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EXCEL - IDEA: XBRL DOCUMENT - CORNERSTONE REALTY FUND LLC | Financial_Report.xls |
EX-32 - EX-32 - CORNERSTONE REALTY FUND LLC | a58017exv32.htm |
EX-31.2 - EX-31.2 - CORNERSTONE REALTY FUND LLC | a58017exv31w2.htm |
EX-31.1 - EX-31.1 - CORNERSTONE REALTY FUND LLC | a58017exv31w1.htm |
EX-10.1 - EX-10.1 - CORNERSTONE REALTY FUND LLC | a58017exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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 000-51868
CORNERSTONE REALTY FUND, LLC
(Exact name of registrant as specified in its charter)
CALIFORNIA | 33-0827161 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1920 MAIN STREET, SUITE 400, IRVINE, CA | 92614 | |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) | (ZIP CODE) |
949-852-1007
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
o Yes þ No
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements (unaudited) |
2 | |||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
9 | ||||||||
13 | ||||||||
17 | ||||||||
17 | ||||||||
PART II OTHER INFORMATION |
||||||||
Item 1. Legal Proceedings |
||||||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
||||||||
Item 3. Defaults Upon Senior Securities |
||||||||
Item 4. Submission of Matters to a Vote of Security Holders |
||||||||
17 | ||||||||
18 | ||||||||
19 | ||||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED STATEMENT OF NET ASSETS
(Liquidation Basis)
As of June 30, 2011 (Unaudited)
June 30, | ||||
2011 | ||||
ASSETS |
||||
Investment in real estate |
$ | 24,100,000 | ||
Cash and cash equivalents |
3,429,000 | |||
Accounts receivable, net |
40,000 | |||
Total assets |
27,569,000 | |||
LIABILITIES |
||||
Accounts payable and accrued liabilities |
523,000 | |||
Note payable |
3,961,000 | |||
Liability for estimated costs in excess of estimated receipts during the liquidation period |
802,000 | |||
Total liabilities |
5,286,000 | |||
Net assets in liquidation |
$ | 22,283,000 | ||
The accompanying notes are an integral part of these condensed financial statements.
3
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED BALANCE SHEET
(Going Concern Basis)
December 31, 2010
December 31, 2010 | ||||
ASSETS |
||||
Cash and cash equivalents |
$ | 4,356,000 | ||
Investments in real estate |
||||
Land |
9,593,000 | |||
Buildings and improvements, net |
15,649,000 | |||
Intangible asset in-place leases, net |
104,000 | |||
25,346,000 | ||||
Other assets |
||||
Tenant and other receivables, net |
292,000 | |||
Prepaid expenses and other assets |
19,000 | |||
Deferred financing cost, net |
77,000 | |||
Leasing commissions, net |
195,000 | |||
Total assets |
$ | 30,285,000 | ||
LIABILITIES AND MEMBERS CAPITAL |
||||
Liabilities |
||||
Accounts payable, accrued liabilities and prepaid rent |
$ | 157,000 | ||
Distributions payable |
622,000 | |||
Real estate taxes payable |
231,000 | |||
Tenant security deposits |
254,000 | |||
Note payable |
3,987,000 | |||
Total liabilities |
5,251,000 | |||
Commitments and contingencies (Note 8) |
||||
Members capital (100,000 units authorized and issued as
of December 31, 2010; 98,670 units outstanding as of
December 31, 2010) |
25,034,000 | |||
Total liabilities and members capital |
$ | 30,285,000 | ||
The accompanying notes are an integral part of these condensed financial statements.
4
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED STATEMENTS OF OPERATIONS
For the Two and Five
Months Ended May 31, 2011 (Going Concern Basis unaudited) and
for the Three and Six Months Ended June 30, 2010 (Going Concern Basis unaudited)
Two Months | Three Months | Five Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
May 31, | June 30, | May 31, | June 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental revenues |
$ | 436,000 | $ | 676,000 | $ | 1,054,000 | $ | 1,364,000 | ||||||||
Tenant reimbursements and other income |
114,000 | 165,000 | 291,000 | 324,000 | ||||||||||||
550,000 | 841,000 | 1,345,000 | 1,688,000 | |||||||||||||
Expenses: |
||||||||||||||||
Property operating and maintenance |
125,000 | 284,000 | 352,000 | 547,000 | ||||||||||||
Property taxes |
101,000 | 150,000 | 254,000 | 301,000 | ||||||||||||
General and administrative |
92,000 | 77,000 | 261,000 | 187,000 | ||||||||||||
Depreciation and amortization |
141,000 | 188,000 | 416,000 | 402,000 | ||||||||||||
Impairment of real estate |
| 560,000 | | 560,000 | ||||||||||||
459,000 | 1,259,000 | 1,283,000 | 1,997,000 | |||||||||||||
Other income |
| | | 51,000 | ||||||||||||
Interest expense |
43,000 | | 107,000 | | ||||||||||||
Net income (loss) |
$ | 48,000 | $ | (418,000 | ) | $ | (45,000 | ) | $ | (258,000 | ) | |||||
Net income (loss) allocable to managing member |
$ | 5,000 | $ | (42,000 | ) | $ | (5,000 | ) | $ | (26,000 | ) | |||||
Net income (loss) allocable to unit holders |
$ | 43,000 | $ | (376,000 | ) | $ | (40,000 | ) | $ | (232,000 | ) | |||||
Per unit amounts: |
||||||||||||||||
Basic and diluted net income (loss) allocable to unit holders |
$ | 0.44 | $ | (3.81 | ) | $ | (0.41 | ) | $ | (2.35 | ) | |||||
Basic and diluted weighted average number of units outstanding |
98,457 | 98,670 | 98,627 | 98,746 |
The accompanying notes are an integral part of these interim financial statements.
