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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-51868

CORNERSTONE REALTY FUND, LLC

(Exact name of registrant as specified in its charter)


CALIFORNIA		33-0827161
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1920 MAIN STREET, SUITE 400, IRVINE, CA		92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

949-852-1007
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

þ Yes o No

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

þ Yes o 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):

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

o Yes þ No

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			2
Condensed Statement of Net Assets as of June 30, 2011 (Liquidation Basis — unaudited)			3
Condensed Balance Sheet as of December 31, 2010 (Going Concern Basis — audited)			4
Condensed Statements of Operations for the Two and Five Months Ended May 31, 2011 (Going Concern Basis — unaudited) and for the Three and Six Months Ended June 30, 2010 (Going Concern Basis — unaudited)			5
Condensed Statement of Changes in Net Assets for the One Month Ended June 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 Six Months Ended June 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			13
Item 3. Qualitative and Quantitative Disclosures About Market Risk			17
Item 4. Controls and Procedures			17

PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information			17
Item 6. Exhibits			18
Signatures			19
EX-10.1
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

CONDENSED STATEMENT OF NET ASSETS

(Liquidation Basis)

As of June 30, 2011 (Unaudited)


	June 30,
	2011
ASSETS
Investment in real estate	$	24,100,000
Cash and cash equivalents		3,429,000
Accounts receivable, net		40,000

Total assets		27,569,000

LIABILITIES
Accounts payable and accrued liabilities		523,000
Note payable		3,961,000
Liability for estimated costs in excess of estimated receipts during the liquidation period		802,000

Total liabilities		5,286,000

Net assets in liquidation	$	22,283,000

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

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

CONDENSED BALANCE SHEET

(Going Concern Basis)

December 31, 2010


	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.

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

CONDENSED STATEMENTS OF OPERATIONS

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

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


	Two Months		Three Months			Five Months			Six Months
	Ended		Ended			Ended			Ended
	May 31,		June 30,			May 31,			June 30,
	2011		2010			2011			2010
Revenues:
Rental revenues	$	436,000	$	676,000		$	1,054,000		$	1,364,000
Tenant reimbursements and other income		114,000		165,000			291,000			324,000

		550,000		841,000			1,345,000			1,688,000
Expenses:
Property operating and maintenance		125,000		284,000			352,000			547,000
Property taxes		101,000		150,000			254,000			301,000
General and administrative		92,000		77,000			261,000			187,000
Depreciation and amortization		141,000		188,000			416,000			402,000
Impairment of real estate		—		560,000			—			560,000

		459,000		1,259,000			1,283,000			1,997,000

Other income		—		—			—			51,000
Interest expense		43,000		—			107,000			—


Net income (loss)	$	48,000	$	(418,000	)	$	(45,000	)	$	(258,000	)



Net income (loss) allocable to managing member	$	5,000	$	(42,000	)	$	(5,000	)	$	(26,000	)

Net income (loss) allocable to unit holders	$	43,000	$	(376,000	)	$	(40,000	)	$	(232,000	)

Per unit amounts:
Basic and diluted net income (loss) allocable to unit holders	$	0.44	$	(3.81	)	$	(0.41	)	$	(2.35	)

Basic and diluted weighted average number of units outstanding		98,457		98,670			98,627			98,746

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

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

CONDENSED STATEMENT OF CHANGES IN NET ASSETS

For the One Month Ended June 30, 2011

(Liquidation Basis — unaudited)


Net assets in liquidation, May 31, 2011	$	22,283,000

Changes in net assets in liquidation:
Changes to the reserve for estimated costs during liquidation:
Operating income		(148,000	)

Changes to the reserve for estimated costs during liquidation		(148,000	)
Changes in fair value of assets and liabilities:
Change in fair value of real estate investments		—
Change in assets and liabilities due to activity in the reserve for estimated costs during liquidation		148,000

Net change in fair value		148,000

Change in net assets in liquidation		—

Net assets in liquidation, June 30, 2011	$	22,283,000

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

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.

CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)

CONDENSED STATEMENTS OF CASH FLOWS

For the Five Months Ended May 31, 2011 and

the Six Months Ended June 30, 2010

(Going Concern Basis — unaudited)


	Five Months Ended			Six Months Ended
	May 31, 2011			June 30, 2010
OPERATING ACTIVITIES
Net loss	$	(45,000	)	$	(258,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred financing costs		11,000			—
Depreciation and amortization		416,000			402,000
Provision for bad debt		(4,000	)		90,000
Impairment of real estate		—			560,000
Straight-line rent and amortization of acquired above/below market leases, net		21,000			(64,000	)
Changes in operating assets and liabilities:
Tenant and other receivables, net		4,000			(64,000	)
Prepaid expenses and other assets		(67,000	)		(81,000	)
Accounts payable, accrued liabilities and prepaid rent		123,000			(18,000	)
Real estate taxes payable		(35,000	)		(6,000	)

Net cash provided by operating activities		424,000			561,000


INVESTING ACTIVITIES
Capital expenditures		(69,000	)		(72,000	)

Net cash used in investing activities		(69,000	)		(72,000	)


FINANCING ACTIVITIES
Repayment of note payable		(22,000	)		—
Cash distributions to unit holders		(1,230,000	)		(622,000	)
Cash distributions to managing member		(56,000	)		—
Units repurchased and retired		(49,000	)		(49,000	)

Net cash used in financing activities		(1,357,000	)		(671,000	)


Net decrease in cash and cash equivalents		(1,002,000	)		(182,000	)

Cash and cash equivalents at beginning of period		4,356,000			761,000


Cash and cash equivalents at end of period	$	3,354,000		$	579,000


Supplemental disclosure of non-cash financing and investing activities:
Cash paid for interest	$	96,000			—

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

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 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. As permitted by the SEC filing requirements for Form 10-Q, the condensed financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The condensed financial statements included herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010. As outlined below, commencing on June 1, 2011 we adopted the liquidation basis of accounting.

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 five months ended May 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 2011, rather than waiting until 2012 because of the inherent uncertainty of the future and our managing member’s view of (i) the 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 concluded that a liquidation of the Fund at this time will more likely produce greater returns within a reasonable period of time to our investors 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 solicit unitholders’ approvals 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 are not material to the financial results for the periods presented. The net assets in liquidation at June 1, 2011 would have resulted in liquidation distributions of approximately $226 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.

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.

We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

Our condensed balance 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, real estate taxes payable, tenant security deposits and a note payable. For all instruments noted except for the note payable, we consider the carrying values to be approximate fair value because of the short period of time between origination of the instruments and their expected payment. Prior to the adoption of liquidation basis accounting, the fair value of the note was $3.9 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 uncertainty in the timing of the anticipated sales dates and the cash flows from, operations 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 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. 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. Reserve for Estimated Costs During Liquidation

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 the 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.

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


	June 1,			Cash Payments			Change in		June 30,
	2011			and (Receipts)			Estimates		2011
Liabilities:
Estimated net inflows from operating activities	$	157,000		$	(161,000	)	$		$	(4,000	)
Liabilities:
Liquidation costs		(70,000	)		—			—		(70,000	)
Reserve for second quarter 2011 distributions		(614,000	)		—			—		(614,000	)
Redemptions		(50,000	)		—			—		(50,000	)
Capital expenditures		(77,000	)		13,000			—		(64,000	)

		(811,000	)		13,000			—		(798,000	)

Total net liabilities for estimated disbursements in excess of estimated receipts during liquidation	$	(654,000	)	$	(148,000	)	$	—	$	(802,000	)

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 beginning net assets in liquidation):


Members’ equity at May 31, 2011 — going concern basis	$	24,276,000

Decrease due to 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

We currently estimate, based on our net assets as of June 30, 2011, that net proceeds from liquidation will be $226 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 dispositions during the six months ended June 30, 2011 and twelve months ended December 31, 2011.

