10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

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

FOR THE TRANSITION PERIOD FROM                TO               

Commission File Number   333-76609

CORNERSTONE REALTY FUND, LLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

California	33-0827161
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

4590 MACARTHUR BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA 92660

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

949-852-1007

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Not Applicable

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)

CHECK 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 PAST 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.

YES ý         NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  o  Yes ý  No

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE ACT).
o  YES ý  NO

As of November 4, 2005, the Fund had 100,000 units of membership interest issued and outstanding.

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
Cornerstone Realty Fund, LLC
Condensed Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004
Condensed Statements of Operations for the Three Months and Nine Months ended September 30, 2005 (unaudited) and September 30, 2004 (unaudited)
Condensed Statements of Members’ Capital for the Nine Months ended September 30, 2005 (unaudited)
Condensed Statements of Cash Flows for the Nine Months ended September 30, 2005 (unaudited) and September 30, 2004 (unaudited)
Notes to Condensed Financial Statements (unaudited)

2

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

CONDENSED BALANCE SHEETS

	September 30, 2005		December 31, 2004(A)
	(unaudited)
ASSETS
Assets
Cash and cash equivalents	$	13,850,580	$	11,793,822
Investments in real estate
Land	8,297,490		4,539,400
Buildings and improvements, less accumulated depreciation of $609,984 in 2005 and $342,697 in 2004	18,363,541		7,628,745
Intangible lease value, less accumulated amortization of $31,434 in 2005	518,566		—
Intangible asset – in place leases, less accumulated amortization of $277,189 in 2005 and $118,911 in 2004	643,660		48,503
	27,823,257		12,216,648
Other assets
Escrow deposit and other costs	8,004		275,052
Tenant and other receivables	174,543		31,876
Prepaid insurance	13,061		30,737
Leasing commissions, less accumulated amortization of $38,975 in 2005 and $15,282 in 2004	89,052		47,477
Total assets	$	41,958,497	$	24,395,612
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable and accrued liabilities	$	475,482	$	173,535
Tenant security deposits	240,028		135,294
Total liabilities	715,510		308,829
Members’ capital (100,000 units authorized, 100,000 units issued and outstanding at 2005 and 59,097 units issued and outstanding at 2004)	41,242,987		24,086,783
Total liabilities and members’ capital	$	41,958,497	$	24,395,612

(A)  Derived from the audited financial statements as of December 31, 2004.

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)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Revenues
Rental revenues	$	522,740		$	316,985		$	1,445,735		$	904,360
Amortization of in-place leases	(52,980		)	(25,553		)	(158,278		)	(95,957		)
Tenant reimbursements and other income	64,980			46,547			208,251			169,623
	534,740			337,979			1,495,708			978,026
Expenses
Property operating and maintenance	124,583			55,423			350,035			206,685
Property taxes	88,624			30,331			265,725			150,907
General and administrative	94,101			24,220			249,037			141,971
Depreciation and amortization	121,672			53,888			322,414			156,788
	428,980			163,862			1,187,211			656,351
Operating income	105,760			174,117			308,497			321,675
Interest, dividends and other Income	92,170			7,968			173,120			10,174
Net income	$	197,930		$	182,085		$	481,617		$	331,849
Net income allocable to managing member	$	19,793		$	18,209		$	48,162		$	33,185
Net income allocable to unitholders	$	178,137		$	163,876		$	433,455		$	298,664
Per unit amounts:
Basic and diluted income allocable to unitholders	$	1.84		$	3.55		$	5.50		$	7.37
Basic and diluted weighted average units outstanding	96,609			46,143			78,778			40,532

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)

Balance, December 31, 2004	$	24,086,783
Net proceeds from offering	18,286,508
Contribution from managing member	412,035
Distributions to unit holders	(1,204,376		)
Deferred offering costs repaid to managing member	(819,580		)
Net income	481,617
Balance, September 30, 2005	$	41,242,987

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)