5
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED STATEMENT OF CHANGES IN NET ASSETS
For the One Month Ended June 30, 2011
(Liquidation Basis unaudited)
Net
assets in liquidation, May 31, 2011 |
$ | 22,283,000 | ||
Changes in net assets in liquidation: |
||||
Changes to the reserve for estimated costs during liquidation: |
||||
Operating income |
(148,000 | ) | ||
Changes to the reserve for estimated costs during liquidation |
(148,000 | ) | ||
Changes in fair value of assets and liabilities: |
||||
Change in fair value of real estate investments |
| |||
Change in assets and liabilities due to activity in the reserve for estimated costs during liquidation |
148,000 | |||
Net change in fair value |
148,000 | |||
Change in net assets in liquidation |
| |||
Net assets in liquidation, June 30, 2011 |
$ | 22,283,000 | ||
The accompanying notes are an integral part of these condensed financial statements.
6
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED STATEMENT OF MEMBERS EQUITY
For the Five Months
Ended May 31, 2011
(Going Concern Basis unaudited)
Number of | ||||||||
Units | Total | |||||||
BALANCE December 31, 2010 |
98,670 | $ | 25,034,000 | |||||
Distributions |
| (664,000 | ) | |||||
Redemptions |
213 | (49,000 | ) | |||||
Net loss |
| (45,000 | ) | |||||
BALANCE
May 31, 2011 |
98,457 | $ | 24,276,000 | |||||
The accompanying notes are an integral part of these condensed financial statements.
7
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
(a California Limited Liability Company)
CONDENSED STATEMENTS OF CASH FLOWS
For the Five Months
Ended May 31, 2011 and
the Six Months Ended June 30, 2010
(Going Concern Basis unaudited)
Five Months Ended | Six Months Ended | |||||||
May 31, 2011 | June 30, 2010 | |||||||
OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (45,000 | ) | $ | (258,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Amortization of deferred financing costs |
11,000 | | ||||||
Depreciation and amortization |
416,000 | 402,000 | ||||||
Provision for bad debt |
(4,000 | ) | 90,000 | |||||
Impairment of real estate |
| 560,000 | ||||||
Straight-line rent and amortization of acquired above/below market leases,
net |
21,000 | (64,000 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Tenant and other receivables, net |
4,000 | (64,000 | ) | |||||
Prepaid expenses and other assets |
(67,000 | ) | (81,000 | ) | ||||
Accounts payable, accrued liabilities and prepaid rent |
123,000 | (18,000 | ) | |||||
Real estate taxes payable |
(35,000 | ) | (6,000 | ) | ||||
Net cash provided by operating activities |
424,000 | 561,000 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(69,000 | ) | (72,000 | ) | ||||
Net cash used in investing activities |
(69,000 | ) | (72,000 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Repayment of note payable |
(22,000 | ) | | |||||
Cash distributions to unit holders |
(1,230,000 | ) | (622,000 | ) | ||||
Cash distributions to managing member |
(56,000 | ) | | |||||
Units repurchased and retired |
(49,000 | ) | (49,000 | ) | ||||
Net cash used in financing activities |
(1,357,000 | ) | (671,000 | ) | ||||
Net decrease in cash and cash equivalents |
(1,002,000 | ) | (182,000 | ) | ||||
Cash and cash equivalents at beginning of period |
4,356,000 | 761,000 | ||||||
Cash and cash equivalents at end of period |
$ | 3,354,000 | $ | 579,000 | ||||
Supplemental disclosure of non-cash financing and investing activities: |
||||||||
Cash paid for interest |
$ | 96,000 | |
The accompanying notes are an integral part of these condensed financial statements.
8
Table of Contents
CORNERSTONE REALTY FUND, LLC
(a California Limited Liability Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. Organization and Description of Business
Cornerstone Realty Fund, LLC, a California limited liability company (the Fund), was formed
in October of 1998 to invest in multi-tenant business parks catering to small business tenants. As
used in this report, Fund, we, us and our refer to Cornerstone Realty Fund, LLC except
where the context otherwise requires.