ASC 820-10 establishes a three-tiered fair value hierarchy that prioritizes valuation technique inputs. Level 1 inputs (“observable inputs”) are quoted prices in active markets for identical assets or liabilities and are given the highest priority. Level 2 inputs (“other observable input”) are either observable directly or through corroboration with observable market data. Level 3 inputs (“unobservable inputs”) are unobservable in the market, such as internally developed valuation models. As a result of our adoption of liquidation basis of accounting, as of June 30, 2011, we estimated the fair value of the investment in real estate, less estimated closing costs, to be $24.1 million on a recurring basis using Level 3 inputs based on 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 June 30, 2011 and December 31, 2010, we had an outstanding balance of approximately $4.0 million, 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 June 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 June 30, 2011 and December 31 2010, we had incurred net financing costs of $81,000. The financing costs have been capitalized and are being amortized over the life of the loan. For the five months ended May 31, 2011 and the six months ended June 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 values of the outstanding notes to their estimated settlement amounts in the condensed consolidated statement of net assets.

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


	Principal
Year	Amount
July 1, 2011 to December 31, 2011	$	26,000
2012	$	54,000
2013	$	3,881,000
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.

8. Commitments and Contingencies

The Fund monitors its properties for the presence of hazardous or 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 and 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 its financial position, cash flows and results of operations. The Fund is not presently subject to any material litigation nor, to its knowledge, any material litigation threatened against the Fund which if determined unfavorably to the Fund would have a material adverse effect on its cash flows, financial condition or results of operations.

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 implements changes to the regulation of the financial services industry, including provisions that made permanent the $250,000 limit for federal deposit insurance and 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 June 30, 2011, none of our depository accounts are in excess of the federal deposit insurance nor SIPC insured limits, as such, we do not have credit risks related to these depository accounts.

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

10. Subsequent Events

In a Form 8-K filed on June 9, 2011, the Fund reported the execution of a purchase and sale agreement (the “Agreement”) with Birtcher Anderson Realty, LLC (the “Bidder”) to effect the sale of all the Fund’s real estate properties to the Bidder for a purchase price of approximately $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. The Company continues to work with various real estate brokers to qualify potential purchasers of its portfolio. We expect to effectuate the liquidation of our real estate portfolio by the end of 2011.

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 June 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 month ended June 30, 2011 (liquidation basis), the results of operations and cash flows for the two and five months ended May 31, 2011 (going concern basis) and three and three and six months ended June 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; 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. Our financial performance prior to liquidation, will depend, 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 at this time, rather than waiting until 2012 because of the inherent uncertainty of the future and our managing member’s view of (i) the 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 within a reasonable period of time to our investors 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 solicit unitholders’ approvals on 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 as described under Note 3 to the accompanying condensed financial statements and below.

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. 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 first month ended June 30, 2011 is as follows:


	June 1,			Cash Payments			Change in		June 30,
	2011			and (Receipts)			Estimates		2011
Liabilities:
Estimated net inflows from operating activities	$	157,000		$	(161,000	)	$	—	$	(4,000	)
Liabilities:
Liquidation costs		(70,000	)		—			—		(70,000	)
Reserve for second quarter 2011 distributions		(614,000	)		—			—		(614,000	)
Redemptions		(50,000	)		—			—		(50,000	)
Capital expenditures		(77,000	)		13,000			—		(64,000	)

		(811,000	)		13,000			—		(798,000	)

Total net liabilities for estimated disbursements in excess of estimated receipts during liquidation	$	(654,000	)	$	(148,000	)	$	—	$	(802,000	)

Net Assets in Liquidation


Members’ equity at May 31, 2011 — going concern basis	$	24,276,000
Decrease due to 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

The net assets in liquidation at June 1, 2011 would have resulted in liquidation distributions of approximately $226 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.

Results of Operations

Results of operations for the two and five months ended May 31, 2011 and three and six months ended June 30, 2010 discussed below are comprised of six multi-tenant industrial business park properties in three major metropolitan areas. Due to the listing for sale of our properties and adoption of liquidation basis accounting as of June 1, 2011, our comparison of results of operations between periods is limited as the current year periods contain one fewer month than the corresponding prior year periods. The results of operations are discussed below.