	Nine Months Ended
	September 30,
	2005			2004
OPERATING ACTIVITIES
Net income	$	481,617		$	331,849
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	480,692			252,745
Changes in operating assets and liabilities:
Other assets	76,789			(31,034		)
Accounts payable, accrued liabilities and security deposits	406,682			(15,694		)
Net cash provided by operating activities	1,445,780			537,866
INVESTING ACTIVITIES
Real estate additions	(16,063,609		)	(181,030		)
Net cash used in investing activities	(16,063,609		)	(181,030		)
FINANCING ACTIVITIES
Advances from managing member	412,035			—
Net proceeds from offering	18,286,508			7,025,230
Distributions to members	(1,204,376		)	(656,930		)
Deferred offering costs repaid to managing member	(819,580		)	(315,660		)
Net cash provided by financing activities	16,674,587			6,052,640
Net increase in cash	2,056,758			6,409,476
Cash and cash equivalents at beginning of period	11,793,822			1,464,206
Cash and cash equivalents at end of period	$	13,850,580		$	7,873,682

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

(Unaudited)

1.Organization and Business

Cornerstone Realty Fund, LLC, a California limited liability company (the “Fund”) (formerly Cornerstone Multi-Tenant Industrial Business Parks Fund, LLC and Cornerstone Industrial Properties Income and Growth Fund I, LLC), was formed on October 28, 1998.  The members of the Fund are Cornerstone Industrial Properties, LLC, a California limited liability company, as the Managing Member (“Managing Member”), Terry G. Roussel, an individual, and other various unitholders as described below.  The purpose of the Fund is to acquire, operate and sell multi-tenant industrial properties.  On August 18, 2005, the Fund completed its public offering equity interests (“units”) in the Fund.  As of that date, the Fund had issued 100,000 units to unitholders for gross offering proceeds of $50,000,000, before discounts of $19,780.

The interim unaudited condensed financial statements of the Fund have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission.  As permitted by the Securities and Exchange Commission filing requirements for Form 10-Q, the condensed financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The condensed financial statements included herein should be read in conjunction with the Fund’s Annual Report on Form 10-K for the year ended December 31, 2004.

The interim unaudited condensed financial statements have been prepared in accordance with the Fund’s customary accounting practices.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with accounting principles generally accepted in the United States have been included.  Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Each member’s liability is limited pursuant to the provisions of the Beverly-Killea Limited Liability Company Act.  The term of the Fund shall continue until December 31, 2010, unless terminated sooner pursuant to the operating agreement.

The operating agreement, as amended and restated, provides, among other things, for the following:

The Managing Member generally has complete and exclusive discretion in the management and control of the Fund; however, unitholders holding the majority of all outstanding and issued units have certain specified voting rights which include the removal and replacement of the Managing Member.

Net Cash Flow from Operations, as defined, will be distributed 90% to the unitholders and 10% to the Managing Member until the unitholders have received either an 8% or 12% cumulative, non-compounded annual return on their Invested Capital Contributions, as defined. The 12% return applies to specified early investors for the twelve-month period subsequent to the date of their Invested Capital Contributions and is in lieu of the 8% return during that period.

7

Net Sales Proceeds, as defined, will be distributed first, 100% to the unitholders in an amount equal to their Invested Capital Contributions; then, 90% to the unitholders and 10% to the Managing Member until the unitholders have received an amount equal to the unpaid balance of their aggregate cumulative, non-compounded annual return on their Invested Capital Contributions; and thereafter, 50% to the unitholders and 50% to the Managing Member.

Net Income, as defined, is allocated first, 10% to the Managing Member and 90% to the unitholders until Net Income allocated equals cumulative Net Losses, as defined, previously allocated in such proportions; second, in proportion to and to the extent of Net Cash Flow from Operations and Net Sales Proceeds previously distributed to the members, exclusive of distributions representing a return of Invested Capital Contributions; and then 50% to the Managing Member and 50% to the unitholders.

Net Loss is allocated first, 50% to the Managing Member and 50% to the unitholders, until Net Loss allocated equals cumulative Net Income previously allocated in such proportions; then remaining Net Loss is allocated 10% to the Managing Member and 90% to the unitholders.