Our managing member is Cornerstone Industrial Properties, LLC (CIP), a California limited
liability company. Cornerstone Ventures, Inc. is the managing member of CIP. Cornerstone
Ventures, Inc. is an experienced real estate operating company specializing in the acquisition,
operation and repositioning of multi-tenant industrial business parks catering to small business
tenants.
On August 7, 2001, we commenced a public offering of units of our membership interest pursuant to a
registration statement on Form S-11 filed with the Securities and Exchange Commission (SEC)
pursuant to the Securities Act of 1933. On August 18, 2005, we completed a public offering of
these units. As of that date, we had issued 100,000 units to unit holders for gross offering
proceeds of $50,000,000, before discounts of $39,780.
Our
interim unaudited condensed financial statements for the periods
through May 31, 2011 have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and
in accordance with the rules and regulations of the Securities and
Exchange Commission on a going concern basis. As
permitted by the SEC filing requirements for Form 10-Q, the condensed financial statements do not
include all of the information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The condensed financial statements
included herein should be read in conjunction with our Annual Report on Form 10-K for the year
ended December 31, 2010. As outlined below, commencing on June
1, 2011 we adopted the liquidation basis of accounting.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a presentation in accordance with accounting principles generally accepted in the
United States have been included. Operating results for the five
months ended May 31, 2011 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2011.
2. Plan of Liquidation
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our managing
member began the process of evaluating strategic alternatives for winding up the Fund in order to
maximize overall returns for our investors. Our managing member initiated the examination in 2011,
rather than waiting until 2012 because of the inherent uncertainty of the future and our managing
members view of (i) the current market conditions, (ii) the current increasing costs of corporate
compliance (including, without limitation, all federal, state and local regulatory requirements
applicable to us, including the Sarbanes-Oxley Act of 2002, as amended), (iii) the possible need to
reduce or suspend our distributions and (iv) the other factors discussed in more detail in the
Definitive Proxy Statement as filed by the Fund with the SEC on April 1, 2011.
After a thorough analysis, consultation with a real estate broker specializing in multi-tenant
industrial real estate in the geographical regions where our properties are located, and a targeted
solicitation of bids for a potential sale of our portfolio, our managing member concluded that a
liquidation of the Fund at this time will more likely produce greater returns within a reasonable
period of time to our investors than other potential exit strategies reasonably available to us,
including waiting until 2012 to complete a liquidation. On April 1, 2011, we filed a definitive
proxy statement with the SEC to solicit unitholders approvals of our liquidation plan.
The plan
of liquidation was approved by our unitholders on May 29, 2011. As a result, we adopted
the liquidation basis of accounting as of June 1, 2011 and for
all subsequent periods, as the results of operations for May 30 and
31, 2011 are not material to the financial results for the periods
presented.
The net assets in liquidation at June 1, 2011 would have resulted in liquidation distributions of approximately
$226 per unit. The estimates for liquidation distributions per unit include projections of costs and expenses expected to be incurred during the
period required to complete the plan of liquidation. These projections could change materially based on the timing of any
sales, the performance of the underlying assets and changes in the underlying assumptions of the projected cash flows.
There can be no assurance about the amount of any liquidating distributions and it is possible that there might not be any funds
available for liquidating distributions.
9
Table of Contents
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on
various assumptions that we believe to be reasonable under the circumstances, and these estimates
form the basis for our judgments concerning the carrying values of assets and liabilities that are
not readily apparent from other sources. We periodically evaluate these estimates and judgments
based on available information and experience. Actual results could differ from our estimates under
different assumptions and conditions. If actual results significantly differ from our estimates,
our financial condition and results of operations could be materially impacted. For more
information regarding our critical accounting policies and estimates please refer to Summary of
Significant Accounting Policies contained in our Annual Report on Form 10-K for the year ended
December 31, 2010. There have been no material changes to the critical accounting policies
previously disclosed in that report except as discussed below.
Interim Financial Information
The accompanying interim condensed financial statements have been prepared by our management in
accordance with accounting principles generally accepted in the
United States of America (GAAP) in conjunction with the rules and
regulations of the SEC on a going concern basis and under the liquidation basis of
accounting (adopted on June 1, 2011). Certain information and note disclosures required for annual financial
statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the
interim condensed financial statements do not include all of the information and notes required by
GAAP for complete financial statements. The accompanying financial information reflects all
adjustments which are, in the opinion of our management, of a normal recurring nature and necessary
for a fair presentation of our financial position, results of operations and cash flows for the
interim periods. Our
accompanying interim condensed financial statements should be read in conjunction with our audited
financial statements and the notes thereto included on our 2010 Annual Report on Form 10-K, as
filed with the SEC.
Fair Value of Financial Instruments
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 825-10,
Financial Instruments, requires the disclosure of fair value information about financial
instruments whether or not recognized on the face of the balance sheet, for which it is practical
to estimate that value.
