e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
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o |
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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 000-51868
CORNERSTONE REALTY FUND, LLC
(Exact name of registrant as specified in its charter)
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CALIFORNIA
(State or other jurisdiction of incorporation or organization)
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33-0827161
(I.R.S. Employer Identification No.) |
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1920 MAIN STREET, SUITE 400, IRVINE, CA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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92614
(ZIP CODE) |
949-852-1007
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
o Yes þ No
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
CONDENSED BALANCE SHEETS
(UNAUDITED)
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March 31, 2011 |
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December 31, 2010 |
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ASSETS |
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Cash and cash equivalents |
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$ |
3,892,000 |
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$ |
4,356,000 |
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Investments in real estate |
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Land |
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9,593,000 |
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9,593,00 |
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Buildings and improvements, net |
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15,474,000 |
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15,649,000 |
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Intangible asset in-place leases, net |
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92,000 |
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104,000 |
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25,159,000 |
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25,346,000 |
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Other assets |
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Tenant and other receivables, net |
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261,000 |
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292,000 |
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Prepaid expenses and other assets |
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67,000 |
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19,000 |
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Deferred financing cost, net |
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70,000 |
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77,000 |
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Leasing commissions, net |
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173,000 |
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195,000 |
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Total assets |
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$ |
29,622,000 |
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$ |
30,285,000 |
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LIABILITIES AND MEMBERS CAPITAL |
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Liabilities |
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Accounts payable, accrued liabilities and prepaid rent |
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$ |
304,000 |
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$ |
157,000 |
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Distributions payable |
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622,000 |
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Real estate taxes payable |
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200,000 |
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231,000 |
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Tenant security deposits |
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259,000 |
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254,000 |
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Note payable |
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3,974,000 |
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3,987,000 |
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Total liabilities |
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4,737,000 |
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5,251,000 |
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Commitments and contingencies (Note 7) |
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Members capital (100,000 units authorized and issued as
of March 31, 2011 and December 31, 2010; 98,670 and
98,670 units outstanding as of March 31, 2011 and
December 31, 2010, respectively) |
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24,885,000 |
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25,034,000 |
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Total liabilities and members capital |
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$ |
29,622,000 |
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$ |
30,285,000 |
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The accompanying notes are an integral part of these interim financial statements.
3
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Revenues |
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Rental revenues |
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$ |
618,000 |
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$ |
688,000 |
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Tenant reimbursements and other income |
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177,000 |
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159,000 |
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795,000 |
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847,000 |
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Expenses |
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Property operating and maintenance |
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228,000 |
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266,000 |
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Property taxes |
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152,000 |
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150,000 |
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General and administrative |
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169,000 |
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109,000 |
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Depreciation and amortization |
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275,000 |
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214,000 |
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824,000 |
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739,000 |
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Other income |
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51,000 |
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Interest expense |
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(64,000 |
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Net (loss) income |
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$ |
(93,000 |
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$ |
159,000 |
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Net (loss) income allocable to managing member |
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$ |
(9,000 |
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$ |
16,000 |
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Net (loss) income allocation to unit holders |
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$ |
(84,000 |
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$ |
143,000 |
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Per unit amounts: |
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Basic and diluted (loss) income allocable to unit holders |
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$ |
(0.85 |
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$ |
1.45 |
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Basic and diluted weighted average units outstanding |
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98,670 |
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98,790 |
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The accompanying notes are an integral part of these interim financial statements.
4
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
CONDENSED STATEMENT OF MEMBERS CAPITAL
(Unaudited)
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Balance, December 31, 2010 |
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$ |
25,034,000 |
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Cash distributions to managing member |
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(56,000 |
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Net loss |
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(93,000 |
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Balance, March 31, 2011 |
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$ |
24,885,000 |
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The accompanying notes are an integral part of these interim financial statements.
