SMITH BUNDAY BERMAN BRITTON, P.S.

Transcription

1 SMITH BUNDAY BERMAN BRITTON, P.S. CORNERSTONE REAL ESTATE FUND A, LLC FINANCIAL STATEMENTS INCOME TAX BASIS DECEMBER 31, 2010

2 CORNERSTONE REAL ESTATE FUND A, LLC FINANCIAL STATEMENTS DECEMBER 31, 2010 CONTENTS Page Independent auditor s report 1 Statement of assets and liabilities income tax basis 2 Statement of operations income tax basis 3 Statement of capital income tax basis 4 Statement of cash flows income tax basis 5 Notes to financial statements 6-13 Supplementary information Report on supplementary information 14 Schedule of member account activity income tax basis 15-16

3 SMITH BUNDAY BERMAN BRITTON, P.S. CERTIFIED PUBLIC ACCOUNTANTS September 29, 2011 To the Members of Cornerstone Real Estate Fund A, LLC Independent Auditor s Report We have audited the accompanying statement of assets and liabilities income tax basis of Cornerstone Real Estate Fund A, LLC (the Fund) as of December 31, 2010, and the related statements of operations income tax basis, capital income tax basis and cash flows income tax basis for the year then ended. These financial statements are the responsibility of the Fund s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, these financial statements were prepared on the basis of accounting the Fund uses for federal income tax purposes, which is a comprehensive basis of accounting other than U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities of Cornerstone Real Estate Fund A, LLC as of December 31, 2010, and its operations, changes in its capital and its cash flows for the year then ended on the basis of accounting as described in Note Northup Way, Suite 240 Bellevue, Washington Phone (425) Fax (425)

4 CORNERSTONE REAL ESTATE FUND A, LLC STATEMENT OF ASSETS AND LIABILITIES - INCOME TAX BASIS DECEMBER 31, 2010 Assets Investments - Note 3 $31,261,798 Cash and cash equivalents 2,192,049 Receivables: Cornerstone Real Estate Fund B, LLC 2,122 Distributions from investments 61,894 Deferred start-up costs, net of accumulated amortization of $5,116 at December 31, ,480 Total assets 33,532,343 Liabilities Accounts payable 5,206 Net Assets $33,527,137 Represented by Proceeds from sale of member interests $44,404,112 Distributions to members (2,540,098) Accumulated net loss on investments (8,336,877) $33,527,137 The accompanying notes are an integral part of these financial statements. 2

5 CORNERSTONE REAL ESTATE FUND A, LLC STATEMENT OF OPERATIONS - INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2010 Income (Loss) Ordinary loss ($1,078,249) Rental real estate loss (1,167,456) Loss on disposal of assets (420) Interest income 22,624 Total income (loss) (2,223,501) Expenses Portfolio deductions from investments 18,791 Administrative expenses 18,241 Professional fees 38,948 Amortization 1,306 Charitable contributions 93 Total expenses 77,379 Decrease in net assets from operations ($2,300,880) The accompanying notes are an integral part of these financial statements. 3

6 CORNERSTONE REAL ESTATE FUND A, LLC STATEMENT OF CAPITAL - INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2010 Balance, January 1, 2010 $31,506,703 Proceeds from sale of member interests 5,043,629 Distributions to members (722,315) Decrease in capital resulting from operations (2,300,880) Balance, December 31, 2010 $33,527,137 The accompanying notes are an integral part of these financial statements. 4

7 CORNERSTONE REAL ESTATE FUND A, LLC STATEMENT OF CASH FLOWS - INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2010 Cash flows from operating activities Net decrease in net assets from operations ($2,300,880) Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities: Net allocation of taxable losses and deductions from pass-through investments 2,242,676 Amortization 1,306 Purchase of investments (3,141,699) Distributions from investments 946,431 Increase in distributions receivable from investments (31,262) Increase in amounts due from Cornerstone Real Estate Fund B, LLC (47) Increase in accounts payable 3,973 Net cash used in operating activities (2,279,502) Cash flows from financing activities Proceeds from sale of member interests 5,043,629 Distributions to members (722,315) Net cash provided by financing activities 4,321,314 Net increase in cash 2,041,812 Cash and cash equivalents Beginning of year 150,237 End of year $2,192,049 The accompanying notes are an integral part of these financial statements. 5

