10-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

(Mark One)
ý	Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
	for the fiscal year ended December 31, 2005 or
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:  333-76609

CORNERSTONE REALTY FUND, LLC

(Exact name of the 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, California 92614

(Address of Principal Executive Offices)

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Name of Each Exchange on Which Registered
None	None

Securities registered pursuant to Section 12(g) of the Act: Units of limited liability company interests

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o    No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities 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. Yes  ý    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o Accelerated filer o Non-accelerated filer ý

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

The aggregate market value of the units of membership interest held by non-affiliates of the registrant was $43,291,000 as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2005) based upon the price at which the units of membership interest were sold.

Documents incorporated by reference.  None.

PART I

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Item 1a of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1. BUSINESS

General Development of Business

Cornerstone Realty Fund, LLC is a California limited liability company that invests in multi-tenant business parks catering to small business tenants.  We purchase existing, leased properties located in major metropolitan areas in the United States on an all cash basis without debt financing.  We have purchased six properties as of the date of this report.  As used in this report, “we,” “us” and “our” refer to Cornerstone Realty Fund, LLC except where the context otherwise requires.

Our managing member is Cornerstone Industrial Properties, LLC (CIP), a California limited liability company.  CIP is managed by Cornerstone Ventures, Inc.  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 filed on Form S-11 under the Securities Act of 1933.  On August 18, 2005, we completed our public offering of these units.  As of that date, we had issued 100,000 units to unitholders for gross offering proceeds of $50,000,000, before discounts of $39,780.

Narrative Description of Business

We are a real estate fund that seeks positive return on investment through the acquisition, management and sale of multi-tenant industrial business parks.  We have purchased and operate a diversified portfolio of existing, leased multi-tenant industrial business parks catering to the small business tenant.  Our managing member believes that investment opportunities in multi-tenant industrial business parks are ordinarily not readily available to investors other than large institutional investors and experienced real estate operators with specialized knowledge and experience in a specific geographic area.

The properties we acquire cater to the small business tenant and have lease terms averaging one to three years.  During economic conditions when rental rates are rising rapidly, these relatively short-term leases should allow us to increase rental income at a faster rate than properties with longer-term leases. This occurs at times when the annual rental rate increases provided for in existing leases are less than the actual level of growth in market rents.

We purchase properties located in major metropolitan areas in the United States.  We emphasize the acquisition of properties in geographic areas nationwide that have historically demonstrated strong levels of demand

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for rental space by tenants requiring small industrial buildings.  We attempt to acquire our properties in the highest demand locations.  Of the six properties that we own, three are located in the Los Angeles area, two are located in the Chicago area and our most recent acquisition in September 2005 is located in the Phoenix area.

We acquire properties that currently exist and generate income from rental operations.  We will not develop new properties or acquire raw land.

We attempt to acquire properties at prices below what our managing member estimates to be the new development cost of a similar property located within the same competitive geographic area.  In stabilized market areas with high tenant demand, a tenant with an expiring lease may not be able to find a competitive space to rent.  In high tenant demand locations, rental rates and property values should eventually increase to the levels necessary to justify the construction of competitive properties.  The increase in rental rates and property values is expected to occur to balance out the high levels of tenant demand for space as compared to the restricted amounts of available space for a tenant to choose from.  If this occurs, we could experience financial gain as a result of having purchased properties at prices below their new development cost.

Multi-Tenant Business Parks

Multi-tenant business parks comprise one of the major segments of the commercial real estate market on a nationwide basis.  These properties contain a large number of diversified tenants and differ from large warehouse and manufacturing buildings that rely on a single tenant. Multi-tenant business parks are ideal for small businesses that require both office and warehouse space.  This combination of office and warehouse space cannot generally be met in other commercial property types.  Multi-tenant business park tenants come from a broad spectrum of industries including light manufacturing, assembly, distribution, import/export, general contractors, telecommunications, computer technology, general office/warehouse, wholesale, service, high-tech and other fields.  These properties diversify revenue by generating rental income from multiple businesses instead of relying on one or two large tenants.

One of the most attractive features of multi-tenant business parks is the ability to adapt to changing market conditions and to meet the diversification needs of small business tenants.  A multi-tenant business park is the first home for many small businesses.  In good economic times, new businesses are forming and existing businesses are growing.  Multi-tenant business parks can accommodate this growth with a tenant’s expansion into multiple units.  In difficult economic times, a tenant’s space requirements often contract, and tenants who previously outgrew their space in a multi-tenant business park may move back.  Accordingly multi-tenant industrial parks space is in demand in both growing and declining economies.

Lease terms generally range from month-to-month to five years.  The average lease term is two to three years.  Leasing activity is typically diversified, with smaller-sized tenants.  Leases for properties that we purchase usually contain stipulated rent escalation provisions when market conditions allow. 

The Small Business Opportunity

For the last sixteen years, Cornerstone Ventures, Inc. and its affiliates have achieved success by focusing on the needs of small business tenants.  Cornerstone Ventures, Inc.  focuses on what the small business tenant wants in terms of functional, well-designed space in a superior location. Cornerstone Ventures, Inc. believes that it knows how to differentiate between tenant spaces and projects that should maintain their demand over the long term versus those that might ultimately lag in performance.

Investment Strategy

Cornerstone Ventures, Inc. specializes in and has substantial operating experience investing in and operating multi-tenant business parks.  Cornerstone Ventures, Inc. offers in-depth real estate expertise through an experienced team of industry professionals with extensive understanding of industrial real estate.

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We pursue a strategy of purchasing properties in major industrial markets with considerable tenant demand.  We acquire properties in areas with strong tenant demand and a large base of existing industrial properties, a high population of small business tenants and substantial competitive barriers to entry.

Our strategy is to purchase multi-tenant business parks at prices below replacement cost.  Such opportunities may exist where rental rates at properties configured for the small business tenant are below the levels necessary to justify the development of new projects.  With market rents at such levels, we may be able to purchase a property at a price below the levels needed to justify development of competitive properties.

Properties serving the needs of the small industrial business tenant are operating at or near capacity in many markets, and rental rates in these markets are expected to rise to the point where development of new space is justified.  Compared to single-user industrial properties that typically have longer lease terms, the shorter-term multi-tenant business park leases allow for greater opportunities to increase rents and maximize revenue growth in upward trending markets.  Our investment strategy is to purchase and reposition properties and capitalize on shorter lease terms, rising rents, increasing cash flow and increasing market value.

We expect to achieve diversification by purchasing multi-tenant business parks serving the small business tenant in high tenant demand markets nationwide.  The number of properties that we purchase will depend upon the size and location of the properties we purchase.  The maximum dollar amount that we will invest in any single property is $10,000,000.  As of March 15, 2006, we have purchased six properties for an aggregate investment of approximately $28.3 million.  We expect to acquire one to two additional properties.  This estimate is subject to variations based on the purchase price of each property.

Property Features

Land:  Lot sizes for the properties we purchase generally range from approximately 4 to 25 acres depending upon the number of buildings and building sizes.  Individual buildings contained in any specific property may be located on a single parcel of land or on multiple parcels of land depending upon the configuration and layout of the entire project.  Sites are zoned for industrial, commercial and/or office uses depending on local governmental regulations.  The location of each property to be purchased is considered carefully and we focus on purchasing what we consider to be prime properties in prime locations.

Buildings:  The actual buildings contained in any project are generally rectangular in shape and constructed utilizing concrete tilt up construction methods and in some cases brick and mortar methods.  Building sizes generally range from 5,000 to 200,000 square feet divided into leasable unit sizes ranging from 500 square feet to 30,000 square feet.  We generally look for the following building features:

•Functional site plan offering ample tenant parking and good truck and car circulation;

•Multiple truck doors with ground level and dock high loading;

•Ceiling clear heights in each tenant space from 14 feet to 24 feet;

•Attractive front entry and visibility with a location for tenant’s address and sign;

•Quality office improvements including private offices, restrooms and reception area;

•Minimum of 100 amps of electrical service;

•Heating, ventilating and air conditioning systems for the office area; and

•Fire sprinklers where required by local governmental agencies.

We evaluate a property’s physical condition and, if capital improvements are necessary, we incorporate this into the acquisition analysis for the property.

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Property Selection

Our managing member has experienced staff engaged in the selection and evaluation of properties that we acquire.  The acquisition process is performed by our managing member with no acquisition fees payable by us to our managing member.  All property acquisitions are evaluated by our managing member based upon its experience in the area of multi-tenant business parks and our investment objectives and supported by an appraisal prepared by a competent independent appraiser.

We purchase properties based on the decision of our managing member after an examination and evaluation of some or all of the following:

•Functionality of the physical improvements at the property;

•Historical financial performance of the property;

•Current market conditions for leasing space at the property;

•Proposed purchase price, terms, and conditions;

•Potential cash flow and profitability of the property;

•Estimated cost to develop a new competitive property within the immediate market area;

•Demographics of the area in which the property is located;

•Demand for space by small business tenants in the immediate market area;

•Rental rates and occupancy levels at competing business parks in the immediate area;

•Historical tenant demand for space at the property;

•Current market versus actual rental rates at the property and in the immediate area;

•Operating expenses being incurred and expected to be incurred at the property;

•Level of local property tax assessments;

•Potential capital improvements and leasing commissions reasonably expected to be expended;

•A review of the terms of each existing tenant lease at the property;

•An evaluation of title and the obtaining of satisfactory title insurance;

•An evaluation of a current appraisal conducted by a qualified independent appraiser; and

•An evaluation of any reasonably ascertainable risks such as environmental contamination.

The Asset Management Function

Asset management includes preparation, implementation, supervision and monitoring of a business plan specifically designed for each property.  Our managing member performs the following asset management services for us:  

•Create and implement an individualized plan for enhancing the profitability and value of each property;

•Supervise the day-to-day operations of property managers assigned to each property;

•Select and supervise the on-going marketing efforts of leasing agents responsible for marketing the property to prospective tenants;

•Coordinate semi-annual rental surveys of competitive projects in the local geographic area – this function is designed to maintain the property at the highest possible rental rates allowable in the market where the property is located;

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•Approve lease terms negotiated by leasing agents with new tenants and tenants renewing their leases – this includes making sure that lease rates being attained are in line with market conditions as well as in line with the then current operating plan for the property;

•Review and approve any capital improvements necessary at the property, including tenant improvements necessary to lease space;

•Supervise the collection of rent and resolution of tenant lease defaults;

•Review monthly financial reports prepared by property managers with a focus on improving the cost efficiency of operating the property;

•Prepare annual property operating budgets for review and approval by senior management; and

•Prepare regular updates regarding operations of the property as compared to budget estimates.

Although most real estate operating companies charge a separate fee for asset management services, our managing member does not charge us a separate fee for such services.

Property Management Services

Our managing member is responsible for providing or obtaining property management services for our properties and is responsible for overseeing all day-to-day operations for each property, including the following:

•Invoice tenants for monthly rent;

•Collect rents;

•Pay property level operating expenses;

•Solicit bids from vendors for monthly contract services;

•Provide property level financial reports on a monthly basis;

•Review and comment on annual property operating budgets;

•On-going assessment of potential risks or hazards at the property;

•Clean up and prepare vacant units to be leased;

•Supervise tenant improvement construction;

•Supervise tenant and owner compliance with lease terms;

•Supervise tenant compliance with insurance requirements;

•Periodically inspect tenant spaces for lease compliance; and

•Respond to tenant inquiries.

