ITEM 1. BUSINESS
Overview
Cornerstone Realty Fund, LLC is 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 in October of 1998 to invest in multi-tenant business parks catering to small business tenants. Our properties are located in major metropolitan areas in the United States and are owned on an all cash basis without debt financing. 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.
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 unit holders for gross offering proceeds of $50,000,000, before discounts of $39,780.
Description of Business
We are a real estate fund that seeks return on our investments through the acquisition, management and sale of multi-tenant industrial business parks. We have purchased and operate a diversified portfolio of six existing, leased multi-tenant industrial business parks catering to the small business tenant.
Our properties are located in major metropolitan areas in the United States. These are geographic areas nationwide that have historically demonstrated strong levels of demand for rental space by tenants requiring small industrial buildings. We have properties located in the Los Angeles, Chicago and Phoenix areas.
We have acquired only completed properties that generate current income from rental operations. Our strategy has been to acquire such 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, causing rental rates and property values to rise to the levels necessary to justify the construction of competitive properties. 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.
The properties we have acquired cater to the small business tenant and have lease terms ranging from one to five years. During economic conditions when rental rates are rising rapidly, the short-term leases should allow us to increase rental income at a faster rate than properties with longer-term leases. This occurs due to below market in place rents for the existing tenants coupled with increasing rental rates in a particular market.
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 park space is in demand in both growing and declining economies.
Leasing activity is typically diversified, with smaller-sized tenants. Leases for properties that we purchase contain stipulated rent escalation provisions when market conditions allow.
Investment Strategy
Cornerstone Ventures, Inc. specializes in and has substantial operating experience investing in and operating multi-tenant business parks, offering in-depth real estate expertise through an experienced team of industry professionals with extensive understanding of industrial real estate.
Our investment strategy has been to purchase properties in major industrial markets with considerable tenant demand. We acquired 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 has involved purchasing 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, property pricing may be below the levels needed to justify development of competitive properties.
We regularly conduct portfolio property reviews and, if appropriate, we make determinations to dispose of properties that we do not believe meet our strategic criteria based on economic, market and other circumstances.
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 has been to purchase and reposition properties and capitalize on shorter lease terms, rising rents, increasing cash flow and capital appreciation.
Our portfolio is comprised of multi-tenant properties serving the small business tenant in three high tenant demand markets. The highest dollar amount we have invested in any single property is $9.9 million. As of December 31, 2007, we had purchased a total of seven properties for an aggregate investment of approximately $37.5 million. On April 16, 2007, we sold one of our properties to an unaffiliated third party for gross proceeds of $3.2 million. We do not expect to acquire additional properties.
Property Features
Land Lot sizes for our properties range from approximately 1.6 to 5.0 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 is an important factor in its future value. We have purchased properties in what we considered to be prime properties in prime locations.
Buildings: The 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 range from 5,000 to 200,000 square feet divided into leasable unit sizes ranging from 500 square feet to 30,000 square feet. Generally our buildings include the following 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.
Property Selection
The experienced staffs of our managing member were responsible for the selection and evaluation of properties that we acquired. The acquisition process was performed by our managing member with no acquisition fees payable by us to our managing member. All property acquisitions were evaluated by our managing member based upon its experience in the area of multi-tenant business parks and our investment objectives and supported by appraisals prepared by a competent independent appraiser.
Our property acquisitions were approved by our managing member after an examination and evaluation of some or all of the following criteria:
· Functionality of the physical improvements at the property;
· Historical financial performance of the property;
· 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;
· 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:
· Creates and implements an individualized plan for enhancing the profitability and value of each property;
· Supervises the day-to-day operations of property managers assigned to each property;
· Selects and supervises the on-going marketing efforts of leasing agents responsible for marketing the property to prospective tenants;
· Coordinates 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;
· Approves 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;
· Reviews and approves any capital improvements necessary at the property, including tenant improvements necessary to lease space;
· Reviews monthly financial reports prepared by property managers with a focus on improving the cost efficiency of operating the property;
· Prepares annual property operating budgets for review and approval by senior management; and
· Prepares 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. However, our managing member is entitled to receive an incentive share of our net cash flows from operations, as described under Item 13. “Certain Relationships and Related Transactions”.
