acquisitions, for the paymentof tenant improvements and leasing commissions, for the payment of operatingexpenses, including interest expense on any outstanding indebtedness, and forthe payment of distributions.

As of June 30, 2007 a total of approximately 7.5million shares of our common stock had been sold in our Offering for aggregategross proceeds of approximately $59.9 million.   As of June 30, 2007, we had approximately$19.2 million in cash and cash equivalents on hand and approximately $15.6million available under our acquisition credit facility with HSH Nordbank.  Our liquidity will increase as additionalsubscriptions are accepted and decrease as net offering proceeds are expendedin connection with the acquisition and operation of properties.

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

Generally, cash needs foritems other than property acquisitions will be met from operations, and cashneeds for property acquisitions will be met from public offerings of our sharesor from borrowings on our credit facility.

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

We are currently dependent on our advisor to fund aportion of our organization and offering activities because the amount we canspend on organization and offering expenses is limited by our charter.  At June 30, 2007, our advisor had incurred$3.0 million of organization and offering costs on our behalf.  Of this amount, $2.2 million had beenreimbursed to our advisor.  Our advisoradvances us money for these organization and offering expenses or pays theseexpenses on our behalf.  Our advisor willnot charge us interest on these advances. We will repay these advances and reimburse our advisor for expenses paidon our behalf using the gross proceeds of our initial public offering, but inno event will we have any obligation to reimburse our advisor for these coststotaling in excess of 3.5% of the gross proceeds from our primary offering. Ouradvisor will pay all of our organization and offering expenses described abovethat are in excess this 3.5% limitation. In addition, our advisor will pay all of our organization and offeringexpenses that, when combined with the sales commissions and dealer manager feesthat we incur, exceed 13.5% of the gross proceeds from our initial publicoffering.

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We will not rely on advances from our advisor toacquire properties but our advisor and its affiliates may loan funds to specialpurposes entities that may acquire properties on our behalf pending our raisingsufficient proceeds from our initial public offering to purchase the propertiesfrom the special purpose entity.

Our advisor is newly formed, has limitedcapitalization, has incurred losses since its inception and is continuing toincur losses. Our advisor must obtain financial support from its affiliates orsole member or raise funds through the sale of its own debt or equitysecurities to obtain the cash necessary to provide these advances. There can beno assurance as to the amount or timing of our advisor’s receipt of funds.Adverse changes in the financial condition of our advisor could adverselyaffect us. If our advisor’s financial condition affects the amount of fundsavailable to us for offering and organizational activities, our ability toraise funds in our initial public offering could be adversely affected.Cornerstone Industrial Properties, LLC, the sole member of our advisor, haslimited capitalization, has incurred significant losses since its inception andis continuing to incur significant losses.

We will endeavor to repay any temporary acquisitiondebt financing promptly upon receipt of proceeds in our initial publicoffering.  To the extent sufficientproceeds from our offering are unavailable to repay such debt financing withina reasonable time as determined by our board of directors, we will endeavor toraise additional equity or sell properties to repay such debt so that we willown our properties all-cash with no permanent financing.  In the event that our initial public offeringis not fully sold, our ability to diversify our investments may be diminished.

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

**Contractual Obligations**

The following table reflects our contractualobligations as of June 30, 2007, specifically our obligations under long-termdebt agreements and purchase obligations: 
| ** **                                     | ** ** | **Payment due by period** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**               | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt  Obligations                    |       | $                                        | 34,428,000 | ** ** | $ | 34,428,000 |   | $ | — |   | $ | — |   | $ | — | ** ** |
| Purchase  Obligations (1) and (2)              |       | $                                        | 20,000,000 |   | $ | 20,000,000 |   | $ | — |   | $ | — |   | $ | — | ** ** |
| Interest Expense  related to long term debt(3) |       | $                                        | 2,259,000  |   | $ | 2,259,000 |   | $ | — |   | $ | — |   | $ | — |   |

 

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 (1) As of May1, 2007, we had an agreement to purchase a newly constructed multi-tenantindustrial property known Classic Business Park from CP215 Business Park, LLCfor a purchase price of $9.8 million. The acquisition is expected to close during first quarter of 2008.

