WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

 

 

FOR THE TRANSITION PERIOD FROM                   TO                  

 

Commission File Number   333-63656

 

CORNERSTONE REALTY FUND, LLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

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

 

YES  ý      NO  o

 

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

 

As of August 1, 2003, the Fund had 25,219 units of membership interest issued and outstanding.

 

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
Cornerstone Realty Fund, LLC
Condensed Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002
Condensed Statements of Operations for the Three Months and Six Months ended June 30, 2003 and June 30, 2002 (unaudited)
Condensed Statements of Members’ Capital for the Six Months ended June 30, 2003 (unaudited) and for the year ended December 31, 2002
Condensed Statements of Cash Flows for the Six Months ended June 30, 2003 and June 30, 2002 (unaudited)
Notes to Condensed Financial Statements

 

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CONDENSED BALANCE SHEETS

 

 

		June 30, 2003 (Unaudited)			December 31, 2002
ASSETS
Assets
Cash and cash equivalents		$	3,822,743		$	1,062,947
Investments in real estate
Land		2,201,930			2,201,930
Buildings and improvements, less accumulated depreciation of $70,517 in 2003 (unaudited) and $15,868 in 2002		4,210,232			4,237,894
		6,412,162			6,439,824
Other assets
Tenant and other receivables		37,142			11,197
Prepaid insurance		7,166			14,877
Leasing commissions, less accumulated amortization of $408 in 2003 (unaudited) and $136 in 2002		1,926			1,497
Office equipment, less accumulated depreciation of $2,708 in 2003 (unaudited) and $2,313 in 2002		146			541
Total assets		$	10,281,285		$	7,530,883
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable and accrued liabilities		$	11,831		$	101,038
Real estate taxes payable		115,993			113,657
Tenant security deposits		72,496			82,622
Advances payable to managing member		114,115			111,059
Total liabilities		314,435			408,376
Members’ capital (100,000 units authorized, 20,497 units issued and outstanding in 2003 (unaudited) and 18,061 units issued and outstanding in 2002)		9,966,850			7,122,507
Total liabilities and members’ capital		$	10,281,285		$	7,530,883

 

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

 

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Revenues
Rental revenues		$	201,943		$	—		$	396,310		$	—
Tenant reimbursements and other income		43,701			—			73,505			—
Interest, dividends and other income		1,343			14,622			4,267			26,420
		246,987			14,622			474,082			26,420
Expenses
Property operating and maintenance		30,917			—			59,893			—
Property taxes		38,436			—			76,126			—
General and administrative		23,462			68,882			68,789			101,050
Interest on advances payable to managing member		8,894			10,143			18,098			22,938
Depreciation and amortization		27,617			142			55,316			284
		129,326			79,167			278,222			124,272
Net income (loss)		$	117,661		$	(64,545	)	$	195,860		$	(97,852	)
Net income (loss) allocable to managing member		$	11,766		$	(6,454	)	$	19,586		$	(9,785	)
Net income (loss) allocable to unitholders		$	105,895		$	(58,091	)	$	176,274		$	(88,067	)
Per unit amounts:
Basic and diluted income (loss) allocable to unitholders		$	4.68		$	(5.84	)	$	8.43		$	(10.33	)
Basic and diluted weighted average units outstanding		22,650			9,945			20,902			8,527

 

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

 

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

 

CONDENSED STATEMENTS OF MEMBERS’ CAPITAL

(Unaudited)

 

Balance, December 31, 2002		7,122,507
Net proceeds from offering		2,834,465
Distributions to members		(59,302		)
Deferred offering costs repaid to managing member		(126,680		)
Net income		195,860
Balance, June 30, 2003		$	9,966,850

 

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

 