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 more 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, which are not affiliated with us or with our managing member.
Competition
We experience competition for tenants from owners and managers of comparable projects which may include our managing member and its 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, perform a full range of real estate services including property acquisition, leasing, property management, accounting, and 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.
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. The risk factors described below are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.
We may not generate sufficient cash for distributions. If the rental revenues from the properties we own 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 unit holders 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.
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;
· 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 obtained satisfactory Phase I environmental assessments on each property we purchased. 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. It is possible that all environmental liabilities were not identified in the Phase I assessments we obtained 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 unit holders. If we were treated as a corporation, distributions to our unit holders 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.
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 unit holders. 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 unit holders.
Future events may result in federal income tax treatment of us and our unit holders 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. 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; Arrow Business Center in Irwindale, California; Zenith Business Centre in Glenview, Illinois; Paramount Business Center in Paramount, California, Interstate Commerce Center in Tempe, Arizona; and Shoemaker Industrial Park in Santa Fe Spring, California. We purchased these properties for all cash, without debt financing. On April 16, 2007, we sold our 41,422 square foot property located in Northbrook, IL commonly known as “Sky Harbor Business Park”, for $3.2 million to an unaffiliated third party. This property was purchased for $2.6 million in December 2002.
Following are descriptions of our 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 approximately $3.9 million. As of December 31, 2007, this property was 95.5% leased to 28 tenants whose spaces range in size from 1,200 to 3,358 square feet.
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:
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.
The following table sets forth lease expiration information for the next five years for those leases in place at December 31, 2007:
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 approximately $6.0 million. As of December 31, 2007, the property was 92.9% leased to 37 tenants whose spaces range in size from approximately 800 square feet to over 4,800 square feet.
The property’s historical occupancy rates are as follows:
The following table sets forth lease expiration information for the next five years for leases in place as of December 31, 2007:
(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%.
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 approximately $5.3 million. As of December 31, 2007, the property was 88.2% leased to 30 tenants whose spaces range in size from approximately 100 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.
The property’s historical occupancy rates are as follows:
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.
The following table sets forth lease expiration information:
(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. This lease expires in 2013. 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 approximately $1,900 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 approximately $3.2 million. As of December 31, 2007, the property was 85.6% leased to nine tenants whose spaces range in size from 1,988 square feet to 3,608 square feet. The property’s historical occupancy rates are as follows:
The following table sets forth lease expiration information:
(1) Although almost half 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%.
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 83,385 square feet of leasable space situated on approximately 5.02 acres of land. Our total acquisition cost was approximately $7.5 million. As of December 31, 2007, the property was 100% leased to six tenants whose spaces range in size from 8,372 square feet to 19,930 square feet. The property’s historical occupancy rates are as follows:
Lease for one of the tenant who occupies three units will expire in 2009, representing 48% of the total property leaseable area.
Shoemaker Industrial Park, Santa Fe Spring, California
On June 28, 2006 we acquired Shoemaker Industrial Park. The acquisition price was $9.9 million. This property consists of three buildings totaling 86,000 square feet of leasable space situated on approximately 4.0 acres of land. As of December 31, 2007, the property was 94.9% leased to 20 tenants whose spaces range in size from 1,960 square feet to 13,617 square feet. The property’s historical occupancy rates are as follows:
The following table sets forth lease expiration information for the next five years:
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our members in the fourth quarter of 2007.
PART II
ITEM 5.
ITEM 5. MARKET FOR MEMBERSHIP INTERESTS, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
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.
Holders
On August 18, 2005, we completed our public offering of units. We had sold a total of 100,000 units of membership interest to 1,448 investors for a total investment of $50,000,000. 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.
Distributions
Holders of our units are entitled to receive 90% of cash from operations, as defined in the operating agreement, 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, 2007, we have distributed a total of $8,837,000 to our investors, of which $8,493,000 was paid to unit holders and $344,000 was paid to our managing member. Of the amount paid to unit holders, $786,000 was paid directly from funds of our managing member. We contemplate making distributions quarterly but distributions may be made more or less frequently.
On January 9, 2008, we distributed an additional $672,000 to our investors, of which $628,000 was paid to unit holders and $44,000 was paid to our managing member.
Equity Compensation Plan Information
We do not have any equity compensation plans and no units of membership interests are issuable under any individual compensation arrangement.
Unit Repurchases
On February 22, 2007, our unit holders approved an amendment to the Fund’s operating agreement to eliminate the prohibition on repurchases of units by the Fund and add a provision to the operating agreement specifically permitting the managing member to cause the Fund to repurchase units at any time, and from time to time, on such terms and conditions as the managing member may determine in its sole discretion; provided that such repurchases do not jeopardize the status of the Fund as a partnership for federal income tax purposes or cause the Fund to be treated as a publicly-traded partnership.
As of December 31, 2007, we have redeemed 280 units at a repurchase price of $435 per unit less a $37.5 per investor transaction fee.
During the quarter ended December 31, 2007, we repurchased units as follows:
(1) All units were repurchased pursuant to the Fund’s publicly announced unit repurchase program.
(2) The repurchase program is subject to a limitation on the number of units that can be purchased in any calendar year (initially 2% of the total units outstanding).
ITEM 6.
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
Balance Sheet Data
The comparability of the information set forth above is materially affected by our public offering, sale of membership interests, beginning in August 2001and completed in August of 2005, by the acquisition of a property in each of September and December 2002, December 2003, January, April and September 2005, and June 2006, by the sale of one property in April 2007 and cash distributions. See Item 2 entitled “Description of Properties”.
ITEM 7.
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 our audited financial statements and notes thereto as well as the Section “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 (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ materially from 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 (“SFAS 144”). SFAS 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 Standards No. 141, Business Combinations (“SFAS 141”), we allocate the purchase price of acquired properties to land, buildings and improvements and identified tangible and intangible assets and liabilities associated with in-place leases (including tenant improvements, unamortized leasing commissions, value of above and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values. The requirements are applicable to all acquisitions subsequent to July 1, 2001.
The fair value of the tangible assets of the acquired properties considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets and liabilities acquired. Amounts allocated to land are derived from comparable sales of land within the same region. Amounts allocated to buildings and improvements, tenant improvements and unamortized leasing commissions are based on current market replacement costs and other market rate information.
Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term. The value of acquired above and below market leases is amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on our statement of operations.
The amount allocated to acquired in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to acquire in-place leases is included in intangible asset - in-place leases in the balance sheet and amortized as an increase to amortization expense over the remaining non-cancelable term of the respective leases.
Investment in Real Estate Held-for-Sale
The Company evaluates the held-for-sale classification of its owned real estate each quarter. Assets that are classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are generally classified as held-for-sale once management commits to a plan to sell the Properties and has initiated an active program to market them for sale. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported.
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 July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which clarifies the relevant criteria and approach for the recognition, derecognition, and measurement of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007 and it had no material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal periods beginning after November 15, 2007 (our fiscal year beginning January 1, 2008), and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on our consolidated financial statements. In February 2008, FASB deferred the effective date of SFAS No. 157 for one year for non finanacial assests and non financial liabilities that are recognized or disclosed at fair value in the financnial statements on a non recurring basis. In addition, FASB issued a staff position that SFAS No. 157 does not apply under SFAS No. 13 “ Accounting for Leases “ and other accounting pronouncements that address fair value measurements for purposes of lease classifications under SFAS No. 13.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS 141(R)”). In summary, SFAS 141(R) requires the acquirer of a business combination to measure at fair value the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited exceptions. The standard is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
In December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting Research Board No. 51, SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
Results of Operations
Continuing Operations
During 2007, we owned and operated six properties for the entire year. During 2006, we owned and operated five properties for the entire year and acquired an additional property in June 2006. In 2005, we owned two properties for the entire year and purchased three additional properties. These new properties were added in January, April and September of 2005.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Rental revenues and tenant reimbursements and other income increased by $741,000 to $4,039,000 in 2007 from $3,298,000 in 2006 largely due to a full year operation of six properties.