We generally determine or calculate the fair value of financial instruments using quoted market
prices in active markets when such information is available or using appropriate present value or
other valuation techniques, such as discounted cash flow analyses, incorporating available market
discount rate information for similar types of instruments and our estimates for non-performance
and liquidity risk. These techniques are significantly affected by the assumptions used, including
the discount rate, credit spreads, and estimates of future cash flow.
Our
condensed balance sheet as of December 31, 2010 includes the following financial instruments: cash and cash equivalents, tenant and
other receivables, prepaid expenses and other assets, accounts payable, accrued liabilities and
prepaid rent, real estate taxes payable, tenant security deposits
and a note payable. For all instruments noted except for the note
payable, we consider the
carrying values to be approximate fair value because of the short period
of time between origination of the instruments and their expected
payment. Prior to the adoption of liquidation basis accounting, the
fair value of the note was $3.9 million, consistent with its carrying
value.
Liquidation Basis of Accounting
As a result of the approval of our plan of liquidation by our unitholders, we adopted the
liquidation basis of accounting as of June 1, 2011, and for all
subsequent periods. Accordingly, on June 1, 2011, all assets
were adjusted to their estimated net realizable value. Liabilities, including estimated costs associated with implementing our plan
of liquidation, were adjusted to their estimated settlement amounts. The valuation of real estate
held for sale is based on current contracts, estimates and other indications of sales
value net of estimated selling costs. Actual values realized for assets and settlement of
liabilities may differ materially from the amounts estimated. Estimated future cash flows from
property operations were made based on the anticipated sales dates of the assets. Due to the
uncertainty in the timing of the anticipated sales dates and the cash flows from, operations may
differ materially from amounts estimated. These amounts are presented in the accompanying
condensed statement of
net assets in liquidation. Net assets in liquidation represents the estimated liquidation value of our assets available to our
unitholders upon liquidation. The actual settlement amounts realized for assets and settlement of
liabilities may differ materially, perhaps in adverse ways, from the amounts estimated.
In particular, the estimates of our costs will vary with the length of time necessary to complete the plan of liquidation.
Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be
distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate presented
in the accompanying statement of net assets in liquidation.
10
Table of Contents
Since
June 1, 2011, the date we adopted liquidation basis accounting, we
continually evaluate the net realizable value of our existing
portfolio, and adjust our liquidation value of the related assets and
liabilities accordingly.
4. Reserve for Estimated Costs During Liquidation
Under the liquidation basis of accounting, we are required to estimate, and record as an
asset, the cash flows from operations through the liquidation period and accrue the costs
associated with implementing our plan of liquidation. We currently estimate that we will have
operating cash outflows from our estimated costs in excess of our the receipts during the
liquidation period. Estimated amounts can vary significantly due to, among other things, the timing
and estimates for executing and renewing leases, estimates of tenant improvements incurred and
paid, the timing of the property sales, the timing and amounts associated with discharging known
and contingent liabilities and the costs associated with the winding up of our operations. These
costs are estimated and are expected to be paid out over the remaining liquidation period.
The change in the net liability for estimated disbursements in excess of estimated receipts
during liquidation for the month ended June 30, 2011 is as follows:
June 1, | Cash Payments | Change in | June 30, | |||||||||||||
2011 | and (Receipts) | Estimates | 2011 | |||||||||||||
Liabilities: |
||||||||||||||||
Estimated net inflows from operating activities |
$ | 157,000 | $ | (161,000 | ) | $ | $ | (4,000 | ) | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(70,000 | ) | | | (70,000 | ) | ||||||||||
Reserve for
second quarter 2011 distributions |
(614,000 | ) | | | (614,000 | ) | ||||||||||
Redemptions |
(50,000 | ) | | | (50,000 | ) | ||||||||||
Capital expenditures |
(77,000 | ) | 13,000 | | (64,000 | ) | ||||||||||
(811,000 | ) | 13,000 | | (798,000 | ) | |||||||||||
Total net liabilities for estimated
disbursements in excess of estimated receipts
during liquidation |
$ | (654,000 | ) | $ | (148,000 | ) | $ | | $ | (802,000 | ) | |||||
5. Net Assets in Liquidation
The following is a reconciliation of total members equity under the going concern basis of
accounting to net assets in liquidation under the liquidation basis
of accounting as of June 1,
2011 (the beginning net assets in liquidation):
Members equity at May 31, 2011 going concern basis |
$ | 24,276,000 | ||
Decrease due to estimated net realizable value of operating properties |
(961,000 | ) | ||
Decrease due to the write-off of other intangible assets and other liabilities |
(378,000 | ) | ||
Reserve for estimated outflows during liquidation |
(654,000 | ) | ||
Adjustment to reflect the change to the liquidation basis of accounting |
(1,993,000 | ) | ||
Estimated value of net assets in liquidation at June 1, 2011 |
$ | 22,283,000 | ||
We currently estimate, based on our net assets as of June
30, 2011, that net proceeds from liquidation will be $226 per unit.