8 CORNERSTONE REAL ESTATE FUND A, LLC NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Cornerstone Real Estate Fund A, LLC (the Fund ) was formed on November 8, 2006 as a Washington limited liability company. Operations commenced on January 23, The Fund offers investors who are qualified purchasers (as defined in Section 2(a)(51) of the Investment Company Act of 1940) member interests. As of December 31, 2010, the Fund has 80 members. The Fund is not required to register with the Securities and Exchange Commission under the Investment Company Act of 1940 because interests can only be purchased by "qualified purchasers" and it does not offer or propose to offer interests to the public. The objective of the Fund is to generate attractive, long-term risk adjusted rates of return by investing in U.S. real estate-related equity investments, including real estate project limited partnerships, limited liability companies and diversified real estate funds ( Investments ). The Fund's Manager is Cornerstone Advisors, Inc. ("Cornerstone"), a Washington corporation. The financial statements and accompanying notes are representations of the Fund s management, who is responsible for their integrity and objectivity. Basis of Accounting - The accompanying financial statements have been prepared on the accrual accounting basis used by the Fund for federal income tax purposes. That basis differs from U.S. generally accepted accounting principles primarily due to generally accepted accounting principles requiring that the investments be stated at fair value and that start-up costs be expensed as incurred. The income tax basis accounts for investments at cost, adjusted for distributions, taxable income and allowable deductions. The income tax basis capitalizes start-up costs and allows for amortization of the costs over fifteen years. Cash and Cash Equivalents - The Fund considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments - Investments are stated at cost adjusted for distributions, taxable income or losses and deductions. The Investments fair value may differ significantly from the adjusted cost disclosed in the financial statements and accompanying notes. 6

9 NOTE 1 - continued: Deferred Start-Up Costs - The Fund capitalizes start-up costs in excess of $5,000 and these costs are amortized on a straight-line basis over a period of fifteen years. Expected future amortization expense is expected to be $1,306 in each year through Federal Income Taxes - The Fund has elected to be taxed as a partnership. As a partnership, all amounts affecting taxable income flow through to members and are reported on their tax returns. Accordingly, the Fund s financial statements do not include a provision for income taxes. The U.S. and state income tax returns of the Fund are subject to examination by federal and state taxing authorities. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the accompanying financial statements could be changed at a later date upon final examination by the respective taxing authorities. As of December 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2007 forward (with limited exceptions). Concentration of Credit Risk - The Fund routinely maintains balances in a single money market fund in a brokerage account and is therefore subject to credit risk. Use of Estimates - The preparation of financial statements requires management to make estimates and assumptions that may affect certain reported amounts and disclosures. Actual results could differ from those estimates. NOTE 2 - LLC AGREEMENT: Term - The Fund has a term of twelve years from the date of its initial closing. The Manager, in its sole discretion, may extend the term of the Fund for two additional one-year periods, and further extensions can be made with the consent of a majority of the members. Distributions - Distributable proceeds, as defined, will be distributed to the members in proportion to their capital percentages subject to certain exceptions contained in the Fund s LLC Agreement. Distributions to a member are limited to the member s capital account balance. 7

