U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

(Mark One)

ý		Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
		for the fiscal year ended December 31, 2004 or

o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
		for the transition period from to

Commission file number: 333-76609

CORNERSTONE REALTY FUND, LLC

(Exact name of the registrant as specified in its charter)

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

4590 MacArthur Blvd, Suite 610, Newport Beach, CA		92660
(Address of principal executive offices)		(Zip Code)

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

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

Title of each class		Name of each exchange on which registered
None		None

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

None

(Title of class)

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

ý Yes o No

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). oYes ý No

The aggregate market value of the units of membership interest held by non-affiliates of the registrant was $21,567,000 as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004) based upon the price at which the units of membership interest were sold.

Documents incorporated by reference. None.

PART I

Item 1. Business

General Development of Business

Cornerstone Realty Fund, LLC (the “Fund”) is a California limited liability company which invests in multi-tenant business parks catering to small business tenants. The Fund purchases existing, leased properties located in major metropolitan areas in the United States on an all cash basis without debt financing. The Fund has acquired four properties as of the date of this report.

The Fund’s Managing Member is Cornerstone Industrial Properties, LLC, a California limited liability company. The Fund’s Managing Member is managed by Cornerstone Ventures, Inc. Cornerstone Ventures, Inc. is an experienced real estate operating company specializing in the acquisition, operation and repositioning of multi-tenant industrial business parks catering to small business tenants.

On August 7, 2001, the Fund commenced a public offering of its units of membership interest pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Fund seeks to raise a maximum amount of $50,000,000.

As of March 15, 2005, the Fund had sold 67,089 units resulting in gross proceeds of $33,564,500.

Narrative Description of Business

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

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

We will purchase properties located in major metropolitan areas in the United States. We will emphasize the acquisition of properties in geographic areas nationwide that have historically demonstrated strong levels of demand for rental space by tenants requiring small industrial buildings. We will attempt to acquire our properties in the highest demand locations. Of the four properties that we own as of our most recent acquisition in January 2005, two are located in the Los Angeles area and two are located in the Chicago area. On March 16, 2005, we entered into an agreement for the purchase of a fifth property, which is located in Paramount, California. The property purchase did not close by the originally scheduled closing date. We have not presented information concerning this property because we have not determined that there is a reasonable probability that we will acquire this property.

We will acquire properties that are currently existing and generating income from rental operations. We will not develop new properties or acquire raw land.

We will attempt to acquire properties at prices below what the Managing Member estimates the new development cost of a similar property located within the same competitive geographic area to

be. In stabilized market areas where tenant demand for space is high, when a tenant’s lease expires, the tenant may not be able to find a competitive space to rent. In high tenant demand locations, rental rates and property values should eventually increase to the levels necessary to justify the construction of competitive properties. The increase in rental rates and property values is expected to occur to balance out the high levels of tenant demand for space as compared to the restricted amounts of available space for a tenant to choose from. If this occurs, we could experience financial gain as a result of having acquired 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 majority of all businesses in the United States are classified as “small business.” Office parks serve businesses that are generally service oriented. Industrial parks accommodate businesses that need both office and warehouse space. The primary difference between these two types of buildings is the percentage of office space within a given unit. We will acquire multi-tenant business parks with varying percentages of interior office improvements. We may acquire properties with interior office improvements approaching 100% which will have limited or no warehouse or assembly space.

The typical multi-tenant business park offers tenant spaces ranging from 500 square feet to 30,000 square feet. This type of property accommodates tenants’ growth patterns. For example, a 1,200 square foot tenant may grow to 2,400 square feet by leasing the adjacent unit. This flexibility diversifies the owner’s risk of losing a tenant as the tenant’s business grows. A single-tenant industrial building cannot accommodate a tenant’s growth.

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. It is not uncommon to see a tenant occupy two to four units as its business expands. In difficult economic times, a tenant’s space requirements often contract. Many tenants who previously outgrew their space in a multi-tenant business park move back during periods of contraction since they can no longer afford the larger facility they leased. Tenants move through this type of property in growing and declining economies.

The managing member believes that these factors contribute to the advantage of shorter lease terms inherent in multi-tenant business parks. Lease terms generally range from month-to-month to five years. The average lease term is two to three years. Leasing activity is typically more diversified with smaller-sized tenants. The Managing Member views regularly expiring leases with varying lease terms as an attractive diversification feature of multi-tenant business parks. Leases for properties that we purchase will usually contain stipulated rent escalation provisions when market conditions allow. After rental adjustment, a property’s income and the resulting cash flow will adjust accordingly.

The Managing Member believes that multi-tenant business parks offer specific characteristics that may support an investor’s portfolio diversification strategy.

The Small Business Opportunity

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

Higher Construction Costs

Compared to industrial buildings that serve the large or single user tenant, costs to construct multi-tenant buildings serving the small business tenant can be 50% to 60% higher due to the following differences:

• Two restrooms generally required for each individual tenant space;

• Numerous walls to separate individual tenant spaces;

• Multiple entrances for each tenant space;

• Utility connections for each tenant space;

• Separate office build-out in each tenant space;

• Separate heating, ventilating and air conditioning (HVAC) installations;

• Individual truck roll-up doors for each tenant space; and

• Construction interest expense significantly higher due to longer initial lease-up with numerous tenants.

These additional features drive up the cost of multi-tenant industrial parks as compared to other industrial properties.

Acquisition Strategies

Cornerstone Ventures, Inc. specializes in the multi-tenant business park segment of the commercial real estate market. As previously having been the managing partner in a joint venture with a nationally prominent real estate company, Cornerstone Ventures, Inc. has substantial operating experience investing in and operating multi-tenant business parks. Cornerstone Ventures, Inc. offers in-depth real estate expertise through an experienced team of industry professionals with extensive understanding of industrial real estate.

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

Among Cornerstone Ventures, Inc.’s acquisition strategies, one is the recognition of opportunities to purchase multi-tenant business parks at prices below replacement cost. Cornerstone Ventures, Inc. has observed that such opportunities exist because rental rates at projects configured for the small business tenant are at times below the levels necessary to justify the development of new projects. With market rents at such levels, the Managing Member may be able to identify an opportunity to purchase a property at a price below the levels needed to justify development of competitive properties.

Because projects serving the needs of the small industrial business tenant may be currently operating at or near capacity in many sub-markets, rental rates are expected to continue 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. The Managing Member’s acquisition strategy, therefore, will be to purchase and reposition properties and capitalize on shorter lease terms, rising rents, increasing cash flow and increasing market value.

We expect to achieve diversification by purchasing multi-tenant business parks serving the small business tenant in high tenant demand markets nationwide. The number of properties that we will purchase will depend on the amount of funds we raise in this offering and upon the size and location of the properties we purchase. The maximum dollar amount that we will invest in any single property is $10,000,000. As of January 25, 2005, we have purchased four properties for an aggregate investment of approximately $17.6 million. On March 16, 2005, we entered into an agreement to purchase a fifth property for $3.1 million. If we do not sell substantially more units in our offering, the Managing Member estimates that we will acquire one more property. If we sell the maximum number of units, we may acquire up to 4 or more additional properties. These estimates are subject to significant variations based on the purchase price of each property.

Property Features

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

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

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

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

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

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

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

• Minimum of 100 amps of electrical service;

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

• Fire sprinklers where required by local governmental agencies.

