10-Q

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, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  Accelerated filer o  Non-accelerated filer o  Smaller Reporting Company 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 as of September 30, 2010 and December 31, 2009 (unaudited)	3
	Condensed Statements of Operations for the Three and  Nine Months Ended September 30, 2010 and September 30, 2009 (unaudited)	4
	Condensed Statement of Members’ Capital for the Nine Months Ended September 30, 2010 (unaudited)	5
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2010 and September 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

 

2

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED BALANCE SHEETS

(UNAUDITED)

	September 30, 2010		December 31, 2009
ASSETS
Cash and cash equivalents	$	1,050,000	$	761,000
Investments in real estate
Land		9,870,000		10,088,000
Buildings and improvements, net		15,397,000		16,110,000
Intangible asset - in-place leases, net		—		9,000
Property held for sale, net		1,721,000		1,726,000
		26,988,000		27,933,000
Other assets
Non-real estate assets associated with property held for sale		80,000		74,000
Tenant and other receivables, net		251,000		263,000
Prepaid expenses and other assets		22,000		50,000
Leasing commissions, net		173,000		158,000
Deferred financing costs		16,000		—
Total assets	$	28,580,000	$	29,239,000
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable, accrued liabilities and prepaid rent	$	122,000	$	161,000
Real estate taxes payable		188,000		76,000
Tenant security deposits		187,000		194,000
Intangible lease liability, net		—		5,000
Liabilities associated with property held for sale		295,000		262,000
Total liabilities		792,000		698,000
Members’ capital (100,000 units authorized and issued as of September 30, 2010 and December 31, 2009; 98,670 and 98,814 units outstanding as of September 30, 2010 and December 31, 2009, respectively)		27,788,000		28,541,000
Total liabilities and members’ capital	$	28,580,000	$	29,239,000

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  September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009
Revenues
Rental revenues	$	579,000	$	669,000		$	1,785,000		$	2,029,000
Tenant reimbursements and other income		128,000		131,000			364,000			386,000
		707,000		800,000			2,149,000			2,415,000
Expenses
Property operating and maintenance		213,000		171,000			642,000			473,000
Property taxes		112,000		115,000			334,000			329,000
General and administrative		59,000		30,000			246,000			197,000
Depreciation and amortization		202,000		209,000			589,000			620,000
Impairment of real estate		—		—			560,000			—
		586,000		525,000			2,371,000			1,619,000
Interest income		—		—			—			1,000
Net income (loss) from continuing operations		121,000		275,000			(222,000	)		797,000
Net income (loss) from discontinued operation		56,000		(1,224,000	)		141,000			(1,210,000	)
Net income (loss)	$	177,000	$	(949,000	)	$	(81,000	)	$	(413,000	)
Net income (loss) allocable to managing member:
From continuing operations	$	12,000	$	27,000		$	(22,000	)	$	80,000
From discontinued operation		6,000		(122,000	)		14,000			(121,000	)
	$	18,000	$	(95,000	)	$	(8,000	)	$	(41,000	)
Net income (loss) allocable to unit holders:
From continuing operations	$	109,000	$	247,000		$	(200,000	)	$	717,000
From discontinued operation		50,000		(1,102,000	)		127,000			(1,089,000	)
	$	159,000	$	(855,000	)	$	(73,000	)	$	(372,000	)
Per unit amounts:
Basic and diluted net income (loss) from continuing operations allocable to unit holders	$	1.10	$	2.49		$	(2.03	)	$	7.22
Basic and diluted net income (loss) from discontinued operation allocable to unit holders	$	0.51	$	(11.11	)	$	1.29		$	(10.97	)
Basic and diluted weighted average number of units outstanding		98,670		99,127			98,725			99,261

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, 2009	$	28,541,000
Cash distributions to unit holders		(623,000	)
Units repurchased and retired		(49,000	)
Net loss		(81,000	)
Balance, September 30, 2010	$	27,788,000

