Unassociated Document

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).

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Balance Sheets as of June 30, 2010 and December 31, 2009 (unaudited)	3

	Condensed Statements of Operations for the Three and Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)	4

	Condensed Statement of Members’ Capital for the Six Months Ended June 30, 2010 (unaudited)	5

	Condensed Statements of Cash Flows for the Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)	6

	Notes to Condensed Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

PART II.	OTHER INFORMATION

Item 6.	Exhibits	16

SIGNATURES		17

	June 30, 2010		December 31, 2009

ASSETS

Cash and cash equivalents	$	579,000	$	761,000
Investments in real estate
Land		9,870,000		10,088,000
Buildings and improvements, net		15,509,000		16,110,000
Intangible asset — in-place leases, net		-		9,000
Property held for sale, net		1,716,000		1,726,000
		27,095,000		27,933,000
Other assets
Non-real estate assets associated with property held for sale		81,000		74,000
Tenant and other receivables, net		301,000		263,000
Prepaid expenses and other assets		34,000		50,000
Leasing commissions, net		194,000		158,000

Total assets	$	28,284,000	$	29,239,000

LIABILITIES AND MEMBERS’ CAPITAL

Liabilities
Accounts payable, accrued liabilities and prepaid rent	$	165,000	$	161,000
Real estate taxes payable		76,000		76,000
Tenant security deposits		199,000		194,000
Intangible lease liability, net		-		5,000
Liabilities associated with property held for sale		232,000		262,000
Total liabilities		672,000		698,000

Members’ capital (100,000 units authorized and issued as of June 30, 2010 and December 31, 2009; 98,670 and 98,814 units outstanding as of June 30, 2010 and December 31, 2009, respectively)		27,612,000		28,541,000

Total liabilities and members’ capital	$	28,284,000	$	29,239,000

	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010			2009
Revenues
Rental revenues	$	599,000		$	675,000	$	1,206,000		$	1,360,000
Tenant reimbursements and other income		121,000			131,000		236,000			255,000
		720,000			806,000		1,442,000			1,615,000
Expenses
Property operating and maintenance		215,000			146,000		429,000			302,000
Property taxes		111,000			107,000		222,000			214,000
General and administrative		78,000			88,000		187,000			167,000
Depreciation and amortization		188,000			204,000		387,000			411,000
Impairment of real estate		560,000			—		560,000			—
		1,152,000			545,000		1,785,000			1,094,000

Interest income		—			—		—			1,000
Net (loss) income from continuing operations		(432,000	)		261,000		(343,000	)		522,000

Net income from discontinued operation		14,000			13,000		85,000			14,000

Net (loss) income	$	(418,000	)	$	274,000	$	(258,000	)	$	536,000

Net (loss) income allocable to managing member:
From continuing operations	$	(43,000	)	$	26,000	$	(34,000	)	$	52,000
From discontinued operation		1,000			1,000		8,000			2,000
	$	(42,000	)	$	27,000	$	(26,000	)	$	54,000
Net (loss) income allocable to unit holders:
From continuing operations	$	(389,000	)	$	235,000	$	(309,000	)	$	470,000
From discontinued operation		13,000			12,000		77,000			12,000
	$	(376,000	)	$	247,000	$	(232,000	)	$	482,000
Per unit amounts:
Basic and diluted net (loss) income from continuing operations allocable to unit holders	$	(3.94	)	$	2.37	$	(3.13	)	$	4.73
Basic and diluted net income from discontinued operation allocable to unit holders	$	0.13		$	0.12	$	0.78		$	0.12

Basic and diluted weighted average number of units outstanding		98,670			99,231		98,746			99,296

	Six Months Ended June 30,
	2010			2009
OPERATING ACTIVITIES
Net (loss) income	$	(258,000	)	$	536,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Impairment of real estate		560,000			—
Depreciation and amortization		402,000			474,000
Provision for bad debt		90,000			9,000
Straight-line rent and amortization of acquired below market leases		(64,000	)		(13,000	)
Changes in operating assets and liabilities:
Other assets, net		(149,000	)		(101,000	)
Accounts payable, accrued liabilities and prepaid rent		(18,000	)		(50,000	)
Real estate taxes payable		(6,000	)		(1,000	)
Tenant security deposits		4,000			(19,000	)