5
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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OPERATING ACTIVITIES |
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Net (loss) income |
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$ |
(93,000 |
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$ |
159,000 |
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Adjustments to reconcile net (loss) income to net cash provided by operating
activities: |
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Amortization of deferred financing costs |
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7,000 |
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Depreciation and amortization |
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275,000 |
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214,000 |
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Provision for bad debt |
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7,000 |
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41,000 |
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Straight-line rent and amortization of acquired above/below market leases, net |
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18,000 |
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(29,000 |
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Changes in operating assets and liabilities: |
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Tenant and other receivables, net |
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7,000 |
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(30,000 |
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Prepaid expenses and other assets |
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(60,000 |
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(82,000 |
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Accounts payable, accrued liabilities and prepaid rent |
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144,000 |
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(14,000 |
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Real estate taxes payable |
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(31,000 |
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22,000 |
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Net cash provided by operating activities |
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274,000 |
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281,000 |
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INVESTING ACTIVITIES |
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Investments in real estate |
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(47,000 |
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(22,000 |
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Net cash used in investing activities |
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(47,000 |
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(22,000 |
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FINANCING ACTIVITIES |
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Repayment of note payable |
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(13,000 |
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Cash distributions to unit holders |
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(622,000 |
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(622,000 |
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Cash distributions to managing member |
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(56,000 |
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Units repurchased and retired |
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(49,000 |
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Net cash used in financing activities |
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(691,000 |
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(671,000 |
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Net decrease in cash and cash equivalents |
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(464,000 |
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(412,000 |
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Cash and cash equivalents at beginning of period |
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4,356,000 |
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761,000 |
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Cash and cash equivalents at end of period |
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$ |
3,892,000 |
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$ |
349,000 |
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Supplemental disclosure of non-cash financing and investing activities: |
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Cash paid for interest |
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$ |
57,000 |
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$ |
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The accompanying notes are an integral part of these interim financial statements.
6
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)
1. Organization and Business
Cornerstone Realty Fund, LLC, a California limited liability company (the Fund), was formed in
October of 1998 to invest in multi-tenant business parks catering to small business tenants. As
used in this report, Fund, we, us and our refer to Cornerstone Realty Fund, LLC except
where the context otherwise requires.
Our managing member is Cornerstone Industrial Properties, LLC (CIP), a California limited
liability company. Cornerstone Ventures, Inc. is the managing member of CIP. Cornerstone
Ventures, Inc. is an experienced real estate operating company specializing in the acquisition,
operation and repositioning of multi-tenant industrial business parks catering to small business
tenants.
On August 7, 2001, we commenced a public offering of units of our membership interest pursuant to a
registration statement on Form S-11 filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933. On August 18, 2005, we completed a public offering of these units. As
of that date, we had issued 100,000 units to unit holders for gross offering proceeds of
$50,000,000, before discounts of $39,780.
Our interim unaudited condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and in accordance with the rules and regulations of the Securities and
Exchange Commission (SEC). As permitted by the SEC filing requirements for Form 10-Q, the
condensed financial statements do not include all of the information and footnotes required by GAAP
for complete financial statements. The condensed financial statements included herein should be
read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a presentation in accordance with GAAP have been included. Operating results for the
three months ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2011.
Proposed Plan of liquidation
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our managing member
began the process of evaluating strategic alternatives for winding up the Fund in order to maximize
overall returns for our investors. Our managing member initiated the examination at this time,
rather than waiting until 2012 because of the inherent uncertainty of the future and our managing
members view of (i) the current market conditions, (ii) the current increasing costs of corporate
compliance (including, without limitation, all federal, state and local regulatory requirements
applicable to us, including the Sarbanes-Oxley Act of 2002, as amended), (iii) the possible need to
reduce or suspend our distributions and (iv) the other factors discussed in more detail in the
Definitive Proxy Statement as filed by the Fund with the SEC on April 1, 2011.
After a thorough analysis, consultation with a real estate broker specializing in multi-tenant
industrial real estate in the geographical regions where our properties are located, and a targeted
solicitation of bids for a potential sale of our portfolio, our managing member concluded that a
liquidation of the Fund at this time will more likely produce superior returns within a reasonable
period of time to our investors than other potential exit strategies reasonably available to us,
including waiting until 2012 to complete a liquidation.