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
		2003			2002
OPERATING ACTIVITIES
Net income (loss)		$	195,860		$	(97,852	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		55,316			284
Changes in operating assets and liabilities:
Other assets		(18,935		)	—
Accounts payable, accrued liabilities and security deposits		(99,333		)	(33,355		)
Real estate taxes payable		2,336			—
Net cash provided by (used in) operating activities		135,244			(130,923		)
INVESTING ACTIVITIES
Additions to buildings		(26,987		)	—
Net cash used in investing activities		(26,987		)	—
FINANCING ACTIVITIES
Advances from managing member		3,056			11,168
Repayment of managing member advances		—			(189,055		)
Net proceeds from offering		2,834,465			2,744,369
Distributions to members		(59,302		)	—
Deferred offering costs repaid to managing member		(126,680		)	(120,620		)
Net cash provided by financing activities		2,651,539			2,445,862
Net increase in cash		2,759,796			2,314,939
Cash and cash equivalents at beginning of period		1,062,947			2,493,073
Cash and cash equivalents at end of period		$	3,822,743		$	4,808,012

 

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

 

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Organization and Business

 

Cornerstone Realty Fund, LLC, a California limited liability company (the “Fund”) (formerly Cornerstone Multi-Tenant Industrial Business Parks Fund, LLC and Cornerstone Industrial Properties Income and Growth Fund I, LLC), was formed on October 28, 1998.  The members of the Fund are Cornerstone Industrial Properties, LLC, a California limited liability company, as the managing member (“Managing Member”), Terry G. Roussel, an individual, and other various unitholders as described below.  The purpose of the Fund is to acquire, operate and sell multi-tenant industrial properties.  The Fund currently is issuing and selling equity interests (“units”) in a public offering in the Fund, and is admitting the new unitholders as members of the Fund.

 

The Fund is generating sufficient net cash from operations to meet its obligations as they come due.  The Fund is still in its offering and organizational stage, and is dependent on the Managing Member to provide advances for costs incurred in connection with the offering of units. The Managing Member must raise funds through the sale of debt or equity securities to obtain the cash necessary to provide these advances.  There can be no assurance as to the amount or timing of the Managing Member’s receipt of funds.  The Fund is to reimburse the Managing Member for the offering costs advanced by the Managing Member in the amount of 4% of the gross proceeds from the offering of units. During December 2001, the Fund raised the minimum offering requirement of 6,000 units.  As of July 24, 2003, the Fund has issued 25,153 units primarily to new unitholders for gross offering proceeds of $12,576,500.

 

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

 

2.                                      Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statement presentation.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation, have been included.  Operating results for the three-month and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

 

For further information, refer to the audited financial statements and footnotes thereto included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

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Use of Estimates

 

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

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist primarily of interest-bearing investments with original maturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents is $72,496 that the Fund has designated as tenant security deposits.

 

Investments in Real Estate

 

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

 

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

 

Office Equipment and Leasing Commissions

 

Office equipment is stated at cost.  Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets.  The estimated useful life of the office equipment is five years.  Leasing commissions are stated at cost.  Amortization is computed on a straight-line basis over the related lease term.

 

Revenue Recognition

 

Rental revenues are recorded on an accrual basis as they are earned over the lives of the respective tenant leases on a straight-line basis.  Rental receivables are periodically evaluated for collectibility.

 

Fair Value of Financial Instruments

 

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

 

Income Tax Matters

 

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

 

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Concentration of Credit Risk

 

The Fund maintains some of its cash in money market accounts which, at times, exceeds federally insured limits.  No losses have been experienced related to such amounts.

 

Reclassifications

 

Certain reclassifications have been made to the 2002 financial statement account balances to conform to the 2003 presentation.

 

Computation of Net Income (Loss) per Unit

 

The basic and diluted income (loss) allocable to unitholders is computed by dividing net income (loss) by the weighted average number of units outstanding for the period.

 

Impact of New Accounting Pronouncements

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation No. 45”).  The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002.  The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002.  Interpretation No. 45 requires the recording of a guarantee liability equal to its estimated fair value based on the expected present value of the estimated probability-weighted range of contingent payments under the guarantee arrangement.  Management has evaluated the impact of the required accounting treatment under Interpretation No. 45 for guarantees issued or modified after December 31, 2002, and as of June 30, 2003 and believes that the provisions of this pronouncement have no effect on the Company’s financial statements.