Property operating and maintenance expenses decreased to $840,000 in 2007 from $878,000 in 2006. The decrease is largely due to tenant space renovation work performed during the second half of 2006 on spaces occupied by new tenants in 2007.
Property taxes increased to $581,000 in 2007 from $561,000 in 2006 primarily due to higher assessed property tax values.
General and administrative expenses decreased to $421,000 in 2007 from $461,000 in 2006. The decrease is due to a reduction in marketing and accounting expenses, partially offset by higher audit and compliance fees.
Depreciation and amortization expense increased to $1,053,000 in 2007 from $906,000 in 2006 primarily from the full year impact of property acquired in mid-2006.
Interest and other income decreased to $141,000 in 2007 from $304,000 in 2006. This decrease is attributable to a lower average cash balance in 2007 due to the June 2006 acquisition and cash distributions.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Rental revenues and tenant reimbursements and other income increased to $3,298,000 in 2006 from $2,103,000 in 2005. Approximately $755,000 of this increase is attributable to operating the three properties acquired in 2005 for an entire year in 2006, approximately $374,000 is attributable to the property acquired during 2006, with the remaining increase is due to rental increases from properties owned prior to 2004.
Property operating and maintenance increased to $878,000 in 2006 from $465,000 in 2005. Approximately $213,000 of this increase is attributable to refurbishing vacant spaces from four properties, with the remaining attributable to the four properties we acquired during 2005 and 2006.
Property taxes increased to $561,000 in 2006 from $291,000 in 2005 primarily from the full year’s impact of properties purchased during 2005 and one new acquisition during 2006.
General and administrative expenses increased to $461,000 in 2006 from $414,000 in 2005. The increase primarily resulted from higher audit and accounting fees.
Depreciation and amortization expense increased to $906,000 in 2006 from $632,000 in 2005 primarily from the full year’s impact of properties purchased during 2005 and one new acquisition during 2006.
Interest, dividends and other income increased to $304,000 in 2006 from $291,000 in 2005. This increase is attributable to higher interest rate earned on our invested funds, partially offset by lower average funds available for investment in 2006.
Discontinued Operations
During 2006, we determined that the potential sale of Sky Harbor Business Park to a third party was probable and classified it as held for sale in accordance with SFAS No. 144. This property was sold in April 2007. A property disposition fee of $32,000 or 1% of the sales price was paid to CIP, in accordance with the terms of operating agreement. Income from discontinued operations was $45,000, $78,000 and $36,000 for the years ended December 31, 2007, 2006 and 2005 respectively. Gain on sale of real estate was $306,000 for the year ended December 31, 2007.
Liquidity and Capital Resources
As of February 29, 2008, we had approximately $3.8 million in cash and cash equivalents. We intend to use these funds to make capital improvements to the properties, to provide operating reserves and fund distributions, including the special distribution of $10.00 per unit from the sale of Sky Harbor Business Park to be made in April 2008.
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 unit holders.
Contractual Obligations
Not applicable.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our cash and cash equivalents in FDIC insured savings accounts and securities backed by the United States government, 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, related notes and supplemental Schedule III are contained on pages to of this report. The index to such items is included in Item 15(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer at Cornerstone Ventures, Inc., the manager of our managing member, have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of our managing member, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Based on our evaluation as of the end of the period covered by this report, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2007.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Cornerstone Industrial Properties, LLC is a California limited liability company, which was initially organized for the purpose of being our managing member. 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.
Our managing member also acts as the manager of another investment fund and is 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, 2008, 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 of Manager of Managing Member
Terry G. Roussel, age 54, 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 and Cornerstone Growth & Income REIT, Inc. and their 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 52, 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 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.
Financial Oversight Committee
We do not have a board of directors or an audit committee. Accordingly, as the managing member of 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 our independent registered public accounting firm, and establishing and enforcing our Code of Business Conduct and 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
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, age 63, 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, Inc. and its advisor, Cornerstone Realty Advisors, LLC. Ms. Kaiser is responsible for finance and accounting.
