SEC Registration No. 333-107750
Filed pursuant to Rule 424(b)(3)
[THE FOLLOWING IS TEXT TO A STICKER TO BE ATTACHED TO THE FRONT COVER OF THE PROSPECTUS IN A MANNER THAT WILL NOT OBSCURE THE RISK FACTORS]
SUPPLEMENTAL INFORMATION—The Prospectus of Cornerstone Realty Fund, LLC consists of this sticker, the Prospectus dated November 1, 2004, Supplement No. 1 dated January 28, 2005 and Supplement No. 2 dated February 11, 2005. Supplement Nos. 1 and 2 contain descriptions of the status of the offering, a property which the fund has purchased, revisions to "Management's Discussion and Financial Condition and Results of Operations" and financial statements and pro forma financial information.
SUPPLEMENT NO. 2
DATED FEBRUARY 11, 2005
TO THE PROSPECTUS DATED NOVEMBER 1, 2004
OF CORNERSTONE REALTY FUND, LLC
This Supplement No. 2 supplements, modifies or supersedes certain information contained in the prospectus of Cornerstone Realty Fund, LLC, dated November 1, 2004, and must be read in conjunction with such prospectus and Supplement No. 1 dated January 28, 2005.
The purpose of this Supplement No. 2 is to include the financial statements and pro forma financial information relating to the acquisition of the Zenith Drive Center located in Glenview, Illinois as described in Supplement No. 1.
We are not aware of any material factors relating to Zenith Drive Center other than those discussed in Supplement No. 1 that would cause the historical financial information presented in this Supplement to be not necessarily indicative of future results.
The following section regarding Zenith Drive Center is inserted at the end of the "Index to Financial Statements" on page F-1 of our prospectus.
| Zenith Drive Center | |||
Report of Independent Registered Public Accounting Firm | F-41 | ||
Statements of Revenue and Certain Expenses for the Year Ended December 31, 2003 and the Nine Months Ended September 30, 2004 (unaudited) | F-42 | ||
Notes to Statements of Revenue and Certain Expenses | F-43 | ||
Cornerstone Realty Fund, LLC | |||
Summary of Unaudited Pro Forma Financial Information | F-45 | ||
Unaudited Pro Forma Condensed Balance Sheet as of September 30, 2004 | F-46 | ||
Unaudited Pro Forma Condensed Statement of Operations for the Year Ended December 31, 2003 | F-48 | ||
Unaudited Pro Forma Condensed Statement of Operations for the Nine Months Ended September 30, 2004 | F-49 | ||
The following financial statements and pro forma financial information relating to the acquisition of the Zenith Drive Center located in Glenview, Illinois are inserted following page F-40 of our prospectus:
1
Report of Independent Registered Public Accounting Firm
To the Members
Cornerstone Realty Fund, LLC
We have audited the accompanying statement of revenue and certain expenses of Zenith Drive Center for the year ended December 31, 2003. This statement of revenue and certain expenses is the responsibility of the management of Zenith Drive Center. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the current report on Form 8-K/A of Cornerstone Realty Fund, LLC) as described in Note 1 and is not intended to be a complete presentation of the revenue and expenses of the property.
In our opinion, the statement of revenue and certain expenses of Zenith Drive Center presents fairly, in all material respects, the revenue and certain expenses described in Note 1 of Zenith Drive Center for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ BDO SEIDMAN, LLP
Costa Mesa, California
January 4, 2005
F-41
ZENITH DRIVE CENTER
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
| | Year ended December 31, 2003 | Nine months ended September 30, 2004 | |||||
|---|---|---|---|---|---|---|---|
| | | (Unaudited) | |||||
| Revenue | |||||||
| Rental revenue | $ | 557,775 | $ | 432,973 | |||
| Tenant reimbursements | 44,534 | 29,408 | |||||
| Other | 2,850 | 1,400 | |||||
| Total revenue | 605,159 | 463,781 | |||||
| Certain Expenses | |||||||
| Property operating and maintenance | 85,893 | 68,023 | |||||
| Property taxes | 104,256 | 79,368 | |||||
| Insurance | 9,027 | 7,299 | |||||
| Total certain expenses | 199,176 | 154,690 | |||||
| Excess of revenue over certain expenses | $ | 405,983 | $ | 309,091 | |||
See accompanying notes to statements of revenue and certain expenses.