Liquidation is not considered imminent until we have received a majority in interest of votes from
our unit holders approving the proposed plan of liquidation. If the plan of liquidation is not
approved by our unit holders, our managing member will determine other reasonably available
alternatives to pursue in the best interest of us and our unit holders, including, without
limitation, continuing to manage our assets until December 31, 2012. Investors have the power to
revoke their consent at any time before the determination date, May 29, 2011. Accordingly, the
approval of the proposed liquidation plan will not be determined prior to the determination date.
In addition, managing member has the right to withdraw the proposed liquidation plan prior to the
determination date May 29, 2011.
As such, we will continue to use the going-concern basis of accounting until the determination
date. Please see Note 8, Subsequent Events, for further details.
7
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on
various assumptions that we believe to be reasonable under the circumstances, and these estimates
form the basis for our judgments concerning the carrying values of assets and liabilities that are
not readily apparent from other sources. We periodically evaluate these estimates and judgments
based on available information and experience. Actual results could differ from our estimates under
different assumptions and conditions. If actual results significantly differ from our estimates,
our financial condition and results of operations could be materially impacted. For more
information regarding our critical accounting policies and estimates please refer to Summary of
Significant Accounting Policies contained in our Annual Report on Form 10-K for the year ended
December 31, 2010. There have been no material changes to the critical accounting policies
previously disclosed in that report except as discussed below.
Interim Financial Information
The accompanying interim condensed financial statements have been prepared by our management in
accordance with GAAP and in conjunction with the rules and regulations of the SEC. Certain
information and note disclosures required for annual financial statements have been condensed or
excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed financial
statements do not include all of the information and notes required by GAAP for complete financial
statements. The accompanying financial information reflects all adjustments which are, in the
opinion of our management, of a normal recurring nature and necessary for a fair presentation of
our financial position, results of operations and cash flows for the interim periods. Operating
results for the three months ended March 31, 2011 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010. Our accompanying interim condensed
financial statements should be read in conjunction with our audited financial statements and the
notes thereto included on our 2010 Annual Report on Form 10-K, as filed with the SEC.
Reclassifications
Certain amounts in our condensed financial statements for prior periods have been reclassified to
conform to the current period presentation. Asset held for sale and associated liabilities at
December 31, 2010 have been reclassified held as used on the condensed balance sheets and operating
results have been reclassified from discontinuing to continued operations. See Note 3 Investment
in Real Estate for more details.
3. Investment in Real Estate
During the first quarter of 2010, management committed to a plan to sell Zenith Drive Centre to a
third party and classified the property as held for sale. Management intended to sell Zenith Drive
Centre on an individual basis upon receipt of a reasonable offer. The property had not been sold as
of December 31, 2010 and accordingly was classified as held for sale as of December 31, 2010. In
accordance with the liquidation requirement under the operating agreement, early in 2011,
management began consideration of alternatives available for liquidation by the scheduled
dissolution date of December 31, 2012, and determined that a portfolio sale would be likely to
result in higher liquidation proceeds than sales of the individual assets. Accordingly, the listing
agreement for Zenith Drive Center was cancelled subsequent to year ended December 31, 2010, and the
property was reclassified as held as used at March 31, 2011, along with other properties in the
portfolio, until a plan of liquidation is voted upon by unit holders. A corresponding
reclassification was made as of and for the period ended March 31, 2010.
In accordance with Accounting Standards Codification (ASC) 360-35-44, Zenith Center Drive was
reclassified as held as used for at the lower of (1) its carrying amount before it was classified
as held for sale, adjusted it for any depreciation expenses that would have been recognized had it
been continuously classified as held as used and (2) its fair value. Subsequent to December 31,
2010, Zenith Drive Centres fair market value exceeded its adjusted carrying amount. Accordingly,
Zenith Drive Centre was reclassified at its carrying value, adjusted for depreciation expense that
would have been recognized had it been continuously classified as held as used. For the three
months ended March 31, 2011 and 2010, we recorded depreciation expense of $71,000 and $11,000,
respectively, related to Zenith Drive Centre. As of March 31, 2011 and December 31, 2010, Zenith
Centre Drive had an adjusted book balance of approximately $1.7 million.