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.
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 a Certified Public Accountant since 1981.
Dominic J. Petrucci, age 45, 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 $1.0 billion in debt and equity investments in addition to participation in the marketing and selling of nearly $300.0 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 49, 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, (should we include CGI) 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 $5.0 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 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 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 is also entitled to receive a percentage of net cash flow from operations and net sales proceeds, both as defined in our operating agreement. See Item 13 for a discussion of the fees we pay to our managing member and its affiliates.
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.
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, 2007 through December 31, 2007, there were no Section 16(a) filings required.
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, including Principal Executive Officer and Principal Financial Officer. The Code of Business Conduct and Ethics can be found on http://www.crefunds.com.
ITEM 11.
ITEM 11. COMPENSATION OF OUR MANAGING MEMBER AND AFFILIATES
We do not have executive officers or directors. We did not pay compensation to the executive officers of our managing member’s managing member for services rendered to us. See Item 13 for a discussion of the fees paid to and services provided by our managing member and its affiliates
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS
There are no units of membership interest owned by our managing member as of December 31, 2007. There are five units of membership interest owned by Terry G. Roussel as of December 31, 2007 which represents less than 1% of the units outstanding.
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, 2007.
ITEM 13.
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 by us to our managing member and its affiliates in connection with the operation of the company and the liquidation of our properties for the year ended December 31, 2007.
Type of Compensation
and Recipient
Method of Compensation
Amount
OPERATIONAL STAGE
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
$
-
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
$
-
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
$
-
Incentive share of net cash flow from operations payable to our managing member
10% of net cash flow from operations each year until unit holders 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
$
262,000
Reimbursement of actual cost of goods, materials and other services supplied to us by our managing member
Reimbursement of actual expenses and costs
$
-
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
$
32,000
Incentive share of net sales proceeds payable to our managing member
After the unit holders have received an amount equal to their aggregate capital contributions, 10% of proceeds from property sales until the unit holders 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
$
-
Director Independence
We are a limited liability company, not a corporation, and are therefore managed by our managing member, Cornerstone Industrial Properties LLC, rather than by a board of directors. Our managing member is managed by Cornerstone Ventures, Inc., which has a board of directors comprised of two directors, Terry G. Roussel and Alfred A. Pizzurro. Since our securities are not listed on a national securities exchange or an inter-dealer quotation system, we are not subject to the director independence standards that are applicable to listed entities. Neither Mr. Roussel nor Mr. Pizzurro would be considered independent as defined in the rules applicable to listed entities.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
BDO Seidman, LLP audited our financial statements for the years ended December 31, 2007, 2006 and 2005.
Audit and Non-Audit Fees
Aggregate fees for professional services rendered to us by BDO Seidman, LLP for the years ending December 31, 2007 and 2006 were as follows:
Audit Fees. The aggregate fees billed for the years ended December 31, 2007 and 2006 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, 2007 and 2006 were for services provided for our property acquisitions and for acquisition-related audits
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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 14th day of March 2008.
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 14, 2008
Terry G. Roussel
/s/ ALFRED J. PIZZURRO
Director of Cornerstone Ventures, Inc.
March 14, 2008
Alfred J. Pizzurro
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORNERSTONE REALTY FUND, LLC
Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP
Balance Sheets as of December 31, 2007 and 2006
Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005
Statements of Members’ Capital for the Years Ended December 31, 2007, 2006 and 2005
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
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, 2007 and 2006, and the related statements of operations, members’ capital and cash flows for each of the three years in the period ended December 31, 2007. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and 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 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. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, 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 14, 2008
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
BALANCE SHEETS
ASSETS
LIABILITIES AND MEMBERS’ CAPITAL
The accompanying notes are an integral part of these financial statements.
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF MEMBERS’ CAPITAL
The accompanying notes are an integral part of these financial statements.
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
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 unit holders 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, unit holders holding the majority of all outstanding and issued units have certain specified voting rights which include the removal and replacement of the Managing Member.