10 NOTE 2 - continued: Withdrawals - No member has the right to withdraw from the Fund without the prior consent of the Manager, which will be given at the Manager s sole discretion. Capital Accounts and Allocations - The Fund s LLC Agreement specifies that a capital account shall be established for each member. Each capital account is maintained in accordance with the principles of Treasury Regulations Sections and The capital account of a member shall be credited by the amount of cash initially contributed by the member. The capital account of a member shall be further increased by any additional contributions and the amount of net income allocated to the member. The capital account shall be decreased by the amount of net losses allocated to the member, any cash distributed to the member and the fair market value of property distributed to such member. Net income and net losses will generally be allocated to the members in proportion to their respective capital percentages, except that the allocation of losses to a member is limited to the available balance in the member s capital account. At December 31, 2010, the Fund had capital commitments from investors totaling $50,650,000, of which $44,404,112 had been called and received. Under the Fund s LLC Agreement, the investment period for making additional capital calls was scheduled to terminate on November 30, In 2010, in accordance with the Fund s LLC Agreement, the Manager elected to extend the investment period for one additional year to November 30, Members - The Manager may issue additional interests and admit additional members at one or more subsequent closings not later than twelve months from the initial closing. The Fund s initial closing was held on January 23, No additional member interests may be issued subsequent to the date twelve months after the initial closing without consent of two-thirds of the existing members. Dissolution - The Fund shall dissolve upon any of the following events: 1) the bankruptcy, dissolution or withdrawal of the Manager, unless a majority of member interests agrees to continue; 2) the passing of the investment period termination date, as defined, and sale of substantially all of the assets of the Fund; 3) the expiration of the term explained above; 4) the date of any event that would result in the dissolution of the Fund under the Washington Limited Liability Company Act, as amended. 8

11 NOTE 2 - continued: Liquidation - Upon dissolution of the Fund, its business affairs shall be liquidated in an orderly manner, for a period of up to two years. The proceeds from liquidation shall be divided and applied in the following manner: 1. to the expenses of liquidation and debts of the Fund other than debts to members, then 2. to accrued and unpaid debts owing to the members, which shall be paid pro rata, then 3. the balance shall be distributed to the members in proportion to their membership interests. NOTE 3 - INVESTMENTS: Investments at December 31, 2010 consist of the following: Investment 581 Market Street Investors, LLC Percentage ownership Description Basis 40% This entity is invested in a retail building located in downtown San Francisco, California. The property has approximately 30,000 square feet of space and is leased to a single tenant. $3,302,803* Cityview Group, LLC Custos Income and Growth Fund I, LLC Des Moines Place Investors, LLC 44% This entity is invested is the Alexan Cityview apartment building located in Austin, Texas. The building has 308 units. 896,145 17% The fund will target $5 to $20 million assets. This entity will invest in several property types including retail, office, industrial and apartments; however the biggest emphasis will be on retail. Target markets include: Arizona, California, Colorado, Idaho, Oregon, Utah, Nevada and Washington. To date, the fund has invested in two apartment buildings in Indiana and Kentucky and an office building in California. 3,203,802* 58% The entity is invested in the Des Moines Place apartment building located in Des Moines, Washington. The building has 95 units. 1,169,401 9

12 NOTE 3 - continued: Hotel Group Opportunity Fund III, LLC Hotel Group Opportunity Fund IV, LLC JC Mueller Seattle Fund I LLC Metzler North America Partners, LP Pacific Building Partners LLC 15% This entity acquires under-performing hotel properties for the purpose of renovation. Management intends to acquire four to seven hotels throughout the continental United States and hold them for three to five years. To date, the entity has invested in three hotels located in Montana, Ohio and Missouri. 2,533,561* 36% The entity targets under-performing fullservice and upper-end limited-service hotel properties that can be purchased at a substantial discount to replacement costs. Candidate properties need to have strong locations and demonstrate significant repositioning potential within its market. To date, the entity has invested in one hotel located in New Mexico. 1,799,676* 13% The entity acquires and develops properties for multi-family, commercial or mixed use that are located in Seattle Washington. To date, three properties have been acquired and the entity has an option to purchase a fourth property. The properties are located in urban Seattle neighborhoods. During the remaining life of the entity, management expects to redevelop one of the properties and will likely divest of the other two prior to redevelopment. 2,283,982* 15% The entity targets value-added direct real estate investments. Property types will include office, industrial/flex, retail and possibly multi-family. Office properties will likely be the largest type allocation. Metzler seeks to make its investments in targeted major metropolitan markets that demonstrate strong demographics and attractive real estate fundamentals. To date, the entity has invested in an office building in California, a garage facility in Washington and an apartment building in Oregon. 1,996,400* 11% The entity is invested in a twenty-two story office building located in downtown Seattle, Washington. 1,197,937 10

