Cornerstone Realty Fund 10-Q 2011 Q3 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 September 30, 2011

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.    x  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).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Statement of Net Assets as of September 30, 2011 (Liquidation Basis — unaudited)	3
Condensed Balance Sheet as of December 31, 2010 (Going Concern Basis — unaudited)	4
Condensed Statements of Operations for the Five Months Ended May  31, 2011 (Going Concern Basis — unaudited) and for the Three and Nine Months Ended September 30, 2010 (Going Concern Basis — unaudited)	5
Condensed Statement of Changes in Net Assets for the Three and Four Months Ended September  30, 2011 (Liquidation Basis — unaudited)	6
Condensed Statement of Members’ Equity for the Five Months Ended May  31, 2011 (Going Concern Basis — unaudited)	7
Condensed Statements of Cash Flows for the Five Months Ended May  31, 2011 and for the Nine Months Ended September 30, 2010 (Going Concern Basis — unaudited)	8
Notes to Condensed Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Qualitative and Quantitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19
PART II — OTHER INFORMATION
Item 5. Other Information	21
Item 6. Exhibits	22
Signatures	23

2

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENT OF NET ASSETS

(Liquidation Basis)

As of September 30, 2011 (Unaudited)

	September 30, 2011
ASSETS
Investment in real estate	$	23,013,000
Cash and cash equivalents		3,195,000
Total assets		26,208,000
LIABILITIES
Accounts payable and accrued liabilities		409,000
Note payable		3,949,000
Liability for estimated costs in excess of estimated receipts during the liquidation period		441,000
Total liabilities		4,799,000
Net assets in liquidation	$	21,409,000

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

3

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED BALANCE SHEET

(Going Concern Basis)

December 31, 2010 (Unaudited)

	December 31, 2010
ASSETS
Cash and cash equivalents	$	4,356,000
Investments in real estate
Land		9,593,000
Buildings and improvements, net		15,649,000
Intangible asset — in-place leases, net		104,000
		25,346,000
Other assets
Tenant and other receivables, net		292,000
Prepaid expenses and other assets		19,000
Deferred financing cost, net		77,000
Leasing commissions, net		195,000
Total assets	$	30,285,000
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable, accrued liabilities and prepaid rent	$	157,000
Distributions payable		622,000
Real estate taxes payable		231,000
Tenant security deposits		254,000
Note payable		3,987,000
Total liabilities		5,251,000
Commitments and contingencies (Note 8)
Members’ capital (100,000 units authorized and issued as of December 31, 2010; 98,670 units outstanding as of December 31, 2010)		25,034,000
Total liabilities and members’ capital	$	30,285,000

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

4

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENTS OF OPERATIONS

For the Five Months Ended May 31, 2011 (Going Concern Basis — unaudited) and

for the Three and Nine Months Ended September 30, 2010 (Going Concern Basis — unaudited)

	Five Months Ended May 31,			Three Months Ended September 30,		Nine Months Ended September 30,
	2011			2010		2010
Revenues:
Rental revenues	$	1,054,000		$	579,000	$	1,785,000
Tenant reimbursements and other income		291,000			128,000		364,000
		1,345,000			707,000		2,149,000
Expenses:
Property operating and maintenance		352,000			213,000		642,000
Property taxes		254,000			112,000		334,000
General and administrative		261,000			59,000		246,000
Depreciation and amortization		416,000			202,000		589,000
Impairment of real estate		—			—		560,000
		1,283,000			586,000		2,371,000
Interest expense		107,000			—		—
Income (loss) from continuing operations		(45,000	)		121,000		(222,000	)
Income (loss) from discontinued operations		—			56,000		141,000
Net income (loss)	$	(45,000	)	$	177,000	$	(81,000	)
Net income (loss) allocable to managing member
From continuing operations	$	(5,000	)	$	12,000	$	(22,000	)
From discontinued operations		—			6,000		14,000
	$	(5,000	)	$	18,000	$	(8,000	)
Net income (loss) allocable to unit holders
From continuing operations	$	(40,000	)	$	109,000	$	(200,000	)
From discontinued operations		—			50,000		127,000
	$	(40,000	)	$	159,000	$	(73,000	)
Per unit amounts:
Basic and diluted net income (loss) from continuing operations allocable to unit holders	$	(0.41	)	$	1.10	$	(2.03	)
Basic and diluted net income (loss) from discontinued operations allocable to unit holders	$	—		$	0.51	$	1.29
Basic and diluted weighted average number of units outstanding		98,627			98,670		98,725