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

Property Selection

The Managing Member will have experienced staff engaged in the selection and evaluation of properties that we may acquire. The acquisition process will be performed by the Managing Member with no acquisition fees payable by us to the Managing Member. All property acquisitions will be approved by the Managing Member through Cornerstone Ventures, Inc. based upon its experience in the area of multi-tenant business parks and our investment objectives and supported by an appraisal prepared by a competent independent appraiser.

We will purchase properties based on the independent decision of the Managing Member after an examination and evaluation of some or all of the following:

• Functionality of the physical improvements at the property;

• Historical financial performance of the property;

• Current market conditions for leasing space at the property;

• Proposed purchase price, terms, and conditions;

• Potential cash flow and profitability of the property;

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

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

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

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

• Historical tenant demand for space at the property;

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

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

• Level of local property tax assessments;

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

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

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

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

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

The Asset Management Function

Asset management includes preparation, implementation, supervision and monitoring of a business plan specifically designed for each property. The Managing Member will perform the asset management function for us at no additional charge. The Managing Member through Cornerstone Ventures, Inc. will perform the following asset management services for us:

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

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

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

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

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

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

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

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

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

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

Although most real estate operating companies charge a separate fee for asset management services, the Managing Member will not charge us a separate fee for such services.

Property Management Services

The Managing Member is responsible for providing property management services for our properties. The Managing Member through Cornerstone Ventures, Inc. will be 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 highly management intensive. The type of properties we will acquire are generally considered to be more management intensive than other types of commercial real estate used by larger business tenants with longer term leases. 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. The Managing Member believes in providing a very high level of property management service and in ensuring strict property maintenance standards in order to maximize the value of each property. The Managing Member may subcontract for such services with either an affiliate or third party property management organization. The Managing Member presently subcontracts with CB Richard Ellis, Inc., Essex Realty Management, Inc. and Mercury Investments, Inc. for all of its property management services.

Competition

The Fund will experience competition from other buyers when acquiring properties. The Fund will also experience competition for tenants from owners and managers of competing projects which may include the Managing Member and its affiliates. As a result, the Fund may be required to provide free rent, reduced charges for tenant improvements, and other inducements, all of which may have an adverse impact on the Fund’s results of operations. At the time the Fund elects to dispose of its properties, the Fund will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

Employees and Consultants

The Fund has no direct employees. Employees of Cornerstone Ventures, Inc., the Managing Member of the Fund’s Managing Member, will perform a full range of real estate services including property acquisition, leasing, property management, accounting, asset management and investor relations for the Fund. The Managing Member will also engage consultants to assist the Fund with these services where the Managing Member deems this to be in the best interests of the Fund. See Item 13 – “Certain Relationships and Related Transactions” for a summary of the types of fees to be paid to the Managing Member and its affiliates for these services.

Item 1a. Cautionary Statement Regarding Future Results, Forward-Looking Information and Certain Important Factors

The Fund makes written and oral statements from time to time regarding its business and prospects, such as projections of future performance, statements of plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, and filings with the Securities and Exchange Commission. For such statements, the Fund claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The future results of the Fund, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of the Fund speaks only as of the date on which such statement is made. The Fund’s forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision.

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

We will not be able to diversify our investments unless we raise additional funds. Our ability to reduce risk by purchasing multiple properties in different geographic areas will be limited by the amount of funds we raise in our public offering. We will consider the purchase of properties with prices ranging between $2.5 million and $10 million. As of March 15, 2005, we have purchased four properties

for an aggregate investment of approximately $17.6 million and have entered an agreement to purchase a fifth property for $3.1 million. We may not sell all of the units we are offering. As of March 15, 2005, we have raised gross proceeds of $33,564,500. Unless we raise additional funds, we may only be able to acquire one additional property.

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

Cornerstone Ventures, Inc. 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 purchase, operate and sell the same type of properties which we will be purchasing. 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 the Managing Member and the interests of our unitholders may differ as a result of their financial and tax position and the compensation to which our Managing Member or affiliates may be entitled to receive upon the sale of a property.

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

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

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

• changes in the general economic climate;

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

• competition from other available space;

• governmental regulations;

• changes in zoning or tax laws;

• 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 obtain 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. An owner or operator of real estate may be required by 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. 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 will obtain satisfactory Phase I environmental assessments on each property we purchase. A Phase I assessment is an inspection and review of the property, its existing and prior uses, aerial maps and records of government agencies for the purpose of determining the likelihood of environmental contamination. A Phase I assessment includes only non-invasive testing. Where indicated, we may also obtain a Phase II assessment of the property. A Phase II assessment involves further exploration and may include soils testing, lead paint testing or asbestos testing. The Managing Member may determine that a Phase I or Phase II environmental assessment is satisfactory even if an environmental problem exists and has not been resolved at the time we purchase the property. This could happen if the seller has agreed in writing to pay for any costs we incur or if the Managing Member determines that the problem is minor or can be easily remediated by us at a reasonable cost. It is possible that a seller will not be able to pay the costs we incur or that the Managing Member may underestimate the cost of remediation. It is also possible that all environmental liabilities will not be identified or that a prior owner, operator or current occupant has created an environmental condition which we do not know about. There can be no assurance that future laws, 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 are publicly traded or frequently transferred. We have included provisions in our operating agreement designed to avoid this result. If we were to be reclassified as an association taxable as a corporation or classified as a publicly traded partnership, we would be taxed on our net income at rates of up to 35% for federal income tax purposes. All items of our income, gain, loss, deduction, and credit would be reflected only on our tax returns and would not be passed through to our unitholders. If we were treated as a corporation, distributions to our unitholders would be ordinary dividend income to the extent of our earnings and profits, and the payment of such dividends would not be deductible by us.

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

Year Ending December 31	Average Annual Occupancy (%)
2000	90.07	%
2001	89.41	%
2002	93.50	%
2003	94.90	%
2004	91.00	%
Current (2-28-05)	93.00	%

In evaluating this property as a potential acquisition and determining the appropriate amount of consideration to be paid for the property, we considered a variety of factors including overall valuation of net rental income, location, demographics, physical condition, tenant mix, quality of tenants, length of leases, price per square foot, occupancy and analyzed how the property compares to comparable properties in its market. We believe that this property is well located, has good roadway access and will attract quality tenants. This property will be subject to competition from similar multi-tenant industrial parks within its market area, and its economic performance could be affected by changes in local economic conditions. We did not consider any other factors materially relevant to the decision to acquire this property.

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

No single tenant leases more than 7% of the total leasable area of the property, nor does any tenant have rights to acquire the property or portions thereof.

The following table sets forth lease expiration information for the next five years for those leases in place at December 31, 2004:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
2005	18	27,425	269,336	56.30	%	61.01	%
2006	3	6,663	68,365	13.68	%	15.49	%
2007	5	8,865	91,186	18.2	%	20.66	%
2008	—	—	—	—		—
2009	1	1,200	12,580	2.46	%	2.84	%
	27	44,153	441,467	90.64	%	100.00	%

Sky Harbor Business Park, Northbrook, Illinois

On December 27, 2002, we acquired an existing multi-tenant business park known as the Sky Harbor Business Park, a single-story building built in 1976 of approximately 41,422 square feet of leasable space on approximately 2.145 acres of land. Our total acquisition cost was $2,553,996, which equates to approximately $62 per square foot of leasable space. The property is currently 57% leased to 4 tenants whose spaces range in size from approximately 1,850 to over 7,347 square feet. Active leasing for this space is continuing. We purchased this property for all cash, without debt financing.

