Cornerstone Realty Fund 10-Q 2009 Q2 Quarterly report

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 June 30, 2009

or

£ 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.

T  Yes  £  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 £  Accelerated filer £  Non-accelerated filer £  Smaller Reporting Company T

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

£  Yes  T  No

1

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008	3
	Condensed Statements of Operations for the Three and Six Months ended June 30, 2009 (unaudited) and June 30, 2008 (unaudited)	4
	Condensed Statement of Members’ Capital for the Six Months ended June 30, 2009 (unaudited)	5
	Condensed Statements of Cash Flows for the Six Months ended June 30, 2009 (unaudited) and June 30, 2008 (unaudited)	6
	Notes to Condensed Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 6.	Exhibits	15
SISIGNATURES		16

2

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED BALANCE SHEETS

	June 30, 2009		December 31, 2008
	(unaudited)		(a)
ASSETS
Cash and cash equivalents	$	1,669,000	$	2,289,000
Investments in real estate
Land		11,474,000		11,474,000
Buildings and improvements, net		19,542,000		19,885,000
Intangible lease assets, net		189,000		198,000
Intangible in-place lease assets, net		40,000		84,000
		31,245,000		31,641,000
Tenant and other receivables, net		280,000		274,000
Prepaid expenses and other assets		31,000		36,000
Leasing commissions, less accumulated amortization of $443,000 as of June 30, 2009 and $391,000 as of December 31, 2008		199,000		161,000
Total assets	$	33,424,000	$	34,401,000
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable, accrued and other liabilities	$	266,000	$	316,000
Real estate taxes payable		219,000		219,000
Tenant security deposits		276,000		295,000
Intangible lease liability, net		17,000		32,000
Total liabilities		778,000		862,000
Members’ capital (100,000 units authorized and issued as of June 30, 2009 and December 31, 2008; 99,161 and 99,350 units outstanding as of June 30, 2009 and December 31, 2008, respectively)		32,646,000		33,539,000
Total liabilities and members’ capital	$	33,424,000	$	34,401,000

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

(a) Derived from the audited financial statements as of December 31, 2008.

3

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Revenues
Rental revenues	$	765,000	$	855,000	$	1,538,000	$	1,704,000
Tenant reimbursements and other income		164,000		169,000		314,000		350,000
		929,000		1,024,000		1,852,000		2,054,000
Expenses
Property operating and maintenance		187,000		284,000		389,000		514,000
Property taxes		144,000		144,000		287,000		289,000
General and administrative		88,000		85,000		167,000		153,000
Depreciation and amortization		236,000		266,000		474,000		530,000
		655,000		779,000		1,317,000		1,486,000
Interest income		-		10,000		1,000		33,000
Net income	$	274,000	$	255,000	$	536,000	$	601,000
Net income allocable to managing member	$	27,000	$	26,000	$	54,000	$	60,000
Net income allocable to unit holders	$	247,000	$	229,000	$	482,000	$	541,000
Per unit amounts
Basic and diluted income allocable to unit holders	$	2.49	$	2.30	$	4.85	$	5.43
Basic and diluted weighted average units outstanding		99,231		99,598		99,296		99,635

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, 2008	$	33,539,000
Cash distributions to unit holders		(1,238,000	)
Cash distributions to managing member		(125,000	)
Units repurchased and retired		(66,000	)
Net income		536,000
Balance, June 30, 2009	$	32,646,000

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)

	Six Months Ended June 30,
	2009			2008
OPERATING ACTIVITIES
Net income	$	536,000		$	601,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debt		9,000			32,000
Depreciation and amortization		474,000			530,000
Changes in operating assets and liabilities
Other assets		(100,000	)		(96,000	)
Accounts payable, accrued and other liabilities		(84,000	)		(89,000	)
Net cash provided by operating activities		835,000			978,000
INVESTING ACTIVITIES
Investments in real estate		(26,000	)		(159,000	)
Net cash used in investing activities		(26,000	)		(159,000	)
FINANCING ACTIVITIES
Cash distributions to unit holders		(1,238,000	)		(2,246,000	)
Cash distributions to managing member		(125,000	)		(104,000	)
Units repurchased and retired		(66,000	)		(74,000	)
Net cash used in financing activities		(1,429,000	)		(2,424,000	)
Net decrease in cash		(620,000	)		(1,605,000	)
Cash and cash equivalents at beginning of period		2,289,000			4,201,000
Cash and cash equivalents at end of period	$	1,669,000		$	2,596,000

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

(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, “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 pursuant to the Securities Act of 1933.  On August 18, 2005, we completed a public offering of these units.  As of that date, we had issued 100,000 units to unit holders for gross offering proceeds of $50,000,000, before discounts of $39,780.