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

5

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS

For the Three and Four Months Ended September 30, 2011

(Liquidation Basis — unaudited)

	Three Months Ended September 30,			Four Months Ended September 30,
	2011			2011
Net assets in liquidation, beginning of period	$	22,283,000		$	22,283,000
Changes in net assets in liquidation:
Changes to the liability for estimated costs in excess of estimated receipts during the liquidation period:
Net (inflows) outflows from operating activities		(532,000	)		(693,000	)
Quarterly distributions to unit holders		614,000			614,000
Capital expenditures		16,000			29,000
Disbursement of redemptions		50,000			50,000
Change in estimated liquidation reserve		213,000			213,000
Changes to the liability for estimated costs in excess of estimated receipts during the liquidation period		361,000			213,000
Changes in net realizable value of assets and liabilities:
Change in net realizable value of real estate investments		(1,087,000	)		(1,087,000	)
Change in assets and liabilities due to activity in liability for estimated costs in excess of estimated receipts during the liquidation period		(148,000	)		—
Change in net assets in liquidation		(874,000	)		(874,000	)
Net assets in liquidation, end of period	$	21,409,000		$	21,409,000

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

6

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENT OF MEMBERS’ EQUITY

For the Five Months Ended May 31, 2011

(Going Concern Basis — unaudited)

	Number of Units			Total
BALANCE — December 31, 2010		98,670		$	25,034,000
Distributions		—			(664,000	)
Redemptions		(213	)		(49,000	)
Net loss		—			(45,000	)
BALANCE — May 31, 2011		98,457		$	24,276,000

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

7

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

CONDENSED STATEMENTS OF CASH FLOWS

For the Five Months Ended May 31, 2011 and

the Nine Months Ended September 30, 2010

(Going Concern Basis — unaudited)

	Five Months Ended May 31, 2011			Nine Months Ended September 30, 2010
OPERATING ACTIVITIES
Net loss	$	(45,000	)	$	(81,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred financing costs		11,000			—
Depreciation and amortization		416,000			604,000
Provision for bad debt		(4,000	)		148,000
Impairment of real estate		—			560,000
Straight-line rent and amortization of acquired above/below market leases, net		21,000			(34,000	)
Changes in operating assets and liabilities:
Tenant and other receivables, net		4,000			(104,000	)
Prepaid expenses and other assets		(67,000	)		(84,000	)
Accounts payable, accrued liabilities and prepaid rent		123,000			(41,000	)
Real estate taxes payable		(35,000	)		146,000
Tenant security deposits		—			(10,000	)
Net cash provided by operating activities		424,000			1,104,000
INVESTING ACTIVITIES
Capital expenditures		(69,000	)		(127,000	)
Net cash used in investing activities		(69,000	)		(127,000	)
FINANCING ACTIVITIES
Repayment of note payable		(22,000	)		—
Cash distributions to unit holders		(1,230,000	)		(623,000	)
Cash distributions to managing member		(56,000	)		—
Units repurchased and retired		(49,000	)		(49,000	)
Deferred financing costs		—			(16,000	)
Net cash used in financing activities		(1,357,000	)		(688,000	)
Net (decrease) increase in cash and cash equivalents		(1,002,000	)		289,000
Cash and cash equivalents at beginning of period		4,356,000			761,000
Cash and cash equivalents at end of period	$	3,354,000		$	1,050,000
Supplemental disclosure of non-cash financing and investing activities:
Cash paid for interest	$	96,000		$	—
Accrued additions to real estate	$	—		$	(5,000	)

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

8

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

1. Organization and Description of 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 for the periods through May 31, 2011 (prepared under the going-concern basis of accounting) 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 on a going concern basis. Our accompanying interim unaudited condensed financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position for the interim periods. 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, 2010. As outlined below, commencing on June 1, 2011 we adopted the liquidation basis of accounting.