13 NOTE 3 - continued: PDS Napa Investors, LLC RS Investors II, LLC Unico Northwest Fund II, LLC Unico Northwest Fund III LLC University Park Properties, LLC 68% The entity holds an investment in a 70- unit apartment community located in Napa, California, consisting of eleven two-story apartment buildings, a rental office/clubhouse and an outdoor swimming pool. 1,983,308* 42% The entity is invested in four retail properties located in Lacey, Washington; Boise, Idaho; and Sandy and Orem, Utah. The properties are all leased to ShopKo under 20 year leases. 2,742,661* 33% The entity is invested in a seventeen story office building located in Denver, Colorado and a twenty story office building located in Spokane, Washington. 4,784,069* 17% The entity holds an investment in the U.S. Bancorp Tower located in Portland, Oregon. The project consists of a 43-story office building, a connecting 7-story office/retail building and a 13-story parking garage. 2,405,679* 33% The entity is invested in the University Apartments located in Ellensburg, Washington. The property has 96 units. 962,374 Total Investments $31,261,798 *Basis represents more than five percent of Fund net assets. The Fund has placed a concentration restriction limit of 20% of capital commitments on any single investment unless waived by a majority of the members. NOTE 4 - RELATED PARTY ACTIVITY: The Manager is also the manager of Cornerstone Real Estate Fund B, LLC ("Fund B"). Fund B was established concurrent with the establishment of the Fund to accommodate investors who are not qualified purchasers but who are "accredited investors" (as defined by Rule 501 of Regulation D under the Securities Act of 1933). Fund B is operated on substantially the same terms as the Fund to invest in parallel with the Fund. In accordance the terms of the respective LLC agreements, each portfolio investment has been adjusted so that the ratio of such holdings between the Fund and Fund B is in proportion to the respective commitment percentages of each entity. At December 31, 2010, a receivable in the amount of $2,122 was recorded to recognize the effect of the 2008 portfolio investment adjustment. 11

14 NOTE 4 - continued: The Manager may charge an administration fee to the Fund to reimburse the Manager for certain payroll, overhead and indirect costs. The quarterly fee is based on the carrying value, as defined, of all member interests and shall not exceed.025% each quarter. For the year ended December 31, 2010, the Fund recorded administrative fees of.0125% per quarter totaling $14,989, of which $2,784 is included in accounts payable as of December 31, NOTE 5 - MANAGEMENT FEES: The Fund was formed primarily for the benefit of current clients of the Manager, accordingly, except for certain reimbursement of direct and indirect fund expenses that may be incurred by the Manager and an administration fee, the Manager will not charge the Fund or the members a separate management fee; provided however, that the Manager shall assess a separate management fee against any member who is not an active client of the Manager, which will be not greater than.25% per quarter of the carrying value, as defined, of such member. No such fees were assessed against any members in NOTE 6 - COMMITMENTS: As of December 31, 2010, the Fund has outstanding capital commitments to one Investment in the amount of $1,425,000. The Fund is not obligated to contribute capital in excess of its capital commitments to Investments. NOTE 7 - INVESTMENTS AND ASSOCIATED RISKS: In the normal course of business, the Fund invests in real estate-related equity investments which exposes the Fund to various risk factors including market and credit risk. The investments are also subject to the terms of subscription agreements, private placement memoranda and other governing agreements, which may include provisions that restrict both the transferability of the Fund s interest and ability to withdraw subjecting the Fund to liquidity risk. Additionally, the investments are dependent on factors such as the general state of the economy, consumer spending and the commercial and residential real estate markets. Due to the level of risk associated with the investments, it is at least reasonably possible that change in the values of the investments will occur in the near term and that such changes could materially affect the Fund. NOTE 8 - SUBSEQUENT EVENTS: Effective August 24, 2011, in accordance with section 3.1(e) of the Fund s LLC Agreement, the Manager elected to extend the Fund s investment period for one additional year to November 30, On August 31, 2011, the Fund made an additional contribution of $76,937 in the form of an unsecured promissory note to JC Mueller Seattle Fund I, LLC. Unless repaid earlier, the unsecured promissory note matures September 30, The note bears an interest rate of 16% per annum. 12

15 NOTE 8 - SUBSEQUENT EVENTS - continued The Fund s management has evaluated subsequent events through September 29, 2011, the date which the financial statements were available to be issued. 13

16 SUPPLEMENTARY REPORT AND INFORMATION

17 SMITH BUNDAY BERMAN BRITTON, P.S. CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR S REPORT ON SUPPLEMENTARY INFORMATION September 29, 2011 To the Members of Cornerstone Real Estate Fund A, LLC Our report on our audit of the basic financial statements of Cornerstone Real Estate Fund A, LLC appears on page one. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Member Account Activity Income Tax Basis for the year ended December 31, 2010 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion is fairly stated in all material respects in relation to the basic financial statements taken as a whole on the basis of accounting described in Note Northup Way, Suite 240 Bellevue, Washington Phone (425) Fax (425)

18 CORNERSTONE REAL ESTATE FUND A, LLC SCHEDULE OF MEMBER ACCOUNT ACTIVITY - INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2010 (See auditor's report on supplementary information) Capital Capital Capital Net allocated Capital Capital Dec. 31, 2009 contributions transfers loss distributions Dec. 31, 2010 Limited Partners CREFA0001 $311,019 $54,430 $37,726 ($23,433) ($7,404) $372,338 CREFA ,007 49,789 (22,712) (7,130) 330,954 CREFA ,012 99,578 (45,426) (14,261) 661,903 CREFA ,515 24,894 (11,360) (3,565) 165,484 CREFA ,498 24,894 (11,357) (3,565) 165,470 CREFA ,012 49,789 (22,717) (7,131) 330,953 CREFA ,007 99,578 (45,425) (14,261) 661,899 CREFA ,502 24,895 (11,356) (3,565) 165,476 CREFA ,011 49,789 (22,715) (7,131) 330,954 CREFA ,006 49,789 (22,714) (7,131) 330,950 CREFA ,505 24,895 (11,359) (3,565) 165,476 CREFA , ,367 (68,139) (21,391) 992,847 CREFA ,012 49,789 (22,715) (7,131) 330,955 CREFA ,501 24,895 (11,359) (3,565) 165,472 CREFA ,004 49,789 (22,709) (7,131) 330,953 CREFA ,504 24,895 (11,355) (3,565) 165,479 CREFA ,411 69,705 (31,799) (9,983) 463,334 CREFA ,408 69,705 (31,799) (9,983) 463,331 CREFA ,596 29,873 (13,628) (4,278) 198,563 CREFA ,009 49,789 (22,712) (7,131) 330,955 CREFA ,009 49,789 (22,714) (7,131) 330,953 CREFA ,607 29,873 (13,628) (4,278) 198,574 CREFA , ,325 (72,686) (22,817) 1,059,036 CREFA ,510 74,684 (34,070) (10,696) 496,428 CREFA ,515 74,684 (34,070) (10,696) 496,433 CREFA ,708 34,852 (15,897) (4,991) 231,672 CREFA0037 3,110, ,890 (227,133) (71,305) 3,309,515 CREFA0038 2,177, ,523 (158,994) (49,913) 2,316,654 CREFA ,016 49,789 (22,716) (7,131) 330,958 CREFA ,999 49,789 (22,713) (7,131) 330,944 CREFA ,003 49,789 (22,711) (7,131) 330,950 CREFA ,008 49,789 (22,714) (7,131) 330,952 CREFA ,016 99,578 (45,430) (14,261) 661,903 CREFA ,835 24,895 (11,354) (3,565) 165,811 CREFA ,516 24,895 (11,361) (3,565) 165,485 CREFA ,993 49,789 (22,714) (7,131) 330,937 CREFA ,017 25,316 (599,228) (33,844) (14,261) - CREFA ,010 49,789 (22,713) (7,131) 330,955 CREFA ,502 24,895 (11,354) (3,565) 165,478 CREFA ,503 24,895 (11,359) (3,565) 165,474 CREFA ,698 34,852 (15,896) (4,991) 231,663 CREFA ,509 24,895 (11,360) (3,565) 165,479 CREFA ,344 99,578 (45,426) (14,261) 651,235 CREFA0057 2,488, ,312 (181,708) (57,044) 2,647,619 CREFA ,504 24,895 (11,360) (3,565) 165,474 15

