UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to

Commission File Number   000-51868

CORNERSTONE REALTY FUND, LLC
(Exact name of registrant as specified in its charter)

CALIFORNIA	33-0827161
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1920 MAIN STREET, SUITE 400, IRVINE, CA	92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

949-852-1007
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

x  Yes  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.

Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

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

o  Yes  x  No

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

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CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

CONDENSED BALANCE SHEETS

(Unaudited)

	September 30, 2006		December 31, 2005
ASSETS
Cash and cash equivalents Investments in real estate	$	2,646,577	$	13,488,985
Land	12,197,490		8,297,490
Buildings, less accumulated depreciation of $1,196,518 in 2006 and $717,262 in 2005.	24,460,944		18,317,939
Intangible lease value, less accumulated amortization of $73,346 in 2006 and $41,912 in 2005	476,654		508,088
Intangible assets - in place lease value, less accumulated amortization of $515,175 in 2006 and $359,683 in 2005	378,966		561,165
	37,514,054		27,684,682
Other assets
Deposits and other costs	9,499		11,836
Tenant and other receivables	154,217		205,792
Prepaid expenses	16,940		14,371
Leasing commissions, less accumulated amortization of $122,728 in 2006 and $55,113 in 2005	213,784		99,895
Total assets	$	40,555,071	$	41,505,561
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable and accrued liabilities	$	291,476	$	232,071
Real estate taxes payable	345,564		273,030
Tenant security deposits	328,859		239,385
Intangible lease liability, less accumulated amortization of $27,011 in 2006	127,202		—
Total liabilities	1,093,101		744,486
Members’ capital (100,000 units authorized and and outstanding at 2006 and 2005)	39,461,970		40,761,075
Total liabilities and members’ capital	$	40,555,071	$	41,505,561

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

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CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenue
Rental revenue	$	891,558		$	522,740		$	2,113,684		$	1,445,735
Amortization of in-place leases	(49,960		)	(52,980		)	(149,904		)	(158,278		)
Tenant reimbursements and other income	157,571			64,980			468,086			208,251
	999,168			534,740			2,431,866			1,495,708
Expenses
Property operating and maintenance	217,257			124,583			675,290			350,035
Property taxes	225,945			88,624			520,190			265,725
General and administrative	86,180			94,101			374,013			249,037
Depreciation and amortization	230,375			121,672			578,305			322,414
	759,757			428,980			2,147,798			1,187,211
Operating income	239,411			105,760			284,068			308,497
Interest, dividends and other income	18,150			92,170			286,440			173,120
Net income	$	257,561		$	197,930		$	570,508		$	481,617
Net income allocable to managing member	$	25,756		$	19,793		$	57,051		$	48,162
Net income allocable to unitholders	$	231,805		$	178,137		$	513,457		$	433,455
Per unit amounts:
Basic and diluted income allocable to unitholders	$	2.32		$	1.84		$	5.13		$	5.50
Basic and diluted weighted average units outstanding	100,000			96,609			100,000			78,778

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

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CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

CONDENSED STATEMENT OF MEMBERS’ CAPITAL

(Unaudited)

Balance, December 31, 2005	$	40,761,075
Distributions to unit holders	(1,869,613		)
Net Income	570,508
Balance, September 30, 2006	$	39,461,970

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

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CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2006			2005
OPERATING ACTIVITIES
Net income	$	570,508		$	481,617
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	706,786			480,692
Changes in operating assets and liabilities
Other assets	(130,162		)	76,789
Accounts payable, accrued liabilities and security deposits	221,413			406,682
Net cash provided by operating activities	1,368,545			1,445,780
INVESTING ACTIVITIES
Real estate acquisitions	(10,341,340		)	(16,063,609		)
Net cash used in investing activities	(10,341,340		)	(16,063,609		)
FINANCING ACTIVITIES
Contribution from managing member	—			412,035
Net proceeds from offering	—			18,286,508
Distributions to members	(1,869,613		)	(1,204,376		)
Deferred offering cost repaid to managing member	—			(819,580		)
Net cash provided by (used in) financing activities	(1,869,613		)	16,674,587
Net increase (decrease) in cash	(10,842,408		)	2,056,758
Cash and cash equivalents at beginning of period	13,488,985			11,793,822
Cash and cash equivalents at end of period	$	2,646,577		$	13,850,580

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

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.Organization and Business

Cornerstone Realty Fund, LLC is a California limited liability company that invests in multi-tenant business parks catering to small business tenants.  We purchase existing, leased properties located in major metropolitan areas in the United States on an all cash basis without debt financing.  We have purchased seven properties as of the date of this report.  As used in this report, “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 manages 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 interests pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933.  On August 18, 2005, we completed our public offering of these units.  As of that date, we had issued 100,000 units to unitholders 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 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 our Annual Report on Form 10-K for the year ended December 31, 2005.