2. Plan of Liquidation

In anticipation of the Fund’s scheduled dissolution date of December 31, 2012, our managing member began the process of evaluating strategic alternatives for winding up the Fund in order to maximize overall returns for our investors. Our managing member initiated the examination in early 2011, rather than waiting until 2012 because of the inherent uncertainty of the future and our managing member’s view of (i) current market conditions, (ii) the current increasing costs of corporate compliance (including, without limitation, all federal, state and local regulatory requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended), (iii) the need to reduce or suspend our distributions and (iv) the other factors discussed in more detail in the Definitive Proxy Statement as filed by the Fund with the SEC on April 1, 2011.

After a thorough analysis, consultation with a real estate broker specializing in multi-tenant industrial real estate in the geographical regions where our properties are located, and a targeted solicitation of bids for a potential sale of our portfolio, our managing member concluded that a liquidation of the Fund at this time will more likely produce greater returns for our investors within a reasonable period of time than other potential exit strategies reasonably available to us, including waiting until 2012 to complete a liquidation. On April 1, 2011, we filed a definitive proxy statement with the SEC to disclose our plan to solicit unitholders’ approval of our liquidation plan.

The plan of liquidation was approved by our unitholders on May 29, 2011. As a result, we adopted the liquidation basis of accounting as of June 1, 2011 and for all subsequent periods, as the results of operations for May 30 and 31, 2011 were not material to the financial results for the periods presented. The net assets in liquidation at September 30, 2011 would have resulted in liquidation distributions of approximately $217 per unit. The estimates for liquidation distributions per unit include projections of costs and expenses expected to be incurred during the period required to complete the plan of liquidation. These projections could change materially based on the timing of any sales, the performance of the underlying assets and changes in the underlying assumptions of the projected cash flows. There can be no assurance about the amount of any liquidating distributions and it is possible that there might not be any funds available for liquidating distributions. Additionally, our managing member receives compensation from the Fund pursuant to our operating agreement. The maximum amount of fees that would be due to our managing member for disposing of our property interests, based on the current estimated maximum sales prices of our properties and the terms of the operating agreement, would be $1.1 million. Actual fees paid may be lower or higher than this estimate.

9

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

On June 7, 2011, we became obligated under a purchase and sale agreement in connection with the liquidation of the Fund’s real estate properties by Birtcher Anderson Realty, LLC, for a purchase price of $26.4 million. Under the Agreement, the sale was scheduled to close on or before August 1, 2011, however, due to the bidder’s inability to secure acceptable financing for the transaction, the parties agreed to terminate the Agreement effective as of July 1, 2011.

On September 8, 2011, we became obligated under a purchase and sale agreement in connection with the sale of the Fund’s real estate properties by Rexford Industrial Fund V, L.P. for a purchase price of $25.1 million. Except with respect to specific contingencies, the buyer does not have the right to terminate the agreement without our consent. On October 11, 2011, the purchase agreement was amended to adjust the purchase price to $24.7 million and extend the property inspection period for one property. Additionally, on November 7, 2011, the purchase agreement was amended to extend the property inspection period for one property to November 14, 2011 and extend the closing date to November 29, 2011. All other contingencies were deemed to be satisfied or waived.

3. 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, 2010. 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 accounting principles generally accepted in the United States of America (“GAAP”) in conjunction with the rules and regulations of the SEC on a going concern basis and under the liquidation basis of accounting (adopted on June 1, 2011). 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. Our accompanying interim condensed financial statements should be read in conjunction with our audited financial statements and the notes thereto included on our 2010 Annual Report on Form 10-K, 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.

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,Fair Value Measurement (“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

10

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

unobservable inputs reflect the reporting entity’s assumptions about market participant assumptions used to value an asset or liability.

Financial assets and liabilities measured at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1.Quoted prices in active markets for identical instruments.

Level 2.Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3.Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

11

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

Assets and liabilities measured at fair value 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 as a level 3 instrument.