 

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“Interpretation No. 46”), which applies immediately to arrangements created after January 31, 2003.  Interpretation No. 46 applies to arrangements created before February 1, 2003 beginning on July 1, 2003.  The initial adoption of Interpretation No. 46 for arrangements created after February 1, 2003 did not have a material impact on our financial position or results of operations.  We do not anticipate that the impact of arrangements entered into prior to February 1, 2003 will have a material effect on our financial position or results of operations.

 

In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”).  SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  The Company believes that the adoption of SFAS No. 150 does not have a material impact on the Company’s financial statements.

 

3.                                      Investments in Real Estate

 

On September 27, 2002, the Fund acquired an existing multi-tenant industrial business park known as Normandie Business Center, located in Torrance, California for an investment of $3,901,696.  Normandie Business Center consists of two single-story buildings containing a total of 48,979 leasable square feet.

 

9

 

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

 

Industrial space in the properties is generally leased to tenants under lease terms that provide for the tenants to pay a portion of operating expenses in addition to minimum rent.

 

4.                                      Deferred Offering Costs Advanced by Managing Member

 

Deferred offering costs advanced by the Managing Member for the six months ended June 30, 2003 (unaudited) are as follows:

 

		Deferred Offering Costs
Balance, December 31, 2002		463,614
Costs advanced		106,083
Costs repaid		(126,680		)
Balance, June 30, 2003		$	443,017

 

Specific incremental costs incurred in connection with the offering of membership units are advanced by the Managing Member.  These advances bear simple interest at the prevailing prime commercial lending rate (4.00% at June 30, 2003) plus two percentage points.  Reimbursement of such offering costs is limited to 4% of the gross proceeds of the related offerings.  Offering costs incurred by the Managing Member in excess of the 4% limitation are deferred, and will be reimbursed from future offering proceeds.  Any offering costs incurred by the Managing Member on behalf of the Fund that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the Managing Member, with an offsetting expense recognized in the Fund’s statement of operations.  Through June 30, 2003, the Fund has received, from its Managing Member, cumulative unsecured advances for deferred offering costs in the amount of $930,917 (unaudited), and has repaid the Managing Member $487,900 (unaudited) of those deferred offering costs.

 

5.                                      Related Party Transactions

 

The Fund is to reimburse its Managing Member for deferred offering costs advanced by its Managing Member to the Fund in the amount of 4% of the gross proceeds from the offering of units.  The Fund is to reimburse its Managing Member for 100% of initial operating costs advanced to the Fund.  Deferred offering and initial operating costs advanced to the Fund by its Managing Member bear interest at the prevailing prime commercial lending rate plus two percentage points.

 

In order to fund its initial operating costs, the Fund has received, from its Managing Member, unsecured advances and has incurred interest for a cumulative total of $479,283 (unaudited).  Through June 30, 2003, the Fund has repaid the Managing Member $365,168 (unaudited) of initial operating costs and interest. The initial operating cost advances bear simple interest at the prevailing prime commercial lending rate (4.00% at June 30, 2003) plus two percentage points.  Interest expense totaling $18,098 (unaudited) and $22,938 (unaudited) for the six months ended June 30, 2003 and 2002, respectively, was incurred on these advances.  At June 30, 2003, the balance of initial operating cost advances payable to the Managing Member was $114,115 (unaudited).

 

10

 

An affiliate of the Managing Member, Pacific Cornerstone Capital, Inc., is entitled to receive various fees, compensation and reimbursements as specified in the Fund’s operating agreement, including commissions of 9% of the first $3,000,000 of gross proceeds from the offering of units and 7% thereafter, marketing fees of 2% of gross proceeds from the offering of units less $60,000, and expense allowances of 1.5% of gross proceeds from the offering of units.  During the six months ended June 30, 2003 and 2002, the total fees, compensation and reimbursements were $332,535 (unaudited) and $312,631 (unaudited), respectively, of which a substantial portion is paid out to other broker-dealers.