Net cash provided by operating activities		561,000			835,000

INVESTING ACTIVITIES
Investments in real estate		(72,000	)		(26,000	)

Net cash used in investing activities		(72,000	)		(26,000	)

FINANCING ACTIVITIES
Cash distributions to unit holders		(622,000	)		(1,238,000	)
Cash distributions to managing member		—			(125,000	)
Units repurchased and retired		(49,000	)		(66,000	)

Net cash used in financing activities		(671,000	)		(1,429,000	)

Net decrease in cash		(182,000	)		(620,000	)

Cash and cash equivalents at beginning of period		761,000			2,289,000

Cash and cash equivalents at end of period	$	579,000		$	1,669,000

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 (“SEC”) 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 for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. 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 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, 2009.

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 six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

—

Net Cash Flow from Operations, as defined, will be distributed 90% to the unit holders and 10% to the Managing Member until the unit holders 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 unit holders in an amount equal to their Invested Capital Contributions; then, 90% to the unit holders and 10% to the Managing Member until the unit holders 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 unit holders and 50% to the Managing Member.

—

Net Income, as defined, is allocated first, 10% to the Managing Member and 90% to the unit holders 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 unit holders.

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, 2009. There have been no material changes to the critical accounting policies previously disclosed in that report except as discussed below.

The accompanying interim condensed financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“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 six months ended June 30, 2010 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 2009 Annual Report on Form 10-K, as filed with the SEC.

We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

Our condensed balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, prepaid expenses and other assets, accounts payable, accrued liabilities and prepaid rent, real estate taxes payable and tenant security deposits, which we consider the carrying values approximate fair value for these financial instruments because of the short period of time between origination of the instruments and their expected payment.

In February 2010, FASB issued Accounting Standard Update (“ASU”) 2010-09, Subsequent Events: Amendments to Certain recognition and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09 clarifies that subsequent events should be evaluated through the date the financial statements are issued. In addition, this update no longer requires a filer to disclose the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued subsequent to February 24, 2010. We adopted this guidance on February 24, 2010.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring measurements. The guidance requires new disclosures on the transfer of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for interim and annual periods beginning after December 15, 2009. We adopted this guidance on January 1, 2010.

In June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R), which was primarily codified into ASC Topic 810 Consolidation. The new guidance impacts the consolidation guidance applicable to variable interest entity (“VIE”) and among other things require a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, continuous assessments of whether a company is the primary beneficiary of a VIE and enhanced disclosures about a company’s involvement with a VIE. We adopted this guidance on January 1, 2010 and it did not have a material impact on our condensed financial statements.

The Fund evaluates the held for sale classification of its owned real estate each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are classified as held for sale once management commits to a plan to sell the properties and has initiated an active program to market them for sale. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. During the first quarter of 2010, management committed a plan to sell Zenith Drive Centre to a third party and classified the property as held for sale. This property has not been sold as of June 30, 2010 and accordingly, is classified as held for sale. See Note 7 for additional information.

In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets, the Fund assesses whether there has been impairment in the value of its investments in real estate whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Its portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential impairment include the following:

In the second quarter of 2010, we reviewed the impairment indicators as described in FASB ASC 360-10-35-21. We noted a longer lease up period than anticipated for one of our properties, which resulted in comparing the expected future undiscounted cash flows for the property against its carrying amount. As the estimated undiscounted cash flows were less than its carrying amount we recorded an impairment loss of $560,000 based on the property’s estimated fair value. During the evaluation process, we used Level 3 - fair value estimates. The assessment as to whether our investments in real estate are impaired is highly subjective. The calculations, which are primarily based on discounted cash flow analysis, involve projections of expected future cash flows and require us to estimate (1) future market rental income amounts subsequent to the expiration of current lease agreements, (2) property operating expenses, (3) risk-adjusted rate of return and capitalization rates, (4) the number of months it takes to re-lease the property and (5) the number of years the property is held for investment. A change in any one or more of these factors could materially impact whether a property is impaired as of any given valuation date.