(2) As of May 18, 2007. we had an agreement topurchase a newly constructed industrial show room building and threefree-standing industrial buildings in Classic Pacific Business Park from CP215Business Park, LLC, a non-related party, for a purchase price of $10.2 million.The acquisition is expected to close during the second quarter of 2008.

(3) Interest expense is calculated based on the loanbalance outstanding at June 30, 2007, one month LIBOR at June 30, 2007 plusmargin of 1.15%.

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

We invest our cash and cash equivalents in short-term,highly liquid investments including government obligations, bank certificatesof deposit and interest-bearing accounts which, by their nature, are subject tointerest rate fluctuations.  As of June30, 2007, we had borrowed approximately $34.4 million under our creditfacility. This and future borrowing on the credit facility is subject to avariable rate through its maturity date of June 30, 2008. An increase in thevariable interest rate on the facility constitutes a market risk as a change inrates would increase or decrease interest incurred and therefore cash flowsavailable for distribution to shareholders. During the period from January 1,2007 through June 30, 2007, 30-day LIBOR has remained flat. However, therecan be no assurance that this rate will not increase. Based on the debtoutstanding as of June 30, 2007, a 1% change in interest rates would result ina change in interest expense of approximately $344,000 per year.

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

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 disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

We are in the process of developing and implementing aformal set of internal controls and procedures for financial reporting asrequired by the Sarbanes-Oxley Act of 2002. The efficacy of the steps we have taken to date and steps we are stillin the process of completing are subject to continued management reviewsupported by confirmation and testing by management.  We anticipate thatadditional changes may be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control overfinancial reporting occurred during the period ended June 30, 2007 that hasmaterially affected, or is reasonably likely to affect, our internal controlover financial reporting.

**PART II – OTHER INFORMATION**

**Item 4.****            Submission of Mattersto a Vote of Security Holders**

On May 30, 2007,  we held our annual meeting of stockholders atour executive office in Irvine, Caloforina. Our stockholders elected Paul Danchik, Joseph H. Holland, Daniel L.Johnson, Terry G. Roussel and Lee Powell Stedman to the board ofdirectors.  The following table setsforth the number of votes cast for, withheld, and the number of abstentionswith respect to each nominee for director. There were no broker non-votes.
| Name               | ** ** | **Votes For** | ** ** | **Votes withheld** | ** ** | **Abstentions** | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|
| Paul Danchik       |       | 2,915,862          |       | 41,833                  |       | 5,094           |       |
| Joseph H. Holland  |       | 2,915,862          |       | 41,833                  |       | 5,094           |       |
| Daniel L.  Johnson |       | 2,915,862          |       | 46,927                  |       | 0               |       |
| Terry G. Roussel   |       | 2,915,862          |       | 46,927                  |       | 0               |       |
| Lee Powell Stedman |       | 2,915,862          |       | 41,833                  |       | 5,094           |       |

 

**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**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this quarterly report to be signed on itsbehalf by the undersigned, thereunto duly authorized this 10th day of August 2007.
|          | CORNERSTONE CORE  PROPERTIES REIT, INC. |
|----------|-----------------------------------------|
|     |                                    |   |
|     | By:                                     | /s/ TERRY G.  ROUSSEL |   |
|     | * *                                | Terry G.  Roussel,*Chief Executive Officer* |
|     |                                    |   |
|     |                                    |   |
|     | By:                                     | /s/ SHARON C.  KAISER |   |
|     | * *                                | Sharon C.  Kaiser,*Chief Financial Officer* |
| * * | * *                                | * * | *(Principal  Financial Officer and* |
| * * | * *                                | * * | *Principal  Accounting Officer)* |
|          |                                         |  |  |  |

 

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