This estimate for liquidation distribution per member unit
includes projections of costs and expenses expected to be incurred during the period required to
complete the plan of liquidation. Therefore, these projections could change materially based on the timing of
any sale, the performance of the underlying assets and change in the underlying assumptions of the
projected cash flow.
11
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6. Real Estate Investments
Our real estate investments are comprised of wholly owned real estate properties.
We had no dispositions during the six months ended June 30, 2011 and twelve months ended
December 31, 2011.
ASC 820-10 establishes a three-tiered fair value hierarchy that
prioritizes valuation technique inputs. Level 1 inputs
(observable inputs) are quoted prices in active markets for identical assets or liabilities and are given the highest
priority. Level 2 inputs (other observable input) are either observable directly or through corroboration with
observable market data. Level 3 inputs (unobservable inputs) are unobservable in the market, such as internally
developed valuation models. As a result of our adoption of liquidation basis of accounting, as of June 30, 2011, we
estimated the fair value of the investment in real estate, less estimated closing costs, to be $24.1 million on a
recurring basis using Level 3 inputs based on a market approach valuation technique. This estimate is based on
unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be
materially different.
7. Note Payable
On December 2, 2010, we entered into a $4.0 million loan agreement with Farmers & Merchants
Bank of Long Beach. The loan matures on November 19, 2013 with no option to extend and bears
interest at a fixed rate of 5.75% per annum. The terms of the loan require monthly payments of
principal and interest. We may repay the loan, in whole or in part, on or before November 19, 2013
without any penalty. As of June 30, 2011 and December 31, 2010, we had an outstanding balance of
approximately $4.0 million, under this loan agreement. The loan agreement contains various
covenants including financial covenants with respect to debt service coverage ratios and loan to
value ratio. As of June 30, 2011, we were in compliance with all of these covenants.
We anticipate repaying our existing debt obligation with cash on hand and the proceeds from the
sale of real estate assets. As of June 30, 2011 and December 31 2010, we had incurred net
financing costs of $81,000. The financing costs have been capitalized and are being
amortized over the life of the loan. For the five months ended
May 31, 2011 and the six months
ended June 30, 2010, $11,000 and, $0, respectively, of deferred financing costs were amortized and
included in interest expense in the condensed statement of operations.
At June 1,
2011, we adjusted the carrying values of the outstanding notes to
their estimated settlement amounts in the condensed consolidated
statement of net assets.
The
principal payments contractually due on the note payable for July 1, 2011 to December 31, 2011 and each of
the subsequent years are as follows:
Principal | ||||
Year | Amount | |||
July 1, 2011 to December 31, 2011
|
$ | 26,000 | ||
2012
|
$ | 54,000 | ||
2013
|
$ | 3,881,000 | ||
2014
|
$ | | ||
2015
|
$ | |
We anticipate repaying the note upon sale of
the real estate portfolio,
and as a result the note payable may be repaid before its contractual maturity date.
8. Commitments and Contingencies
The Fund monitors its properties for the presence of hazardous or toxic substances. While
there can be no assurance that a material environmental liability does not exist, the Fund is not
currently aware of any environmental liability with respect to the properties that would have a
material effect on its financial condition, results of operations and cash flows. Further, the Fund
is not aware of any environmental liability or any unasserted claim or assessment with respect to
an environmental liability that the Fund believes would require additional disclosure or the
recording of an estimated obligation upon liquidation.
The Funds commitments and contingencies include the usual obligations of real estate owners and
operators in the normal course of business. In the opinion of management, these matters are not
expected to have a material impact on its financial position, cash flows and results of operations.
The Fund is not presently subject to any material litigation nor, to its knowledge, any material
litigation threatened against the Fund which if determined unfavorably to the Fund would have a
material adverse effect on its cash flows, financial condition or results of operations.
9. Concentration of Credit Risk
Financial instruments that potentially subject the Fund to a concentration of credit risk are
primarily cash investments. Cash is generally invested in investment-grade short-term instruments.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act that implements changes to
the regulation of the financial services industry, including provisions that made permanent the
$250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor
Protection Corporation (SIPC) protection from $100,000 to $250,000, and provided unlimited
federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction
accounts at all insured depository institutions. As of June 30, 2011, none of our depository
accounts are in excess of the federal deposit insurance nor SIPC insured limits, as such, we do not
have credit risks related to these depository accounts.
12
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As of June 30, 2011, we owned four properties in the state of California, one property in the state
of Arizona and one property in the state of Illinois. Accordingly, there is a geographic
concentration of risk subject to fluctuations in the California economy.
10. Subsequent Events
In a Form
8-K filed on June 9, 2011, the Fund reported the execution of a purchase and sale
agreement (the Agreement) with Birtcher Anderson Realty, LLC (the Bidder) to effect the sale of
all the Funds real estate properties to the Bidder for a purchase price of approximately $26.4
million. Under the Agreement, the sale was scheduled to close on or before August 1, 2011,
however, due to the Bidders inability to secure acceptable financing for the transaction, the
parties agreed to terminate the Agreement effective as of July 1, 2011.