FASB ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies prospectively to all other accounting pronouncements that require or permit fair value measurements. The adoption of ASC 820-10 did not have a material impact on the Fund’s financial statements since it does not record its financial assets and liabilities in its financial statements at fair value. The Fund adopted ASC 820-10 with respect to its non-financial assets and non-financial liabilities on January 1, 2009. The adoption of ASC 820-10 with respect to its non-financial assets and liabilities did not have a material impact on its financial statements.

Fair value represents the estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820 establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from independent sources and unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability. Level 1 includes quoted prices in active markets for identical instruments. Level 2 includes quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in inactive markets; and model-derived valuations using observable market information for significant inputs. Level 3 includes valuation techniques where one or more significant inputs are unobservable. Financial instruments are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified Level 3.

Certain assets and liabilities were measured at fair value on a nonrecurring basis. This category included the impairment of real estate. For the six months ended June 30, 2010, we recorded impairment charges to reduce certain investments in real estate assets to estimated fair value. No impairment of real estate was recorded for the six months ended June 30, 2009. The fair values of investment in real estate included inputs based on management’s estimate of net operating income, expected occupancy changes, expected rental rates, capitalization rates and discount rates based on available market information using a discounted cash flow analysis. Because one or more of significant inputs are unobservable, the fair values of investment in real estate are classified as Level 3.

	Total Fair Value Measurement		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses Three Months Ended June 30, 2010			Total Losses Six Months Ended June 30, 2010

Investment in real estate	$	2,268,000	$	—	$	—	$	2,268,000	$	(560,000	)	$	(560,000	)

	Land		Buildings and Improvements			Intangible Lease Value		In-Place Lease Value			Acquired Below- Market Leases
Investments in real estate	$	9,870,000	$	17,860,000		$	—	$	770,000		$	(154,000	)
Less: accumulated depreciation and amortization from continuing operations		—		(2,351,000	)		—		(770,000	)		154,000
Net investments in real estate and related lease intangibles from continuing operations		9,870,000		15,509,000			—		—			—
Net investments in real estate and related lease intangibles held for sale		355,000		1,257,000			104,000		—			—
	$	10,225,000	$	16,766,000		$	104,000	$	—		$	—

	Land		Buildings and Improvements			Intangible Lease Value		In-Place Lease Value			Acquired Below- Market Leases
Investments in real estate	$	10,088,000	$	18,411,000		$	—	$	770,000		$	(154,000	)
Less: accumulated depreciation and amortization from continuing operations		—		(2,301,000	)		—		(761,000	)		149,000
Net investments in real estate and related lease intangibles from continuing operations		10,088,000		16,110,000			—		9,000			(5,000	)
Net investments in real estate and related lease intangibles held for sale		355,000		1,265,000			106,000		—			—
	$	10,443,000	$	17,375,000		$	106,000	$	9,000		$	(5,000	)

Depreciation and amortization related to investments in real estate and related lease intangibles for the three months ended June 30, 2010 and 2009 were $166,000 and $209,000, respectively. Depreciation and amortization related to investments in real estate, real estate investment held for sale and related lease intangibles for the six months ended June 30, 2010 and 2009 were $349,000 and $422,000, respectively.

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. Currently, the Federal Deposit Insurance Corporation, or FDIC, generally insures amounts up to $250,000 per depositor per insured bank. This amount is scheduled to be reduced to $100,000 after December 31, 2013. As of June 30, 2010, one of our cash accounts were in excess of FDIC insured limits.

We monitor our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our 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 our condensed financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, any material litigation threatened against us which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.