Due to the short-term nature of the tenant leases, as well as the large number of small business tenants at each property, multi-tenant business parks are management intensive.  For this reason, property management fees for multi-tenant industrial properties are generally higher than property management fees for other types of commercial real estate.  Our managing member believes that a very high level of property management service and strict property maintenance standards maximizes the value of each property.  Our managing member may subcontract property management services with either an affiliate or third party property management organization.  Currently, our properties are managed under subcontracts with CB Richard Ellis, Inc., Essex Realty Management, Inc. and Mercury Investments, Inc.

Competition

We experience competition from other buyers when acquiring properties.  We also experience competition for tenants from owners and managers of competing projects which may include our managing member and its

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affiliates.  As a result, we may be required to provide free rent, reduced charges for tenant improvements, and other inducements, all of which may have an adverse impact on our results of operations.  At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers.

Employees and Consultants

We have no direct employees.  Employees of Cornerstone Ventures, Inc., an affiliate of our managing member, performs a full range of real estate services including property acquisition, leasing, property management, accounting, asset management and investor relations for us.  Our managing member may also engage consultants to provide these services when our managing member deems this to be in our best interest.  See Item 13 – “Certain Relationships and Related Transactions” for a summary of the types of fees to be paid to our managing member and its affiliates for these services.

ITEM 1A.  RISK FACTORS

In addition to other matters we identify or describe from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned, or results that are reflected from time to time in any forward-looking statement that may be made by us or on our behalf.  Some of these important factors, but not necessarily all important factors, are discussed below.

We may not generate sufficient cash for distributions.  If the rental revenues from the properties we acquire do not exceed our operational expenses, we will not be able to make cash distributions until such time as we sell a property.

Our managing member, its affiliates, and its officers also have management responsibilities to other entities. Cornerstone Ventures, Inc. may have conflicts of interests in allocating management time between us and other entities.  These other entities will purchase, operate and sell the same type of properties, which we purchase, own and operate.  Our managing member, which is operated by Cornerstone Ventures, Inc., may have conflicts of interest in determining which entity will acquire a particular property.  A conflict could also arise in deciding whether or not to sell a property since the interest of our managing member and the interests of our unitholders may differ as a result of their financial and tax position and the compensation to which our managing member or affiliates may be entitled to receive upon the sale of a property.

We may not be able to purchase desirable income-producing properties on purchase terms that will be economically attractive.There can be no assurance that we will be successful in purchasing properties with financially attractive terms or that, if we purchase properties, the properties we purchase will be desirable properties or will increase in value.

Multi-tenant industrial properties accommodating small business tenants have a substantial on-going risk of tenant lease defaults.  If a tenant defaults on a lease, we will generally lose rental income and have to pay legal costs, repair costs and re-leasing commissions.  We may be unable to re-lease the property for as much rent as we previously received.  We may incur additional expenditures in re-leasing the property.  We could experience delays in enforcing our rights and collecting rents due from a defaulting tenant.

Risks we do not control will affect the value of our properties.  The values of the properties we purchase will be affected by:

•changes in the general economic climate;

•oversupply of space or reduced demand for real estate in local area;

•competition from other available space;

•governmental regulations;

•changes in zoning or tax laws;

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•interest rate levels;

•availability of financing; and

•potential liability under environmental laws.

These factors may cause our rental income and the value of our properties to decrease and may make it difficult for us to sell properties.

We may experience uninsured losses on our properties.  We intend to maintain commercial general liability insurance and property damage insurance on our properties.  We believe this insurance will be adequate to cover most risks.  We may not obtain earthquake insurance on our properties due to the lack of available and affordable earthquake insurance.  If one of our properties sustains damage as a result of an earthquake, we may incur substantial losses and lose our investment in the property.  If we, as a property owner, incur any liability that is not fully covered by insurance, we would be liable for such amounts.

We may be subject to environmental liabilities.  Various federal and state environmental laws and regulations to investigate and clean up hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at the property may require an owner or operator of real estate.  The presence of contamination or the failure to remedy contamination will adversely affect the owner’s ability to sell or lease real estate.  The owner or operator of a site may be liable to third parties for damages and injuries resulting from environmental contamination.

We obtain satisfactory Phase I environmental assessments on each property we purchase.  A Phase I assessment is an inspection and review of the property, its existing and prior uses, aerial maps and records of government agencies for the purpose of determining the likelihood of environmental contamination.  A Phase I assessment includes only non-invasive testing.  Where indicated, we may also obtain a Phase II assessment of the property.  A Phase II assessment involves further exploration and may include soils testing, lead paint testing or asbestos testing.  Our managing member may determine that a Phase I or Phase II environmental assessment is satisfactory even if an environmental problem exists and has not been resolved at the time we purchase the property.  This could happen if the seller has agreed in writing to pay for any costs we incur or if the Managing Member determines that the problem is minor or can be easily remediated by us at a reasonable cost.  It is possible that a seller will not be able to pay the costs we incur or that our managing member may underestimate the cost of remediation.  It is also possible that all environmental liabilities will not be identified or that a prior owner, operator or current occupant has created an environmental condition which we do not know about.  There can be no assurance that future law, ordinances or regulations will not impose material environmental liability on us or that the current environmental condition of our properties will not be affected by our tenants, or by the condition of land or operations in the vicinity of our properties such as the presence of underground storage tanks or groundwater contamination.

We will not seek any rulings from the Internal Revenue Service regarding any tax issues.  We are relying on opinions of our legal counsel.  The opinions are based upon representations and assumptions and conditioned upon the existence of specified facts.  The opinions are not binding on the IRS or the courts.

If we lose our “partnership” status we would be taxed as a corporation.   Our legal counsel has advised us that we will be treated as a “partnership” for federal income tax purposes and that we will not be treated as an association taxable as a corporation, subject to the publicly traded partnership rules.  The application of “publicly traded partnership” rules to us will be based upon future facts.  The IRS may determine that we will be treated as a “publicly traded partnership” if our units of membership interests are publicly traded or frequently transferred.  We have included provisions in our operating agreement designed to avoid this result. If we were to be reclassified as an association taxable as a corporation or classified as a publicly traded partnership, we would be taxed on our net income at rates of up to 35% for federal income tax purposes.  All items of our income, gain, loss, deduction, and credit would be reflected only on our tax returns and would not be passed through to our unitholders.  If we were treated as a corporation, distributions to our unitholders would be ordinary dividend income to the extent of our earnings and profits, and the payment of such dividends would not be deductible by us.

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The IRS may challenge our allocations of income, gain, loss, and deduction.  The operating agreement provides for the allocation of income, gain, loss and deduction among the unitholders.  The rules regarding partnership allocations are complex.  It is possible that the IRS could successfully challenge the allocations in the operating agreement and reallocate items of income, gain, loss or deduction in a manner that reduces benefits or increases income allocable our investors.

The IRS may disallow deduction of fees and expenses or reallocate basis.  The IRS may challenge or disallow our deduction of some or all fees and expenses.  The IRS could seek to reallocate our basis in properties among land, improvements and personal property.  This could result in reduced tax losses or increased income without a corresponding increase in net cash flow to our unitholders.

Future events may result in federal income tax treatment of us and our unitholders that is materially and adversely different from the current tax treatment.  Changes in current law, including the internal revenue code, the treasury regulations, administrative interpretations, and court decisions, could affect taxable years arising before and after such events.  There can be no assurance that future legislation and administrative interpretations will not be applied retroactively.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 Not Applicable.

ITEM 2.  DESCRIPTION OF PROPERTIES

Our managing member provides us with office space for our operations without charge.

As of the date of this report, we own six properties:  Normandie Business Center in Torrance, California; Sky Harbor Business Park in Northbrook, Illinois; Arrow Business Center in Irwindale, California; Zenith Business Centre in Glenview, Illinois; Paramount Business Center in Paramount, California, and Interstate Commerce Center in Tempe, Arizona.   Following is a description of these properties :

Normandie Business Center, Torrance, CA

On September 27, 2002, we purchased an existing multi-tenant industrial park known as Normandie Business Center.  Normandie Business Center is located on approximately 2.45 acres and is comprised of two single-story buildings containing a total of 48,711 leaseable square feet.  Our total acquisition cost was $3,901,696.  As of December 31, 2005, this property was 95% leased to 27 tenants whose spaces range in size from 1,200 to 3,358 square feet.  We purchased this property for all cash, without debt financing.

The property is located in Torrance, California, and is in the South Bay submarket of Los Angeles.  The South Bay is one of the largest and most active industrial submarkets in Los Angeles County near the ports of Los Angeles and Long Beach.

The property’s historical occupancy rates are as follows:

Year Ending December 31	Average Annual Occupancy (%)
2001	89	%
2002	93	%
2003	95	%
2004	91	%
2005	95	%

The property was built in 1989 and is currently in good physical condition.  We intend to make modest repairs and improvements to this property over the next few years.

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The following table sets forth lease expiration information for the next five years for those leases in place at December 31, 2005:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2006	13	22,623	241,829	46.44	%	49.61	%
2007	9	13,665	144,967	28.05	%	29.74	%
2008	4	8,823	88,044	18.11	%	18.06	%
2009	1	1,200	12,580	2.47	%	2.59	%
2010	—	—	—	—		—
	27	46,311	487,420	95.07	%	100.00	%

Sky Harbor Business Park, Northbrook, Illinois

On December 27, 2002, we purchased an existing multi-tenant business park known as the Sky Harbor Business Park, a single-story building built in 1976 consisting of approximately 41,422 square feet of leasable space on approximately 2.145 acres of land.  Our total acquisition cost was $2,553,996.  As of December 31, 2005, the property was 61% leased to 4 tenants whose spaces range in size from approximately 5,016 to 9,197 square feet.  Subsequent to December 31, 2005 and effective April 1, 2006, one of the existing tenants renewed its existing lease and expanded into an additional 7,710 of adjacent previously vacant space.  Active leasing for the remaining 8,254 square feet of vacant space is continuing.  We purchased this property for all cash, without debt financing.

The property is located in the Chicago area, specifically in the Northern Cook County Industrial sub-market in the Village of Northbrook, Illinois.

The property’s historical average occupancy rates are as follows:

Year Ending December 31	Average Annual Occupancy (%)
2001	100	%
2002	100	%
2003	86	%
2004	57	%
2005	61	%

The following table sets forth lease expiration information for the next five years for leases in place as of December 31, 2005:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2006	—	—	—	—		—
2007	3	20,458	165,654	49.39	%	80.35	%
2008	1	5,000	40,500	12.07	%	19.65	%
2009	—	—	—	—		—
2010	—	—	—	—		—
	4	25,458	206,154	61.46	%	100.00	%

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Arrow Business Park, Irwindale, California

On December 10, 2003, we purchased an existing multi-tenant business park known as the Arrow Business Center, a single-story three building property built in 1987 consisting of approximately 69,592 square feet of leasable space on approximately 5.04 acres of land.  Our total acquisition cost was $5,910,579.  As of December 31, 2005, the property was 95% leased to 39 tenants whose spaces range in size from approximately 800 square feet to over 4,800 square feet. We purchased this property for all cash, without debt financing.