The Company continues to work with various real estate brokers to
qualify potential purchasers of its portfolio. We expect to effectuate the liquidation of our real estate portfolio by the end of 2011.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements and notes thereto contained
elsewhere in this report. Such financial statements and information have been prepared to reflect
our net assets in liquidation as of June 30, 2011 (liquidation basis) and financial position at
December 31, 2010 (going concern basis), together with the statement of changes in net assets for
the month ended June 30, 2011 (liquidation basis), the results of operations and cash flows for the
two and five months ended May 31, 2011 (going concern basis) and three and three and six months
ended June 30, 2010 (going concern basis), respectively.
This section contains forward-looking statements, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and the assumptions upon
which those statements are based. These forward-looking statements generally are identified by
the words believes, project, expects, anticipates, estimates, intends, strategy,
plan, may, will, would, will be, will continue, will likely result, and similar
expressions. Forward-looking statements are based on current expectations and assumptions that
are subject to risks and uncertainties which may cause actual results to differ materially from the
forward-looking statements. Forward-looking statements were true at the time made may ultimately
prove to be incorrect or false. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
Our ability to predict results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on our operations and future
prospects include, but are not limited to: changes in economic conditions generally and the real
estate market specifically; legislative/regulatory changes; availability of capital, interest
rates; competition; supply and demand for operating properties in our current market areas;
generally accepted accounting principles; the availability of buyers to acquire properties we make
available for sale; the availability of financing; and the absence of material litigation. These
risks and uncertainties should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. All forward-looking statements should be read in
light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year
ended December 31, 2010 and in light of the risks identified in the definitive proxy statement
related to our proposed plan of liquidation dated April 1, 2011, as filed with the SEC.
Overview
Our revenues, which are comprised largely of rental income, include rents reported on a
straight-line basis over the initial term of the lease. Our financial
performance prior to liquidation, will depend, in part,
on our ability to (i) increase rental income and other earned income from leases by
increasing rental rates and occupancy levels; (ii) maximize tenant recoveries given the underlying
lease structures; and (iii) control operating and other expenses. Our operations are impacted by
property specific, market specific, general economic and other conditions.
Plan of liquidation
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our managing member
began the process of evaluating strategic alternatives for winding up the Fund in order to maximize
overall returns for our investors. Our managing member initiated the examination at this time,
rather than waiting until 2012 because of the inherent uncertainty of the future and our managing
members view of (i) the current market conditions, (ii) the current increasing costs of corporate
compliance (including, without limitation, all federal, state and local regulatory requirements
applicable to us, including the Sarbanes-Oxley Act of 2002, as
13
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amended), (iii) the possible need to
reduce or suspend our distributions and (iv) the other factors discussed in more detail in the
Definitive Proxy Statement as filed by the Fund with the SEC on April 1, 2011.
After a thorough analysis, consultation with a real estate broker specializing in multi-tenant
industrial real estate in the geographical regions where our properties are located, and a targeted
solicitation of bids for a potential sale of our portfolio, our managing member has concluded that
a liquidation of the Fund at this time will more likely produce superior returns within a
reasonable period of time to our investors than other potential exit strategies reasonably
available to us, including waiting until 2012 to complete a liquidation. On April 1, 2011, we
filed a definitive proxy statement with the SEC to solicit unitholders approvals on our
liquidation plan.
The plan
of liquidation was approved by our unitholders on May 29, 2011.
Critical Accounting Policies
Our condensed financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The preparation of these condensed
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the condensed financial statements and the
reported amount of revenue and expenses during the reporting period. Actual results could differ
materially from those estimates.
There have been no material changes to our critical accounting policies as previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC other
than as described under Note 3 to the accompanying condensed financial statements and below.
Liquidation Basis of Accounting
As a result of the approval of the plan of liquidation by our unitholders, we adopted the
liquidation basis of accounting as of June 1, 2011, and for all
subsequent periods.
Accordingly, on June 1, 2011, assets were adjusted to their estimated
net realizable values. Liabilities, including estimated costs associated with implementing and
completing the plan of liquidation, were adjusted to their estimated settlement amounts. The
valuation of real estate held for sale is based on current contracts, estimates and other
indications of sales value net of estimated selling costs. Actual values realized for assets and
settlement of liabilities may differ materially from the amounts estimated. Estimated future cash
flows from property operations were made based on the anticipated sales dates of the assets. Due to
the uncertainty in the timing of the anticipated sales dates and the cash flows therefrom,
operations may differ materially from amounts estimated. These amounts are presented in the
accompanying statement of net assets. The net assets represent the estimated liquidation value of
our assets available to our unitholders upon liquidation. The actual settlement amounts realized
for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the
amounts estimated.