F-42
ZENITH DRIVE CENTER
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. Organization and Summary of Significant Accounting Policies
Organization
The accompanying statement of revenue and certain expenses includes the operations of Zenith Drive Center (the "Property") located in Glenview, Illinois, which was acquired by Cornerstone Realty Fund, LLC (the "Fund"), from a nonaffiliated third party. The Property was acquired on January 25, 2005 for $5,200,000 and has 38,008 leasable square feet (unaudited).
Basis of Presentation
The accompanying statements of revenue and certain expenses have been prepared in accordance with the requirements of the Securities and Exchange Commission Regulation S-X, Rule 3-14. Accordingly, the statements exclude items not comparable to the proposed future operations of the Property such as mortgage interest, leasehold rental, depreciation, corporate expenses, and federal and state income taxes.
The accompanying statements are not representative of the actual operations for the periods presented, as certain expenses that may not be comparable to the expenses expected to be incurred by the Fund in the future operations of the Property have been excluded. The statement for the nine months ended September 30, 2004 is unaudited and reflects all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the operating results for the interim period presented. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2004.
Revenue Recognition
Rental revenue is recognized on an accrual basis as it is earned over the lives of the respective tenant leases on a straight-line basis. Rental receivables are periodically evaluated for collectibility.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenue and certain expenses during the reporting period. Actual results could differ materially from the estimates in the near term.
2. Industrial Property
The future minimum lease payments to be received under existing operating leases as of December 31, 2003, are as follows:
| 2004 | $ | 369,362 | |
| 2005 | 119,653 | ||
| 2006 | 91,194 | ||
| 2007 | 71,275 | ||
| 2008 | 55,570 | ||
| Thereafter | 184,500 | ||
| $ | 891,554 | ||
F-43
Industrial space in the Property is generally leased to tenants under lease terms which provide for the tenants to pay increases in operating expenses in excess of specified amounts. The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses.
The leases include scheduled base rent increases over their respective terms; the difference between base rental income on a straight-line basis and amounts currently due pursuant to the lease agreements was not significant.
One tenant represents approximately 14% of the rental income of the Property for the each of the periods presented.
F-44
CORNERSTONE REALTY FUND, LLC
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Statements of Operations of Cornerstone Realty Fund, LLC (the "Fund") for the year ended December 31, 2003 and for the nine months ended September 30, 2004 have been prepared as if the acquisition of Zenith Drive Center had occurred as of January 1, 2003 and Unaudited Condensed Balance Sheet of the Fund as of September 30, 2004 has been prepared as if the acquisition of Zenith Drive Center had occurred on September 30, 2004.
Such Unaudited Pro Forma Financial Information is based in part upon (i) the Audited Financial Statements of the Fund for the year ended December 31, 2003 included in the Fund's Annual Report on Form 10-K for the year ended December 31, 2003; (ii) the Unaudited Financial Statements of the Fund as of and for the nine months ended September 30, 2004 included in the Fund's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004; and (iii) the Historical Statements of Revenue and Certain Expenses of Zenith Drive Center for the year ended December 31, 2003 and for the nine months ended September 30, 2004 (unaudited) filed herewith.
The Unaudited Pro Forma Financial Information is presented for information purposes only and is not necessarily indicative of the financial position or results of operations of the Fund that would have occurred if the acquisition of Zenith Drive Center had been completed on the date indicated, nor does it purport to be indicative of future financial position or results of operations. In the opinion of the Fund's managing member, all material adjustments necessary to reflect the effect of this transaction have been made.