All allocations and distributions to the unitholders are to be pro rata in proportion to their ownership shares.

2.Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting periods.  Actual results could materially differ materially from the estimates in the near term.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of interest-bearing investments with original maturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents at September 30, 2005 is $240,028 related to tenant security deposits.  The Fund places its cash with major financial institutions.  Approximately $13.2 million in cash balances was in excess of federally insured limits as of September 30, 2005.

Investments in Real Estate

Investments in real estate are stated at cost and include land, buildings and building improvements.  Expenditures for ordinary maintenance and repairs are expensed to operations as incurred.  Significant replacements, betterments and tenant improvements, which improve or extend the useful lives of the buildings, are capitalized.  Depreciation of the buildings and building improvements is computed on a straight-line basis over their estimated useful lives of either 10 or 39 years.  Tenant improvements are depreciated over the shorter of the useful asset life or the related lease term.

The Fund evaluates the carrying value for investments in real estate in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”).  FAS 144 requires that when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable, companies should evaluate the need for an impairment write-down.  When an impairment write-down is required, the related assets are adjusted to their estimated fair value.

8

The Fund accounts for its acquisitions in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 and No. 142 require the Fund to record at acquisition an intangible asset or liability for the value attributable to in-place leases.  As of September 30, 2005, the Fund has recorded $920,849, as an intangible asset attributable to the value of the leases in place as of the date of acquisition. Accumulated amortization was $277,189 as of September 30, 2005.  As of September 30, 2005, the Fund has recorded $550,000 as an intangible asset attributable to the current value of billboard and cell site leases as of the date of acquisition.  Accumulated amortization was $31,434 as of September 30, 2005.

Leasing Commissions

Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term.

Revenue Recognition

Rental revenues are recorded on an accrual basis as they are earned over the lives of the respective tenant leases on a straight-line basis.  Included in this calculation are contractual rent increases and amounts paid to tenants as tenant improvement allowances.  Rental receivables are periodically evaluated for collectibility.

Fair Value of Financial Instruments

The Fund believes that the recorded values of all financial instruments approximate their current values.

Income Tax Matters

It is the intent of the Fund and its members that the Fund be treated as a partnership for income tax purposes.  As a limited liability company, the Fund is subject to certain minimal taxes and fees; however, income taxes on the income or losses realized by the Fund are generally the obligation of the members.

Concentration of Credit Risk

The Fund maintains its cash at banks with federally insured accounts and uninsured money market funds.  The amounts are substantially uninsured.  No losses have been experienced related to such amounts.

3.Investments in Real Estate

On September 27, 2002, the Fund acquired an existing multi-tenant industrial business park known as Normandie Business Center, located in Torrance, California for $3,901,696.  Normandie Business Center consists of two single-story buildings containing a total of 48,711 leasable square feet.

On December 27, 2002, the Fund acquired an existing multi-tenant industrial business park known as the Sky Harbor Business Park, located in Northbrook, Illinois for $2,553,996.  Sky Harbor Business Park consists of a single-story building containing a total of 41,422 leasable square feet.

9

On December 10, 2003, the Fund acquired an existing multi-tenant industrial park known as Arrow Business Center located in Irwindale, California for $5,910,579.  The property consists of three single-story buildings containing a total of 69,592 leasable square feet.

On January 25, 2005, the Fund acquired an existing multi-tenant business park in Glenview, Illinois known as Zenith Drive Centre for $5,243,732.  Zenith Drive Centre is a single-story three building property built in 1978 of approximately 38,088 square feet on approximately 2.54 acres of land.

Included in the acquisition and purchase price of Zenith Drive Centre were a billboard sign and cellular relay antenna located on the property leased to a large media company and communications company, respectively.  Management separately valued these leases and the resulting amounts are included in intangible lease value.  The value of these leases is amortized over the remaining respective terms.

On April 28, 2005, the Fund purchased an existing multi-tenant industrial park known as Paramount Business Center for $3,143,733.  Paramount Business Center is a single-story two building property of approximately 30,157 square feet on approximately 1.66 acres of land located in Paramount, California.