We generally determine or calculate the fair value of financial instruments 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 sheet as of December 31, 2010 includes the following financial instruments: cash and cash equivalents, tenant and other receivables, prepaid expenses and other assets, accounts payable, accrued liabilities and prepaid rent, distributions payable, real estate taxes payable, tenant security deposits and a note payable. For all instruments noted except for the note payable, we considered the carrying values to approximate fair value because of the short period of time between origination of the instruments and their expected payment. As of December 31, 2010 (prior to the adoption of liquidation-basis accounting) the fair value of the note was $4.0 million, consistent with its carrying value.

Liquidation Basis of Accounting

As a result of the approval of our plan of liquidation by our unitholders, we adopted the liquidation basis of accounting as of June 1, 2011, and for all subsequent periods. Accordingly, on June 1, 2011, all assets were adjusted to their estimated net realizable value. Liabilities, including estimated costs associated with implementing our plan of liquidation, were adjusted to their estimated settlement amounts. The valuation of real estate held for sale is based on current contracts, estimates and other indications of sales value net of estimated selling costs. Actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated. Estimated future cash flows from property operations were made based on the anticipated sales dates of the assets. Due to the uncertain timing of and cash flows from the anticipated sales, operating cash flows may differ materially from amounts estimated. These amounts are presented in the accompanying condensed statement of net assets in liquidation. Net assets in liquidation represents the estimated liquidation value of our assets available to our unitholders upon liquidation. The actual amounts realized for assets and actual settlement amounts of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated. In particular, the estimates of our costs will vary with the length of time necessary to complete the plan of liquidation. Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate presented in the accompanying statement of net assets in liquidation.

Since June 1, 2011, the date we adopted liquidation basis accounting, we continually evaluate the net realizable value of our existing portfolio, and adjust our liquidation value of the related assets and liabilities accordingly.

4. Liability for Estimated Costs in Excess of Estimated Receipts During the Liquidation Period

Under the liquidation basis of accounting, we are required to estimate, and record as an asset, the cash flows from operations through the liquidation period and accrue the costs associated with implementing our plan of liquidation. We currently estimate that we will have operating cash outflows from our estimated costs in excess of our receipts during the liquidation period. Estimated amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, estimates of tenant improvements incurred and paid, the timing of the property sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of our operations. These costs are estimated and are expected to be paid out over the remaining liquidation period.

12

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

The change in the net liability for estimated disbursements in excess of estimated receipts during liquidation for the four months ended September 30, 2011 is as follows:

	June 1, 2011			Cash Payments and  (Receipts)			Change in Estimates			September 30, 2011
Estimated net (inflows) outflows from operating activities	$	157,000		$	(693,000	)	$	298,000		$	(238,000	)
Liabilities:
Liquidation costs		(70,000	)		—			(85,000	)		(155,000	)
Reserve for second quarter 2011 distributions		(614,000	)		614,000			—			—
Redemptions		(50,000	)		50,000			—			—
Capital expenditures		(77,000	)		29,000			—			(48,000	)
		(811,000	)		693,000			(85,000	)		(203,000	)
Total net liabilities for estimated disbursements in excess of estimated receipts during liquidation	$	(654,000	)	$	—		$	213,000		$	(441,000	)

5. Net Assets in Liquidation

The following is a reconciliation of total members’ equity under the going concern basis of accounting to net assets in liquidation under the liquidation basis of accounting as of June 1, 2011 (the adoption of the liquidation basis of accounting):

Members’ equity at May 31, 2011 — going concern basis	$	24,276,000
Decrease due to change in estimated net realizable value of operating properties		(961,000	)
Decrease due to the write-off of other intangible assets and other liabilities		(378,000	)
Reserve for estimated outflows during liquidation		(654,000	)
Adjustment to reflect the change to the liquidation basis of accounting		(1,993,000	)
Estimated value of net assets in liquidation at June 1, 2011	$	22,283,000

13

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

We currently estimate, based on our net assets as of September 30, 2011, that net proceeds from liquidation will be $217 per unit. This estimate for liquidation distribution per member unit includes projections of costs and expenses expected to be incurred during the period required to complete the plan of liquidation. Therefore, these projections could change materially based on the timing of any sale, the performance of the underlying assets and change in the underlying assumptions of the projected cash flow.