Comparison of the Two Months Ended May 31, 2011 and the Three Months Ended June 30, 2010

Operating results for the two periods, after adjustment for the difference in the number of months presented, were comparable, except as discussed below.

Property operating and maintenance expenses for the two months ended May 31, 2011 was $0.1 million compared to $0.3 million for the three months ended June 30, 2010, due in part to a lower allowance for bad debt in the 2011 period.

General and administrative expenses for the two months ended May 31, 2011 was $92,000 compared to $77,000 for the three months ended June 30, 2010. The 2011 was due in part to higher professional fees and insurance costs.

Impairment of real estate for the for the two months ended May 31, 2011 was $0 compared to $0.6 million the three months ended June 30, 2010. For the three months ended June 30, 2010 we recognized an impairment charge for our Paramount property. For the two months ended May 31, 2011, no impairment charge was recorded. However, as of May 31, 2011, as part of the conversion to liquidation accounting, we adjusted our properties to fair value, less estimated costs to sell, with the corresponding charge to net assets in liquidation.

Interest expense for the two months ended May 31, 2011 was $43,000 compared to $0 for the three months ended June 30, 2010. The increase was due to borrowing under the loan agreement entered into in the fourth quarter of 2010.

Comparison of the Five Months Ended May 31, 2011 and the Six Months Ended June 30, 2010

Operating results for the two periods, after adjustment for the difference in the number of months presented, were comparable, except as discussed below.

Rental revenues for the five months ended May 31, 2011 were $1.3 million compared to $1.7 million the six months ended June 30, 2010. The decrease was partially due to lower occupancy resulting from longer lease up periods of vacant units, lower market lease rates and higher concessions to attract and retain tenants as a result of the competitive market conditions.

Property operating and maintenance expenses for the five months ended May 31, 2011 was $0.4 million compared to $0.5 million for the six months ended June 30, 2010. The decrease is primarily due in part to a lower allowance for bad debt in the 2011 period.

General and administrative expenses for the five months ended May 31, 2011 was $0.3 million compared to $0.2 million for the six months ended June 30, 2010. The 2011 increase was due in part to higher professional fees and insurance costs..

Depreciation and amortization expenses for the five months ended May 31, 2011 was $0.4 million compared to $0.4 million the six months ended June 30, 2010. The increase was partially due to catch up depreciation recorded in the first quarter of 2011 for an asset held for sale in 2010.

Impairment of real estate for the for the five months ended May 31, 2011 was $0 compared to $0.6 million the five months ended June 30, 2010. For the five months ended June 30, 2010 we recognized an impairment charge for our Paramount property. For the five months ended May 31, 2011, no impairment charge was recorded. However, as of May 31, 2011, as part of the conversion to liquidation accounting, we adjusted our properties to fair value, less estimated costs to sell, with the corresponding charge to net assets in liquidation.

Interest expense for the five months ended May 31, 2011 was $0.1 million compared to $0 for the five months ended June 30, 2010. The increase was due to borrowing under the loan agreement entered into in the fourth quarter of 2010.

Liquidity and Capital Resources

As of June 30, 2011, our net assets in liquidation were approximately $22.2 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 there from. 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 would be $1.2 million. This maximum is based on the estimated maximum sales prices of our properties and the terms of the operating agreement. Actual fees paid may be lower.

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 invest our cash and cash equivalents in government backed securities and FDIC insured savings account which, by its nature, are subject to interest rate fluctuations. As of June 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.

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.

PART II — OTHER INFORMATION

Item 5. Other Information

Item 6. Exhibits


10.1		Purchase and Sale Agreement dated June 7, 2011 by and between the Company and Birtcher Anderson Realty, LLC

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 June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Cash Flows.

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 15^th day of August 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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CORNERSTONE REALTY FUND LLC 10-Q