On September 30, 2005, the Fund purchased a multi-tenant industrial park in Tempe, Arizona, near the Phoenix airport, for $7,584,772 from an independent third party seller.  This property consists of four buildings totaling 83,205 square feet of leaseable space situated on approximately 5.02 acres of land.  At acquisition, the property was 82% leased, excluding approximately 14,727 square feet leased back to the seller for a period of up to six months.

Industrial space in the properties is generally leased to tenants under lease terms that provide for the tenants to pay increases in operating expenses in excess of specified amounts.

4.Related Party Transactions

The Managing Member incurs specific incremental costs in connection with the offering of membership units.  Reimbursement of such offering costs is limited to 4% of the gross proceeds of the related offerings.  Any offering costs incurred by the Managing Member that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the Managing Member, with an offsetting expense recognized in the Fund’s statement of operations.

Unrecovered offering costs incurred by the Managing Member for the nine months ending September 30, 2005 are as follows:

Balance, December 31, 2004	$	443,690
Costs incurred	380,210
Costs paid	(819,580			)
Balance, September 30, 2005	$		4,320

Currently the Fund is distributing a 5% annual return paid quarterly.  During the nine months ended September 30, 2005, the Managing Member funded $412,035 to subsidize the Fund’s distributions of $1,204,376 to the unit holders.  This funding by the Managing Member will not be reimbursed to the Managing Member by the Fund.

10

The Managing Member and/or its affiliates are entitled to receive various fees, compensation and reimbursements as specified in the Fund’s operating agreement, including commissions of 7%, marketing fees of 2% of gross proceeds from the offering of units, and expense allowances of 1.5% of gross proceeds from the offering of units. During the nine months ended September 30, 2005 and 2004, the total fees, compensation and reimbursements were $2,164,993 and $832,442, respectively.

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

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Fund’s financial statements and notes thereto contained elsewhere in this report.  Certain statements in this section and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to risks and other factors that may cause the Fund’s future results of operations to be materially different than those expressed or implied herein.  Some of these risks and other factors include, but are not limited to:  (i) no assurance that Fund properties will continue to experience the current level of occupancy; (ii) tenants may not be able to meet their financial obligations; (iii) rental revenues from the properties may not be sufficient to meet the Fund’s cash requirements for operations, capital requirements and distributions; (iv) suitable investment properties may not continue to be available; and (v) adverse changes to the general economy may disrupt operations.

Critical Accounting Policies

The Fund’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting period.  Actual results could differ materially from the estimates in the near term.

Revenue Recognition

Rental revenues are recorded on an accrual basis as they are earned over the lives of the respective tenant leases on a straight-line basis.  Included in this calculation are contractual rent increases and amounts paid to tenants as tenant improvement allowances.  Rental receivables are periodically evaluated for collectibility.

Investments in Real Estate

Investments in real estate are stated at cost and include land, buildings and building improvements.  Expenditures for ordinary maintenance and repairs are expensed to operations as incurred.  Significant replacements, betterments and tenant improvements, which improve or extend the useful lives of the buildings, are capitalized.  Depreciation of the buildings and building improvements is computed on a straight-line basis over their estimated useful lives of either 10 or 39 years.  Tenant improvements are depreciated over the shorter of the useful asset life or the related lease term.

The Fund evaluates the carrying value for investments in real estate in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”).  FAS 144 requires that when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable, companies should evaluate the need for an impairment write-down.  When an impairment write-down is required, the related assets are adjusted to their estimated fair value.

In June 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 and No. 142 require the Fund to record at acquisition an intangible asset or liability for the value attributable to in-place leases.  The requirements are applicable to all acquisitions subsequent to July 1, 2001.  As of

11

September 30, 2005, the Fund has recorded $920,849, as an intangible asset attributable to the value of the leases in place as of the date of acquisition. Accumulated amortization was $277,189 as of September 30, 2005.  As of September 30, 2005, the Fund has recorded $550,000 as an intangible asset attributable to the current value of billboard and cell site leases as of the date of acquisition.  Accumulated amortization was $31,434 as of September 30, 2005.