In accordance with FASB ASC 360-10, Property, Plant & Equipment, we report results of operations from real estate assets that meet the definition of a component of an entity that have been sold, or meet the criteria to be classified as held for sale, as discontinued operations. As of March 1, 2010, we determined that the potential sale of Zenith Drive Centre to a third party was probable, and accordingly, classified the property as held for sale. Depreciation and amortization of Zenith Drive was not recorded for the period of March 1, 2010 to June 30, 2010 in accordance with ASC 360-10. No properties were sold during the quarters ended June 30, 2010 and 2009. We included all results of the discontinued operations in a separate component of income on the statements of operations under the heading Net income from Discontinued Operations. This treatment resulted in certain reclassifications of 2009 financial statement amounts.

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Rental revenues, tenant reimbursements and other income	$	122,000	$	123,000	$	298,000	$	237,000
Operating expenses and real estate taxes		108,000		78,000		198,000		160,000
Depreciation and amortization		-		32,000		15,000		63,000

Net income from discontinued operation	$	14,000	$	13,000	$	85,000	$	14,000

Net income from discontinued operation allocable to managing member	$	1,000	$	1,000	$	8,000	$	2,000

Net income from discontinued operation allocable to unit holders	$	13,000	$	12,000	$	77,000	$	12,000

	June 30, 2010		December 31, 2009

Investments in real estate
Land	$	355,000	$	355,000
Buildings and improvements, net		1,257,000		1,265,000
Intangible lease assets, net		104,000		106,000
Property held for sale, net		1,716,000		1,726,000

Other assets
Tenant and other receivables, net		49,000		50,000
Prepaid expenses and other assets		4,000		2,000
Leasing commissions, net		28,000		22,000
Non-real estate assets associated with property held for sale		81,000		74,000

Total assets	$	1,797,000	$	1,800,000

Liabilities
Accounts payable, accrued liabilities and prepaid rent	$	20,000	$	42,000
Real estate taxes payable		151,000		157,000
Tenant security deposits		61,000		63,000
Liabilities associated with property held for sale	$	232,000	$	262,000

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. 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 forward–looking statements, whether as a result of new information, future events or otherwise. 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, 2009 as filed with the Securities and Exchange Commission (“SEC”).

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 growth 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.

In recent years, both the national and most global economies have experienced substantially increased unemployment and a downturn in economic activity. Despite certain recent positive economic indicators and improved stock market performance, the aforementioned conditions, combined with low consumer confidence, have resulted in an unprecedented global recession and continue to contribute to a challenging economic environment that may delay the implementation of our business strategy or force us to modify it.

As a result of the decline in general economic conditions, the U.S. commercial real estate industry has also experienced deteriorating fundamentals across all major property types and most geographic markets. Tenant defaults have risen, while demand for commercial real estate space is contracting, resulting in a highly competitive leasing environment, downward pressure on both occupancy and rental rates, and an increase in leasing incentives. Mortgage delinquencies and defaults have trended upward, with many industry analysts predicting significant credit defaults, foreclosures and principal losses.

From a financing perspective, the severe dislocations and liquidity disruptions in the credit markets have impacted both the cost and availability of commercial real estate debt. The commercial mortgage-backed securities market, formerly a significant source of liquidity and debt capital, has become inactive and has left a void in the market for long-term, affordable, fixed-rate debt. This void has been partially filled by portfolio lenders such as insurance companies, but at very different terms than were available in the past five years. These remaining lenders have generally increased credit spreads, lowered the amount of available proceeds, required recourse security and credit enhancements, and otherwise tightened underwriting standards considerably, while simultaneously generally limiting lending to existing relationships with borrowers that invest in high quality assets in top tier markets. In addition, lenders have limited the amount of financing available to existing relationships in an effort to manage and mitigate the risk of overconcentration in certain borrowers.

The factors discussed above have translated into declining real estate values and a corresponding rise in required investment returns and capitalization rates. Overall transaction activity has slowly increased during the last two quarters as the gap between “ask” and “bid” has contracted; however, the volume is well below that of two years ago.