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

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

Year Ending	Average Annual
December 31	Occupancy (%)

2000	100	%
2001	100	%
2002	100	%
2003	86	%
2004	57	%
Current (2-28-05)	57	%

The following table sets forth lease expiration information for the next five years for leases in place as of December 31, 2004:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)	Percent of Total Annual Base Rent Expiring (%)

2005	2	11,245	97,089	27.15%	53.53%
2006	—	—	—	—	—
2007	2	12,363	84,289	29.85%	46.47%
2008	—	—	—	—	—
2009	—	—	—	—	—
	4	23,608	181,378	57.00%	100.00%

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 of approximately 69,592 square feet of leasable space on approximately 5.04 acres of land. The acquisition price was $5,910,579, which equates to approximately $85 per square foot of leasable space. The property is currently 85.6% leased to 36 tenants whose spaces range in size from approximately 800 square feet to over 4,800 square feet. We purchased this property for all cash, without debt financing.

The property’s historical occupancy rates are as follows:

Year Ending	Average Annual
December 31	Occupancy (%)

2001	94	%
2002	95	%
2003	97	%
2004	91	%
Current (2-28-05)	94	%

No tenant occupies more than 7% of the rentable square footage. These tenants operate varying business, including light manufacturing and distribution, light assembly and warehousing that encompasses a wide variety of businesses.

The following table sets forth lease expiration information for the next five years for leases in place as of December 31, 2004:

Year Ending December 31	No. of Leases Expiring	Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)

2005	22	35,290	298,330	50.71	%	53.63	%
2006	7	10,560	89,352	15.17	%	16.06	%
2007	7	15,326	141,146	22.02	%	25.37	%
2008	—	—	—	0.00	%	0.00	%
2009	1	2,160	27,480	3.10	%	4.94	%
	37	63,336	556,308	91.00	%	100.00	%

Zenith Drive Centre, Glenview, Illinois

On January 25, 2005, we purchased an existing multi-tenant industrial park known as Zenith Drive Centre from an independent third party. Zenith Drive Centre is a single-story, three building property built in 1978 of approximately 38,088 square feet of leasable space on approximately 2.54 acres of land. The acquisition price was $5,200,000 with an additional $44,000 in closing costs which equates to approximately $138 per square foot of leasable space. The property is currently 99% leased to thirty tenants whose spaces range in size from approximately 100 square feet to over 6,000 square feet. Currently, there is 1900 square feet vacant. We purchased this property for all cash, without debt financing.

The property’s historical occupancy rates are as follows:

Year Ending	Average Annual
December 31	Occupancy (%)

2001	95	%
2002	97	%
2003	98	%
2004	100	%
Current (2-28-05)	95	%

Two tenants occupy 10% or more of the rentable square footage. One tenant occupies approximately 16% and one other tenant occupies 12% of the rentable square footage. The following table sets forth certain information with respect to the leases of these two tenants at the date of acquisition:

Total Square Feet Leased	Expiration Date	Renewal Options	Current Annual Rent ($)	Base rent per sq. ft. per annum ($)

6,000	Sept. 30, 2005	1-year	82,032	13.67
4,500	Aug. 31, 2005	1-year	58,536	13.00

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:

Year Ending December 31	No. of Leases Expiring		Approx. Amount of Expiring Leases (Sq. Feet)	Base Rent Of Expiring Leases (Annual $)	Percent of Total Leasable Area Expiring (%)		Percent of Total Annual Base Rent Expiring (%)
							(1)
2005	23		33,306	472,151	89.23	%	88.88	%
2006	7		4,019	59,016	10.77	%	11.12	%
2007	0		0	0	0.00	%	0.00	%
2008	0		0	0	0.00	%	0.00	%
2009	0		0	0	0.00	%	0.00	%
thereafter	(1	)	See Footnote	0	0.00	%	6.50	%
	30		37,325	531,167	100.00	%	100.00	%

(1) A majority of the leases expire within the next twelve months; however, most tenants’ average tenure at the property exceeds 5 years and typically renew on a 1-year basis. Existing leases at the property generally include annual rental increases ranging between 3% and 7%.

Item 6. Selected Financial Data

The selected financial data set forth below has been derived from the Fund’s audited financial statements included elsewhere in this Annual Report on Form 10-K and should be read in conjunction with the financial statements and notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Operating Data

	Years Ended December 31,
	2004		2003			2002			2001			2000

Revenues	$	1,285,180	$	887,690	(1)	$	131,335	(1)	$	8,319		$	—
Net Income (Loss)	$	365,574	$	321,218		$	(93,796	)	$	(144,985	)	$	(135,227	)
Net Income (Loss) allocable to unitholders	$	329,017	$	289,096		$	(84,416	)	$	(130,486	)	N/A
Net Income (Loss) per unit allocable to unitholders	$	7.50	$	11.92		$	(7.27	)	$	(21.32	)	N/A
Cash distributions per unit to public unitholders	$	21.61	$	21.76	(2)	$	17.24	(2)	$	0.80		N/A

Balance Sheet Data

	Years Ended December 31,
	2004		2003		2002		2001		2000

Total assets	$	24,395,612	$	13,870,190	$	7,567,741	$	2,497,368	$	6,033

Total liabilities (all current)	$	308,829	$	350,127	$	408,376	$	320,665	$	343,221

(1) Amounts for interest income previously reported as revenues have been reclassified to other income and expense.

(2) The cash distributions per unit have been adjusted to include amounts previously paid by the Managing Member on behalf of the Fund.

The comparability of the information set forth above is materially affected by the Fund’s public offering and sale of membership interests, beginning in August 2001 and continuing through the date of this report, and by the Fund’s acquisition of a property in each of September 2002, December 2002 and December 2003. See Item 2 entitled “Description of Properties”.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Fund’s audited financial statements and notes thereto as well as the Section “Description of Properties” contained elsewhere in this report. Certain statements in this section and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to risks and other factors that may cause the Fund’s future results of operations to be materially different than those expressed or implied herein. Some of these risks and other factors include, but are not limited to: (i) no assurance that Fund properties will continue to experience minimal or no vacancy; (ii) tenants may not be able to meet their financial obligations; (iii) rental revenues from the properties may not be sufficient to meet the Fund’s cash requirements for operations, capital requirements and distributions; (iv) suitable investment properties may not continue to be available; and (v) adverse changes to the general economy may disrupt operations.

Critical Accounting Policies

The Fund’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. 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 and amounts paid to tenants as tenant improvement allowances. Rental receivables are periodically evaluated for collectibility.

Investments in Real Estate

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

In June 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 and No. 142 require the Fund to record at acquisition an intangible asset or liability for the value attributable to in-place leases. The requirements are applicable to all acquisitions subsequent to July 1, 2001. At December 31, 2004, the unamortized balance of this intangible asset was $48,503.