Off-balance Sheet Financings and Liabilities

Other than lease commitments and legal contingencies incurred in the normal course of business, the Fund does not have any off-balance sheet financing arrangements or liabilities.  The Fund does not have any majority-owned subsidiaries or any interests in, or relationships with, any special-purpose entities.

Results of Operations

As of September 30, 2005, the Fund had purchased six multi-tenant industrial business park properties in three major metropolitan areas.  The properties were purchased from the proceeds from the sale of membership units, without debt financing. The properties were purchased in September 2002, December 2002, December 2003, and January, April and September 2005. As a result of the dates of purchase, Fund operations for 2004 reflect the net income from only three properties for all nine months of the prior period.

For the three months ended September 30, 2005, operating results reflect operations for the five properties owned for the three months.  Operating results for the third quarter of 2005 does not include any results for the property that was purchased on September 30, 2005. The results of operations for this property are immaterial for both the three and nine month periods ending September 30, 2005.

For the nine months ended September 30, 2005, Fund operations reflect operations for nine months for the three properties purchased in prior years, plus operating results of eight and five months respectively for the properties purchased in January and April 2005.

Three months ended September 30, 2005 and 2004

The Fund’s net income for the three months ended September 30, 2005 and 2004 was $197,930 and $182,085, respectively.  Revenue increased from $337,979 to $534,740.  These increases primarily reflect the additions of Zenith Centre Drive and Paramount Business Center in 2005.  Property operating and maintenance expenses, and property taxes increased from $85,754 in 2004 to $213,207 in 2005 due to the addition of the aforementioned two properties. Depreciation and amortization increased from $53,888 to $121,672 due to the addition of properties.  General and administrative costs increased from $24,220 to $94,101. Increased costs associated with investor services, professional fees and additional accounting effort, due to the growth in the size of the Fund, account for the majority of the increase.

Interest and other income increased to $92,170 for the three months ended September 30, 2005 from $7,968 for the same period in 2004.  The increase was primarily due to a significant increase in invested cash balances and the rise in short-term interest rates.

Nine months ended September 30, 2005 and 2004

The Fund’s net income for the nine months ended September 30, 2005 and 2004 was $481,617 and $331,849, respectively.  Revenue increased from $978,026 to $1,495,708. This increase primarily reflects the additions of Zenith Center Drive and Paramount Business Park.  Property operating and maintenance expenses, and property taxes increased from $357,592 in 2004 to $615,760 in 2005 due to

12

the addition of the aforementioned two properties.  Depreciation and amortization increased from $156,788 to $322,414 due to the addition of properties.  General and administrative costs increased from $141,971 to $249,037.  Increased costs associated with investor services, professional fees and additional accounting effort, due to the growth in the size of the Fund, account for the majority of the increase.

Interest and other income increased to $173,120 for the nine months ended September 30, 2005 from $10,174 for the same period in 2004.  The increase was primarily due to a significant increase in invested cash balances and the rise in short-term interest rates.

Liquidity and Capital Resources

As of September 30, 2005, the Fund had received $50,000,000 of gross proceeds, before discounts of $19,780, from the sale of membership units, and $896,474 as a capital contribution from the Managing Member.  As of September 30, 2005, the Fund has $13.9 million ($13.6 at November 4, 2005) in cash and cash equivalents.

Although the equity offering of the Fund is now complete, the Fund intends to use the existing cash balance for the acquisition of additional multi-tenant industrial business park properties, capital improvements to the properties, and for operating expenses and reserves.

The Fund expects to meet its short-term liquidity requirements from net cash generated by operations, which we believe will be adequate to meet operating costs of the properties and the Fund, and allow for cash distributions to the unitholders. However, because offering proceeds are not yet fully invested, current net cash generated by operations is not expected to be sufficient to fund distributions to unitholders at the historical distribution rate of 5%.