The interim unaudited condensed financial statements have been prepared in accordance with  our 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 Septermber 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

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:

·CIP generally has complete and exclusive discretion in the management and control of our operations; 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.

·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

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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 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, 2006 is $328,859 related to tenant security deposits.  The Company places its cash with major financial institutions.  At times, cash balances may be in excess of amounts insured by Federal agencies.  Approximately $343,542 in cash balances was in excess of federal deposit insurance at September 30, 2006.

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 improving or extending the useful lives of the buildings are capitalized.  Generally, depreciation of the buildings and building improvements is computed on a straight-line basis over their estimated useful lives of 39 years and tenant improvements are depreciated over the shorter of the useful life or the  related lease term.

We evaluate 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.  No assets were deemed to be impaired at September 30, 2006.

In accordance with Statements of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, we record at acquisition an intangible asset or liability for the value attributable to in-place leases.  We amortize the value attributable to in-place leases over the initial term of the respective leases. The estimated useful life of the leases ranges from one month to five years. The accumulated amortization associated with the lease intangibles of our properties was $488,164 at September 30, 2006.

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Anticipated amortization for the period from October 1 through December 31, 2006 and for each of the four following years ended December 31 is as follows:

		Lease
		Intangibles
Oct 1, 2006 –	December 31, 2006	$	24,588
	2007	92,898
	2008	81,583
	2009	49,117
	2010	3,588

As of September 30, 2006, accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

	Buildings and Improvements			Intangible Lease Value			In-Place Lease Value			Acquired Below-Market Leases
Cost	$	25,657,462		$	550,000		$	894,141		$	154,213
Less: depreciation and amortization	(1,196,518		)	(73,346		)	(515,175		)	(27,011		)
Net	$	24,460,944		$	476,654		$	378,966		$	127,202

Leasing Commissions

Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term.  As of September 30, 2006, we had recorded $336,512 in leasing commissions.  The unamortized portion of this asset was $213,784 at September 30, 2006.

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

We believe that the recorded values of all financial instruments approximate their current values.

Income Tax Matters

It is our intent we be treated as a partnership for income tax purposes.  As a limited liability company, we are subject to certain minimal taxes and fees, including state income taxes on limited liability companies; however, income taxes on the income or losses we realize are generally the obligation of the members.

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Concentration of Credit Risk

We maintain some of our cash in money market accounts.  No losses have been experienced related to such amounts.

3.Investments in Real Estate

On January 25, 2005, we purchased an existing multi-tenant industrial park known as Zenith Drive Centre located in Glenview, Illinois for an investment of $5,327,256.  The property is a single-story, three building property consisting of approximately 37,900 leasable square feet.  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.  We separately valued these leases and the resulting amounts are included in intangible lease value.  The value of these leases is amortized over their remaining respective terms.

On April 28, 2005, we purchased an existing multi-tenant industrial park known as Paramount Business Center located in Paramount, California, for an investment of $3,149,410.  Paramount Business Center is a single-story two building property of approximately 30,157 (unaudited) square feet.

On September 30, 2005, we purchased an existing multi-tenant industrial park in Tempe, Arizona, near the Phoenix airport, for an investment of $7,518,714.  This property consists of four buildings totaling approximately 83,205 square feet of leasable space.

On June 30, 2006, we purchased an existing multi-tenant industrial park known as Shoemaker Industrial Park located in Santa Fe Springs, California for an investment of $9,946,433.  The property consists of approximately 86,084 square feet of leasable space in three single-story buildings.

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

We reimbursed our Managing Member specific incremental costs incurred in connection with the offering of our membership units, limited to 4% of the gross proceeds of our offering.  During the nine months ended September 30, 2005, we reimbursed our Managing Member for $819,580 of these costs.  At December 31, 2005, we had fully repaid all offering costs incurred by Managing Member.