The property’s historical occupancy rates are as follows:

Year Ending	Average Annual
December 31	Occupancy (%)
2001	94	%
2002	95	%
2003	97	%
2004	91	%
2005	95	%

The following table sets forth lease expiration information for the next five years for leases in place as of December 31, 2005:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2006	21	31,130	283,744	44.73	%	45.73	%
2007	13	20,286	192,091	29.15	%	30.96	%
2008	2	3,760	35,990	5.40	%	5.80	%
2009	1	2,160	28,848	3.10	%	4.65	%
2010	2	8,896	79,795	12.79	%	12.86	%
	39	66,232	620,468	95.17	%	100.00	%

Zenith Drive Centre, Glenview, Illinois

On January 25, 2005, we purchased an existing multi-tenant industrial park known as Zenith Drive Centre.  Zenith Drive Centre is a single-story, three building property built in 1978 consisting of approximately 37,900 square feet of leasable space on approximately 2.54 acres of land.  Our total acquisition cost was $5,327,256. As of December 31, 2005, the property was 69% leased to 23 tenants whose spaces range in size from approximately 325 square feet to 6,000 square feet. Included in the acquisition and purchase price of Zenith Drive Centre were a billboard sign and cellular relay antenna located on the property leased to a large media company and communications company, respectively.   We purchased this property for all cash, without debt financing.

The property’s historical occupancy rates are as follows:

Year Ending	Average Annual
December 31	Occupancy (%)
2001	95	%
2002	97	%
2003	98	%
2004	100	%
2005	69	%

The industrial park’s tenants operate varying business, including light manufacturing and distribution, light assembly, warehousing and service office that encompasses a wide variety of businesses.

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The following table sets forth lease expiration information:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)(1)
2006	21	25,039	375,907	66.06	%	95.21	%
2007	1	678	10,200	1.78	%	2.58	%
2008	1	350	8,712	0.92	%	2.21	%
2009	—	—	—	—		—
2010	—	—	—	—		—
	23	26,067	394,819	68.76	%	100.00	%

(1)Although a majority of the leases expire within the next twelve months, most tenants’ average tenure at the property exceeds 5 years and typically tenants renew on a one year basis.  Existing leases at the property generally include annual rental increases ranging between 3% and 7%.  The table excludes the billboard and cell site leases.

Clear Channel Communications leases a portion of the land parcel for the purpose of maintaining and displaying a billboard sign.  Annual rent is $40,000 paid annually in advance.  The initial term of this lease expires in 2008.  Successive five-year extensions run until 2038.

Cingular Wireless leases a portion of the land parcel for the purpose of maintaining and operating a cell-site.  This lease expires in 2028.  Monthly rent is currently $1,801 per month.

Paramount Business Center, Paramount, California

 On April 28, 2005, we purchased an existing multi-tenant industrial park known as Paramount Business Center, a single-story two building property built in 1985 consisting of approximately 30,157 square feet on approximately 1.66 acres of land.  Our total acquisition cost was $3,149,410. As of December 31, 2005, the property was 93% leased to nine tenants whose spaces range in size from 2,159 square feet to 4,336 square feet. The property’s historical occupancy rates are as follows:

Year Ending	Average Annual
December 31	Occupancy (%)
2001	98	%
2002	98	%
2003	100	%
2004	100	%
2005	93	%

The following table sets forth lease expiration information:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2006	5	14,458	125,583	47.94	%	50.53	%
2007	1	4,336	39,800	14.38	%	16.01	%
2008	2	7,216	62,928	23.93	%	25.32	%
2009	—	—	—	—		—
2010	1	2,159	20,208	7.16	%	8.14	%
	9	28,169	248,519	93.41	%	100.00	%

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Interstate Commerce Center, Tempe, Arizona

On September 30, 2005, we purchased a multi-tenant industrial park built in 1987 in Tempe, Arizona, near the Phoenix airport.  This property consists of four buildings totaling 83,205 square feet of leasable space situated on approximately 5.02 acres of land.  Our total acquisition cost was $7,518,714.  At acquisition, the property was 82% leased, excluding approximately 14,703 square feet leased back to the seller for a period of up to six months. As of December 31, 2005, the property was 82% leased to 3 tenants whose spaces range in size from 8,372 square feet to 40,200 square feet.  The property’s historical occupancy rates are as follows:

Year Ending December 31	Average Annual Occupancy (%)
2001	N/A
2002	85	%
2003	75	%
2004	82	%
2005	82	%

One tenant, whose lease expires in 2009, represents 61% of the current base rent and 48% of the total property leasable area. The following table sets forth lease expiration information:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2006	1	8,372	60,278	10.06	%	11.87	%
2007	—	—	—	—		—
2008	—	—	—	—		—
2009	1	40,200	308,700	48.31	%	60.80	%
2010	1	19,930	138,720	23.96	%	27.33	%
	3	68,502	507,698	82.33	%	100.00	%

ITEM 3.  LEGAL PROCEEDINGS

There are no pending material legal proceedings to which we or our assets are subject.  In addition, no such material proceedings are known to be contemplated against us.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters have been submitted to a vote of our members.

PART II

ITEM 5.  MARKET FOR MEMBERSHIP INTERESTS AND RELATED MEMBER MATTERS

There is no established public trading market for our units of membership interests and it is not anticipated that a public trading market for the units will develop.  Under our operating agreement, our managing member has the right to refuse to permit the transfer of units in its reasonable discretion.

As of March 15, 2006, we had sold 100,000 units of membership interest to 1,448 investors for a total investment of $50,000,000.  On August 18, 2005, we completed our public offering of units.  The sale of the units of membership interest was made pursuant to a Registration Statement filed pursuant to the Securities Act of 1933, as amended.

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Any of the funds raised in our public offering that have not been invested in properties within one year of the completion of the offering will be distributed to our unit holders.

Holders of our units are entitled to receive 90% of cash from operations each year until investors receive a specified cumulative, non-compounded annual return, then 50% of cash from operations.  A 12% cumulative non-compounded annual return applies to specified early investors for the 12-month period subsequent to the date of their capital contributions and is in lieu of the 8% return during that period.  Otherwise, investors are entitled to receive 90% of cash flow from operation until they receive an 8% non-compounded annual return.  Holders of our units receive 100% of net proceeds from property sales until they have received the return of their capital contributions, then 90% of net proceeds from property sales until they have received an overall 8% non-compounded annual return, taking into account all prior distributions, and thereafter 50% of net proceeds from property sales.

As of December 31, 2005, we have distributed a total of $3,575,451 to our investors, of which $3,493,412 was paid to unitholders and $82,039 was paid to our managing member.  Of the amount paid to unitholders, $786,495 was paid directly from funds of our managing member. We contemplate making distributions quarterly but distributions may be made more or less frequently.

On February 15, 2006, we distributed an additional $629,888 to unitholders.

We do not have any equity compensation plans and no units of membership interests are issuable under any individual compensation arrangement.

ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction with the financial statements and notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Operating Data

	Years Ended December 31,
	2005		2004		2003		2002			2001
Revenues	$	2,131,135	$	1,285,180	$	887,690	$	131,335		$	8,319
Net Income (Loss)	$	628,275	$	365,574	$	321,218	$	(93,796	)	$	(144,985	)
Net Income (Loss) allocable to unitholders	$	565,447	$	329,017	$	289,096	$	(84,416	)	$	(130,486	)
Net Income (Loss) per unit allocable to unitholders	$	6.72	$	7.50	$	11.92	$	(7.27	)	$	(21.32	)
Cash distributions per unit to public unitholders	$	21.55	$	21.61	$	21.76	$	17.24		$	0.80

Balance Sheet Data

	Years Ended December 31,
	2005		2004		2003		2002		2001
Total assets	$	41,505,561	$	24,395,612	$	13,870,190	$	7,567,741	$	2,497,368
Total liabilities (all current)	$	744,486	$	308,829	$	350,127	$	408,376	$	320,665

The comparability of the information set forth above is materially affected by our public offering and sale of membership interests, beginning in August 2001 and completed in August of 2005, and by our acquisition of a property in each of September and December 2002, December 2003, January, April and September 2005.  See Item 2 entitled “Description of Properties”.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the our audited financial statements and notes thereto as well as the Section ”Description of Properties” contained elsewhere in this report.

Critical Accounting Policies

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

Revenue Recognition

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

Investments in Real Estate

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

In June 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 and No. 142 require us to record at acquisition an intangible asset or liability for the value attributable to in-place leases.  The requirements are applicable to all acquisitions subsequent to July 1, 2001.  At December 31, 2005, the unamortized balance of this intangible asset was $561,165.

Off-balance Sheet Financings and Liabilities

Other than lease commitments and legal contingencies incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities.  We do not have any majority-owned subsidiaries or any interests in, or relationships with, any special-purpose entities.

Impact of New Accounting Pronouncements

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership.  A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardless of the sole general partner’s ownership interest in the limited partnership.  The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership.  Other substantive participating rights by the limited partners may also overcome the control presumption.  This consensus is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified after June 29, 2005.  For general partners in all other limited partnerships, this consensus would be effective no later that the beginning of the first reporting period in fiscal years beginning after December 15, 2005.  The Company does not expect EITF 04-05 to have a significant impact on its financial statements.

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In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (“FIN 47”). FIN 47 is an interpretation of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The adoption of FIN 47 did not have a material impact on the Company’s financial statements.

Results of Operations

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

At the end of 2004, we owned three properties, all which were operated for the entire year of 2004.  During 2005, we purchased three additional properties.  These new properties were added in January, April and September of 2005.  These acquisitions do account for most of the variation in 2005.

Rental revenues and tenant reimbursements increased by $845,955 from $1,285,180 in 2004 to $2,131,135 in 2005.  Approximately $800,000 of this increase is attributable to the three properties acquired in 2005, with the remaining increase coming from rental increases from properties owned in 2004.  The 2005 increases in property operating and maintenance expenses, property taxes and, depreciation and amortization were primarily due to the additional properties.  ..

General the administrative expenses increased from $238,515 to $414,294 in 2005.  Audit and accounting fees increased due to additional procedures and compliance reviews related to the new properties.  The 2005 expenses also include costs associated with due diligence on two properties not ultimately purchased by us.  We also incurred approximately $12,000 in California limited liability company income taxes in 2005 not previously assessed.

Depreciation and amortization expense increased from $227,454 to $456,308 in 2005 as a result of the increase in properties.

Interest, dividends and other income increased from $39,095 in 2004 to $290,841 in 2005.  This increase is attributable to both the increase in the interest rate paid on our money market and short-term investments and the increase in the amount of funds invested over 2004.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

As of December 31, 2004, we owned three properties. The properties were purchased in September 2002, December 2002 and December 2003. Accordingly, our operations for 2003 reflect the operations of two properties for a full year, while our 2004 operations reflect a full year of operations for all three properties.