 

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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 the Fund’s unaudited condensed financial statements and notes thereto contained elsewhere in this prospectus.  Certain statements in this section and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to risks and other factors that may cause the Fund’s future results of operations to be materially different than those expressed or implied herein.  Some of these risks and other factors include, but are not limited to:  (i) no assurance that Fund properties will continue to experience minimal or no vacancy; (ii) tenants may not be able to meet their financial obligations; (iii) rental revenues from the properties may not be sufficient to meet the Fund’s cash requirements for operations, capital requirements and distributions; (iv) suitable investment properties may not continue to be available; and (v) adverse changes to the general economy may disrupt operations.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

Rental revenues are recorded on an accrual basis as they are earned over the lives of the respective tenant leases on a straight-line basis.  Rental receivables are periodically evaluated for collectibility.

 

Investments in Real Estate

 

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

 

Impact of New Accounting Pronouncements

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation No. 45”).  The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002.  The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002.  Interpretation No. 45 requires the recording of a guarantee liability equal to its estimated fair value based on the expected present value of the estimated probability-weighted range of contingent payments under the guarantee arrangement.  Management has evaluated the impact of the required accounting treatment under Interpretation No. 45 for guarantees issued or modified after

 

12

 

December 31, 2002, and as of June 30, 2003 and believes that the provisions of this pronouncement have no effect on our financial statements.

 

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“Interpretation No. 46”), which applies immediately to arrangements created after January 31, 2003.  Interpretation No. 46 applies to arrangements created before February 1, 2003 beginning on July 1, 2003.  The initial adoption of Interpretation No. 46 for arrangements created after February 1, 2003 did not have a material impact on our financial position or results of operations.  We do not anticipate that the impact of arrangements entered into prior to February 1, 2003 will have a material effect on our financial position or results of operations.

 

In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”).  SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  We believe that the adoption of SFAS No. 150 does not have a material impact on our financial statements.

 

Results of Operations

 

As of June 30, 2003, the Fund has purchased two multi-tenant industrial business park properties containing a total of 36 tenant spaces, in two different major metropolitan areas.  The properties were purchased from the proceeds from the sale of membership units, without debt financing.

 

Normandie Business Center, acquired in September 2002, is operating as expected. Lease renewals and new leases have been signed at rental rates slightly higher than our acquisition pro-forma budget. The new leases also include 5% annual increases, which is higher than the 3% increases we assumed during our acquisition forecasting. The property is currently 94% occupied.

 

Sky Harbor Business Park, acquired in December 2002, has also performed as expected.  During the acquisition review, we confirmed that one tenant who occupied 12,002 square feet was planning to vacate when their lease expired on June 30, 2003. This knowledge allowed us to negotiate a reduced purchase price and forecast a number of months for the vacancy and costs to locate a replacement tenant.  According to plan, we are actively marketing the space and anticipate having the space leased by the fourth quarter of 2003.

 

We recently identified another property for acquisition and on July 10, 2003, we opened an escrow account with a refundable deposit of $250,000. The property, IRSCO Business Park, is located in Irwindale, California, a sub-market of metropolitan Los Angeles. The property is situated in a high tenant demand market and is currently 95% occupied.  We have commenced the standard preliminary pre-acquisition review, and formalized the negotiations, with a closing of the transaction expected at the end of August 2003, pending satisfactory results of our formal review.

 

The Fund generated net income for the six months ended June 30, 2003 of $195,860 compared to a net loss of $97,852 for the same period of 2002, for an overall increase in net income of $293,712.  This increase was primarily due to rental revenues of $469,815 generated by the properties we purchased, and a decrease in general and administrative expenses of $32,261 and interest expense on advances payable to managing member of $4,840. This revenue increase of $506,916 was offset by reduced interest income on proceeds from unit sales of $22,153, and property and related expenses of $191,051.