Our interim unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission.  As permitted by the Securities and Exchange Commission filing requirements for Form 10-Q, the condensed financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In preparing the accompanying interim financial statements, we have evaluated the potential occurrence of subsequent events through August 10, 2009, the date at which the financial statements were issued. 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, 2008.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with accounting principles generally accepted in the United States have been included.  Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending 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.

7

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

— 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.

2. Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of interest-bearing investments with original maturities of 90 days or less at the date of purchase.  We place our cash with major financial institutions.  At times, cash balances may be in excess of amounts insured by Federal agencies. The carrying amounts approximate fair value.

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 and depreciated over their estimated useful lives.   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 shorter of related lease term or expected useful life.

We evaluate the carrying value for investments in real estate in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 144,” Accounting for the Impairment or Disposal of Long-Lived Assets”(“SFAS 144”).  We periodically evaluate our investments in real estate for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. In the fourth quarter of 2008, we recorded an impairment charge of approximately $1.8 million.

In accordance with FASB No. 141, “Business Combinations” (“SFAS 141”), we allocated the purchase price of acquired properties to land, buildings and improvements and identified tangible and intangible assets and liabilities associated with in-place leases (including tenant improvements, unamortized leasing commissions, value of above and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values.

The fair value of the tangible assets of the acquired properties considers the value of the properties as if vacant as of the acquisition date.  Management must make significant assumptions in determining the value of assets and liabilities acquired.  Amounts allocated to land are derived from comparable sales of land within the same region.  Amounts allocated to buildings and improvements, tenant improvements and unamortized leasing commissions are based on current market replacement costs and other market rate information.

Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.  The value of acquired above and below market leases is amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on our statement of operations.

The amount allocated to acquired in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased.  The amount allocated to acquired in-place leases is included in intangible assets — in-place lease assets in the condensed balance sheet and amortized to expense over the remaining non-cancelable term of the respective leases.

8

Estimated amortization associated with the intangible lease assets, in-place lease assets and intangible lease liability for July 1, 2009 through December 31, 2009 and each of the four subsequent years is as follows:

	Lease Intangibles
July 1, 2009 to December 31, 2009	$	29,000
2010		22,000
2011		18,000
2012		18,000
2013		13,000
Thereafter		112,000
Total	$	212,000

As of June 30, 2009, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:

	Land		Buildings and Improvements			Intangible Lease Assets			In-Place Lease Assets			Intangible Lease Liability
Investments in real estate and related lease intangibles	$	11,474,000	$	22,537,000		$	365,000		$	894,000		$	(154,000	)
Less: accumulated depreciation and amortization		—		(2,995,000	)		(176,000	)		(854,000	)		137,000
Net investments in real estate and related lease intangibles	$	11,474,000	$	19,542,000		$	189,000		$	40,000		$	(17,000	)

As of December 31, 2008, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:

	Land			Buildings and Improvements			Intangible Lease Assets			In-Place Lease Assets			Intangible Lease Liability
Investments in real estate and related lease intangibles	$	11,779,000		$	23,829,000		$	550,000		$	894,000		$	(155,000	)
Less: impairment charge		(305,000	)		(1,318,000	)		(185,000	)
Investment in real estate values		11,474,000			22,511,000			365,000			894,000			(155,000	)
Less: accumulated depreciation and amortization		—			(2,626,000	)		(167,000	)		(810,000	)		123,000
Net investments in real estate and related lease intangibles	$	11,474,000		$	19,885,000		$	198,000		$	84,000		$	(32,000	)

Depreciation and amortization related to investments in real estate and related lease intangibles for the three months ended June 30, 2009 and 2008 were $203,000 and $224,000, respectively.  Depreciation and amortization related to investments in real estate and related lease intangibles for the six months ended June 30, 2009 and 2008 were $408,000 and $448,000, respectively.