The market conditions that have and will likely continue to have a significant impact on our real estate investments have also negatively impacted our tenants’ businesses. As a result, our tenants are finding it more difficult to meet current lease obligations, forcing them to negotiate reduced rental rates upon renewal in order for their businesses to remain viable. Lower lease rates and increased rent concessions have resulted in lower current cash flow as compared to the first six months of 2009. Additional declines in rental rates, slower or potentially negative net absorption of leased space and additional rental concessions, including free rent, would result in additional future decreases in cash flows.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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 those estimates.

Results of continuing operations for the three months and six months ended June 30, 2010 and 2009 comprise five multi-tenant industrial business park properties in two major metropolitan areas. On March 1, 2010, we determined that the potential sale of Zenith Drive Centre to a third party was probable and classified the property as held for sale. We have included all operating results of the Zenith Drive Centre in a separate component of income on the Statements of Operations under the heading net income from discontinued operations for the three and six months ended June 30, 2010 and 2009.

Rental revenues, tenant reimbursements and other income from continuing operations decreased to approximately $720,000 for the three months ended June 30, 2010 from approximately $806,000 for the comparable period of 2009, primarily due to higher vacancy, lower market lease rates and from higher concessions to attract and retain tenants as a result of the current economic environment. These factors were partially offset by rental escalations from existing tenants.

Depreciation and amortization expenses decreased to approximately $188,000 for the three months ended June 30, 2010 from approximately $204,000 for the comparable period of 2009. The decrease is due to one impairment of real estate recognized on September 30, 2009 and another impairment of real estate recognized on December 31, 2009, reducing depreciable basis, and the full amortization of intangible assets at two of our properties.

Rental revenues, tenant reimbursements and other income from continuing operations decreased to approximately $1,442,000 for the six months ended June 30, 2010 from approximately $1,615,000 for the comparable period of 2009, primarily due to higher vacancy, lower market lease rates and higher concessions to attract and retain tenants as a result of the current economic environment. These factors were partially offset by rental escalations for existing tenants.

Property operating and maintenance expenses from continuing operations increased to approximately $429,000 for the six month period ended June 30, 2010 from approximately $302,000 for the comparable period of 2009. The increase is primarily due to increases in uncollectible accounts, collection fees and repairs and maintenance expenses.

Depreciation and amortization expenses from continuing operations decreased to approximately $387,000 for the six months ended June 30, 2010 from approximately $411,000 for the comparable period of 2009. The decrease is due to one impairment of real estate recognized on September 30, 2009 and another impairment of real estate recognized on December 31, 2009, reducing depreciable basis, and the full amortization of intangible assets at two or our properties.

During the first quarter of 2010, we determined that the potential sale of Zenith Drive Center to a third party was probable and classified the property as held for sale in accordance with ASC 360-10, Property, Plant and Equipment. Net income from discontinued operations was approximately $14,000 and $13,000 for the three months ended June 30, 2010 and 2009, respectively. Net income from discontinued operations was approximately $85,000 and $14,000 for the six months ended June 30, 2010 and 2009, respectively. The increase is primarily due to a property tax refund received in 2010 from a prior year’s tax appeal and higher revenue due to higher occupancy in 2010 offset by lower depreciation expenses.

As of June 30, 2010, we had approximately $579,000 in cash and cash equivalents. We intend to use the existing cash balance for capital improvements to the properties and to provide for operating reserves. Cash in excess of these needs, if any, will be available for distribution to unit holders and 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 financing or sell selected properties so that we can continue to operate the remaining properties and pay cash distributions. As of June 30, 2010, we had not incurred any debt financings.

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 SEC’s 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 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.

3.1

Amended and Restated Operating Agreement of Cornerstone Realty Fund, LLC dated as of June 30, 2003 (as amended on February 22, 2007, June 2, 2009 and April 27, 2010) (Incorporated by reference to the Company’s quarterly report on form 10-Q for the quarter ended March 31, 2010, as filed with the Securities and Exchange Commission on May 14, 2010).

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)

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)

Balance, December 31, 2009	$	28,541,000

Cash distributions to unit holders		(622,000	)
Units repurchased and retired		(49,000	)
Net loss		(258,000	)

Balance, June 30, 2010	$	27,612,000