During the nine months ended September  30, 2005, our Managing Member funded $412,035 to subsidize our distribution of 1,204,376 to the unit holders.  We are not obligated to reimburse our Managing Member for this funding contribution.

Our Managing Member and/or its affiliates were entitled to receive various fees, compensation and reimbursements in connection with the offering of our membership units, 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, 2006 and 2005, the total fees, compensation and reimbursements were $0 and $2,164,993, respectively.

5.Commitments and Contingencies

In accordance with the terms of the our Operating Agreement, any of the funds raised in our public offering that have not been invested in properties or designated for specific reserves within one year of the completion of the offering would be distributed to our unitholders. At September 30, 2006, all available funds have been invested or reserved for specific property improvements.

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

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report.  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 our 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 our 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 our cash requirements for operations, capital requirements and distributions; and (iv) adverse changes to the general economy may disrupt operations.

Results of Operations

As of September 30, 2006, we had purchased seven multi-tenant industrial business park properties in three major metropolitan areas.  Three of these properties were purchased before 2005, three properties were purchased in January, April and September 2005 and one property was purchased in June 2006. The 2006 results reflect a full nine months of operations for all properties purchased before 2006.  Results for 2005 reflect a full nine months of operations from only three properties.

Three months ended September 30, 2006 and 2005

Revenue for the third quarter of 2006 increased to $999,168 from $534,740 for the comparable period of 2005.  The increase was due primarily to the properties purchased during 2005.

Property operating and maintenance expenses increased to $217,257 in 2006 from $124,583 in 2005.  This increase was the result of the addition of properties as well as refurbishment at several properties in the 2006 quarter.  Property taxes increased to $225,945 in 2006 from $88,624 in 2005 due to the addition of properties.

General and administrative costs decreased to $86,180 in the third quarter of 2006 from $94,101 in the comparable quarter of 2005.  The decrease was due to lower  professional fees. Depreciation and amortization increased to $230,375 in the the third quarter of 2006 from $121,672 in the comparable quarter of 2005 as a result of the addition of properties.

Interest and other income decreased to $18,150 for the three months ended September 30, 2006 from $92,170 for the same period of 2005 due to lower cash available for investment after the  purchase of Shoemaker property in June 2006.

Nine months ended September 30, 2006 and 2005

Revenue for the nine months ended September 30,  2006 increased to $2,431,866 from $1,495,708 for the comparable period of 2005.  The increase was due primarily to the properties purchased during  2005.

Property operating and maintenance expenses increased to $675,290 in 2006 from $350,035 in 2005.  This increase was the result of the addition of properties as well as non recurring repairs and maintenance and refurbishment at several properties in the 2006 period.  Property taxes increased to $520,190 in 2006 from $265,725 in 2005 due to the addition of properties and a re-assessment of one property acquired in 2005.

General and administrative costs increased to $374,013 in 2006 from $249,037 in 2005.  The increase was due to higher professional fees including tax, auditing, legal and non-recurring consulting fees.  Depreciation and amortization increased to $578,305 in 2006 from $322,414 in 2005 as a result of the addition of properties.

Interest and other income increased to $286,440 for the nine months ended September 30, 2006 from $173,120 for the same period of 2005 due to higher the short-term interest rates earned on invested cash, partially offset by lower invested cash in the third quarter of 2006.

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Liquidity and Capital Resources

Our planned $50,000,000 equity offering is now complete and we do not expect to raise any additional funds. We intend to use the existing cash balance for, capital improvements to the properties and for operating expenses and reserves.

We expect to meet our short-term liquidity requirements from net cash generated by operations, which we believe will be adequate to meet operating costs, and allow for cash distributions to the unitholders.  However, current net cash generated by operations is not expected to be sufficient to fund distributions to unitholders at an annual rate of 5%.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We invest our cash and cash equivalents in government backed securities and money market accounts, which, by their nature, are subject to interest rate fluctuations.

Item 4.Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports we file or submit 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 our 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 our Managing Member, have reviewed 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.

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.

PART II - OTHER INFORMATION

Item 6.              Exhibits

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 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 13th day of November.

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)

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