Off-balance Sheet Financings and Liabilities

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

Impact of New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This statement replaces SFAS No 123, “Accounting for Stock-Based Compensation” and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the fair value of stock options. SFAS 123(R) will be effective for quarterly periods beginning after June 15, 2005. While the Company currently provides the pro forma disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation - - Transition and Disclosure,” on a quarterly basis (see “Note 2 - Stock-Based Compensation”), it is currently evaluating the impact this statement will have on its consolidated financial statements.

Results of Operations

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

As of December 31, 2004, the Fund owned three multi-tenant business park properties in two different major metropolitan areas. The properties were purchased from the proceeds from the sale of membership units, without debt financing. The Fund purchased the properties in the latter parts of September 2002, December 2002 and December 2003, respectively. As a result of the dates of purchase, Fund operations for 2003 reflect the net income from two properties and 20 days for the third property. For 2004, Fund operations reflect a full year of operations for all three properties.

The Fund’s net income for 2004 was $365,574 compared to $321,218 for 2003. The primary reason for this difference is the investment of the Fund’s assets at the end of 2003 Arrow Business Center which generated a full year of rental revenue in the 2004.

With a full year of operations from Arrow Business Center, rental revenues and tenant reimbursements increased from a combined $887,690 in 2003 to $1,285,180 in 2004. Interest income from money market investments increased from $25,542 in 2003 to $ $39,095 in 2004 due to the additional cash balances invested in interest bearing money market accounts.

With the significantly greater level of real estate operations in 2004, related property operating expenses, including property taxes and depreciation, increased from $413,146 in 2003 to $720,186 in 2004.

The Fund’s general and administrative expenses increased from $174,875 in 2003 to $238,515 in 2004, primarily due to additional legal and accounting fees related to the restatement of prior year financial statements. Additional general and administrative expenses are expected to continue until the capitalization and organization of the Fund is complete. Interest expense on costs incurred by the Managing Member reflect the reduction of the amount the Fund owed to the Managing Member in 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

As of December 31, 2003, the Fund has purchased three multi-tenant industrial business park properties in two different major metropolitan areas. The properties were purchased from the proceeds from the sale of membership units, without debt financing. The properties were purchased in the latter parts of September 2002, December 2002 and December 2003, respectively. As a result of the dates if purchase, Fund operations for 2002 reflect the net income from only one property for the last quarter of 2002. For 2003, Fund operations reflect a full year of operation for the two properties purchased in 2002 and a partial month of operations for the property purchased in December 2003.

The Fund's net income for 2003 was $321,218 compared to a net loss of $(93,796) for 2002. The primary reason for this $415,014 difference is the investment Fund's assets at the end of 2002 in two existing multi-tenant industrial properties generating a full year of rental revenue from these properties in the 2003 results. In 2002, only a quarter of operations from the Sky Harbor Business Park was reflected in the operating results.

With greater deployments of the Fund's assets in real estate, rental revenues and tenant reimbursements increased from a combined $131,335 in 2002 to $887,690 in 2003. Correspondingly, interest income from money market investments declined from $51,777 in 2002 to $25,542 in 2003.

With the significantly greater level of real estate operations in 2003, related property operating expenses, including property taxes and depreciation, increased from $46,567 in 2002 to $413,146 in 2003.

The Fund's general and administrative expenses declined from $221,983 in 2002 to $174,875 in 2003, primarily due to lower legal and accounting fees as operations moved further from the initial organization and start-up phase. Additional general and administrative expenses are expected to continue until the capitalization and organization of the Fund is complete. Interest expense on costs incurred by the Managing Member reflect the reduction of the amount of the Fund owed to the Managing Member in 2003.

In 2003 and 2002, the Managing Member funded distributions to the Fund’s unitholders totaling $174,103 and $200,357, respectively. The statements of members’ capital have been adjusted to reflect such payments as in substance capital contributions to the Fund by the Managing Member and distributions to the unitholders. Additionally, amounts for interest income previously reported as revenues have been reclassified as other income and expense.

Liquidity and Capital Resources

As of March 15, 2005, the Fund has received $33,564,500 of gross proceeds from the sale of membership units, and $685,419 as a capital contribution from the Managing Member. The Fund has $10,358,900 in cash and cash equivalents as of March 15, 2005.

The Fund intends to continue offering membership units for sale and use the net proceeds from the sale of units for the acquisition of additional multi-tenant business park properties, capital improvements to the properties, and for operating expenses and reserves.

The Fund expects to meet its short-term liquidity requirements from net cash generated by operations, which we believe will be adequate to meet operating costs of the properties and the Fund, and allow for cash distributions to the unitholders.

The Fund’s offering and organizational activities have been financed by the Managing Member. A portion of those costs have been reimbursed to the Managing Member at the rate of 4% of gross proceeds of the Fund’s unit sales pursuant to the prospectus for the offering. The Fund will continue to incur organizational and offering expenses and the Managing Member, although not obligated, intends to continue providing advances for offering and organizational expenses until the sale of membership units is completed. The Managing Member must raise funds through the sale of its own debt or equity securities to obtain the cash necessary to provide these advances. There can be no assurance as to the amount or timing of the Managing Member’s receipt of funds. The Fund will not reimburse the Managing Member for any amounts advanced by it for offering and organizational expenses which exceed the amounts and percentages set forth in the prospectus for the offering. Any such expenses incurred by the Managing Member on behalf of the Fund that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the Managing Member with an offsetting expense recognized in the Fund’s statement of operations.

In addition, the Managing Member has funded $174,103 and $200,357 for the years ended December 31, 2003 and 2002, respectively, to the Fund’s unitholders related to a 5% annual return on their capital contribution. Subsequent to December 31, 2004, the Managing Member contributed $200,980 to the Fund as a subsidy for the quarterly distribution to unitholders on February 15, 2005. Such amounts will not be reimbursed to the Managing Member by the Fund and have been reflected in the total capital contribution of the Managing Member disclosed above.

Contractual Obligations

As of December 31, 2004, the Fund had no significant contractual obligations or commercial commitments. The Fund entered a contract to purchase the Zenith property prior to December 31, 2004. The contract included contingent conditions at December 31, 2004. The contingencies were cleared and satisfied on or before January 25, 2005 and the property was purchased on that date for $5,200,000. Additionally, the Fund’s Managing Member has incurred $443,690 of reimburseable offering costs in order to fund specific incremental costs in connection with the offering of membership units.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The Fund invests its cash and cash equivalents in FDIC insured savings accounts which, by their nature, are not subject to interest rate fluctuations.

Item 8. Financial Statements and Supplementary Data

Our financial statements, related notes and supplemental Schedule III are contained on pages F-1 to F-13 of this report. The index to such items is included in Item 15(a).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The information in response to this Item has been previously reported in the Fund’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2004.

Item 9A. Controls and Procedures.

On March l7, 2005, the Fund’s independent registered public accounting firm notified the Fund’s Audit Committee that they had identified two material weaknesses regarding the Fund’s internal controls. The weaknesses noted were the lack of sufficient management oversight over and the proper segregation of duties of the accounting department with respect to accounting, financial reporting and disclosure. Management of the Fund has informed the Audit Committee that it is in process of hiring appropriate personnel and making changes in assigned roles and responsibilities to correct for such weaknesses.