The Managing Member has financed the Fund’s offering and organizational activities.  A portion of those costs have been reimbursed to the Managing Member at the rate of 4% of gross proceeds of the Fund’s unit sales pursuant to the prospectus for the offering.  The Managing Member must raise funds through the sale of its own debt or equity securities to obtain the cash necessary to provide these advances.  There can be no assurance as to the amount or timing of the Managing Member’s receipt of funds.  The Fund will not reimburse the Managing Member for any amounts advanced by it for offering and organizational expenses, which exceed the amounts and percentages, set forth in the prospectus for the offering.  Any such expenses incurred by the Managing Member on behalf of the Fund that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the Managing Member with an offsetting expense recognized in the Fund’s statement of operations.

Contractual Obligations

As of September 30, 2005, the Fund had no significant contractual obligations or commercial commitments, other than its operating leases with tenants in its commercial properties.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Fund invests its cash and cash equivalents in FDIC insured savings and money market accounts, which, by their nature, are subject to interest rate fluctuations.

13

Item 4.Controls and Procedures

Since March 2005, the Fund has hired additional accounting personnel and believes that due to the increased number of personnel and the implementation of several new procedures, that the previously identified material weaknesses have been substantially mitigated.  However, during their most recent review, the Funds’s auditors reported several continuing significant control deficiencies. The Fund believes these significant deficiencies are the result of staff turnover, necessitating the use of interim personnel. The Fund expects its accounting group to be fully staffed by year end, facilitating the correction of the recently noted deficiencies. The Fund has not undergone an audit of its internal control over financial reporting as it is not an accelerated filer, however, expects to undergo an examination for the year ended December 31, 2007, or the further extended due date of compliance with the Sarbanes-Oxley Act of 2002.

The Fund’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that the Fund files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Fund’s management, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer of Cornerstone Ventures, Inc., the manager of the Managing Member of the Fund, have reviewed the effectiveness of the Fund’s 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.

We are in the process of developing and implementing a formal set of internal controls and procedures for financial reporting as required by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date and steps we are still in the process of completing is subject to continued management review supported by confirmation and testing by management and by our auditors.  We anticipate that additional changes may be made to our internal controls and procedures.  Other than the foregoing initiatives, no change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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.

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 11th day of November 2005.

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)

15

EX-31.1

Exhibit 31.1

CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER

I, Terry G. Roussel, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cornerstone Realty Fund, LLC;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this quarterly report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ TERRY G. ROUSSEL
Date: November 11, 2005	Terry G. Roussel Chief Executive Officer (Principal Executive Officer) of Cornerstone Ventures, Inc., the Managing Member of Cornerstone Industrial Properties, LLC, the Managing Member of Cornerstone Realty Fund, LLC

EX-31.2

Exhibit 31.2

CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER

I, Sharon C. Kaiser, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cornerstone Realty Fund, LLC;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this quarterly report based on such evaluation;

(c)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ SHARON C. KAISER
Date: November 11, 2005	Sharon C. Kaiser Chief Financial Officer (Principal Financial Officer) of Cornerstone Ventures, Inc., the Managing Member of Cornerstone Industrial Properties, LLC, the Managing Member of Cornerstone Realty Fund, LLC

EX-32

Exhibit 32

CERTIFICATIONS PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Terry G. Roussel and Sharon C. Kaiser, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge, the Quarterly Report of Cornerstone Realty Fund, LLC on Form 10-Q for the nine-month period ended September 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Cornerstone Realty Fund, LLC.

	/s/ TERRY G. ROUSSEL
Date: November 11, 2005	Terry G. Roussel Chief Executive Officer (Principal Executive Officer) of Cornerstone Ventures, Inc., Managing Member of Cornerstone Industrial Properties, LLC, the Managing Member of Cornerstone Realty Fund, LLC

	/s/ SHARON C. KAISER
Date: November 11, 2005	Sharon C. Kaiser Chief Financial Officer (Principal Financial Officer) of Cornerstone Ventures, Inc., Managing Member of Cornerstone Industrial Properties, LLC, the Managing Member of Cornerstone Realty Fund, LLC