6. Real Estate Investments

Our real estate investments are comprised of wholly owned real estate properties.

We had no acquisitions or dispositions during the nine months ended September 30, 2011 and twelve months ended December 31, 2010.

As of September 30, 2011, we estimated the net realizable value of the investment in real estate, less estimated closing costs, to be $23.0 million by applying Level 2 inputs (an offer to purchase) to a market approach valuation technique. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different.

7. Note Payable

On December 2, 2010, we entered into a $4.0 million loan agreement with Farmers & Merchants Bank of Long Beach. The loan matures on November 19, 2013 with no option to extend and bears interest at a fixed rate of 5.75% per annum. The terms of the loan require monthly payments of principal and interest. We may repay the loan, in whole or in part, on or before November 19, 2013 without any penalty. As of September 30, 2011 and December 31, 2010, we had an outstanding balance of $3.9 million and $4.0 million, respectively, under this loan agreement. The loan agreement contains various covenants including financial covenants with respect to debt service coverage ratios and loan to value ratio. As of September 30, 2011, we were in compliance with all of these covenants.

We anticipate repaying our existing debt obligation with cash on hand and the proceeds from the sale of real estate assets. As of September 30, 2011 and December 31 2010, we had incurred net financing costs of $81,000. The financing costs were capitalized and were being amortized over the life of the loan. Upon our adoption of liquidation basis accounting on June 1, 2011, we wrote off the remaining capitalized financing costs. For the five months ended May 31, 2011 and the nine months ended September 30, 2010, $11,000 and, $0, respectively, of deferred financing costs were amortized and included in interest expense in the condensed statement of operations.

At June 1, 2011, we adjusted the carrying value of the outstanding note to its estimated settlement amount in the condensed consolidated statement of net assets.

The principal payments contractually due on the note payable for October 1, 2011 to December 31, 2011 and each of the subsequent years are as follows:

Year	Principal Amount
October 1, 2011 to December 31, 2011	$	13,000
2012	$	54,000
2013	$	3,882,000
2014	$	—
2015	$	—

We anticipate repaying the note upon sale of the real estate portfolio, and as a result the note payable may be repaid before its contractual maturity date.

14

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

8. Commitments and Contingencies

The Fund monitors its properties for the presence of hazardous and toxic substances. While there can be no assurance that a material environmental liability does not exist, the Fund is not currently aware of any environmental liability with respect to the properties that would have a material effect on its financial condition, results of operations or cash flows. Further, the Fund is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Fund believes would require additional disclosure or the recording of an estimated obligation upon liquidation.

The Fund’s 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 the Fund’s net assets in liquidation. The Fund is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Fund which, if the outcome were to be unfavorable to the Fund, would have a material adverse effect on its net assets in liquidation.

9. Concentration of Credit Risk

Financial instruments that potentially subject the Fund to a concentration of credit risk are primarily cash investments. Cash is generally invested in investment-grade short-term instruments. On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that made permanent the $250,000 limit for federal deposit insurance, increased the cash limit of Securities Investor Protection Corporation (“SIPC”) protection from $100,000 to $250,000, and provided unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions. As of September 30, 2011, none of our depository accounts are in excess of the insured limits and, as such, we do not have credit risks related to these depository accounts.

As of September 30, 2011, we owned four properties in California, one property in Arizona and one property in Illinois. Accordingly, there is a geographic concentration of risk subject to fluctuations in the California economy.

10. Subsequent Events

Other than the amendment to the purchase and sale agreement (as discussed in Note 2), no significant events have occurred subsequent to our balance sheet date that require further disclosure or adjustment to our balances.

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. Such financial statements and information have been prepared to reflect our net assets in liquidation as of September 30, 2011 (liquidation basis) and financial position at December 31, 2010 (going concern basis), together with the statement of changes in net assets for the three and four months ended September 30, 2011 (liquidation basis), the results of operations and cash flows for the five months ended May 31, 2011 (going concern basis) and nine months ended September 30, 2010 (going concern basis), respectively.