The Fund’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that the Fund files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Fund’s management, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer of Cornerstone Ventures, Inc., the manager of the Managing Member of the Fund, have reviewed the effectiveness of the Fund’s disclosure controls and procedures and have concluded that the disclosure controls and procedures were not effective as of the end of the period covered by this report. Based on our evaluation, we do not believe that the control weaknesses noted above led to any material misstatements in the financial statements included in this report. As noted above, we are in the process of hiring appropriate personnel and making changes in assigned roles and responsibilities which we believe will correct the control weaknesses we have identified.

While we are in the process of taking the foregoing steps and developing and implementing a formal set of internal controls and procedures for financial reporting as required by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date and steps we are still in the process of completing is subject to continued management review supported by confirmation and testing by management and by our auditors. As a result, we anticipate that additional changes will be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control over financial reporting occurred during the fiscal year ended December 31, 2004 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

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

Item 9B. Other Information

Not applicable.

PART III

Item 10. Managing Member

Cornerstone Industrial Properties, LLC is a California limited liability company which was initially organized for the purpose of being our Managing Member. It is expected that our Managing Member will also act as the Managing Member of other funds in the future. The Managing Member is also a preferred shareholder of Pacific Cornerstone Capital, Inc., our Managing Broker/Dealer. The manager of the Managing Member is Cornerstone Ventures, Inc. Cornerstone Ventures, Inc. oversees the activities of the Managing Member and provides many of the services necessary for the Managing Member to fulfill its responsibilities to the Fund. The Cornerstone Ventures, Inc. team of professionals brings together a unique blend of talent and experience. As of March 15, 2005, 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 operations of the Fund.

Terry G. Roussel, age 51, 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 the Managing Member of the Fund. Mr. Roussel is also the majority shareholder, a director and an officer of Pacific Cornerstone Capital, Inc., the dealer manager of the Cornerstone Realty Fund, LLC offering. Under Mr. Roussel’s direction, Cornerstone Ventures and its affiliates formed nine separate real estate investment funds and joint ventures. In 1993, Cornerstone 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. 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 1985, Mr. Roussel started 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 with Bateman Eichler, Hill Richards, Inc., a regional securities firm headquartered in Los Angeles, California. 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 private 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).

Robert C. Peterson, age 45, is a Director of Cornerstone Ventures, Inc. and has served as Chief Investment Officer since 2004. Mr. Peterson is also currently a principal of RCP Realty Advisors, a firm focused on commercial real estate acquisition and development. Mr. Peterson was an 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 $4.5 billion of commercial real estate on behalf of many of the largest private and public pension funds 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 central region of the United States for KBS. Mr. Peterson was with KBS since its inception in 1992 until 2004.

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 is a Certified Public Accountant (CPA), 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.

William H. McFarland, age 65, is a Director of Cornerstone Ventures, Inc., and also a director of William Lyon Homes. Between 1997 and 1999, Mr. McFarland was Chief Executive Officer of Irvine Apartment Communities, Inc., the dominant owner and operator of apartment properties in the nation’s largest master-planned community, Orange County’s Irvine Ranch.

Between 1993 and 1997, Mr. McFarland was President and Chief Executive Officer of Irvine Community Development, the land development arm of The Irvine Company.

In 1996 Mr. McFarland was elected to the California Building Industry Foundation Hall of Fame, recognizing his housing industry leadership and his influence in the construction of more than 40,000 homes and apartments in California during his 32-year career.

Alfred J. Pizzurro, age 49, 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. 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.

Joseph H. Holland, age 48, is a Director of Cornerstone Ventures, Inc. Mr. Holland is currently the Managing Member of Uptown Partners, LLC, a real estate group developing market-rate, multi-family housing in New York City. He is also of counsel with the law firm of Van Lierop, Burns & Bassett, where he handles a wide-ranging real estate law practice focused on the development of affordable housing projects in the New York City metropolitan area. Mr. Holland is Director, New York State Urban Development Corporation, gubernatorial appointee since 2000, Director, Municipal Assistance Corporation of the City of New York, gubernatorial appointee since 1998 and a Member, Board of Trustees, Cornell University since 1998.

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

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

Timothy C. Collins, age 57, is a Director of Cornerstone Ventures, Inc., and has been a consultant to Cornerstone during the formation of the Cornerstone Realty Fund, LLC. Mr. Collins has been Founder and Principal of T.C. Collins & Associates since 1987. T.C. Collins & Associates is involved in the areas of real estate consulting and management in California, Hawaii and Nevada, principally in project entitlement, project and corporate finance, construction management and property management.

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

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

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

Robert E. Witt, age 71, is a Director of Cornerstone Ventures, Inc. Mr. Witt was most recently Managing Director, Foreign Investments of Roth Capital Partners, LLC, a noted investment banking firm located in Newport Beach, California. Prior to joining Roth Capital Partners in 1999, Mr. Witt was Chairman & CEO of South Coast Financial Securities, a full service investment firm that he founded in 1992.

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

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

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

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

The Audit Committee

The Audit Committee of Cornerstone Ventures, Inc. consists of Timothy C. Collins and Robert E. Witt, each of whom is considered independent under applicable securities laws. The Audit Committee has determined that Mr.Collins meets the criteria of an “audit committee financial expert” as that term is defined in the SEC rules. The SEC rules provide that audit committee financial experts do not have any additional duties, obligations or liabilities and are not considered experts for purposes of the Securities Act of 1933.

Management of the Managing Member

The Managing Member is managed by Cornerstone Ventures, Inc. The 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 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:

Gary W. Nielson, age 55, has been the Chief Financial Officer of Cornerstone Ventures, Inc. since 2003. From 2002 to 2003, he was the Chief Financial Officer of American Regional Malls. From 1999 to 2002, Mr. Nielson was the Senior Managing Director of Finance and Administration for CB Richard Ellis, a real estate services company based in Los Angeles. His operational responsibilities included the Information Technology, Corporate Accounting and Reporting, and Human Resources Groups. Mr. Nielson was also actively involved in the planning and execution of their strategic acquisitions.

From 1997 to 1999, Mr. Nielson served as the Executive Vice President and Chief Financial Officer of Price Enterprises, Inc., a San Diego based publicly traded retail real estate investment trust. He was responsible for institutional investor and analyst relations as well as corporate reporting and banking relations.

Before joining Price Enterprises, Mr. Nielson spent six years at Newport Beach based Koll Management Services. He served in various senior positions at Koll which included Senior Vice President of Financial Services, Managing Director of the Strategic Acquisition and Planning Group, and Chief Financial Officer.

Mr. Nielson has served as Chief Financial Officer and member of the Board of Directors of Carver Development and Carver Savings and Loan. He also spent six years in various senior financial positions at The Hahn Company, a regional shopping center developer, after beginning his career in the Los Angeles office of Deloitte & Touche.

Mr. Nielson holds at Bachelor of Science degree in Accounting and a Master of Business Administration in Finance, both from the University of Southern California. He became a Certified Public Accountant in 1975.

Dominic J. Petrucci, age 41, has served as the Chief Operating Officer of Cornerstone Ventures, Inc. since 2002. Mr. Petrucci is responsible for overseeing sales and real estate operations. Previously, he led Cornerstone’s real estate operations which include acquisitions, asset management, and dispositions.

Prior to joining Cornerstone, 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 he sat on Koll Development Company’s Executive Committee and Investment Committee.