F-45
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
ASSETS
| | September 30, 2004(A) | Recent Acquisition(B) | Proforma September 30, 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 7,873,682 | $ | (5,001,164 | ) | $ | 2,872,518 | ||||
| Investments in real estate | |||||||||||
| Land | 4,539,400 | 900,000 | 5,439,400 | ||||||||
| Buildings and improvements, less accumulated depreciation of $277,734 | 7,636,970 | 4,300,000 | 11,936,970 | ||||||||
| Intangible asset—in place leases, less accumulated amortization of $95,957 | 71,457 | — | 71,457 | ||||||||
| 12,247,827 | 5,200,000 | 17,447,827 | |||||||||
| Other assets | |||||||||||
| Tenant and other receivables | 69,321 | — | 69,321 | ||||||||
| Prepaid insurance | 8,817 | — | 8,817 | ||||||||
| Leasing commissions, less accumulated amortization of $9,580 | 39,338 | — | 39,338 | ||||||||
| Total assets | $ | 20,238,985 | $ | 198,836 | $ | 20,437,821 | |||||
LIABILITIES AND MEMBERS' CAPITAL | |||||||||||
Liabilities | |||||||||||
| Accounts payable and accrued Liabilities | $ | 53,139 | $ | 20,409 | $ | 73,548 | |||||
| Real estate taxes payable | 140,030 | 118,151 | 258,181 | ||||||||
| Tenant security deposits | 141,264 | 60,276 | 201,540 | ||||||||
| Total liabilities | 334,433 | 198,836 | 533,269 | ||||||||
| Members' capital (100,000 units authorized, 48,728 units issued and outstanding in 2004 and 33,012 units issued and outstanding in 2003) | 19,904,552 | — | 19,904,552 | ||||||||
| $ | 20,238,985 | $ | 198,836 | $ | 20,437,821 | ||||||
F-46
CORNERSTONE REALTY FUND, LLC
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
(Unaudited)
| | Cornerstone Realty Fund, LLC Historical(A) | Recent Acquisition(B) | Cornerstone Realty Fund, LLC Pro Forma | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | |||||||||||
| Rental revenue | $ | 750,727 | $ | 557,775 | $ | 1,308,502 | |||||
| Tenant reimbursements | 136,963 | 44,534 | 181,497 | ||||||||
| 887,690 | 602,309 | 1,489,999 | |||||||||
| Expenses | |||||||||||
| Property operating and maintenance | (135,491 | ) | (94,920 | ) | (230,411 | ) | |||||
| Property taxes | (162,592 | ) | (104,256 | ) | (266,848 | ) | |||||
| General and administrative expenses | (174,875 | ) | — | (174,875 | ) | ||||||
| Interest expense on advances payable to managing member | (3,993 | ) | — | (3,993 | ) | ||||||
| Depreciation and Amortization | (115,063 | ) | (110,256 | ) | (225,319 | ) | |||||
| (592,014 | ) | (309,432 | ) | (901,446 | ) | ||||||
| Interest, dividends and other | 25,542 | 2,850 | 28,392 | ||||||||
| Net income | $ | 321,218 | $ | 295,727 | $ | 616,945 | |||||
| Net income allocable to managing member | $ | 32,122 | $ | 61,695 | |||||||
| Net income allocable to unitholders | $ | 289,096 | $ | 555,250 | |||||||
| Per share amounts: | |||||||||||
| Basic and diluted income allocable to unitholders | $ | 11.92 | $ | 22.89 | |||||||
| Basic and diluted weighted average units outstanding | 24,256 | 24,256 | |||||||||
F-47
CORNERSTONE REALTY FUND, LLC
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2004
(Unaudited)
| | Cornerstone Realty Fund, LLC Historical(A) | Recent Acquisition(B) | Cornerstone Realty Fund, LLC Pro Forma | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | |||||||||||
| Rental revenue | $ | 904,360 | $ | 432,973 | $ | 1,337,333 | |||||
| Amortization of in-place leases | (95,957 | ) | — | (95,957 | ) | ||||||
| Tenant reimbursements | 169,623 | 29,408 | 199,031 | ||||||||
| 978,026 | 462,381 | 1,440,407 | |||||||||
| Expenses | |||||||||||
| Property operating and maintenance | (206,685 | ) | (75,322 | ) | (282,007 | ) | |||||
| Property taxes | (150,907 | ) | (79,368 | ) | (230,275 | ) | |||||
| General and administrative expenses | (141,971 | ) | — | (141,971 | ) | ||||||
| Interest expense on advances payable to managing member | — | — | — | ||||||||
| Depreciation and Amortization | (156,788 | ) | (82,892 | ) | (239,680 | ) | |||||
| (656,351 | ) | (237,582 | ) | (893,933 | ) | ||||||
| Interest, dividends and other | 10,174 | 1,400 | 11,574 | ||||||||
| Net income | $ | 331,849 | $ | 226,199 | $ | 558,048 | |||||
| Net income allocable to managing member | $ | 33,185 | $ | 55,805 | |||||||
| Net income allocable to unitholders | $ | 298,664 | $ | 502,243 | |||||||
| Per share amounts: | |||||||||||
| Basic and diluted income allocable to unitholders | $ | 7.37 | $ | 12.39 | |||||||
| Basic and diluted weighted average units outstanding | 40,532 | 40,532 | |||||||||
F-48