This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions generally and the real estate market specifically; legislative/regulatory changes; availability of capital; interest rates; competition; supply and demand for operating properties in our current market areas;

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

generally accepted accounting principles; the availability of buyers to acquire properties we make available for sale; the availability of financing; and the absence of material litigation. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 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, 2010 and in light of the risks identified in the definitive proxy statement related to our proposed plan of liquidation dated April 1, 2011, as filed with the 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. As of June 1, 2011, we adopted the liquidation basis of accounting for all subsequent periods. Our financial performance prior to liquidation, depended, 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.

Plan of liquidation

In anticipation of the Fund’s scheduled dissolution date of December 31, 2012, our managing member began the process of evaluating strategic alternatives for winding up the Fund in order to maximize overall returns for our investors. Our managing member initiated the examination in 2011, rather than waiting until 2012 because of the inherent uncertainty of the future and our managing member’s view of (i) current market conditions, (ii) the current increasing costs of corporate compliance (including, without limitation, all federal, state and local regulatory requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended), (iii) the possible need to reduce or suspend our distributions and (iv) the other factors discussed in more detail in the Definitive Proxy Statement as filed by the Fund with the SEC on April 1, 2011.

After a thorough analysis, consultation with a real estate broker specializing in multi-tenant industrial real estate in the geographical regions where our properties are located, and a targeted solicitation of bids for a potential sale of our portfolio, our managing member has concluded that a liquidation of the Fund at this time will more likely produce superior returns to our investors within a reasonable period of time than other potential exit strategies reasonably available to us, including waiting until 2012 to complete a liquidation. On April 1, 2011, we filed a definitive proxy statement with the SEC to disclose our plan to solicit unitholders’ approval of our liquidation plan.

The plan of liquidation was approved by our unitholders on May 29, 2011.

Critical Accounting Policies

Our condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed 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, 2010, as filed with the SEC other than the adoption of the liquidation basis of accounting as described under Notes 2 and 3 to the accompanying condensed financial statements and below.

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

Liquidation Basis of Accounting

As a result of the approval of the plan of liquidation by our unitholders, we adopted the liquidation basis of accounting as of June 1, 2011, and for all subsequent periods. Accordingly, on June 1, 2011, assets were adjusted to their estimated net realizable values. Liabilities, including estimated costs associated with implementing and completing the plan of liquidation, were adjusted to their estimated settlement amounts. The valuation of real estate held for sale is based on current contracts, estimates and other indications of sales value net of estimated selling costs. Actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated. Estimated future cash flows from property operations were made based on the anticipated sales dates of the assets. Due to the uncertainty in the timing of the anticipated sales dates and the cash flows therefrom, operations may differ materially from amounts estimated. These amounts are presented in the accompanying statement of net assets. The net assets represent the estimated liquidation value of our assets available to our unitholders upon liquidation. The actual settlement amounts realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated. In particular, the estimates of our costs will vary with the length of time necessary to complete the plan of liquidation and our ability to maintain the occupancy levels of our properties. Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate presented in the accompanying statement of net assets in liquidation.

Reserve for Estimated Costs during Liquidation

Under the liquidation basis of accounting, we are required to estimate the cash flows from operations and accrue the costs associated with implementing and completing the plan of liquidation. We currently estimate that we will have operating costs in excess of cash inflows from our properties’ operations during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, estimates of tenant improvements incurred and paid, the timing of the property sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of our operations. These costs are estimated and are expected to be paid out over the liquidation period.

The change in the net liability for estimated disbursements in excess of estimated receipts during liquidation for the three months ended September 30, 2011 is as follows:

	June 1, 2011			Cash Payments and (Receipts)			Change in Estimates			September 30, 2011
Assets:
Estimated net inflows from operating activities	$	157,000		$	(693,000	)	$	298,000		$	(238,000	)
Liabilities:
Liquidation costs		(70,000	)		—			(85,000	)		(155,000	)
Reserve for second quarter 2011 distributions		(614,000	)		614,000			—			—
Redemptions		(50,000	)		50,000			—			—
Capital expenditures		(77,000	)		29,000			—			(48,000	)
		(811,000	)		693,000			(85,000	)		(203,000	)
Total net liabilities for estimated disbursements in excess of estimated receipts during liquidation	$	(654,000	)	$	—		$	213,000		$	(441,000	)