Mr. Petrucci rejoined Koll Development Company after working 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 companies 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 originated or restructured nearly $1 billion in debt and equity investments in addition to marketing and selling $300 million of property. Mr. Petrucci began his career in the real estate group at KPMG Peat Marwick in Los Angeles where he earned a Certified Public Accountant designation. Mr. Petrucci earned his Bachelor of Science degree in commerce, with an accounting major from Rider University in Lawrenceville, New Jersey.

Compensation

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

Services Performed by Others

The 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 the 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 the Managing Member.

Dealer Manager Management

The dealer manager of the Fund is Pacific Cornerstone Capital, Inc., an affiliate of the Managing Member and a member of the National Association of Securities Dealers, Inc. The officers of the dealer manager are responsible for marketing of the Fund to the broker dealers.

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

Section 16(a) Beneficial Ownership Reporting

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Fund’s managers and persons who beneficially own more than 10% of a registered class of the Fund’s 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, 2004 through December 31, 2004, there were no Section 16(a) filings required.

Code of Ethics

Cornerstone Ventures, Inc. has adopted a code of ethics that applies to the Board of Directors. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to the Fund’s principal executive offices at the 4590 MacArthur Boulevard, Suite 610, Newport Beach, California 92660.

Item 11. Compensation of the Managing Member and Affiliates

The following table summarizes the compensation, fees and reimbursements paid to the Managing Member and affiliates during the year ended December 31, 2004.

	Capacity in which Served-
Entity	Form of Compensation	Cash Compensation

Cornerstone Industrial Properties, LLC	Managing member -
	Reimbursement of organization and
	offering costs	$	520,180

Pacific Cornerstone Capital, Inc.	Dealer manager -
	Selling commissions	$	1,373,278	(1)

(1) This amount includes all selling commissions paid on units sold in 2004. A substantial portion was paid out to other broker/dealers.

Item 12. Security Ownership of Certain Beneficial Owners and Management

There are no units of membership interest owned by the Managing Member as of December 31, 2004. There are 5 units of membership interest owned by Terry G. Roussel as of December 31, 2004.

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

The Fund does not have any equity compensation plans and did not have any such plan as of December 31, 2004.

Item 13. Certain Relationships and Related Transactions

Compensation and Fees to be Paid to the Managing Member and its Affiliates

Following is a summary of the compensation and fees to be paid by the Fund to the Managing Members and its affiliates in connection with the formation and operation of the Fund.

Type of Compensation and Recipient	Method of Compensation	Estimated Amount
	*ORGANIZATION AND OFFERING STAGE*
Selling commissions payable to the dealer manager and participating brokers	Up to 7% of all offering proceeds. (Commissions were 9% of offering proceeds on the first $3,000,000 raised in our offering)	$	3,560,000 if 100,000 units are sold
Marketing support fee payable to the dealer manager and participating brokers	Up to 2.0% of offering proceeds	$	1,000,000 if 100,000 units are sold
Reimbursement of non-accountable expenses payable to the dealer manager and participating brokers	Up to 1% of offering proceeds	$	500,000 if 100,000 units are sold
Due diligence expense allowance fee payable to the dealer manager and participating brokers	Up to 0.5% of offering proceeds	$	125,000 if 100,000 units are sold
Reimbursement to Managing Member and its affiliates for organizational and offering expenses	Reimbursement of actual expenses and costs to a maximum of 4% of offering proceeds	Estimated at $2,000,000 if 100,000 units are sold, but not determinable at this time
	*ACQUISITION STAGE*
Acquisition fees payable to the Managing Member and its affiliates	*None*	*None*

Type of Compensation and Recipient	Method of Compensation	Estimated Amount
Reimbursement to the Managing Member and its affiliates for acquisition expenses incurred in the acquisition of properties including non-refundable option payments on property not acquired, surveys, appraisals, title insurance and escrow fees, legal and accounting fees and expenses, architectural and engineering reports, environmental and asbestos audits, travel and communication expenses and other related expenses	Reimbursement of actual expenses and costs	Not determinable at this time
	*OPERATIONAL STAGE*
Fund administration supervisory fee payable to the Managing Member	*None*	*None*
Fixed asset management fee payable to the Managing Member	*None*	*None*
Property management fees payable to the Managing Member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Property management fees equal to 6% of the gross rental income generated by each property will be paid monthly	Not determinable at this time
Property refurbishment supervision fee payable to the Managing Member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Property refurbishment supervision fee equal to 10% of the cost of tenant improvements or capital improvements made to our properties	Not determinable at this time
Leasing commissions payable to the Managing Member and/or its affiliates some or all of which may be paid to unaffiliated third parties	Leasing commissions paid upon execution of each lease equal to 6% of rent scheduled to be paid during the first and second year of the lease, 5% during the third and fourth years and 4% during the fifth and later years	Not determinable at this time

Type of Compensation and Recipient	Method of Compensation	Estimated Amount
Incentive share of net cash flow from operations payable to the Managing Member	10% of net cash flow from operations each year until unitholders have received distributions equal to an 8% per annum, simple return for the year or the early investors 12% incentive return, then 50% of net cash flow from operations	Not determinable at this time
Reimbursement of actual cost of goods, materials and other services supplied to the Fund by the Managing Member	Reimbursement of actual expenses and costs	Not determinable at this time
	*LIQUIDATION STAGE*
Property disposition fees payable to the Managing Member and/or its affiliates some or all of which may be paid to unaffiliated third parties. The Managing Member will not be given an exclusive right to sell our properties	Property disposition fees in an amount equal to 6% of the contract sales price of the property	Not determinable at this time
Incentive share of net sales proceeds payable to the Managing Member	After the unitholders have received an amount equal to their aggregate capital contributions, 10% of proceeds from property sales until the unitholders have received an amount equal to an aggregate 8% per annum, cumulative, non-compounded return taking into account all prior distributions and thereafter 50% of proceeds from property sales	Not determinable at this time

Costs Incurred by Related Parties

At December 31, 2004, the Managing Member has incurred a total of $443,690 of unrecovered deferred offering costs. These costs are repaid at the rate of 4% of the amount of capital raised from unitholders. During calendar 2004, the Fund repaid $520,180 of deferred offering costs to the managing member. The Fund will not reimburse the Managing Member for any amounts advanced for organizational expenses which exceed the amounts and percentages set forth in the prospectus for the offering. Any such expenses incurred by the Managing Member on behalf of the Fund, that are not reimbursed by the Fund, will be reflected as a capital contribution to the Fund by the Managing Member with an offsetting expense recognized in the Fund’s statement of operations.

In addition, the Managing Member, in its sole discretion, has funded $174,103 and $200,357 for the years ended December 31, 2003 and 2002, respectively, to the Fund’s unitholders related to a 5% annual return on their capital contributions. Subsequent to December 31, 2004, the Managing Member contributed $200,980 to the Fund as a subsidy for the quarterly distribution to unitholders on February 15, 2005. Such amounts will not be reimbursed to the Managing Member by the Fund and are accounted for as capital contributed by the Managing Member. The Fund is not obligated to make distributions to its members, and accordingly, there is no guarantee that the Managing Member will subsidize such distributions in the future.

Item 14. Principal Accountant Fees and Services

BDO Seidman, LLP audited our financial statements for the year ended December 31, 2004. Ernst & Young LLP audited our financial statements for the years ended December 31, 2003 and 2002.