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,
	2010			2009
OPERATING ACTIVITIES
Net loss	$	(81,000	)	$	(413,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Impairment of real estate		560,000			1,216,000
Depreciation and amortization		604,000			715,000
Provision for bad debt		148,000			41,000
Straight-line rent and amortization of acquired above/below market leases		(34,000	)		(6,000	)
Changes in operating assets and liabilities:
Tenant and other receivables		(104,000	)		(77,000	)
Prepaid expenses and other assets		(84,000	)		(93,000	)
Accounts payable, accrued liabilities and prepaid rent		(41,000	)		(13,000	)
Real estate taxes payable		146,000			168,000
Tenant security deposits		(10,000	)		(18,000	)
Net cash provided by operating activities		1,104,000			1,520,000
INVESTING ACTIVITIES
Investments in real estate		(127,000	)		(157,000	)
Net cash used in investing activities		(127,000	)		(157,000	)
FINANCING ACTIVITIES
Cash distributions to unit holders		(623,000	)		(1,856,000	)
Cash distributions to managing member		—			(192,000	)
Units repurchased and retired		(49,000	)		(136,000	)
Deferred financing costs		(16,000	)		—
Net cash used in financing activities		(688,000	)		(2,184,000	)
Net increase (decrease) in cash		289,000			(821,000	)
Cash and cash equivalents at beginning of period		761,000			2,289,000
Cash and cash equivalents at end of period	$	1,050,000		$	1,468,000
Supplemental disclosure of non-cash financing and investing activities:
Accrued additions to real estate	$	(5,000	)	$	—

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

SEPTEMBER 30, 2010

(Unaudited)

1. Organization and Business

Cornerstone Realty Fund, LLC, a California limited liability company (the “Fund”), was formed in October of 1998 to invest in multi-tenant business parks catering to small business tenants. As used in this report, “Fund”, “we,” “us” and “our” refer to Cornerstone Realty Fund, LLC except where the context otherwise requires.

Our managing member is Cornerstone Industrial Properties, LLC (“CIP”), a California limited liability company. Cornerstone Ventures, Inc. is the managing member of CIP. Cornerstone Ventures, Inc. is an experienced real estate operating company specializing in the acquisition, operation and repositioning of multi-tenant industrial business parks catering to small business tenants.

On August 7, 2001, we commenced a public offering of units of our membership interest pursuant to a registration statement on Form S-11 filed with the Securities and Exchange Commission (“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 of America (“GAAP”) 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.

Each member’s liability is limited pursuant to the provisions of the Beverly-Killea Limited Liability Company Act.

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, unit holders 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 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.

— Net Loss is allocated first, 50% to the Managing Member and 50% to the unit holders, 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 unit holders.

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

7

— Effective February 22, 2007, our operating agreement was amended to permit repurchase of units on such terms and conditions as the Managing Member may determine.

— Effective June 2, 2009, our operating agreement was amended and the dissolution date in Section 11.1 (a) was extended from December 31, 2010 to December 31, 2012.

— Effective April 27, 2010, our operating agreement was amended and allows 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 the Fund’s operating expenses or to fund cash distributions declared and paid to members.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to "Summary of Significant Accounting Policies" contained in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes to the critical accounting policies previously disclosed in that report except as discussed below.

Interim Financial Information

The accompanying interim condensed financial statements have been prepared by our management in accordance with GAAP and in conjunction with the rules and regulations of the SEC. Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and nine months ended September 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 Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 825-10, Financial Instruments,requires the disclosure of fair value information about financial instruments whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value.

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 and accounts payable, 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.

Recently Issued Accounting Pronouncements

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.

8

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 a 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.

We have considered all other pronouncements that have been issued but are not yet effective which were not listed above. The Fund believes that these other pronouncements will not have any future impact on the Fund’s financial statements.

Investments in Real Estate Assets Held for Sale

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 September 30, 2010 and accordingly, is classified as held for sale. See Note 7 for additional information.

3. Investment in Real Estate

In accordance with ASC Topic 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:

• Change in strategy resulting in a decreased holding period;

• Decreased occupancy levels;

• Deterioration of the rental market as evidenced by rent decreases over numerous quarters;

• Properties adjacent to or located in the same submarket as those with recent impairment issues;

• Significant decrease in market price; and/or

• Tenant financial problems.

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.