Net Cash Flow from Operations, as defined, will be distributed 90% to the unit holders and 10% to the Managing Member until the unit holders have received 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, unit holders 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 unit holders in an amount equal to their Invested Capital Contributions; then, 90% to the unit holders and 10% to the Managing Member until the unit holders have received an amount equal to the unpaid balance of their aggregate cumulative, non-compounded annual return on their Invested Capital Contributions; and thereafter, 50% to the unit holders and 50% to the Managing Member.
Net Income, as defined, is allocated first, 10% to the Managing Member and 90% to the unit holders until Net Income allocated equals cumulative Net Losses, as defined, previously allocated in such proportions; second, in proportion to and to the extent of Net Cash Flow from Operations and Net Sales Proceeds previously distributed to the members, exclusive of distributions representing a return of Invested Capital Contributions; and then 50% to the Managing Member and 50% to the unit holders.
Net Loss is allocated first, 50% to the Managing Member and 50% to the unit holders, until Net Loss allocated equals cumulative Net Income previously allocated in such proportions; then remaining Net Loss is allocated 10% to the Managing Member and 90% to the unit holders.
All allocations and distributions to the unit holders are to be pro rata in proportion to their share of the allocations and distributions.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting periods. Actual results could differ materially from the estimates in the near term.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of interest-bearing investments with original maturities of 90 days or less at the date of purchase. The Company places its cash with major financial institutions. At times, cash balances may be in excess of amounts insured by Federal agencies.
Investments in Real Estate
Investments in real estate are stated at cost and include land, buildings and building improvements. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant replacements, betterments and tenant improvements which improve or extend the useful lives of the buildings are capitalized and depreciated over their estimated useful lives. Depreciation of the buildings and building improvements is computed on a straight-line basis over their estimated useful lives of 39 years. Tenant improvements are depreciated over shorter of related lease term or expected useful life.
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 (“SFAS 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.
The fair value of the tangible assets of the acquired properties considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets and liabilities acquired. Amounts allocated to land are derived from comparable sales of land within the same region. Amounts allocated to buildings and improvements, tenant improvements and unamortized leasing commissions are based on current market replacement costs and other market rate information.
Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term. The value of acquired above and below market leases is amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on our statement of operations.
The amount allocated to acquired in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to acquire in-place leases is included in intangible assets - in-place leases in the balance sheet and amortized as an increase to amortization expense over the remaining non-cancelable term of the respective leases.
Anticipated amortization of lease intangibles for each of the five following years ended December 31, 2007 is as follows:
As of December 31, 2007, accumulated depreciation and amortization related to investments in real estate, investments in real estate assets held-for-sale, and related lease intangibles were as follows:
Depreciation and amortization expense associated with investments in real estate and related lease intangibles were $1.0 million, $0.9 million and $0.7 million in 2007, 2006 and, 2005 respectively.
Investments in Real Estate Assets Held-for- Sale
The Fund evaluates the held-for-sale classification of its owned real estate each quarter. Assets that are classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are generally classified as held-for-sale once management commits to a plan to sell the Properties and has initiated an active program to market them for sale. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. As of October 1, 2006, we determined that the potential sale of Sky Harbor Business Park to a third party was probable and classified it as held for sale in accordance with SFAS No. 144. See Note 9 for additional information.
Leasing Commissions
Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term. As of December 31, 2007, the Fund has recorded approximately $457,000 in leasing commissions. The unamortized portion of this asset was approximately $188,000 at December 31, 2007.
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 is contractual rent increases. Rental receivables are periodically evaluated for collectibility.
Accounts Receivable
The Fund periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. The Fund exercises judgment in establishing these allowances and considers payment history and current credit status of its tenants in developing these estimates.
Fair Value of Financial Instruments
The Fund believes that the recorded values of all financial instruments approximate their current values.
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.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which clarifies the relevant criteria and approach for the recognition, derecognition, and measurement of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007 and it had no material impact on our consolidated financial statements.