Our net income for 2004 was $365,574 compared to $321,218 for 2003.  The primary reason for the increase in 2004 was a full year of operation for the property acquired in late 2003.

Rental revenues and tenant reimbursements increased from $887,690 in 2003 to $1,285,180 in 2004, while property operating and maintenance expenses, including property taxes and depreciation, increased from $413,146 in 2003 to $720,186 in 2004.  Interest income from money market investments increased from $25,542 in 2003 to $39,095 in 2004 due to the additional cash balances invested in interest bearing money market accounts.

Our general and administrative expenses increased from $174,875 in 2003 to $238,515 in 2004, primarily due to additional legal and accounting fees related to the restatement of prior year financial statements.  Interest expense on costs incurred by our managing member reflect the reduction of the amount we owed to our managing member in 2004.

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Liquidity and Capital Resources

As of March 15, 2006, we had $13,040,172 in cash and cash equivalents.  We intend to use these funds to invest in additional multi-tenant business park properties and capital improvements to the properties, and to provide operating reserves.

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

Our offering and organizational activities have been financed by our managing member.  These costs have been fully reimbursed to our managing member at the rate of 4% of gross proceeds of our unit sales pursuant to the prospectus for the offering. 

In addition, our managing member funded $412,035 and $174,103 for the years ended December 31, 2005, and 2003, respectively, to our unitholders related to a 5% annual return on their capital contribution.  Such amounts will not be reimbursed by us to our managing member and have been reflected in the total capital contribution of our managing member disclosed above.

Contractual Obligations

As of December 31, 2005, we had no significant contractual obligations or commercial commitments.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest our cash and cash equivalents in FDIC insured savings accounts, which, by their nature, are not subject to interest rate fluctuations.  At times, cash balances may be in excess of amounts insured by Federal agencies.  Approximately $12,938,420 in cash balances were in excess of Federal insurance limits as of December 31, 2005.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements, related notes and supplemental Schedule III are contained on pages F-1 to F-14 of this report.  The index to such items is included in Item 15(a).

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer of Cornerstone Ventures, Inc., the manager of our managing member, have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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ITEM 9B.  OTHER INFORMATION

Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Cornerstone Industrial Properties, LLC is a California limited liability company, which was initially organized for the purpose of being our managing member. It is expected that our managing member will also act as the managing member of other funds in the future.  Our managing member is also a preferred shareholder of Pacific Cornerstone Capital, Inc., our Managing Broker/Dealer. The manager of our managing member is Cornerstone Ventures, Inc.  Cornerstone Ventures, Inc. oversees the activities of our managing member and provides many of the services necessary for our managing member to fulfill its responsibilities to us.  The Cornerstone Ventures, Inc. team of professionals brings together a unique blend of talent and experience.  As of March 15, 2006, Cornerstone Ventures, Inc. was the owner of 26.4% of the equity profits interest in our managing member and has sole voting control with respect to our operations.

Board of Directors

Terry G. Roussel, age 52, is one of the founding shareholders of the Cornerstone-related entities that commenced operations in 1989.  Mr. Roussel is President, Chief Executive Officer, a Director and the majority shareholder of Cornerstone Ventures, Inc., the manager of our managing member of the Fund.  Mr. Roussel is also the President, Chief Executive Officer and a Director of Cornerstone Core Properties REIT, Inc. and its advisor, Cornerstone Realty Advisors, LLC, and the majority shareholder, a director and an officer of Pacific Cornerstone Capital, Inc.  Under Mr. Roussel’s direction, Cornerstone Ventures and its affiliates formed nine separate real estate investment funds and joint ventures. In 1993, Cornerstone and its affiliates became managing joint venture partner with Koll Capital Markets Group, Inc., a wholly owned subsidiary of Koll Management Services, Inc. (now owned by CB Richard Ellis).

As managing partner of the above-described funds and joint ventures, Cornerstone Ventures, Inc. and its affiliates were responsible for the acquisition, operation, leasing, and disposition of all jointly owned properties between Koll and Cornerstone.  In connection with acquiring properties for the account of these joint ventures, Mr. Roussel personally supervised the acquisition of each property, initiated and directed the business plan for each property, and arranged debt and equity financing the acquisition of each property.

In addition to his real estate experience, Mr. Roussel gained valuable financial services industry experience earlier in his career.  In 1985, Mr. Roussel started the Special Investments Group, a new division within Bank of America’s Capital Markets Group, which provided real estate investment opportunities to the bank’s wealthiest private banking clients.  Between 1980 and 1985, Mr. Roussel was employed by Bateman Eichler, Hill Richards, Inc., a regional securities firm headquartered in Los Angeles, California.  In this capacity, Mr. Roussel was promoted to First Vice President and Manager of the partnership finance department where he was responsible for the due diligence and marketing of all publicly registered and real estate funds offered by the firm.

Mr. Roussel graduated with honors from California State University at Fullerton in 1976 with a B.A. in Business Administration with a concentration in Accounting.  Subsequent to graduation, Mr. Roussel joined the accounting firm of Arthur Andersen & Co. as an auditor and later transferred to the tax department of Arthur Young & Co., a predecessor firm to Ernst & Young.  Mr. Roussel became a Certified Public Accountant in 1979 (now inactive).

Alfred J. Pizzurro, age 50, is a Director and Senior Vice President and shareholder of Cornerstone Ventures, Inc. as well as a shareholder, director and officer of Pacific Cornerstone Capital, Inc., the dealer manager for the Cornerstone Realty Fund, LLC offering that closed in August of 2005.  Mr. Pizzurro joined Cornerstone Ventures, Inc. in April 1998 and has been the individual primarily responsible for Cornerstone’s marketing and new business development activities since that time.

Between 1993 and 1998, Mr. Pizzurro was responsible for business development both domestically and internationally for The Joseph Company, a research and development company.  From 1986 to 1992, he was the

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Director of Marketing for a regional real estate company. Mr. Pizzurro served as a pilot in the United States Marine Corps between 1979 and 1986 where he attained the rank of Captain.

Mr. Pizzurro received his Bachelor of Science Degree in Communications from Clarion University in 1978.

Advisory Committee

On March 28, 2006, Cornerstone Ventures, Inc., the manager of our managing member, formed an informal Advisory Committee.  The purpose of the Advisory Committee is to act as a resource to the board of directors and senior management of Cornerstone Ventures, Inc. in evaluating strategic and significant business issues presented to it by the board of directors and officers of Cornerstone Ventures, Inc., to research and consider alternative solutions available to Cornerstone Ventures, Inc. and to report the results of its deliberations to the board of directors.  On March 28, 2006, Timothy C. Collins, Joseph H. Holland and Robert C. Peterson resigned as directors of Cornerstone Ventures, Inc. and Timothy C. Collins, Joseph H. Holland and Robert E. Witt were appointed as members of its informal Advisory Committee.  Robert C. Peterson will continue as Chief Investment Officer of Cornerstone Ventures, Inc.  Following is information about the members of the Advisory Committee.

Joseph H. Holland, age 49, is currently the Managing Member of Uptown Partners, LLC, a real estate group developing market-rate, multi-family housing in New York City.  He is also of counsel with the law firm of Van Lierop, Burns & Bassett, where he handles a wide-ranging real estate law practice focused on the development of affordable housing projects in the New York City metropolitan area.  Mr. Holland is Director, New York State Urban Development Corporation, gubernatorial appointee since 2000, Director, Municipal Assistance Corporation of the City of New York, gubernatorial appointee since 1998 and a Member, Board of Trustees, Cornell University since 1998.

Mr. Holland is the former Commissioner of the New York State Division of Housing and Community Renewal. In this capacity, Mr. Holland headed the New York State Agency with more than two thousand employees. Mr. Holland was responsible for administering programs in the areas of community development, supervision of State-assisted housing developments and rent regulation in New York City and other municipalities. Mr. Holland held this position between 1995 and 1996.  Between 1985 and 1987, Mr. Holland was Chief Counsel for the New York Standing Committee on Housing and Community Development.  Mr. Holland is the 1991 recipient of the Volunteer Action Award, presented by President George Bush and the 1991 Entrepreneur of the Year Award, presented by then New York Mayor David Dinkins.

Mr. Holland is a 1982 Graduate of Harvard Law School. Mr. Holland received his Bachelor of Arts Degree from Cornell University in 1978 and his Master of Arts Degree from Cornell University in 1979 where his fields of concentration were U.S. Diplomatic History and African-American History.

Timothy C. Collins, age 58, has been Founder and Principal of T.C. Collins & Associates since 1987. T.C. Collins & Associates is involved in the areas of real estate consulting and management in California, Hawaii and Nevada, principally in project entitlement, project and corporate finance, construction management and property management.

Since 1987, T.C. Collins & Associates has managed the construction of 1.7 million square feet of industrial property and has negotiated the disposition of over 2,000 acres of land for both residential and commercial /industrial use.

Between 1981 and 1985, Mr. Collins was one of the founders and served as Executive Vice President and Chief Financial Officer of Jet America Airlines. Further, Mr. Collins was President and Chief Operating Officer of MGM Grand Air, Inc. between 1986 and 1987.  Prior positions include Vice President of Finance for The Biddle Group, a real estate development company as well as Controller for Air California, Inc. and Senior Auditor for Arthur Andersen & Company.

Mr. Collins is a graduate of the University of Santa Clara and is a licensed Certified Public Accountant (inactive).

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Robert E. Witt, age 72, is the President of Witt Management Group which provides business consulting services. Mr. Witt was most recently Managing Director, Foreign Investments of Roth Capital Partners, LLC, a noted investment banking firm located in Newport Beach, California.  Prior to joining Roth Capital Partners in 1999, Mr. Witt was Chairman & CEO of South Coast Financial Securities, a full service investment firm that he founded in 1992.

Prior to founding South Coast Financial Securities, Mr. Witt was President and CEO of American Capital Marketing, a nationally recognized leader in asset management with over $15 billion in mutual funds.

Previously, Mr. Witt enjoyed a distinguished, twenty-seven year career with E.F. Hutton Group, Inc., where he was Executive Vice President and also served on its Board of Directors.  As the senior officer in charge of E.F. Hutton’s Global Retail Group, Mr. Witt was responsible for all sales and training, financial product development and marketing for the firm.  In addition, he supervised the firm’s nine regions, 440 offices and 6,200 registered representatives worldwide.

Mr. Witt is a former Chairman of the Business Conduct Committee of District 11 of the National Association of Securities Dealers.  He is a former Director of Walwyn Stodgell and E.F. Hutton Group.  Mr. Witt has served on the Arbitration Committee of both the New York Stock Exchange and the NASD.  He has also served on the Board of Governors of the Boston Stock Exchange and the Board of Trustees of Ripon College.

Mr. Witt obtained his Bachelor’s degree in Economics from Ripon College in Wisconsin.  He has completed graduate work at the Wharton School of Business and UCLA.