8
As of March 31, 2011, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
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Buildings and |
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Intangible |
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Land |
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Improvements |
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Lease Value |
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Investments in real estate |
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$ |
9,593,000 |
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$ |
18,255,000 |
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$ |
108,000 |
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Less: accumulated depreciation and amortization |
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(2,781,000 |
) |
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(16,000 |
) |
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$ |
9,593,000 |
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$ |
15,474,000 |
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$ |
92,000 |
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As of December 31, 2010, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
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Buildings and |
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Intangible |
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Land |
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Improvements |
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Lease Value |
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Investments in real estate |
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$ |
9,593,000 |
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$ |
18,208,000 |
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$ |
108,000 |
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Less: accumulated depreciation and amortization |
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(2,559,000 |
) |
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(4,000 |
) |
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$ |
9,593,000 |
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$ |
15,649,000 |
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$ |
104,000 |
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Depreciation and amortization related to investments in real estate and related lease intangibles
for the three months ended March 31, 2011 and 2010 was $0.2 million.
Estimated amortization associated with the intangible lease assets, in-place lease assets and
intangible lease liability for April 1, 2011 through December 31, 2011 and each of the four
subsequent years is as follows:
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Lease Intangibles |
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April 1, 2011 to December 31, 2011 |
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$ |
8,000 |
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2012 |
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11,000 |
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2013 |
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7,000 |
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2014 |
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4,000 |
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2015 and thereafter |
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62,000 |
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Total |
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$ |
92,000 |
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4. Allowance for Doubtful Accounts
Our allowance for doubtful accounts was approximately $0.3 million as of March 31, 2011 and
December 31, 2010.
5. Concentration of Credit Risks
Financial instruments that potentially subject the Fund to a concentration of credit risk are
primarily cash investments; cash is generally invested in investment-grade short-term instruments.
On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act
entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act that implements
far-reaching changes to the regulation of the financial services industry, including provisions
that made permanent the $250,000 limit for federal deposit insurance and increased the cash limit
of Securities Investor Protection Corporation (SIPC) protection from $100,000 to $250,000, and
provided unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand
transaction accounts at all insured depository institutions. As of March 31, 2011, none of our
depository accounts are in excess of the federal deposit insurance nor SIPC insured limits, as
such, we do not have credit risks related to these depository accounts.
As of March 31, 2011, we owned four properties in the state of California, one property in the
state of Arizona and one property in the state of Illinois. Accordingly, there is a geographic
concentration of risk subject to fluctuations in the California economy.
6. Note Payable
On December 2, 2010, we entered into a $4.0 million loan agreement with Farmers & Merchants Bank of
Long Beach. The loan matures on November 19, 2013 with no option to extend and bears interest at a
fixed rate of 5.75% per annum. The terms of the loan require monthly payments of principal and
interest. We may repay the loan, in whole or in part, on or before November 19, 2013 without any
penalty. As of March 31, 2011 and December 31, 2010, we had an outstanding balance of
approximately $4.0 million,
9
under this loan agreement. The loan agreement contains various covenants including financial
covenants with respect to debt service coverage ratios and loan to value ratio. As of March 31,
2011, we were in compliance with all of these covenants.
We anticipate repaying our existing debt obligation with cash on hand and the proceeds from the
sale of real estate assets. As of March 31, 2011 and December 31 2010, we had incurred net
financing costs of $81,000. The financing costs have been capitalized and are being amortized over
the life of the loan. For the three months ended March 31, 2011 and 2010, $7,000 and, $0,
respectively of deferred financing costs were amortized and included in interest expense in the
condensed statement of operations.
The principal payments due on the note payable for April 1, 2011 to December 31, 2011 and each of
the subsequent years are as follows:
|
|
|
|
|
|
|
Principal |
|
Year |
|
Amount |
|
April 1, 2011 to December 31, 2011 |
|
$ |
38,000 |
|
2012 |
|
$ |
54,000 |
|
2013 |
|
$ |
3,882,000 |
|
2014 |
|
$ |
|
|
2015 |
|
$ |
|
|
7. Commitments and Contingencies
The Fund monitors its properties for the presence of hazardous or toxic substances. While there can
be no assurance that a material environmental liability does not exist, the Fund is not currently
aware of any environmental liability with respect to the properties that would have a material
effect on its financial condition, results of operations and cash flows. Further, the Fund is not
aware of any environmental liability or any unasserted claim or assessment with respect to an
environmental liability that the Fund believes would require additional disclosure or the recording
of a loss contingency.