 

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Net income increased $182,206 from a loss of $64,545 for the three months ended June 30, 2002 to a net profit of $117, 661 for the three month period ended June 30, 2003.  During the three month period ended June 30, 2003, the Fund generated rental and tenant reimbursement revenues of $245,644 offset by property operating expenses and depreciation totaling $96,970 from the Fund’s industrial property investments.  These property operations accounted for $148,674 of the $182,206 increase in net income. With the use of cash investment for the acquisition of the two industrial properties, the revenue from interest, dividends and other income declined from $14,622 for the three months ended June 30, 2002 to $1,343 for the three months ended June 30, 2003.  General and administrative expenses also declined from $68,882 to $23,462 for the three months ended June 30, 2002 and June 30, 2003, respectively.

 

The Fund is still in its offering and organizational stage. Additional general and administrative expenses are expected to continue until the capitalization and organization of the Fund is complete.

 

Liquidity and Capital Resources

 

During the six months ended June 30, 2003 the Fund’s cash and cash equivalents increased by $2,759,796.  This is primarily the result of net proceeds from the sale of units during the six month period ended June 30, 2003 of $2,834,465.

 

As of August 1, 2003, the Fund has received $12,609,500 of gross proceeds from the sale of membership units, $109,979 as a capital contribution from the managing member, and paid out $1,913,216 for offering costs.  Of the net proceeds of $10,806,263, the Fund purchased two properties for $6,455,693 and has disbursed $26,987 for additional building costs and improvements, used $308,756 in cumulative operating expenses of the Fund and $64,170 in distributions to unitholders.  The Fund has $3,950,657 in cash and cash equivalents, and a refundable deposit on a proposed property purchase of $250,000.

 

The Fund intends to continue offering membership units for sale and use the net proceeds from the sale of units for the acquisition of additional multi-tenant industrial business park properties, capital improvements to the properties, and for operating expenses and reserves.

 

The Fund expects to meet its short-term liquidity requirements from net cash generated by operations, which we believe will be adequate to meet operating costs of the properties and the Fund, and allow for cash distributions to the unitholders.

 

The Fund’s offering and organizational activities have been financed through advances from the managing member.  A portion of those advances have been reimbursed to the managing member at the rate of 4% of gross proceeds of the Fund’s unit sales pursuant to the prospectus for the offering.  The Fund will continue to incur organizational and offering expenses and the managing member, although not

 

14

 

obligated, intends to continue providing advances for offering and organizational expenses until the sale of membership units is completed.  The managing member must raise funds through the sale of debt or equity securities to obtain the cash necessary to provide these advances.  There can be no assurance as to the amount or timing of the managing member’s receipt of funds.  The Fund will not reimburse the managing member for any amounts advanced by it for offering and organizational expenses which exceed the amounts and percentages set forth in the prospectus for the offering.  Any such expenses incurred by the managing member on behalf of the Fund that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the managing member with an offsetting expense recognized in the Fund’s statement of operations.

 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

 

The Fund invests its cash and cash equivalents in FDIC insured savings accounts which, by their nature, are not subject to interest rate fluctuations.

 

As of June 30, 2003, the Fund had $114,115 in advances payable to its managing member.  The advances are related to loans from affiliates which, by their nature, are not subject to interest rate fluctuations.

 

Item 4.           Controls and Procedures

 

The Fund’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that the Fund files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Chief Executive Officer and the Chief Financial Officer of Cornerstone Ventures, Inc., the manager of the managing member of the Fund, have reviewed the effectiveness of the Fund’s disclosure controls and procedures within the last ninety days and have concluded that the disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated.

 

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PART II - OTHER INFORMATION

 

Item 6.                                   Exhibits and Reports on Form 8-K.

 

(a)	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.
	32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C .§ 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Reports on Form 8-K
	None.

 

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 13^th day of August 2003.

 

	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/ GARY W. NIELSON
				Gary W. Nielson,
				Chief Financial Officer
				(Principal Financial Officer and Principal Accounting Officer)

 

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