The Audit Committee

For the year ended December 31, 2005, the Audit Committeeof Cornerstone Ventures, Inc. consisted of Timothy C. Collins and Robert E. Witt, each of whom is considered independent under applicable securities laws.  The Audit Committee determined that Mr. Collins meets the criteria of an “audit committee financial expert” as that term is defined in the SEC rules.  The SEC rules provide that audit committee financial experts do not have any additional duties, obligations or liabilities and are not considered experts for purposes of the Securities Act of 1933.  Effective March 28, 2006, Cornerstone Ventures, Inc. formed a Financial Oversight Committee which will perform the functions previously performed by the Audit Committee.

Financial Oversight Committee

We do not have a board of directors or an audit committee.  Accordingly, as the managing member of the our manager, Cornerstone Ventures, Inc. has established a Financial Oversight Committee consisting of Terry G. Roussel, as the Principal Executive Officer and Sharon C. Kaiser, as the Principal Financial Officer of Cornerstone Ventures, Inc.  The Financial Oversight Committee will serve the equivalent function of an audit committee for, among others, the following purposes: appointment, compensation, review and oversight of the work of the our independent registered public accountant, and establishing and enforcing our Code of Ethics.  However, since we and the managing member do not have an audit committee and the Financial Oversight Committee is not independent of us or the managing member, we do not have an “audit committee financial expert.”

Management of the Managing Member

Our managing member is managed by Cornerstone Ventures, Inc.  Our managing member is owned by Cornerstone Ventures, Inc. and various investors none of whom have any voting rights or control with respect to the operations of our managing member.

Mr. Roussel is the Chief Executive Officer and Mr. Pizzurro is a Senior Vice President of Cornerstone Ventures, Inc.   Additional officers of Cornerstone Ventures, Inc. are:

Sharon C. Kaiser has served as the Chief Financial Officer of Cornerstone Ventures, Inc. since October 2005.  Ms. Kaiser joined Cornerstone in July 2005 as Chief Financial Officer of Cornerstone Core Properties REIT,

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Inc. and its advisor, Cornerstone Realty Advisors, LLC.  Ms. Kaiser is responsible for finance and accounting, MIS, human resources and administrative functions.

Prior to joining Cornerstone, Ms. Kaiser was Director of Financial Operations for Westfield America, Inc., Westfield is one of the largest REITs in the world with approximately $9 billion in assets and the American subsidiary of one of the largest listed retail REITs in the world with $25 billion of assets under management.

From 1999 to 2002, Ms. Kaiser served as Chief Financial Officer of The StayWell Company, a subsidiary of Vivendi Universal, and from 1995 to 1999, she served as Chief Financial Officer and Senior Vice President of HemaCare Corporation, a publicly traded biomedical company.  Her responsibilities included financial accounting and reporting, information technology, investor relations and human resources, as well as strategic planning and acquisition due diligence and integration.

Before joining HemaCare Corporation, Ms. Kaiser served as the Chief Financial Officer of a publicly traded (AMEX) REIT sponsored by the Koll Company.  Earlier she spent eight years with Arthur Andersen and Co.

Ms. Kaiser holds a Bachelor of Science in Business Administration from the University of Southern California and has been and Certified Public Accountant since 1981.

Dominic J. Petrucci, age 42, joined Cornerstone Ventures, Inc. in 2002 and has been Chief Operating Officer since 2004.  Mr. Petrucci is responsible for overseeing all operations and implementing strategic growth for the company.  During his tenure at Cornerstone, he led Cornerstone’s real estate acquisition and operations and served as head of sales and marketing operations.  Mr. Petrucci is also the Chief Operating Officer of Cornerstone Core Properties REIT, Inc. and its advisor, Cornerstone Realty Advisors, LLC.

Prior to joining Cornerstone in 2002, Mr. Petrucci served since 1998 as Division President of Koll Development Company.  In this capacity he managed the commercial real estate development activities for a 2.8 million square foot portfolio.  Mr. Petrucci’s responsibilities included business development, divisional oversight of operations and administration, and participation on Koll Development Company’s Executive Committee and Investment Committee.

Mr. Petrucci was a Vice President for Kitchell Development Company and Kitchell Corporation from 1996 to 1998.  As Vice President for Kitchell Development Company, he oversaw Kitchell’s real estate development operations throughout the western United States.  As Vice President – Finance for Kitchell Corporation, Mr. Petrucci provided total financial oversight of their domestic and international construction activities and managed the property management, financial services, human resources, and risk management departments for Kitchell ($300 million annual revenues).

From 1990 until early 1996 Mr. Petrucci worked with the Koll organization in various capacities.  He was Chief Financial Officer and Corporate Secretary for Koll Construction, Vice President – Finance for Koll International, and Group Controller for Koll Development.  In his capacities with Kitchell and Koll, Mr. Petrucci was involved in the origination and restructuring of nearly $1 billion in debt and equity investments in addition to participation in the marketing and selling of nearly $300 million of property. 

Mr. Petrucci began his career in the real estate group at KPMG Peat Marwick in Los Angeles where he earned a Certified Public Accountant designation.  Mr. Petrucci earned his Bachelor of Science degree in commerce, with an accounting major from Rider University in Lawrenceville, New Jersey.

Robert C. Peterson, age 46, has served as Chief Investment Officer of Cornerstone Ventures, Inc. since 2004.  Mr. Peterson has been involved with Cornerstone related entities since Cornerstone’s joint venture began in 1993.  Mr. Peterson is also the Chief Investment Officer of Cornerstone Core Properties REIT, Inc. and the Chief Investment Officer of its advisor, Cornerstone Realty Advisors, LLC. Mr. Peterson was previously Executive Vice President of Acquisitions and Dispositions for Koll Bren Schreiber Realty Advisors (“KBS”). KBS is one of the largest institutional real estate fund managers in the United States. KBS has acquired over $5 billion of commercial real estate on behalf of many of the largest private and public institutional investors in the United States. In his capacity, Mr. Peterson was the individual responsible for identifying, underwriting, acquiring and disposing of real

21

estate opportunities in the western half of the United States for KBS.  Mr. Peterson was with KBS since its inception in 1992 until 2003.

From 1990 to 1992, he was an officer of Koll Management Services, Inc. (“Koll”), one of the largest managers and operators of commercial real estate in the United States.  Mr. Peterson was instrumental in the formation of both the first joint venture between Koll and Cornerstone Ventures, Inc. in 1993 and the second joint venture between Koll and Cornerstone Ventures, Inc. in 1995.

Mr. Peterson has 24 years of real estate investment experience, including a diverse background in acquisitions, financing, and leasing through previous affiliations with Koll Management Services, Meyer Real Estate Advisors, VMS Realty, Inc. and Peat Marwick in Chicago.

Mr. Peterson earned a Certified Public Accountant (CPA) designation and is a Certified Commercial Investment Member (CCIM), Certified Property Manager (CPM) and a licensed Real Estate Broker in the state of California.  Mr. Peterson also holds a Bachelor’s Degree in Accounting from the University of Illinois.

Compensation

We will reimburse our managing member for its direct expenses in administering our business and pay our managing member compensation for its services as provided in the operating agreement.  Our managing member will also receive a percentage of net cash flow from operations and net sales proceeds.  We will not pay our managing member any other compensation for its services as managing member.  See “Management Compensation.”

Services Performed by Others

Our managing member and its affiliates outsource certain functions and intend to continue hiring independent persons and companies to provide services to us as called for by the operating agreement or which, in the opinion of our managing member, would be in our best interests.  We will pay the cost of all such services unless those services are to be provided by our managing member.

Dealer Manager Management

The dealer manager for our public offering of units, which concluded in August 2005, was Pacific Cornerstone Capital, Inc., an affiliate of our managing member and a member of the National Association of Securities Dealers, Inc.  The officers of the dealer manager were responsible for marketing of our units of membership interests to the broker dealers.

Alfred J. Pizzurro joined Cornerstone in April 1998 and is a Senior Vice President of the dealer manager.  Mr. Pizzurro focuses on new business development and institutional investors.  Mr. Pizzurro holds NASD Series 24, 7 and 63 licenses.

Section 16(a) Beneficial Ownership Reporting

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our managers and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the “SEC”).  Managers and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish the Fund with copies of all Section 16(a) forms they file.

During the period from January 1, 2005 through December 31, 2005, there were no Section 16(a) filings required.

22

Code of Business Conduct and Ethics

Cornerstone Ventures, Inc. has adopted a Code of Business Conduct and Ethics that applies to all of its officers and directors.  We have filed the Code of Business Conduct and Ethics as an exhibit to this report. 

ITEM 11. COMPENSATION OF OUR MANAGING MEMBER AND AFFILIATES

The following table summarizes the compensation, fees and reimbursements paid to our managing member and affiliates during the year ended December 31, 2005.

	Capacity in which Served-
Entity	Form of Compensation	Cash Compensation
Cornerstone Industrial Properties, LLC	Managing member - Reimbursement of organization and offering costs	$	819,580
Pacific Cornerstone Capital, Inc.	Dealer manager - Selling commissions	$	2,135,823	(1)

(1)This amount includes all selling commissions paid on units sold in 2005.  A substantial portion was paid out to other broker/dealers.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There are no units of membership interest owned by our managing member as of December 31, 2005.  There are five units of membership interest owned by Terry G. Roussel as of December 31, 2005.

No arrangements exist which would, upon implementation, result in a change in control of the company.

We do not have any equity compensation plans and did not have any such plan as of December 31, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Compensation and Fees to be paid to our Managing Member and its Affiliates

Following is a summary of the compensation and fees paid and to be paid by us to our managing member and its affiliates in connection with the formation and operation of the company.