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 September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal periods beginning after November 15, 2007 (our fiscal year beginning January 1, 2008), and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on our consolidated financial statements. In February 2008, FASB deferred the effective date of SFAS No. 157 for one year for non finanacial assests and non financial liabilities that are recognized or disclosed at fair value in the financnial statements on a non recurring basis. In, addition, FASB issued a staff position that SFAS No. 157 does not apply under SFAS No. 13 “ Accounting for Leases “ and other accounting pronouncements that address fair value measurements for purposes of lease classifications under SFAS No. 13.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years begining after November 15, 2007. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS 141(R)”). In summary, SFAS 141(R) requires the acquirer of a business combination to measure at fair value the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited exceptions. The standard is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
In December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting Research Board No. 51 SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
3. Investments in Real Estate
Acquisition Activities
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 $4,068,000. 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 $2,867,000. Sky Harbor Business Park consists of a single-story building containing a total of 41,422 (unaudited) leasable square feet. This property was sold on April 16, 2007.
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 $6,056,000. 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 $4,720,000. 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 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 $3,029,000. 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 $7,381,000. This property consists of four buildings totaling 83,205 (unaudited) square feet of leasable space.
On June 28, 2006, the Fund purchased a multi-tenant industrial property known as Shoemaker Industrial Park located in Santa Fe Spring, California, for an investment of $9,906,000. Shoemaker Industrial Park consists of three single buildings located on approximately 4 acres of land with approximately 86,084 (unaudited) square feet of leasable space.
Future Minimum Lease
The future minimum lease payments to be received under existing operating leases for the six properties owned as of December 31, 2007 are as follows:
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.
4. Real Estate Assets and Liabilities Held-for-Sale
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. At September 30, 2006, one of our properties was classified as held-for-sale. In addition to classifying the property as held-for-sale, the financial results are reported as discontinued operations in the Statement of Operations. This property was sold on April 16, 2007. The table below provides information on our held-for-sale assets and liabilities.
As of December 31, 2006 the assets related to the properties held for sale and related liabilities were as follows:
5. Related Party Transactions
Through December 31, 2005, the Managing Member made capital contributions to the Fund in the amount of $896,000, which is inclusive of the in substance capital contribution discussed below.
During the years ended December 31, 2005, the Managing Member, at its sole discretion, funded $412,000 to the Fund’s unit holders related to a 5% annual return on their Invested Capital Contributions, which will not be reimbursed to the Managing Member by the Fund. Amounts funded in 2005 and prior years, totaling $586,000, have been credited to the Managing Member’s Capital Account as an in substance capital contributions and recorded as a distribution to unit holders.
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, the total fees, compensation and reimbursements were $2,136,000. There were no such fees, compensation and reimbursements in 2007 and 2006. During the year ended December 31, 2007, the total incentive share of net cash flow from operations paid to its Managing Member was $262,000. There were no incentive share of net cash flow paid year ended December 31, 2006 and 2005.
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 year ended December 31, 2005, the Fund reimbursed $820,000 of these costs to the Managing Member. There were no such reimbursements in 2007 and 2006.
6. Quarterly Financial Data (unaudited)
Set forth below is certain unaudited quarterly financial information. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements.
7. Discontinued Operations
In accordance with SFAS No. 144, we report results of operations from real estate assets that meet the definition of a component of an entity that have been sold, or meet the criteria to be classified as held for sale, as discontinued operations. As of October 1, 2006, we determined that the potential sale of Sky Harbor Business Park to a third party was probable and classified it as held for sale in accordance with SFAS No. 144. Depreciation and amortization of Sky Harbor Business Park was not recorded for the period of October 1, 2006 to December 31, 2007 in accordance with SFAS No. 144. This property was sold on April 16, 2007. We included all results of these discontinued operations in a separate component of income on the statements of operations under the heading Income from Discontinued Operations.
The following is a summary of the components of income from discontinued operations for the years ended December 31, 2007, 2006 and 2005:
8. Subsequent event
On February 11, 2008, we announced a special distribution related to the sale of the property located at 3170-3190 MacArthur Boulevard, Northbrook, Illinois, commonly known as “ Sky Harbor Business Park. Each unit holder of record as of February 1, 2008 will be paid $10.00 per unit on April 15, 2008 from the sale proceeds.
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2007