Leasing Commissions

Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term.  As of June 30, 2009 and December 31, 2008, we had recorded approximately $642,000 and $552,000 in leasing commissions, respectively. Amortization expense for the three months ended June 30, 2009 and 2008 was approximately $26,000 and 35,000, respectively. Amortization expense for the six months ended June 30, 2009 and 2008 was approximately $52,000 and $67,000, respectively.

9

Revenue Recognition

Rental revenues are recorded on an accrual basis as they are earned over the lives of the respective tenant leases on a straight-line basis.  Included in this calculation are contractual rent increases and amounts paid to tenants as tenant improvement allowances.  Rental receivables are periodically evaluated for collectability.

Accounts Receivable

We periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements.  The Fund exercises judgment in establishing these allowances and considers payment history and current credit status of its tenants in developing these estimates.

Fair Value of Financial Instruments

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

Income Tax Matters

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

Concentration of Credit Risk

We maintain some of our cash in money market accounts which, at times, may exceed federally insured limits.  No losses have been experienced related to such amounts.

Impact of New Accounting Pronouncements

In late 2007, the FASB issued SFAS No. 141R, a revision of SFAS No. 141, “Accounting for Business Combinations.”  This standard expands the use of fair value principles as well as the treatment of pre-acquisition costs.  This standard is effective for fiscal years beginning after December 15, 2008 (and thus acquisitions after December 31, 2008).  We adopted SFAS No. 141R as of January 1, 2009, and it did not have a material impact to our financial position or results of operations.

In February 2008, FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157, “Fair Value Measurements,” for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  We adopted SFAS No. 157 as it relates to non-financial assets and liabilities as of January 1, 2009 and it did not have a material impact to our financial position or results of operations.

In April 2008, FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends paragraph 11(d) of FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. We adopted SFAS 142-3 as of January 1, 2009, and it did not have a material impact to our financial position or results of operations.

In October 2008, FASB issued Staff Position No. SFAS 157-3, which clarifies the application of FASB SFAS No. 157, “Fair Value Measurements”. Staff Position No. 157-3 provides guidance in determining the fair value of a financial asset when the market for that financial asset is not active.  We adopted Staff Position No. 157-3 as of January 1, 2009, and it did not have a material impact to our financial position or results of operations.

In April 2009, FASB issued SFAS No 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, relating to determination of fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 states is the objective of fair value measurement—to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.  We have considered this guidance in making our fair value measurements as of June 30, 2009, and it did not have a significant impact on those measurements.

10

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”(“SFAS 160”) which establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The objective of the guidance is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.  We adopted SFAS 160 as of January 1, 2009 and it did not have a material impact to our financial position or results of operations.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162," which will become the source of authoritative US GAAP recognized by the FASB to be applied to nongovernmental entities. It is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Fund does not believe that this will have a material effect on its financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”) and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), SFAS 166 removes the concept of a qualifying special-purpose entity from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”) and removes the exception from applying FIN 46R. This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. SFAS 168 amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently within the scope of FIN 46(R), as well as qualifying special-purpose entities that are currently excluded from the scope of FIN 46(R). These statements are effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Fund does not believe that they will have a material effect on its financial statements.

In June 2009, the FASB issued SFAS No. 165, "Subsequent Events" which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009.  We adopted SFAS 165 as of June 30, 2009 and it did not have a material effect on the financial statements.

3. Subsequent Event

In July 2009, we repurchased and retired 203 units for approximately $71,000.

11

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

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report.  Certain statements in this section and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to risks and other factors that may cause our future results of operations to be materially different than those expressed or implied herein.  Some of these risks and other factors include, but are not limited to: (i) no assurance that our properties will continue to experience the current level of occupancy; (ii) tenants may not be able to meet their financial obligations; (iii) rental revenues from the properties may not be sufficient to meet our cash requirements for operations, capital requirements and distributions; and (iv) adverse changes to the general economy may disrupt operations.  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, 2008 and in Part II, Item 1A of our quarterly report on form 10-Q for the quarterly period ended March 31, 2009.