19 CORNERSTONE REAL ESTATE FUND A, LLC SCHEDULE OF MEMBER ACCOUNT ACTIVITY - INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2010 (See auditor's report on supplementary information) Capital Capital Capital Net allocated Capital Capital Dec. 31, 2009 contributions transfers loss distributions Dec. 31, 2010 CREFA ,496 24,895 (11,356) (3,565) 165,470 CREFA ,514 24,895 (11,356) (3,565) 165,488 CREFA ,007 49,789 (22,715) (7,131) 330,950 CREFA ,507 24,894 (11,353) (3,565) 165,483 CREFA ,025 99,578 (45,432) (14,261) 661,910 CREFA ,503 24,894 (11,354) (3,565) 165,478 CREFA ,505 24,894 (11,355) (3,565) 165,479 CREFA ,494 24,894 (11,359) (3,565) 165,464 CREFA ,512 24,894 (11,357) (3,565) 165,484 CREFA ,828 89,620 (40,885) (12,835) 595,728 CREFA ,005 49,789 (22,717) (7,130) 330,947 CREFA , ,367 (68,138) (21,391) 1,003,555 CREFA , ,367 (68,142) (21,391) 992,848 CREFA ,598 29,873 (13,624) (4,278) 198,569 CREFA ,708 34,852 (15,897) (4,991) 231,672 CREFA0086 1,244, ,156 (90,856) (28,522) 1,323,806 CREFA ,700 34,852 (15,901) (4,991) 231,660 CREFA ,005 49,789 (22,711) (7,131) 330,952 CREFA ,508 6,329 (150,904) (8,464) (2,469) - CREFA ,697 34,852 (15,895) (4,991) 231,663 CREFA ,501 24,895 (11,355) (3,565) 165,476 CREFA ,504 24,895 (11,357) (3,565) 165,477 CREFA ,105 54,768 (24,986) (7,844) 364,043 CREFA ,498 24,895 (11,358) (3,565) 165,470 CREFA ,606 29,873 (13,626) (4,278) 198,575 CREFA ,530 74,684 (34,074) (10,696) 497,444 CREFA ,499 24,895 (11,359) (3,565) 165,470 CREFA , ,228 (11,580) - 661,910 CREFA0153-4,641 37,726 (726) (274) 41,367 CREFA0154-4,641 37,726 (724) (274) 41,369 CREFA ,506 24,895 (11,358) (3,565) 165,478 CREFA ,498 24,895 (11,358) (3,565) 165,470 CREFA ,498 24,894 (11,357) (3,565) 165,470 CREFA ,842 24,895 (11,358) (3,565) 165,814 CREFA0219-4,641 37,726 (723) (274) 41,370 General Partner CREFA Total $31,506,703 $5,043,629 $ - ($2,300,880) ($722,315) $33,527,137 16