Type of Compensation and Recipient	Method of Compensation	Amount
ORGANIZATION AND OFFERING STAGE
Selling commissions payable to the dealer manager and participating brokers	Up to 7% of all offering proceeds. (Commissions were 9% of offering proceeds on the first $3,000,000 raised in our offering)	$	3,541,000
Marketing support fee payable to the dealer manager and participating brokers	Up to 2.0% of offering proceeds	$	1,000,000
Reimbursement of non-accountable expenses payable to the dealer manager and participating brokers	Up to 1% of offering proceeds	$	500,000
Due diligence expense allowance fee payable to the dealer manager and participating brokers	Up to 0.5% of offering proceeds	$	250,000

23

Type of Compensation and Recipient	Method of Compensation	Amount
Reimbursement to Managing Member and its affiliates for organizational and offering expenses	Reimbursement of actual expenses and costs to a maximum of 4% of offering proceeds	$	2,000,000
	ACQUISITION STAGE
Acquisition fees payable to the Managing Member and its affiliates	None	None
Reimbursement to our managing member and its affiliates for acquisition expenses incurred in the acquisition of properties including non-refundable option payments on property not acquired, surveys, appraisals, title insurance and escrow fees, legal and accounting fees and expenses, architectural and engineering reports, environmental and asbestos audits, travel and communication expenses and other related expenses	Reimbursement of actual expenses and costs	Not determinable at this time
	OPERATIONAL STAGE
Fund administration supervisory fee payable to our managing member	None	None
Fixed asset management fee payable to our managing member	None	None
Property management fees payable to our managing member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Property management fees equal to 6% of the gross rental income generated by each property will be paid monthly	Not determinable at this time
Property refurbishment supervision fee payable to our managing member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Property refurbishment supervision fee equal to 10% of the cost of tenant improvements or capital improvements made to our properties	Not determinable at this time
Leasing commissions payable to our managing member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Leasing commissions paid upon execution of each lease equal to 6% of rent scheduled to be paid during the first and second year of the lease, 5% during the third and fourth years and 4% during the fifth and later years	Not determinable at this time
Incentive share of net cash flow from operations payable to our managing member	10% of net cash flow from operations each year until unitholders have received distributions equal to an 8% per annum, simple return for the year or the early investors 12% incentive return, then 50% of net cash flow from operations	Not determinable at this time
Reimbursement of actual cost of goods, materials and other services supplied to the Fund by our managing member	Reimbursement of actual expenses and costs	Not determinable at this time

24

Type of Compensation and Recipient	Method of Compensation	Amount
	LIQUIDATION STAGE
Property disposition fees payable to our managing member and/or its affiliates some or all of which may be paid to unaffiliated third parties. Our managing member will not be given an exclusive right to sell our properties	Property disposition fees in an amount equal to 6% of the contract sales price of the property	Not determinable at this time
Incentive share of net sales proceeds payable to our managing member	After the unitholders have received an amount equal to their aggregate capital contributions, 10% of proceeds from property sales until the unitholders have received an amount equal to an aggregate 8% per annum, cumulative, non-compounded return taking into account all prior distributions and thereafter 50% of proceeds from property sales	Not determinable at this time

Costs Incurred by Related Parties

As of December 31, 2005, we have repaid our managing member for all of the deferred offering costs incurred by our managing member on our behalf. These costs were repaid at the rate of 4% of the amount of capital raised from unitholders.  During calendar 2005, we repaid $819,580 of deferred offering costs to our managing member.  In addition, our managing member, in its sole discretion, has funded $412,035 and $174,103 for the years ended December 31, 2005 and 2003, respectively, to our unitholders related to a 5% annual return on their capital contributions. Such amounts will not be reimbursed to our managing member by us and are accounted for as capital contributed by our managing member.  We are not obligated to make distributions to its members, and accordingly, there is no guarantee that our managing member will subsidize such distributions in the future.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

BDO Seidman, LLP audited our financial statements for the years ended December 31, 2005 and 2004. 

Audit and Non-Audit Fees

Aggregate fees for professional services rendered to the Fund by BDO Seidman, LLP for the years ending December 31, 2005 and 2004 were as follows:

Services Provided	2005		2004
Audit Fees	$	96,859	$	113,991
Audit Related Fees	32,075		14,551
Tax Fees	—		—
All Other Fees	4,500		—
Total	$	133,434	$	128,542

Audit Fees.    The aggregate fees billed for the years ended December 31, 2005 and 2004 were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports.

Audit Related Fees.    The aggregate fees billed for the years ended December 31, 2005 and 2004 were for services provided for our property acquisitions and for acquisition-related audits.

25

Pre-Approval Policies and Procedures

The Financial Oversight Committee has implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, the Financial Oversight Committee pre-approves both the type of services to be provided by its auditor and the estimated fees related to these services.

During the approval process, the Financial Oversight Committee considers the impact of the types of services and the related fees on the independence of the auditor. The services and fees must be deemed compatible with the maintenance of the auditor’s independence, including compliance with SEC rules and regulations.

Throughout the year, the Financial Oversight Committee will review any revisions to the estimates of audit and non-audit fees initially approved.

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) (1)	Financial Statements
	The following financial statements are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
	Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP
	Report of Independent Registered Public Accounting Firm, Ernst & Young LLP
	Balance Sheets as of December 31, 2005 and 2004
	Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
	Statements of Members’ Capital for the Years Ended December 31, 2005, 2004 and 2003
	Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
	Notes to Financial Statements
(a) (2)	Financial Statement Schedules
	Schedule III - Real Estate and Accumulated Depreciation

(a) (3)	Exhibits
	3.1	Articles of Organization (incorporated by reference to Registration Statement on Form S-11, File No. 333-76609, filed April 20, 1999).
	3.2	Operating Agreement (incorporated by reference to Pre-Effective Amendment No. 3 to Registration Statement on Form S-11, File No. 333-76609, filed June 14, 2000).
	3.3	Amendment to Articles of Organization filed August 18, 1999 (incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-11, File No. 333-76609, filed February 4, 2000).
	3.4	Amendment to Articles of Organization of the Fund filed January 26, 2000 (incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-11, File No. 333-76609, filed February 4, 2000).
	14.1	Code of Business Conduct and Ethics

26

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.

27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized this 29^th day of March, 2006.

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)

Pursuant to the requirements of the Securities Exchange Act of 1934, the following person on behalf of the registrant has signed this report below in the capacity as and on the date indicated.

Signature	Title	Date
/s/ TERRY G. ROUSSEL	Director of Cornerstone Ventures, Inc.	March 29, 2006
Terry G. Roussel
/s/ ALFRED J. PIZZURRO	Director of Cornerstone Ventures, Inc.	March 29, 2006
Alfred J. Pizzurro

28

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CORNERSTONE REALTY FUND, LLC

F-1

Report of Independent Registered Public Accounting Firm

To the Members

Cornerstone Realty Fund, LLC

Irvine, California

We have audited the accompanying balance sheets of Cornerstone Realty Fund, LLC, (the “Fund”) a California limited liability company, as of December 31, 2005 and 2004, and the related statements of operations, members’ capital and cash flows for the years then ended.  In connection with our audits of the financial statements, we also have audited the 2005 and 2004 supplementary information included in Schedule III. These financial statements and financial statement schedule are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Realty Fund, LLC as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.  Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP

Costa Mesa, California

March 15, 2006

F-2

Report of Independent Registered Public Accounting Firm

To the Members

Cornerstone Realty Fund, LLC

We have audited the accompanying statements of operations, members’ capital and cash flows of Cornerstone Realty Fund, LLC, a California limited liability company, for the year ended December 31, 2003. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Cornerstone Realty Fund, LLC for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

Irvine, California /s/ Ernst & Young LLP

March 16, 2004

F-3

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

BALANCE SHEETS

	December 31,
	2005		2004
ASSETS
Assets
Cash and cash equivalents	$	13,488,985	$	11,793,822
Investments in real estate
Land	8,297,490		4,539,400
Buildings and improvements, less accumulated depreciation of $717,262 in 2005 and $342,697 in 2004	18,317,939		7,628,745
Intangible lease value, less accumulated amortization of $41,912 in 2005	508,088		—
Intangible asset – in-place leases, less accumulated amortization of $359,683 in 2005 and $118,911 in 2004	561,165		48,503
	27,684,682		12,216,648
Other assets
Escrow deposit and other costs	11,836		275,052
Tenant and other receivables	205,792		31,876
Prepaid insurance	14,371		30,737
Leasing commissions, less accumulated amortization of $55,113 in 2005 and $15,282 in 2004	99,895		47,477
Total assets	$	41,505,561	$	24,395,612
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Accounts payable and accrued liabilities	$	232,071	$	84,613
Real estate taxes payable	273,030		88,922
Tenant security deposits	239,385		135,294
Total liabilities	744,486		308,829
Members’ capital (100,000 units authorized, 100,000 units issued and outstanding in 2005 and 59,097 units issued and outstanding in 2004)	40,761,075		24,086,783
Total liabilities and members’ capital	$	41,505,561	$	24,395,612

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

F-4

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2005		2004		2003
Revenues
Rental revenues	$	1,822,614	$	1,080,123	$	750,727
Tenant reimbursements	308,521		205,057		136,963
	2,131,135		1,285,180		887,690
Expenses
Property operating and maintenance	531,403		282,890		135,491
Property taxes	391,696		209,842		162,592
General and administrative expenses	414,294		238,515		174,875
Interest expense on reimbursable costs incurred by Managing Member	—		—		3,993
Depreciation and amortization	456,308		227,454		115,063
	1,793,701		958,701		592,014
Interest, dividends and other income	290,841		39,095		25,542
Net income	$	628,275	$	365,574	$	321,218
Net income allocable to managing member	$	62,828	$	36,557	$	32,122
Net income allocable to unit holders	$	565,447	$	329,017	$	289,096
Per share amounts:
Basic and diluted income allocable to unit holders	$	6.72	$	7.50	$	11.92
Basic and diluted weighted average units outstanding	84,127		43,857		24,256

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

F-5

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF MEMBERS’ CAPITAL

Balance, December 31, 2002	$	7,159,365
Net proceeds from offering	6,692,090
In substance capital contribution of Managing Member	174,103
Deferred offering costs paid to Managing Member	(299,020		)
Distributions to unitholders	(527,693		)
Net income	321,218
Balance, December 31, 2003	13,520,063
Net proceeds from offering	11,668,875
Deferred offering costs paid to Managing Member	(520,180		)
Distributions to unitholders	(947,549		)
Net income	365,574
Balance, December 31, 2004	24,086,783
Net proceeds from offering	18,266,507
Capital contributed by Managing Member	412,035
Deferred offering costs paid to Managing Member	(819,580		)
Distributions to unitholders	(1,812,945		)
Net income	628,275
Balance, December 31, 2005	$	40,761,075

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

F-6

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	628,275		$	365,574		$	321,218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	456,308			227,453			115,063
Amortization of in-place lease value	240,772			118,911			—
Changes in operating assets and liabilities:
Other assets	13,417			(364,241		)	(8,476		)
Accounts payable and accrued liabilities	147,458			(4,560		)	(11,865		)
Real estate taxes payable	184,108			(26,403		)	1,668
Tenant security deposits	104,091			(10,335		)	63,007
Net cash provided by operating activities	1,774,429			306,399			480,615
INVESTING ACTIVITIES
Investments in real estate	(16,125,283		)	(237,768		)	(5,984,796		)
FINANCING ACTIVITIES
Advances from Managing Member	—			59,839			—
Advances to Managing Member	—			—			(22,981		)
Repayment of Managing Member advances	—			—			(111,059		)
Net proceeds from offering	18,266,507			11,668,875			6,692,090
Capital contributed by Managing Member	412,035			—			174,103
Deferred offering costs paid to Managing Member	(819,580		)	(520,180		)	(299,020		)
Distributions to unitholders	(1,812,945		)	(947,549		)	(527,693		)
Net cash provided by financing activities	16,046,017			10,260,985			5,905,440
Net increase in cash	1,695,163			10,329,616			401,259
Cash and cash equivalents - beginning of year	11,793,822			1,464,206			1,062,947
Cash and cash equivalents - end of year	$	13,488,985		$	11,793,822		$	1,464,206

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

F-7

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

NOTES TO FINANCIAL STATEMENTS

1.Organization and Business

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

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

The operating agreement, as amended and restated, provides, among other things, for the following:

The Managing Member generally has complete and exclusive discretion in the management and control of the Fund; however, unitholders holding the majority of all outstanding and issued units have certain specified voting rights which include the removal and replacement of the Managing Member.