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

Net Assets in Liquidation

The following is a reconciliation of net assets in liquidation under the liquidation basis of accounting from June 1, 2011 (the adoption of liquidation-basis accounting) to September 30, 2011:

Estimated value of net assets in liquidation at June 1, 2011	$	22,283,000
Decrease due to estimated net realizable value of operating properties		(1,087,000	)
Increase due to change in estimated inflows, net during liquidation		213,000
Adjustment to reflect the change to the liquidation basis of accounting		(874,000	)
Estimated value of net assets in liquidation at September 30, 2011	$	21,409,000

The net assets in liquidation at September 30, 2011 would have resulted in liquidation distributions of approximately $217 per unit. The estimates for liquidation distributions per unit include projections of costs and expenses expected to be incurred during the period required to complete the plan of liquidation. These projections could change materially based on the timing of any sales, the performance of the underlying assets and changes in the underlying assumptions of the projected cash flows. There can be no assurance about the amount of any liquidating distributions and it is possible that there might not be any funds available for liquidating distributions.

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

Changes in Net Assets in Liquidation

Three and Four Months Ended September 30, 2011

Net assets in liquidations decreased $0.9 million for the three and four months ended September 30, 2011. The $0.9 million decrease is primarily due to a price decrease of $1.1 million on the property portfolio partially offset by the collection of the $0.2 million of cash receipts from operations beyond what was projected in the second quarter of 2011.

Liquidity and Capital Resources

As of September 30, 2011, our net assets in liquidation were $21.4 million. Our ability to meet our obligations is contingent upon the disposition of our assets in accordance with our plan of liquidation. Management estimates that the net proceeds from the sale of our assets will be adequate to pay our obligations; however, we cannot provide any assurance with respect to the prices we will receive for the disposition of our assets or the net proceeds therefrom. In anticipation of our liquidation, our unit repurchase program was suspended effective July 31, 2011.

The plan of liquation provides that a liquidating distribution be made to our members as determined by the Managing Member. Although we can provide no assurances, we currently expect that the liquidation will be completed by December 31, 2011.

Our managing member receives compensation from the Fund pursuant to our operating agreement. The maximum amount of fees that would be due to our managing member for disposing of our property interests, based on the current estimated maximum sales prices of our properties and the terms of the operating agreement, would be $1.1 million. Actual fees paid may be lower or higher than this estimate.

We anticipate, but cannot assure, that our cash flow from operations will be sufficient during the liquidation period to fund our cash needs for payment of expenses, capital expenditures and debt service payments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We may invest our cash and cash equivalents in government backed securities and FDIC insured savings accounts which, by their nature, are subject to interest rate fluctuations. As of September 30, 2011, a 1% increase or decrease in interest rates would not have a material effect on our interest income.

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for office space, local, regional and national economic conditions and changes in the credit worthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.

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.

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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

There have been no changes to our internal controls 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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CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

PART II — OTHER INFORMATION

Item 5. Other Information

In a Form 8-K filed on September 12, 2011, the Fund reported the execution of a purchase and sale agreement (the “Agreement”) with Rexford Industrial Fund V, L.P. (the “Bidder”) to effect the sale of all the Fund’s real estate properties to the Bidder for a purchase price of approximately $25.1 million. Under the Agreement, the sale was scheduled to close on or before October 14, 2011. However, through an amendment to the purchase and sale agreement dated October 11, 2011, the property inspection period was extended to October 31, 2011 and the purchase price has been reduced to $24.7 million. Additionally, on November 7, 2011, the purchase agreement was amended to extend the property inspection period to November 14, 2011 and extend the closing date to November 29, 2011.

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Item 6. Exhibits

10.1	Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 12, 2011.
10.2	First Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
10.3	Second Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
10.4	Third Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
10.5	Fourth Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
10.6	Fifth Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
10.7	Sixth Amendment to Purchase and Sale Agreement dated September 1, 2011 by and between the Company and Rexford Industrial Fund V, L.P.
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.
101.1	The following information from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Cash Flows.

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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 14th day of November 2011.

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)

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