In particular, the estimates of our costs will vary with the length of time necessary to complete
the plan of liquidation. Accordingly, it is not possible to predict with certainty the timing or
aggregate amount which may ultimately be distributed to stockholders and no assurance can be given
that the distributions will equal or exceed the estimate presented in the accompanying statement of
net assets in liquidation.
Reserve for Estimated Costs during Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing the plan of
liquidation. We currently estimate that we will have operating costs in excess of cash inflows from
our properties operations during the liquidation period. These amounts can vary significantly due
to, among other things, the timing and estimates for executing and renewing leases, estimates of
tenant improvements incurred and paid, the timing of the property sales, the timing and amounts
associated with discharging known and contingent liabilities and the costs associated with the
winding up of our operations. These costs are estimated and are expected to be paid out over the
liquidation period.
The change in the net liability for estimated disbursements in excess of estimated receipts during
liquidation for the first month ended June 30, 2011 is as follows:
June 1, | Cash Payments | Change in | June 30, | |||||||||||||
2011 | and (Receipts) | Estimates | 2011 | |||||||||||||
Liabilities: |
||||||||||||||||
Estimated net inflows from operating activities |
$ | 157,000 | $ | (161,000 | ) | $ | | $ | (4,000 | ) | ||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(70,000 | ) | | | (70,000 | ) | ||||||||||
Reserve for second quarter 2011 distributions |
(614,000 | ) | | | (614,000 | ) | ||||||||||
Redemptions |
(50,000 | ) | | | (50,000 | ) | ||||||||||
Capital expenditures |
(77,000 | ) | 13,000 | | (64,000 | ) | ||||||||||
(811,000 | ) | 13,000 | | (798,000 | ) | |||||||||||
Total net liabilities for estimated
disbursements in excess of estimated receipts
during liquidation |
$ | (654,000 | ) | $ | (148,000 | ) | $ | | $ | (802,000 | ) | |||||
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Net Assets in Liquidation
The following is a reconciliation of total members equity under the going concern basis of
accounting to net assets in liquidation under the liquidation basis of accounting as of June 1,
2011 (the beginning net assets in liquidation):
Members equity at May 31, 2011 going concern basis |
$ | 24,276,000 | ||
Decrease due to estimated net realizable value of operating properties |
(961,000 | ) | ||
Decrease due to the write-off of other intangible assets and other liabilities |
(378,000 | ) | ||
Reserve for estimated outflows during liquidation |
(654,000 | ) | ||
Adjustment to reflect the change to the liquidation basis of accounting |
(1,993,000 | ) | ||
Estimated value of net assets in liquidation at June 1, 2011 |
$ | 22,283,000 | ||
The net assets in liquidation at June 1, 2011 would
have resulted in liquidation distributions of approximately $226 per
unit. The estimates for liquidation distributions
per unit include projections of costs and expenses expected to be incurred during the period required to complete the
plan of liquidation. These projections could change materially based on the timing of any sales, the performance of the
underlying assets and changes in the underlying assumptions of the projected cash flows. There can be no assurance about
the amount of any liquidating distributions and it is possible that there might not be any funds available for liquidating
distributions.
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Results of Operations
Results of operations for the two and five months ended May 31, 2011 and three and six months
ended June 30, 2010 discussed below are comprised of six multi-tenant industrial business park
properties in three major metropolitan areas. Due to the listing for sale of our properties and
adoption of liquidation basis accounting as of June 1, 2011, our comparison of results of
operations between periods is limited as the current year periods contain one fewer month than the
corresponding prior year periods. The results of operations are discussed below.
Comparison of the Two Months Ended May 31, 2011 and the Three Months Ended June 30, 2010
Operating results for the two periods, after adjustment for the difference in the number of months
presented, were comparable, except as discussed below.
Property operating and maintenance expenses for the two months ended May 31, 2011 was $0.1 million
compared to $0.3 million for the three months ended June 30, 2010, due in part to a lower allowance
for bad debt in the 2011 period.
General and administrative expenses for the two months ended May 31, 2011 was $92,000 compared to
$77,000 for the three months ended June 30, 2010. The 2011 was due in part to higher professional
fees and insurance costs.
Impairment of real estate for the for the two months ended May 31, 2011 was $0 compared to $0.6
million the three months ended June 30, 2010. For the three months ended June 30, 2010 we
recognized an impairment charge for our Paramount property. For the two months ended May 31, 2011,
no impairment charge was recorded. However, as of May 31, 2011, as part of the conversion to
liquidation accounting, we adjusted our properties to fair value, less estimated costs to sell,
with the corresponding charge to net assets in liquidation.
Interest expense for the two months ended May 31, 2011 was $43,000 compared to $0 for the three
months ended June 30, 2010. The increase was due to borrowing under the loan agreement entered
into in the fourth quarter of 2010.