9

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 nine months ended September 30, 2010, we recorded an impairment charge of $560,000 to reduce certain investments in real estate assets to estimated fair value. The fair values of investments 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 investments in real estate are classified as Level 3.

The following table summarizes the property that was measured at fair value on a nonrecurring basis:

	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 September 30, 2010		Total Losses Nine Months Ended September 30, 2010
Investments in real estate	$	2,268,000	$	—	$	—	$	2,268,000	$	—	$	(560,000	)

As of September 30, 2010, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:

	Land		Buildings and Improvements			Intangible Lease Value		In-Place Lease Value			Acquired Below- Market Leases
Investments in real estate	$	9,870,000	$	17,915,000		$	—	$	770,000		$	(154,000	)
Less: accumulated depreciation and amortization from continuing operations		—		(2,518,000	)		—		(770,000	)		154,000
Net investments in real estate and related lease intangibles from continuing operations		9,870,000		15,397,000			—		—			—
Net investments in real estate and related lease intangibles held for sale		355,000		1,262,000			104,000		—			—
	$	10,225,000	$	16,659,000		$	104,000	$	—		$	—

10

As of December 31, 2009, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:

	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 September 30, 2010 and 2009 were $167,000 and $206,000, respectively. Depreciation and amortization related to investments in real estate, real estate investment held for sale and related lease intangibles for the nine months ended September 30, 2010 and 2009 were $511,000 and $614,000, respectively.

4. Allowance for Doubtful Accounts

Our allowance for doubtful accounts was $319,000 and $190,000 as of September 30, 2010 and December 31, 2009, respectively.

5. Concentration of Credit Risks

Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments; cash is generally invested in investment-grade short-term instruments. On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements far-reaching changes to the regulation of the financial services industry, including provisions that made permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions. As of September 30, 2010 we had cash accounts in excess of FDIC insured limits. We believe this risk is not significant.

As of September 30, 2010, we owned four properties in the state of California, one property in the state of Arizona and one property in the state of Illinois. Accordingly, there is a geographic concentration of risk subject to fluctuations in the states’ economy.

6. Commitments and Contingencies

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.

11

7. Discontinued 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 September 30, 2010 in accordance with ASC 360-10. No properties were sold during the three and nine months ended September 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 (loss) from discontinued operations. This treatment resulted in certain reclassifications of 2009 financial statement amounts.

The following is a summary of the components of income from discontinued operations for the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
Rental revenues, tenant reimbursements and other income	$	131,000	$	118,000		$	429,000	$	355,000
Operating expenses and real estate taxes		75,000		94,000			273,000		254,000
Depreciation and amortization		—		32,000			15,000		95,000
Impairment of real estate		—		1,216,000			—		1,216,000
Net income (loss) from discontinued operation	$	56,000	$	(1,224,000	)	$	141,000	$	(1,210,000	)
Net income (loss) from discontinued operation allocable to managing member	$	6,000	$	(122,000	)	$	14,000	$	(121,000	)
Net income (loss) from discontinued operation allocable to unit holders	$	50,000	$	(1,102,000	)	$	127,000	$	(1,089,0000	)

A summary of the property held for sale balance sheet information is as follows:

	September 30, 2010		December 31, 2009
Investments in real estate
Land	$	355,000	$	355,000
Buildings and improvements, net		1,262,000		1,265,000
Intangible lease assets, net		104,000		106,000
Property held for sale, net		1,721,000		1,726,000
Other assets
Tenant and other receivables, net		47,000		50,000
Prepaid expenses and other assets		5,000		2,000
Leasing commissions, net		28,000		22,000
Non-real estate assets associated with property held for sale		80,000		74,000
Total assets	$	1,801,000	$	1,800,000
Liabilities
Accounts payable, accrued liabilities and prepaid rent	$	45,000	$	42,000
Real estate taxes payable		190,000		157,000
Tenant security deposits		60,000		63,000
Liabilities associated with property held for sale	$	295,000	$	262,000

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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. 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 that 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”).

Overview

Our revenues, which are comprised largely of rental income, include rents reported on a straight-line basis over the initial term of the lease. Our 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.