Net Cash Flow from Operations, as defined, will be distributed 90% to the unitholders and 10% to the Managing Member until the unitholders have received a specified cumulative, non-compounded annual return on their Invested Capital Contributions, as defined. A 12% return applies to specified early investors for the twelve-month period subsequent to the date of their Invested Capital Contributions and is in lieu of the 8% return during that period.  Otherwise, unitholders are entitled to receive 90% of the cash flow from operations until they receive an 8% non-compounded annual return.

Net Sales Proceeds, as defined, will be distributed first, 100% to the unitholders in an amount equal to their Invested Capital Contributions; then, 90% to the unitholders and 10% to the Managing Member until the unitholders have received an amount equal to the unpaid balance of their aggregate cumulative, non-compounded annual return on their Invested Capital Contributions; and thereafter, 50% to the unitholders and 50% to the Managing Member.

Net Income, as defined, is allocated first, 10% to the Managing Member and 90% to the unitholders until Net Income allocated equals cumulative Net Losses, as defined, previously allocated in such proportions; second, in proportion to and to the extent of Net Cash Flow from Operations and Net Sales Proceeds previously distributed to the members, exclusive of distributions representing a return of Invested Capital Contributions; and then 50% to the Managing Member and 50% to the unitholders.

Net Loss is allocated first, 50% to the Managing Member and 50% to the unitholders, until Net Loss allocated equals cumulative Net Income previously allocated in such proportions; then remaining Net Loss is allocated 10% to the Managing Member and 90% to the unitholders.

All allocations and distributions to the unitholders are to be pro rata in proportion to their share of the allocations and distributions.

2.             Reclassifications

Certain previously reported amounts have been reclassified to conform to the current year presentation.

F-8

3.             Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of interest-bearing investments with original maturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents at December 31, 2005 is $239,385 related to tenant security deposits.  The Company places its cash with major financial institutions.  At times, cash balances may be in excess of amounts insured by Federal agencies.  Approximately $12,938,420 in cash balances were in excess of Federal insurance limits as of December 31, 2005.

Investments in Real Estate

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

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

In June 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 and No. 142 require the Fund to record at acquisition an intangible asset or liability for the value attributable to in-place leases.  The requirements are applicable to all acquisitions subsequent to July 1, 2001.  As of December 31, 2005, the Fund has recorded $920,848 as an intangible asset attributable to the value of the leases in place as of the date of acquisition.  The unamortized portion of this asset was $561,165 at December 31, 2005.

Leasing Commissions

Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term.  As of December 31, 2005, the Fund has recorded $155,008 in leasing commissions.  The unamortized portion of this asset was $99,895 at December 31, 2005.

Revenue Recognition

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

Fair Value of Financial Instruments

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

F-9

Income Tax Matters

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

Concentration of Credit Risk

The Fund maintains some of its cash in money market accounts which, at times, exceeds federally insured limits. See Footnote 3. No losses have been experienced related to such amounts.

Impact of New Accounting Pronouncements

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership.  A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardless of the sole general partner’s ownership interest in the limited partnership.  The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership.  Other substantive participating rights by the limited partners may also overcome the control presumption.  This consensus is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified after June 29, 2005.  For general partners in all other limited partnerships, this consensus would be effective no later that the beginning of the first reporting period in fiscal years beginning after December 15, 2005.  The Company does not expect EITF 04-05 to have a significant impact on its financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN 47). FIN 47 is an interpretation of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The adoption of FIN 47 did not have a material impact on the Company’s financial statements.

4.             Investments in Real Estate

On September 27, 2002, the Fund purchased an existing multi-tenant business park known as Normandie Business Center, located in Torrance, California for an investment of $3,901,696.  Normandie Business Center consists of two single-story buildings containing a total of 48,711 (unaudited) leasable square feet.

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

On December 10, 2003, the Fund purchased an existing multi-tenant park known as Arrow Business Center located in Irwindale, California for an investment of $5,910,579.  The property consists of three single-story buildings containing a total of 69,592 (unaudited) leasable square feet.

On January 25, 2005, the Fund purchased an existing multi-tenant industrial park known as Zenith Drive Centre located in Glenview, Illinois for an investment of $5,327,256.  The property is a single-story, three building property consisting of approximately 37,900 (unaudited) leasable square feet.  Included in the acquisition and purchase price of Zenith Drive Centre were a billboard sign and cellular relay antenna located on the property leased to a large media company and communications company, respectively.  Management separately valued these leases

F-10

and the resulting amounts are included in intangible lease value.  The value of these leases is amortized over the remaining respective terms.

On April 28, 2005, the Fund purchased an existing multi-tenant industrial park known as Paramount Business Center located in Paramount, California, for an investment of $3,149,410.  Paramount Business Center is a single-story two building property of approximately 30,157 (unaudited) square feet.

On September 30, 2005, the Fund purchased a multi-tenant industrial park in Tempe, Arizona, near the Phoenix airport, for an investment of $7,518,714.  This property consists of four buildings totaling 83,205 (unaudited) square feet of leasable space.

The future minimum lease payments to be received under existing operating leases for the six properties as of December 31, 2005 are as follows:

Years ending December 31,
2006	$	1,904,384
2007	1,209,985
2008	775,089
2009	582,002
2010	136,856
Thereafter	501,325
	$	5,109,641

Industrial space in the properties is generally leased to tenants under lease terms that provide for the tenants to pay increases in operating expenses in excess of specified amounts.  The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses.

5.             Deferred Offering Costs Advanced by Managing Member

Deferred offering costs incurred by the Managing Member for the years ended December 31, 2005 and  2004 are as follows:

	Deferred Offering Costs
Balance, December 31, 2003	$	595,528
Costs incurred	368,342
Costs paid	(520,180		)
Balance, December 31, 2004	443,690
Costs incurred	375,890
Costs paid	(819,580		)
Balance, December 31, 2005	$	—

The Managing Member incurred specific incremental costs in connection with the offering of membership units.  Reimbursement by the Fund of such offering costs was limited to 4% of the gross proceeds of the Fund’s offering.  At December 31, 2005, the Fund has fully repaid all offering costs incurred by Managing Member.

6.             Commitments and Contingencies

Any of the funds raised in our public offering that have not been invested in properties within one year of the completion of the offering will be distributed to our unitholders.

7.             Related Party Transactions

In order to fund its initial operating costs, the Fund received, from its Managing Member, cumulative unsecured advances and related interest totaling $476,227, which were fully repaid by December 31, 2003.  No such amounts were outstanding at December 31, 2005.

F-11

Through December 31, 2005, the Managing Member made capital contributions to the Fund in the amount of $896,474, which is inclusive of the in substance capital contribution discussed below.

During the years ended December 31, 2005 and 2003, the Managing Member, at its sole discretion, funded $412,035 and $174,103, respectively to the Fund’s unitholders related to a 5% annual return on their Invested Capital Contributions, which will not be reimbursed to the Managing Member by the Fund.  These amounts totaling $586,138 have been credited to the Managing Member’s Capital Account as an in substance capital contributions (Note 2) and recorded as a distribution to unitholders.  The Fund is not required to make distributions to its members, and accordingly, there is no guarantee that the Managing Member will subsidize such distributions in the future.

The Managing Member and/or its affiliates were entitled to receive various fees, compensation and reimbursements as specified in the Fund’s operating agreement, including commissions of 9% of the first $3,000,000 of gross proceeds from the offering of units and 7% thereafter, marketing fees of 2% of gross proceeds from the offering of units less $60,000, and expense allowances of 1.5% of gross proceeds from the offering of units.  During the years ended December 31, 2005, 2004 and 2003, the total fees, compensation and reimbursements were $2,135,823, $1,373,278 and $784,927 respectively.

The Fund is required to reimburse its Managing Member for deferred offering costs incurred by its Managing Member in the amount of 4% of the gross proceeds from the offering of units.  During the years ended December 31, 2005, 2004 and 2003, the Fund reimbursed $819,580, $520,180 and $299,020, respectively, of these costs to the Managing Member.

During 2003, the Fund paid the Managing Member $8,716 in property management fees.  No property management fees were charged by the Managing Member to the Fund in 2005 and 2004.

8.Quarterly Financial Data (unaudited)

	Three Months Ended
2005	March 31,		June 30,		September 30,		December 31,
Revenues	$	433,068	$	527,901	$	534,740	$	635,426
Net income allocable to unitholders	145,619		109,699		178,137		131,992
Basic and diluted income allocable to unitholders per unit	2.29		1.45		1.84		1.32
Basic and diluted weighted average units outstanding	63,617		75,745		96,609		100,000

	Three Months Ended
2004	March 31,		June 30,		September 30,		December 31,
Revenues	$	301,503	$	338,545	$	337,979	$	307,153
Net income allocable to unitholders	78,160		55,052		142,211		53,594
Basic and diluted income allocable to unitholders per unit	2.25		1.36		3.08		0.99
Basic and diluted weighted average units outstanding	34,813		40,399		46,143		53,893

F-12

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

Schedule III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2005

		Initial Cost to Fund				Costs Capitalized Subsequent to Acquisition			Gross Amount Invested										Life on which Depreciation in Latest Income
Description	Encum- brance	Land		Building and Improvements		Improvements		Carry Costs	Land		Building and Improvements		Total		Accumulated Depreciation		Date of Construction	Date Acquired	Statement is Computed
Normandie Business Center Torrance, CA	—	$	1,783,075	$	2,118,621	$	144,639	—	$	1,783,075	$	2,263,260	$	4,046,335	$	194,076	1988	09/27/02	39 years
Sky Harbor Business Park Chicago, IL	—	418,855		2,135,141		66,313		—	418,855		2,201,454		2,620,309		185,313		1976	12/27/02	39 years
Arrow Business Center Irwindale ,CA	—	2,337,470		3,405,695		230,927		—	2,337,470		3,636,622		5,974,092		196,413		1987	12/10/03	39 years
Zenith Business Center Chicago ,IL	—	908,090		3,745,000		—		—	908,090		3,745,000		4,653,090		82,543		1978	01/25/05	39 years
Paramount Business Center Paramount, CA	—	1,100,000		1,920,216		—		—	1,100,000		1,920,216		3,020,216		30,773		1985	04/30/05	39 years
Interstate Commerce Center Tempe, AZ	—	1,750,000		5,268,649		—		—	1,750,000		5,268,649		7,018,649		28,144		1987	09/30/05	39 years
Totals	—	$	8,297,490	$	18,593,322	$	441,879	—	$	8,297,490	$	19,035,201	$	27,332,691	$	717,262

	Cost		Accumulated Depreciation
Balance at December 31, 2001	$	—	$	—
2002 Additions	$	6,455,692	$	15,868
Balance at December 31, 2002	$	6,455,692	$	15,868
2003 Additions	$	5,817,382	$	112,806
Balance at December 31, 2003	$	12,273,074	$	128,674
2004 Additions	$	237,768	$	214,023
Balance at December 31, 2004	$	12,510,842	$	342,697
2005 Additions	$	14,821,849	$	374,565
Balance at December 31, 2005	$	27,332,691	$	717,262

F-13

EX-14.1

Exhibit 14.1

CORNERSTONE VENTURES, INC.