Comparison of the Five Months Ended May 31, 2011 and the Six Months Ended June 30, 2010
Operating results for the two periods, after adjustment for the difference in the number of months
presented, were comparable, except as discussed below.
Rental
revenues for the five months ended May 31, 2011 were
$1.3 million compared to $1.7 million
the six months ended June 30, 2010. The decrease was partially due to lower occupancy resulting
from longer lease up periods of vacant units, lower market lease rates and higher concessions to
attract and retain tenants as a result of the competitive market conditions.
Property operating and maintenance expenses for the five months ended May 31, 2011 was $0.4 million
compared to $0.5 million for the six months ended June 30, 2010. The decrease is primarily due in
part to a lower allowance for bad debt in the 2011 period.
General and administrative expenses for the five months ended May 31, 2011 was $0.3 million
compared to $0.2 million for the six months ended June 30, 2010. The 2011 increase was due in part
to higher professional fees and insurance costs..
Depreciation and amortization expenses for the five months ended May 31, 2011 was $0.4 million
compared to $0.4 million the six months ended June 30, 2010. The increase was partially due to
catch up depreciation recorded in the first quarter of 2011 for an asset held for sale in 2010.
Impairment of real estate for the for the five months ended May 31, 2011 was $0 compared to $0.6
million the five months ended June 30, 2010. For the five months ended June 30, 2010 we recognized
an impairment charge for our Paramount property. For the five months ended May 31, 2011, no
impairment charge was recorded. However, as of May 31, 2011, as part of the conversion to
liquidation accounting, we adjusted our properties to fair value, less estimated costs to sell,
with the corresponding charge to net assets in liquidation.
Interest expense for the five months ended May 31, 2011 was $0.1 million compared to $0 for the
five months ended June 30, 2010. The increase was due to borrowing under the loan agreement
entered into in the fourth quarter of 2010.
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Liquidity and Capital Resources
As of June 30, 2011, our net assets in liquidation were approximately $22.2 million. Our ability to
meet our obligations is contingent upon the disposition of our assets in accordance with our plan
of liquidation. Management estimates that the net proceeds from the sale of our assets will be
adequate to pay our obligations: however, we cannot provide any assurance with respect to the
prices we will receive for the disposition of our assets or the net proceeds there from. In
anticipation of our liquidation, our unit repurchase program was suspended effective July 31, 2011.
The plan of liquation provides that a liquidating distribution be made to our members as determined
by the Managing Member. Although we can provide no assurances, we currently expect that the
liquidation will be completed by December 31, 2011.
Our managing member receives compensation from the Fund pursuant to our operating agreement. The
maximum amount of fees that would be due to our managing member for disposing of our property
interests would be $1.2 million. This maximum is based on the estimated maximum sales prices of our
properties and the terms of the operating agreement. Actual fees paid may be lower.
We anticipate, but cannot assure, that our cash flow from operations will be sufficient during the
liquidation period to fund our cash needs for payment of expenses, capital expenditures and debt
service payments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We invest our cash and cash equivalents in government backed securities and FDIC
insured savings account which, by its nature, are subject to interest rate fluctuations. As of
June 30, 2011, a 1% increase or decrease in interest rates would not have a material effect on our
interest income.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in the real estate capital markets, market rental rates for office space, local,
regional and national economic conditions and changes in the credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our senior management, as appropriate, to allow timely decisions
regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer at
Cornerstone Ventures, Inc., the manager of our Managing Member, have evaluated the effectiveness of
our disclosure controls and procedures and have concluded that the disclosure controls and
procedures were effective as of the end of the period covered by this report. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 5. Other Information
In a Form
8-K filed on June 9, 2011, the Fund reported the execution of a purchase and sale
agreement (the Agreement) with Birtcher Anderson Realty, LLC (the Bidder) to effect the sale of
all the Funds real estate properties to the Bidder for a purchase price of approximately $26.4
million. Under the Agreement, the sale was scheduled to close on or before August 1, 2011,
however, due to the Bidders inability to secure acceptable financing for the transaction, the
parties agreed to terminate the Agreement effective as of July 1, 2011.
17
Table of Contents
Item 6.
Exhibits
10.1
|
Purchase and Sale Agreement dated June 7, 2011 by and between the Company and Birtcher Anderson Realty, LLC | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.1
|
The following information from the Companys quarterly report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Cash Flows. |
18
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized this 15th day of August 2011.
CORNERSTONE REALTY FUND, LLC | ||||||||||
By: | CORNERSTONE INDUSTRIAL PROPERTIES, LLC | |||||||||
its Managing Member | ||||||||||
By: | CORNERSTONE VENTURES, INC. | |||||||||
its Manager | ||||||||||
By: | /s/ TERRY G. ROUSSEL
|
|||||||||
(Principal Executive Officer) | ||||||||||
By: | /s/ SHARON C. KAISER
|
|||||||||
Chief Financial Officer | ||||||||||
(Principal Financial Officer and | ||||||||||
Principal Accounting Officer) |
19