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, 2008, as filed with the SEC.

Results of Operations

Continuing operations for the three and six months ended June 30, 2009 and 2008 consists of six multi-tenant industrial business park properties in three major metropolitan areas.  The results of operations for the three and six months ended June 30, 2009 and 2008 are discussed below.

Three months ended June 30, 2009 and 2008

Revenues for the second quarter of 2009 decreased to approximately $929,000 from approximately $1,024,000 for the comparable period of 2008.  The decrease was primarily due to lower occupancies partially offset by rent escalations.

Property operating and maintenance expenses in the second quarter of 2009 decreased to approximately $187,000 from approximately $284,000 for the comparable period of 2008.  The decrease was primarily due to a lower repair, maintenance and refurbishments costs, and lower insurance premiums.  Property taxes in the second quarter of 2009 were comparable to the same period of 2008.

General and administrative expenses in the second quarter of 2009 are comparable to the same period of 2008.  Depreciation and amortization expenses for the second quarter of 2009 decreased to approximately $236,000 from approximately $266,000 for the comparable period of 2008 as a result of the real estate impairment recorded in December 31, 2008.

Interest and other income decreased to approximately $0 in the second quarter of 2009 from approximately $10,000 in the comparable period of 2008.  The decrease was due primarily to the lower average cash balance available for short term investment combined with the low investment rates offered by the banks during the second quarter of 2009.

 Six months ended June 30, 2009 and 2008

Revenues for the first six months of 2009 decreased to approximately $1,852,000 from approximately $2,054,000 for the comparable period of 2008.  The decrease was primarily due to lower occupancies offset by increases from renewal of existing tenants and replacement tenants.

Property operating and maintenance expenses decreased to approximately $389,000 in the first six months of 2009 from approximately $514,000 in the first six months of 2008.  The decrease is primarily due a reduction in repair, maintenance and refurbishments costs and lower insurance premiums.  Property taxes in the first six months of 2009 were comparable to the same period of 2008.

General and administrative costs for the first six months increased to approximately $167,000 from approximately $153,000 due primarily to higher professional fees offset by lower SOX compliance costs.  Depreciation and amortization in the first six months of 2009 decreased to approximately $474,000 from approximately $530,000 for the comparable period of 2008 as a result of real estate impairment recorded in December 31, 2008.

12

Interest and other income decreased to approximately $1,000 in the first six months of 2009 from approximately $33,000 in the comparable period of 2008.  The decrease is due primarily to the lower average cash balances available for short term investments combined with lower investment rates during the first six months of 2009.

Liquidity and Capital Resources

As of July 31, 2009, we had approximately $1.3 million 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 and fund distributions. Cash in excess of these needs will be available for our unit repurchase program and for distribution to unit holders.

Our management believes the cash on hand and the net cash generated by the properties will be adequate to meet operating costs of the properties and the Fund, and allow for cash distributions to our unit holders.

13

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 June 30, 2009, 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 reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.  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.

Our management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of our managing member, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

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.

14

PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders

On April 16, 2009, we commenced a solicitation of written consent and approval from the holders of the our limited liability company interests to approve an amendment to our operating agreement, without the necessity of holding a special meeting of the holders.  The purpose of the amendment was to change our dissolution date under the operating agreement from December 31, 2010 to December 31, 2012 in order to provide more time for an orderly dissolution and disposition of our assets

The affirmative consent of a majority of the outstanding percentage interests was required to approve the amendment to the operating agreement. As of May 27, 2009, we received affirmative consents from holders of a majority of the outstanding percentage interests and therefore concluded the consent process and caused our operating agreement to be amended effective as of June 2, 2009.

Item 6.  Exhibits

3.1 Amended and Restated Operating Agreement of Cornerstone Realty Fund, LLC dated as of June 30, 2003 (as amended on February 22, 2007 and June 2, 2009).

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.

15

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 10th day of August 2009.

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)

16