Code of Business Conduct and Ethics

Introduction

This Code of Business Conduct and Ethics (“Code”) embodies the commitment of Cornerstone Ventures, Inc. to conduct our business in accordance with all applicable laws, rules and regulations and the highest ethical standards. Since its founding, Cornerstone Ventures, Inc. has insisted that all its employees maintain the highest level of integrity in their dealings with and on behalf of the company including dealings with stakeholders and with others from whom the company obtains financing.

This Code of Business Conduct and Ethics is intended to document the principles of conduct and ethics to be followed by the company’s directors, officers and employees, including its principal financial officer and its principal accounting officer. Its purpose is to:

•Promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,

•Promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,

•Promote compliance with applicable governmental rules and regulations,

•Provide guidance to directors, officers and employees to help them recognize and deal with ethical issues,

•Provide mechanisms to report unethical conduct, and

•Help foster a culture of honesty and accountability.

The company will expect all its directors, officers and employees to comply at all times with the principles in this Code. A violation of this Code by an employee is grounds for disciplinary action up to and including discharge and possible legal prosecution. We also expect the consultants we retain to generally abide by this Code. (For purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, Section II of this Code shall be our code of ethics for Senior Financial Officers (as defined below).)

SECTION I

BUSINESS PRINCIPALS

A. Clients’ and Tenants’ Interests

Our clients’ and tenants’ interests always come first. Our experience shows that if we serve our clients and tenants well, our own success will follow.

B. Our Assets

Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.

C. Teamwork

We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the company and its clients and tenants.

D. Dedication

The dedication of our people to the company and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this will be an important part of our success

E. Confidential Information

We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.

F. Fairness in Competition

Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other companies.

G. Integrity and Honesty

Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the company and in their personal lives.

SECTION II

A. Compliance and Reporting

Directors officers and employees and directors should strive to identify and raise potential issues before they lead to problems, and should ask about the application of this Code whenever in doubt. Any director, officer or employee who becomes aware of any existing or potential violation of this Code should promptly notify, in the case of officers and employees, the Chief Executive Officer or the Chief Financial Officer (the “Senior Financial Officers”), and in the case of directors, the Chairman of the Audit Committee (we refer to such contacts as “Appropriate Ethics Contacts”). The company will take such disciplinary or preventive action as it deems appropriate to address any existing or potential violation of this Code brought to its attention.

The identity of the employee who reports a possible violation of this Code will be kept confidential, except to the extent the employee who reports the possible violation consents to be identified or the identification of that employee is required by law. The company will not allow retaliation for reports of possible violations made in good-faith. Possible violations may be reported orally or in writing and may be reported anonymously.

Any questions relating to how these policies should be interpreted or applied should be addressed to an Appropriate Ethics Contact.

B. Conflicts of Interest

Directors, officers and employees must do everything they reasonably can to avoid conflicts of interest or the appearance of conflicts of interest.

A “conflict of interest” occurs when an individual’s private interest is different from the interests of the company as a whole. Conflict situations include:

•When a director, officer or employee, or a member of his or her family, will benefit personally from something the director, officer or employee does or fails to do that is not in the best interests of the company,

•When an employee, officer or director takes actions or has interests that may make it difficult to perform his or her company work objectively and effectively, and

•When an employee, officer or director, or a member of his or her family, receives personal benefits from somebody other than the company as a result of his or her position in the company. Loans to, or guarantees of obligations of, such persons are of special concern.

If a conflict of interest becomes unavoidable, a director, officer of employee must promptly report the conflict of interest to the Appropriate Ethics Contact. In each instance the director, officer or employee will work with the person or persons to whom a conflict of interest is reported to devise an arrangement by which (1) that person or those persons (or their designee) will monitor the situation which creates, or gives the appearance of creating, a conflict of interest, (2) the director, officer or employee who has a conflict will, to the fullest extent possible, be kept out of any decisions that might be affected by the conflict of interest, (3) arrangements will be made to ensure that the director, officer or employee will not profit personally from the situation that causes the conflict of interest, and (4) every reasonable effort will be made to eliminate the conflict of interest as promptly as possible.

C. Public Disclosure

It is the company’s policy that the information in its public communications, including SEC filings, be full, fair, accurate, timely and understandable. All employees and directors who are involved in the company’s disclosure process, including the Senior Financial Officers, are responsible for acting in furtherance of this policy. In particular, these individuals are required to maintain familiarity with the disclosure requirements applicable to the company and are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit, material facts about the company to others, whether within or outside the company, including the company’s independent auditors. In addition, any employee or director who has a supervisory role in the company’s disclosure process has an obligation to discharge his or her responsibilities diligently.

D. Compliance with Laws, Rules and Regulations

It is the company’s policy to comply with all applicable laws, rules and regulations. It is the personal responsibility of each employee and director to adhere to the standards and restrictions imposed by those laws, rules and regulations.

Generally, it is both illegal and against company policy for any employee or director who is aware of material nonpublic information relating to any of the company’s tenants to buy or sell any securities of those issuers. Any employee or director who is uncertain about the legal rules involving his or her purchase or sale of any securities in issuers that he or she is familiar with by virtue of his or her work for the company should consult with an Appropriate Ethics Contact before making any such purchase or sale.

SECTION III

A. Corporate Opportunities

No director, officer or employee will:

•take for himself or herself personally any opportunity of which he or she becomes aware, or to which he or she obtains access, through the use of corporate property, information or position;

•make it possible for somebody other than the company to take advantage of an opportunity in any of the company’s areas of business of which the director, officer or employee becomes aware in the course of his or her activities on behalf of the Company, unless the company has expressly decided not to attempt to take advantage of the opportunity;

•otherwise use corporate property, information, or position for personal gain; or

•compete with the company generally or with regard to specific transactions or opportunities.

Directors, officers and employees owe a duty to the company to advance its legitimate interests when the opportunity to do so arises.

Sometimes the line between personal and company benefits is difficult to draw, and sometimes both personal and company benefits may be derived from certain activities. The only prudent course of conduct for our employees and directors is to make sure that any use of company property or services that is not solely for the benefit of the company is approved beforehand through the Appropriate Ethics Contact.

B. Confidentiality

In carrying out the company’s business, employees and directors often learn confidential or proprietary information about the company, its clients/customers, prospective clients/customers or other third parties. Employees and directors must maintain the confidentiality of all information so entrusted to them, except when disclosure is authorized or legally mandated. Confidential or proprietary information includes, among other things, all information that may be of use to the company’s competitors, or that could be harmful to the company or its clients/customers if disclosed, any non-public information concerning the company, including its businesses, financial performance, results or prospects, and any non-public information provided by a third party with the expectation that the information will be kept confidential and used solely for the business purpose for which it was conveyed.

C. Fair Dealing

Each employee will at all times deal fairly with the company’s tenants, suppliers, competitors and employees. While we expect our employees to try hard to advance the interests of the company, we expect them to do so in a manner that is consistent with the highest standards of integrity and ethical dealing. No employee is to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of facts, or any other unfair-dealing practice.

D. Equal Employment Opportunity and Harassment

Our focus in personnel decisions is on merit and contribution to the company’s success. Concern for the personal dignity and individual worth of every person is an indispensable element in the standard of conduct that we have set for ourselves. The company affords equal employment opportunity to all qualified persons without regard to any impermissible criterion or circumstance. This means equal opportunity in regard to each individual’s terms and conditions of employment and in regard to any other matter that affects in any way the working environment of the employee. We do not tolerate or condone any type of discrimination prohibited by law, including harassment.

E. Protection and Proper Use of Company Assets

All employees should protect the company’s assets and ensure their efficient use. All company assets should be used for legitimate business purposes only.

SECTION IV

WAIVERS OF THIS CODE

From time to time, the company may waive certain provisions of this Code. Any employee or director who believes that a waiver may be called for should discuss the matter with an Appropriate Ethics Contact. Waivers for executive officers (including Senior Financial Officers) or directors of the company may be made only by the Board of Directors or a committee of the Board.

Any waiver of provisions of this Code will be reported in filings with the SEC and otherwise reported to the company’s stockholders to the full extent required by the rules of the SEC.

SECTION V

TERMS USED IN THIS CODE

Any reference in this Code to the company is to Cornerstone Ventures, Inc. and the entities which it directly or indirectly manages.

CORNERSTONE VENTURES, INC.

BUSINESS CODE OF CONDUCT AND ETHICS

Annual Compliance Certificate

This Certificate is to acknowledge that I have read Cornerstone Ventures, Inc.’s Business Code of Conduct and Ethics and I understand its meaning. If a change in circumstances occurs which should be reported in accordance with the Code, I will promptly report this change in circumstances to the Appropriate Ethics Contact identified in the Code and file a revised Certificate with Cornerstone Ventures, Inc. I further certify that:

1.If serving as a member of the Audit Committee, I am independent, in accordance with the criteria set forth in Section 406 of the Sarbanes-Oxley Act of 2002 and the NASDAQ guidelines, and I possess sufficient experience and ability to discharge my responsibilities to the Audit Committee.

2.To the best of my knowledge, neither I not and of my family members or affiliates have engaged in any activity or has any interest which violates the Code, not an I aware of a violation of the Code by any director, officer or employee except as follows (if none, write “None” below):

Date:	, 200
		Signature
		Printed Name

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Terry G. Roussel, certify that:

1.I have reviewed this annual report on Form 10-K of Cornerstone Realty Fund, LLC;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and

(c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ TERRY G. ROUSSEL
Date: March 29, 2006	Terry G. Roussel
	Chief Executive Officer (Principal Executive Officer) of
	Cornerstone Ventures, Inc., the Managing Member of
	Cornerstone Industrial Properties, LLC, the Managing
	Member of Cornerstone Realty Fund, LLC

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Sharon C. Kaiser, certify that:

1.I have reviewed this annual report on Form 10-K of Cornerstone Realty Fund, LLC;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and

(c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ SHARON C. KAISER
Date: March 29, 2006	Sharon C. Kaiser
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of
	Cornerstone Ventures, Inc., the Managing Member of
	Cornerstone Industrial Properties, LLC, the Managing
	Member of Cornerstone Realty Fund, LLC

EX-32

Exhibit 32

CERTIFICATIONS PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Terry G. Roussel and Sharon C. Kaiser, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge, the Annual Report of Cornerstone Realty Fund, LLC on Form 10-K for the twelve month period ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Cornerstone Realty Fund, LLC.

	/s/ TERRY G. ROUSSEL
Date: March 29, 2006	Terry G. Roussel
	Chief Executive Officer (Principal Executive Officer) of
	Cornerstone Ventures, Inc., Managing Member of
	Cornerstone Industrial Properties, LLC, the Managing Member of
	Cornerstone Realty Fund, LLC

	/s/ SHARON C. KAISER
Date: March 29, 2006	Sharon C. Kaiser
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of
	Cornerstone Ventures, Inc., Managing Member of
	Cornerstone Industrial Properties, LLC, the Managing Member of
	Cornerstone Realty Fund, LLC