Market Outlook – Real Estate and Real Estate Finance Markets

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, was inactive during 2009 and early 2010 that had left a void in the market for long-term, affordable, fixed-rate debt. Though, recently there has been a gradual improvement in capital market conditions, including new issuance of commercial mortgage-backed securities debt. During that time the void in the commercial mortgage-backed securities debt market was 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 three 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 nine 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.

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Critical Accounting Policies

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.

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC other than as described under Note 2 to the accompanying condensed financial statements.

Results of Operations

Results of continuing operations for the three months and nine months ended September 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 (loss) from discontinued operations for the three and nine months ended September 30, 2010 and 2009.

The results of continuing operations for the three months and nine months ended September 30, 2010 and 2009 are discussed below.

Three months ended September 30, 2010 and 2009

Rental revenues, tenant reimbursements and other income from continuing operations decreased to approximately $707,000 for the three months ended September 30, 2010 from approximately $800,000 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 $213,000 for the three month period ended September 30, 2010 from approximately $171,000 for the comparable period of 2009. The increase is primarily due to increases in uncollectible accounts and repairs and maintenance expenses.

Property taxes from continuing operations for the three months ended September 30, 2010 were comparable to the corresponding period of 2009.

General and administrative expenses from continuing operations increased to approximately $59,000 for the three months ended from approximately $30,000 for the comparable period of 2009. The increase is primarily due to timing of audit and tax services partially offset by decreases in professional services expenses.

Depreciation and amortization expense for the three months ended September 30, 2010 was comparable to the corresponding period of 2009.

Nine months ended September 30, 2010 and 2009

Rental revenues, tenant reimbursements and other income from continuing operations decreased to approximately $2,149,000 for the nine months ended September 30, 2010 from approximately $2,415,000 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 $642,000 for the nine month period ended September 30, 2010 from approximately $473,000 for the comparable period of 2009. The increase is primarily due to increases in uncollectible accounts, refurbishment of vacant space, and repairs and maintenance expenses.

Property taxes from continuing operations for the nine months ended September 30, 2010 were comparable to the same period of 2009.

General and administrative expenses increased to approximately $246,000 for the nine months ended September 30, 2010 from approximately $197,000 for the comparable period of 2009. The increase is primarily due to timing of audit and tax fee services obligations offset by a decrease in other professional service fees.

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Impairment of real estate charges increased to approximately $560,000 for the nine months ended September 30, 2010 from $0 in the comparable period in 2009 as a result of a decline in the fair market value of one real estate property.

Depreciation and amortization expenses from continuing operations decreased to approximately $589,000 for the nine months ended September 30, 2010 from approximately $620,000 for the comparable period of 2009. The decrease is due to a real estate impairment loss recognized in December 31, 2009 and June 30, 2010, reducing the depreciable basis, and the full amortization of intangible assets at two or our properties.

Discontinued Operations

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. For the three months ended September 30, 2010, net income from discontinued operations increased to approximately $56,000 from a net loss of $1,224,000 for the comparable period of 2009. The increase is primarily due toan impairment charge of $1.2 million recognized during the third quarter of 2009, reducing depreciable basis, and the full amortization of intangible assets of the property. For the nine months ended September 30, 2010, net income increased to $141,000 from a net loss of $1,210,000 for the comparable period of 2009. The increase is primarily due toan impairment charge of $1.2 million recognized during the third quarter of 2009, reducing depreciable basis, and the full amortization of intangible assets of the property.

Liquidity and Capital Resources

As of September 30, 2010, we had approximately $1,050,000 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 September 30, 2010, we had not incurred any debt financings.

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. As of September 30, 2010, a 1% increase or decrease in interest rates would not have a material effect on our interest income.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the 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.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

16

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 12th day of November 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)

17

EX-31.1

Exhibit 31.1

CERTIFICATION 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 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 report;

3.             Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) 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 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 principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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 functions):

(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 12, 2010	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

CERTIFICATION 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 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 report;

3.             Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) 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 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 principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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 functions):

(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 12, 2010	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 three-month period ended September 30, 2010 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 12, 2010	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 12, 2010	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