Audit and Non-Audit Fees

Aggregate fees for professional services rendered to the Fund by BDO Seidman, LLP for the year ending December 31, 2004, and Ernst & Young LLP for the year ended December 31, 2003 were as follows:

Services Provided	2004	2003
Audit Fees	113,991	$	66,900
Audit Related Fees	14,551	28,842
Tax Fees	—	—
All Other Fees		—
Total	128,542	$	95,742

Audit Fees. The aggregate fees billed for the years ended December 31, 2004 and 2003 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 year ended December 31, 2003 were for services provided for the Fund’s property acquisitions and for acquisition-related audits.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee has implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, the Audit 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 Audit 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 Audit Committee will review any revisions to the estimates of audit and non-audit fees initially approved.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (i)	Financial Statements

	The following financial statements are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:

	CORNERSTONE REALTY FUND, LLC
	Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP
	Report of Independent Registered Public Accounting Firm, Ernst & Young, LLP
	Balance Sheets as of December 31, 2004 and 2003
	Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
	Statements of Members’ Capital for the Years Ended December 31, 2004, 2003 and 2002
	Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
	Notes to Financial Statements

(a) (ii)	Financial Statement Schedules

	Schedule III - Real Estate and Accumulated Depreciation

(a) (iii)	Exhibits

	3.1	Articles of Organization of the Fund incorporated by reference to Registration Statement on Form S-11, File No. 333-76609, filed April 20, 1999.

	3.2	Operating Agreement incorporated by reference to Pre-Effective Amendment No. 3 to Registration Statement on Form S-11, File No. 333-76609, filed June 14, 2000.

	3.3	Amendment to Articles of Organization of the Fund filed August 18, 1999 incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-11, File No. 333-76609, filed February 4, 2000.

	3.4	Amendment to Articles of Organization of the Fund filed January 26, 2000 incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-11, File No. 333-76609, filed February 4, 2000.

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)		Reports on Form 8-K.

		The Fund filed a Current Report on Form 8-K on October 14, 2004 reporting under Item 5.02 the resignation of Michael L. Meyer as a director of Cornerstone Ventures, Inc.

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 30th day of March, 2005.

CORNERSTONE REALTY FUND, LLC

By:	CORNERSTONE INDUSTRIAL PROPERTIES, LLC
	its Managing Member

	By:		CORNERSTONE VENTURES, INC.
			its Manager

		By:		/s/ TERRY G. ROUSSEL
				Terry G. Roussel, President
				(Principal Executive Officer)

		By:		/s/ GARY W. NIELSON
				Gary W. Nielson, Chief Financial Officer
				(Principal Financial Officer and
				Principal Accounting Officer)

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

Signature	Title	Date

/s/ TERRY G. ROUSSEL	Director of Cornerstone Ventures, Inc.	March 30, 2005
Terry G. Roussel

/s/ ROBERT C. PETERSON
Robert C. Peterson	Director of Cornerstone Ventures, Inc.	March 30, 2005

/s/ WILLIAM H. MCFARLAND
William H. McFarland	Director of Cornerstone Ventures, Inc.	March 30, 2005

/s/ ALFRED J. PIZZURRO	Director of Cornerstone Ventures, Inc.	March 30, 2005
Alfred J. Pizzurro


Joseph H. Holland	Director of Cornerstone Ventures, Inc.

/s/ TIMOTHY C. COLLINS
Timothy C. Collins	Director of Cornerstone Ventures, Inc.	March 30, 2005

/s/ ROBERT E. WITT
Robert E. Witt	Director of Cornerstone Ventures, Inc	March 30, 2005

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

No annual report or proxy material has been sent to security holders.

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

BALANCE SHEETS

ASSETS

	December 31,
	2004		2003

Assets
Cash and cash equivalents	$	11,793,822	$	1,464,206

Investments in real estate
Land	4,539,400		4,539,400
Buildings and improvements, less accumulated Depreciation of $342,697 in 2004 and $128,674 in 2003	7,628,745		7,605,000
Intangible asset – in-place leases	48,503		167,414
	12,216,648		12,311,814
Other assets
Escrow deposit and other costs	275,052		—
Tenant and other receivables	31,876		27,297
Receivable from Managing Member	—		59,839
Prepaid insurance	30,737		—
Leasing commissions, less accumulated amortization of $15,282 in 2004 and $1,974 in 2003	47,477		6,912
Office equipment, less accumulated depreciation of $2,854 in 2004 and $2,732 in 2003	—		122

Total assets	$	24,395,612	$	13,870,190

LIABILITIES AND MEMBERS’ CAPITAL

Liabilities
Accounts payable and accrued liabilities	$	84,613	$	89,173
Real estate taxes payable	88,922		115,325
Tenant security deposits	135,294		145,629
Total liabilities	308,829		350,127

Members’ capital (100,000 units authorized, 59,097 units issued and outstanding in 2004 and 33,012 units issued and outstanding in 2003)		24,086,783	13,520,063
Total liabilities and members’ capital	$	24,395,612	$	13,870,190

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

F-3

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2004		2003		2002

Revenues
Rental revenues	$	1,080,123	$	750,727	$	121,492
Tenant reimbursements	205,057		136,963		9,843

	1,285,180		887,690		131,335
Expenses
Property operating and maintenance	282,890		135,491		16,104
Property taxes	209,842		162,592		14,130
General and administrative expenses	238,515		174,875		221,983
Interest expense on reimbursable costs incurred by Managing Member	—		3,993		8,358
Depreciation and amortization	227,454		115,063		16,333
	958,701		592,014		276.908

Interest, dividends and other income	39,095		25,542		51,777

Net income (loss)	$	365,574	$	321,218	$	(93,796	)

Net income (loss) allocable to managing member	$	36,557	$	32,122	$	(9,380	)

Net income (loss) allocable to unitholders	$	329,017	$	289,096	$	(84,416	)

Per share amounts:
Basic and diluted income (loss) allocable to unitholders	$	7.50	$	11.92	$	(7.27	)
Basic and diluted weighted average units outstanding	43,857		24,256		11,615

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

F-4

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF MEMBERS’ CAPITAL

Balance, December 31, 2001	$	2,176,703

Net proceeds from offering	5,313,958
In substance capital contribution of Managing Member	200,237
Deferred offering costs paid to Managing Member	(237,500		)
Distributions to unitholders	(200,237		)
Net loss	(93,796		)

Balance, December 31, 2002		7,159,365

Net proceeds from offering	6,692,090
In substance capital contribution of Managing Member	174,103
Deferred offering costs paid to Managing Member	(299,020		)
Distributions to unitholders	(527,693		)
Net income	321,218

Balance, December 31, 2003		13,520,063

Net proceeds from offering	11,668,875
Deferred offering costs paid to Managing Member	(520,180		)
Distributions to unitholders	(947,549		)
Net income	365,574

Balance, December 31, 2004	$	24,086,783

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

F-5

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2004			2003			2002

OPERATING ACTIVITIES
Net income (loss)	$	365,574		$	321,218		$	(93,796	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	227,453			115,063			16,333
Amortization of in-place lease value	118,911			—			—
Changes in operating assets and liabilities:
Other assets	(364,241		)	(8,476		)	(27,707		)
Accounts payable and accrued liabilities	(4,560		)	(11,865		)	45,479
Real estate taxes payable	(26,403		)	1,668			113,657
Tenant security deposits	(10,335		)	63,007			82,622
Net cash provided by operating activities	306,399			480,615			136,588