The Funds commitments and contingencies include the usual obligations of real estate owners and
operators in the normal course of business. In the opinion of management, these matters are not
expected to have a material impact on its financial position, cash flows and results of operations.
The Fund is not presently subject to any material litigation nor, to its knowledge, any material
litigation threatened against the Fund which if determined unfavorably to the Fund would have a
material adverse effect on its cash flows, financial condition or results of operations.
8. Subsequent Event
Proposed Liquidation
On April 1, 2011, we filed a definitive proxy statement with the SEC to solicit unit holder
approval of a plan of liquidation. If we receive votes from a majority in interest of our unit
holders approving the plan of liquidation by the determination date of May 29, 2011, the plan will
be approved and the managing member will be authorized to liquidate our portfolio in accordance
with the plans terms. If the plan of liquidation is not approved by our unit holders, our managing
member will determine other reasonably available alternatives to pursue in the best interest of us
and our unit holders, including, without limitation, continuing to manage our assets until December
31, 2012.
Investors have the power to revoke their consent at any time before the determination date.
Accordingly, even if we were to receive a majority in interest of votes approving the plan before
the determination date, the plan will not be approved until the determination date. In addition,
the managing member has the right to withdraw the proposed plan prior to the determination date.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements and notes thereto contained
elsewhere in this report. This section contains forward-looking statements, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based. These forward-looking statements
generally are identified by the words believes, project, expects, anticipates, estimates,
intends, strategy, plan, may, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations
and assumptions that are subject to risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. Forward-looking statements were true at
the time made may ultimately prove to be incorrect or false. We undertake no obligation to update
or revise publicly any forwardlooking statements, whether as a result of new information, future
events or otherwise.
Our ability to predict results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on our operations and future
prospects on a consolidated basis include, but are not limited to: changes in economic conditions
generally and the real estate market specifically; legislative/regulatory changes; availability of
capital, interest rates; competition; supply and demand for operating properties in our current
market areas; generally accepted accounting principles;; the availability of buyers to acquire
properties we make available for sale; the availability of financing; the absence of material
litigation; and the prospect that our unit holders may approve a plan of liquidation. These risks
and uncertainties should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. All forward-looking statements should be read in light of
the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended
December 31, 2010 and in light of the risks identified in the definitive proxy statement related to
our proposed plan of liquidation dated April 1, 2011, as filed with the SEC.
Overview
Our revenues, which are comprised largely of rental income, include rents reported on a
straight-line basis over the initial term of the lease. Our financial performance depends, in part,
on our ability to (i) increase rental income and other earned income from leases by increasing
rental rates and occupancy levels; (ii) maximize tenant recoveries given the underlying lease
structures; and (iii) control operating and other expenses. Our operations are impacted by property
specific, market specific, general economic and other conditions.
Proposed Plan of liquidation
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our managing member
began the process of evaluating strategic alternatives for winding up the Fund in order to maximize
overall returns for our investors. Our managing member initiated the examination at this time,
rather than waiting until 2012 because of the inherent uncertainty of the future and our managing
members view of (i) the current market conditions, (ii) the current increasing costs of corporate
compliance (including, without limitation, all federal, state and local regulatory requirements
applicable to us, including the Sarbanes-Oxley Act of 2002, as amended), (iii) the possible need to
reduce or suspend our distributions and (iv) the other factors discussed in more detail in the
Definitive Proxy Statement as filed with the SEC on April 1, 2011.
After a thorough analysis, consultation with a real estate broker specializing in multi-tenant
industrial real estate in the geographical regions where our properties are located, and a targeted
solicitation of bids for a potential sale of our portfolio, our managing member has concluded that
a liquidation of the Fund at this time will more likely produce superior returns within a
reasonable period of time to our investors than other potential exit strategies reasonably
available to us, including waiting until 2012 to complete a liquidation. On April 1, 2011, we
filed a definitive proxy statement with the SEC to solicit unit holders approvals on our
liquidation plan.
If the plan of liquidation is not approved by our unit holders, our managing member will determine
other reasonably available alternatives to pursue in the best interest of our Fund and our unit
holders, including, without limitation, continuing to manage our assets until December 31, 2012.
We currently estimate that our net proceeds from liquidation will range between approximately $22.0
million and $24.4 million, and unit holders would receive between approximately $224 and $248 per
unit in liquidating distributions, which we anticipate paying within six months after unit holders
approval of the plan of liquidation. However, our expectations about the amount of liquidating
distributions that we will make and when we will make them are based on many estimates and
assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of
liquidating distributions we pay may be more or less than we estimate.
11
Market Outlook Real Estate and Real Estate Finance Markets
As a result of the slow recovery from declining economic conditions experienced over the last three
years, the U.S. commercial real estate industry has been experiencing deteriorating fundamentals
across all major property types and most geographic markets. These market conditions have and will
likely continue to have a significant impact on our real estate investments. In addition, these
market conditions have impacted our tenants businesses, which makes it more difficult for them to
meet current lease obligations and places pressure on them to negotiate favorable lease terms upon
renewal in order for their businesses to remain viable. Increases in rental concessions given to
retain tenants and maintain our occupancy level, which is vital to the continued success of our
portfolio, has resulted in lower current cash flow.
During 2010, significant and widespread concerns about credit risk and access to capital began to
subside, and concerns about a double-dip recession diminished as a number of economic indicators
improved. However, despite some positive economic indicators, both the national and most global
economies continued to experience volatility throughout 2010.
The aforementioned conditions, combined with stagnant business activity and low consumer
confidence, have resulted in a challenging operating environment. Projected future declines in
rental rates, slower or potentially negative net absorption of leased space and expectations of
future rental concessions, including free rent to retain tenants who are up for renewal or to sign
new tenants, are expected to result in additional decreases in cash flows.
Until economic trends have strengthened sufficiently to resolved uncertainty and spur growth, we
may experience increased vacancies and may be required to reduce rental rates on occupied space.
Critical Accounting Policies
Our condensed financial statements have been prepared in accordance with generally accepted in the
United States of America (GAAP). The preparation of these condensed financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the condensed financial statements and the reported amount of
revenue and expenses during the reporting period. Actual results could differ materially from
those estimates.
There have been no material changes to our critical accounting policies as previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC other
than as described under Note 2 to the accompanying condensed financial statements.
Results of Operations
Results of operations for the three months ended March 31, 2011 and 2010 comprise six multi-tenant
industrial business park properties in three major metropolitan areas. In the quarter ended March
31, 2011, we evaluated Zenith Drive Centres classification and concluded that it could no longer
be classified as held-for-sale. Accordingly, we have reclassified Zenith Drive Centre as held as
used in the three months ended March 31, 2011 and 2010 and recorded depreciation expense as though
it been continuously classified as held as used.
The results of operations for the three months ended March 31, 2011 and 2010 are discussed
below.
Three months ended March 31, 2011 and 2010
Rental revenues decreased to $0.6 million for the three months ended March 31, 2011 from $0.7
million for the comparable period of 2010, due to lower occupancy resulting from longer lease up
periods of vacant units and higher concessions to attract and retain
tenants as a result of the competitive market conditions, partially offset by existing tenant
leases with rent escalations. Tenant reimbursements and other income were comparable for the three
months ended March 31, 2011 and 2010.
Property operating and maintenance expenses decreased to $0.2 million for the three month period
ended March 31, 2011 from $0.3 million for the comparable period of 2010. The decrease is
primarily due to a lower allowance for bad debt charge, lower repairs and maintenance and lower
refurbishment charges.
Property taxes for the three months ended March 31, 2011 were comparable to the corresponding
period of 2010.
General and administrative expenses increased to approximately $0.2 million for the three months
ended March 31, 2011 from approximately $0.1 million for the comparable period of 2010. The
increase is primarily due to higher insurance costs and legal and other professional expenses and
costs related to the proposed liquidation.
12
Depreciation and amortization expenses increased to approximately $0.3 million for the three months
ended March 31, 2011 from approximately $0.2 million for the comparable period of 2010. The
increase is due to an adjustment related to the reclassification of the Zenith property as held as used, partially offset by lower expense resulting from 2010 real estate impairments reducing
depreciable basis and full amortization of intangible assets at two of our properties.
Other income for the three months ended March 31, 2011 decreased to $0 compared to
approximately $51,000 for the comparable period in 2010. The 2010 amount included a refund of prior
year property taxes while there was no such income in the 2011 period.
Liquidity and Capital Resources
As of March 31, 2011, we had approximately $3.9 million in cash and cash equivalents. We intend to
use the existing cash balance for payment of operating expenses, capital improvements, tenant
allowance, leasing commissions and debt repayment, including principal and interest. Cash in excess
of these needs, if any, will be available for distribution to unit holders and or to repurchase
units from unit holders.
Effective April 27, 2010, our operating agreement was amended to allow the managing member to cause
us to incur debt financing, not to exceed ten percent of the capital contributions of all unit
holders, to meet our operating expenses or to fund cash distributions declared and paid to members.
To the extent that net cash generated by the properties is not sufficient to meet operating costs
and pay cash distributions to our unit holders, we will endeavor to obtain additional financing or
sell selected properties so that we can continue to operate the remaining properties and pay cash
distributions.
In the event that our unit holders approve our proposed plan of liquidation, we expect to sell all
of our assets during the six-month period following such approval. The plan of liquidation would
authorize our managing member to create a reserve fund for the payment of unknown or contingent
liabilities. In the event that we cannot dispose of our assets and pay or provide for our
liabilities within six months after approval by our unit holders of the plan of liquidation, or if
the managing member otherwise determines that it is advantageous to do so before the end of such
six-month period, we may transfer our remaining assets and liabilities to a liquidating trust. If
we transfer our assets to a liquidating trust, our unit holders will receive identical shares of
beneficial interest in the liquidating trust. The liquidating trust would be managed by one or more
trustees designated by the managing member and would continue the process of selling our assets and
paying or providing for payment of our liabilities. Our managing member receives compensation from
the Fund pursuant to our operating agreement. Upon approval of the liquidation plan, the maximum
amount of fees that would be due to our managing member for disposing of our property interests
would be $1.2 million. This maximum is based on the estimated maximum sales prices of our
properties and the terms of the operating agreement. Actual fees paid may be lower. Any proceeds
from the sale of our assets remaining after payment of our liabilities would be distributed to our unit holders
and the other holders of shares of beneficial interest in the liquidating trust.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We invest our cash and cash equivalents in government backed securities and FDIC
insured savings account which, by its nature, are subject to interest rate fluctuations. As of
March 31, 2011, a 1% increase or decrease in interest rates would not have a material effect on our
interest income.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in the real estate capital markets, market rental rates for office space, local,
regional and national economic conditions and changes in the credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our senior management, as appropriate, to allow timely decisions
regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer at
Cornerstone Ventures, Inc., the manager of our Managing Member, have evaluated the effectiveness of
our disclosure controls and procedures and have concluded that the disclosure controls and
procedures were effective as of the end of the period covered by this report. In designing and
evaluating the disclosure
13
controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
14
PART II OTHER INFORMATION
Item 6. Exhibits
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized this 6th day of May 2011.
|
|
|
|
|
|
CORNERSTONE REALTY FUND, LLC
|
|
|
By: |
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
|
|
|
its Managing Member |
|
|
|
|
|
|
|
|
|
|
By: |
CORNERSTONE VENTURES, INC.
|
|
|
its Manager |
|
|
|
|
|
|
|
|
|
|
By: |
/s/ TERRY G. ROUSSEL
|
|
|
|
Terry G. Roussel, President |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
By: |
/s/ SHARON C. KAISER
|
|
|
|
Sharon C. Kaiser, |
|
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) |
|
|
16