INVESTING ACTIVITIES
Investments in real estate	(237,768		)	(5,984,796		)	(6,455,692		)

FINANCING ACTIVITIES
Advances from Managing Member	59,839			—			57,041
Advances to Managing Member	—			(22,981		)	(33,433		)
Repayment of Managing Member advances	—			(111,059		)	(211,088		)
Net proceeds from offering	11,668,875			6,692,090			5,313,958
Deferred offering costs paid to Managing Member	(520,180		)	(299,020		)	(237,500		)
Distributions to unitholders	(947,549		)	(353,590		)	—
Net cash provided by financing activities	10,260,985			5,905,440			4,888,978

Net increase (decrease) in cash	10,329,616			401,259			(1,430,126		)

Cash and cash equivalents - beginning of year	1,464,206			1,062,947			2,493,073

Cash and cash equivalents - end of year	$	11,793,822		$	1,464,206		$	1,062,947

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

F-6

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

NOTES TO FINANCIAL STATEMENTS

1. Organization and Business

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

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

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

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

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

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

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

F-7

Investments in Real Estate

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

In June 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 and No. 142 require the Fund to record at acquisition an intangible asset or liability for the value attributable to in-place leases. The requirements are applicable to all acquisitions subsequent to July 1, 2001. As of December 31, 2003, the Fund has recorded $167,414 as an intangible asset attributable to the value of the leases in place as of the date of acquisition. The unamoritzied portion of this asset was $48,503 at December 31, 2004.

Office Equipment and Leasing Commissions

Office equipment is stated at cost and is depreciated on a straight-line basis over the estimated useful lives of the related assets, typically five years. Leasing commissions are stated at cost and amortized on a straight-line basis over the related lease term. Future leasing commission amortization amounts for 2005 and 2006 are $46,055 and $6,924, respectively.

Revenue Recognition

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; however, income taxes on the income or losses realized by the Fund are generally the obligation of the members.

F-9

5. Deferred Offering Costs Advanced by Managing Member

Deferred offering costs incurred by the Managing Member for the years ended December 31, 2004 and 2003 are as follows:

	Deferred Offering Costs

Balance, December 31, 2002	$	463,614
Costs incurred	430,934
Costs paid	(299,020		)

Balance, December 31, 2003	595,528

Costs incurred	368,342
Costs paid	(520,180		)

Balance, December 31, 2004	$	443,690

Specific incremental costs in connection with the offering of membership units are incurred by the Managing Member. Reimbursement of such offering costs is limited to 4% of the gross proceeds of the related offerings. Offering costs incurred by the Managing Member in excess of the 4% limitation are deferred, and will be reimbursed from future offering proceeds. Any offering costs incurred by the Managing Member that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the Managing Member, with an offsetting expense recognized in the Fund’s statement of operations. At December 31, 2004, the Managing Member has incurred $443,690 of unrecovered offering costs.

6. Related Party Transactions

In order to fund its initial operating costs, the Fund received, from its Managing Member, cumulative unsecured advances and related interest totaling $476,227, which were fully repaid by December 31, 2003. No such amounts were outstanding at December 31, 2004.

Through December 31, 2004, the Managing Member made capital contributions to the Fund in the amount of $484,439, which is inclusive of the in substance capital contribution discussed below.

During the years ended December 31, 2003 and 2002, the Managing Member, at its sole discretion, funded $174,103 and $200,357, respectively to the Fund’s unitholders related to a 5% annual return on their Invested Capital Contributions, which will not be reimbursed to the Managing Member by the Fund. These amounts totaling $374,460 have been credited to the Managing Member’s Capital Account as an in substance capital contributions (Note 2) and charged to the distributions to unitholders. The Fund is not required to make distributions to its members, and accordingly, there is no guarantee that the Managing Member will subsidize such distributions in the future.

The Managing Member and/or its affiliates are 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

F-12

7. Quarterly Financial Data (unaudited)

	Three Months Ended
2004	March 31,		June 30,		September 30,		December 31,
Revenues	$	301,503	$	338,545	$	337,979	$	307,153
Net income allocable to unitholders
as reported	78,160		56,627		163,876		N/A
as restated	78,160		55,052		142,211		53,594
Basic and diluted income allocable to unitholders per unit
as reported	2.25		1.40		3.55		N/A
as restated	2.25		1.36		3.08		0.99
Basic and diluted weighted average units outstanding	34,813		40,399		46,143		53,893

	Three Months Ended
2003	March 31,		June 30,		September 30,		December 31,
Revenues	$	224,171	$	245,644	$	205,004	$	212,871
Net income allocable to unitholders	77,365		112,577		68,939		30,215
Basic and diluted income allocable to unitholders per unit	4.04		4.97		2.70		1.02
Basic and diluted weighted average units outstanding	19,135		22,650		25,521		29,717

8. SUBSEQUENT EVENT

On January 25, 2005, the Fund purchased an existing multi-tenant industrial park known as Zenith Drive Centre from an independent third party. Zenith Drive Centre is a single-story, three building property built in 1978 of approximately 38,088 (unaudited) square feet of leasable space on approximately 2.54 (unaudited) acres of land. The acquisition price was $5,200,000 plus approximately

F-14

CORNERSTONE REALTY FUND, LLC

(a California limited liability company)

Schedule III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

		Initial Cost to Fund				Costs Capitalized Subsequent to Acquisition			Gross Amount Invested										Life on which Depreciation in Latest Income Statement is Computed
Description	Encumbrance	Land		Building and Improvements		Improvements		Carry Costs	Land		Building and Improvements		Total		Accumulated Depreciation		Date of Construction	Date Acquired

Normandie Business Center Torrance, CA	—	$1,783,075		$2,118,621		$79,794		—	$1,783,075		$2,198,415		$3,981,490		$132,718		1988	9/27/2002	39 years

Sky Harbor Business Park Chicago, IL	—	418,855		2,135,141		49,288		—	418,855		2,184,429		2,603,284		120,508		1976	12/27/2002	39 years

Arrow Business Center Irwindale ,CA	—	2,337,470		3,405,695		182,903		—	2,337,470		3,588,598		5,926,068		89,471		1987	12/10/2003	39 years
Totals	—	$	4,539,400	$	7,659,457	$	311,985	—	$	4,539,400	$	7,971,442	$	12,510,842	$	342,697

	Cost		Accumulated Depreciation

Balance at December 31, 2001	$	—	$	—

2002 Additions	$	6,455,692	$	15,868

Balance at December 31, 2002	$	6,455,692	$	15,868

2003 Additions	$	5,817,382	$	112,806

Balance at December 31, 2003	$	12,273,074	$	128,674

2004 Additions	$	237,768	$	214,023

Balance at December 31, 2004	$	12,510,842	$	342,697

F-16

Years ending December 31,
2005	$	778,640
2006	478,349
2007	237,181
2008	34,546
2009	19,485

	$	1,548,201

Critical Accounting Policies

Revenue Recognition

Investments in Real Estate

Impact of New Accounting Pronouncements

Results of Operations

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

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm