Cornerstone Core Properties REIT, Inc.
Business
Risk Factors
Unresolved Staff   Comments
Properties
Legal Proceedings
Submission of   Matters to a Vote of Security Holders                       PART II
Market for   Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases   of Equity Securities
Selected Financial Data
Management’s Discussion   and Analysis of Financial Condition and Results of Operations
Quantitative and   Qualitative Disclosures About Market Risk
Financial   Statements and Supplementary Data
Changes in and   Disagreements With Accountants on Accounting and Financial Disclosure
Controls and   Procedures
Other Information                       PART III
Directors   and Executive Officers of the Registrant
Executive   Compensation
Security   Ownership of Certain Beneficial Owners and Management and Related Stockholder   Matters
Certain   Relationships and Related Transactions
Principal   Accounting Fees and Services                       PART IV
Exhibits   and Financial Statement Schedules                 PART I   SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS   Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Item 1A of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.   ITEM 1. BUSINESS   Our Company   Cornerstone Core Properties REIT, Inc., a Maryland corporation, was formed on October 22, 2004 for the purpose of engaging in the business of investing in and owning commercial real estate. We intend to qualify as a real estate investment trust (REIT) for federal tax purposes commencing with our taxable year ending December 31, 2006.   We conduct our principal business and plan to own properties through our operating partnership, Cornerstone Operating Partnership, L.P., a Delaware limited partnership, formed on November 30, 2004. We are the sole general partner of the operating partnership and have control over its affairs. On July 15, 2005, our advisor purchased a 99% limited partnership interest in the operating partnership for $200,000. As used in this report, “we,” “us” and “our” refer to Cornerstone Core Properties REIT, Inc. and its consolidated subsidiary except where the context otherwise requires.   Our advisor is Cornerstone Realty Advisors, LLC, a newly formed limited liability company. Some of our directors are also directors of our advisor and all of our officers are also officers of our advisor. Our advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to present to us investment opportunities and to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. Our advisor will be responsible for managing our affairs on a day-to-day basis and for identifying and making property acquisitions on our behalf. Currently, there are no employees of Cornerstone Core Properties REIT, Inc. and its subsidiaries. All management and administrative personnel responsible for conducting our business are currently employed by our advisor and its affiliates.   From our formation through the end of the year ended December 31, 2005, our activities consisted solely of organizational activities, including preparing for and launching our initial public offering. We did not accept any subscriptions for shares in our initial public offering until January 2006. Accordingly, as of the end of our fiscal year, we had neither purchased nor contracted to purchase any interests in any real properties.   1        Investment Objectives   Our investment objectives are to:   •      preserve stockholder capital by owning and operating real estate on an all-cash basis with no permanent financing;   •      purchase investment grade properties with the potential for capital appreciation to our stockholders;   •      purchase income-producing properties which will allow us to pay cash distributions to our stockholders at least quarterly, if not more frequently; and   •      provide liquidity to our stockholders within the shortest reasonable time necessary to accomplish the above objectives.   Within five years from the closing of our initial public offering, our board of directors will take one or more of the following actions to provide enhanced liquidity for our stockholders:   •      modify our stock repurchase program to allow us to use proceeds from the sale of our properties to redeem shares;   •      list our stock for trading on a national securities exchange or the Nasdaq National Market;   •      seek stockholder approval to begin an orderly liquidation of our assets and distribute the available proceeds of such sales to our stockholders; or   •      seek stockholder approval of another liquidity event such as a sale of our assets or a merger with another entity.   Investment Strategy   Large institutional investors have proven how to build a successful real estate portfolio. They generally start with a foundation of “core” holdings. “Core” holdings are generally existing, high quality properties owned “all-cash” free and clear of debt. We believe that “core” holdings are necessary to help investors build the base of their investment portfolio. That is why our primary investment focus is to acquire investment real estate “all cash” with no permanent financing.   All cash real estate investments add a layer of safety to conservative real estate investment which we believe would be difficult to match by any other strategy. By owning and operating properties on an “all-cash” basis, risk of foreclosure of mortgage debt is substantially eliminated. Following acquisition of “core” real property investments, many large institutional investors then make “core plus,” “valued added” and “opportunistic” real property investments each of which has increasing levels of debt, risk and yield.   Acquisition Policies   Primary Investment Focus   We expect to use substantially all of the net proceeds from our initial public offering to invest in investment grade real estate including multi-tenant industrial properties that are:   •      owned and operated on an all-cash basis with no permanent financing;   •      high-quality, existing, and currently producing income;   •      leased to a diversified tenant base; and   •      leased with overall shorter term operating type leases, allowing for annual rental increases and greater potential for capital growth.   2        We intend to seek potential property acquisitions meeting the above criteria that are located in major metropolitan markets throughout the United States. Among the most important criteria we expect to use in evaluating the markets in which we purchase properties are:   •      high population;   •      historically high levels of tenant demand and lower historic investment volatility for type of property being acquired;   •      high historical and projected employment growth;   •      stable household income and general economic stability;   •      a scarcity of land for new competitive properties; and   •      sound real estate fundamentals, such as high occupancy rates and strong rent rate potential.   The markets in which we invest may not meet all of these criteria and the relative importance that we assign to any one or more of these criteria may differ from market to market or change as general economic and real estate market conditions evolve. We may also consider additional important criteria in the future.   Multi-tenant industrial properties generally offer a combination of both warehouse and office space adaptable to a broad range of tenants and uses and typically cater to local and regional businesses. Multi-tenant industrial properties comprise one of the major segments of the commercial real estate market and tenants in these properties come from a broad spectrum of industries including light manufacturing, assembly, distribution, import/ export, general contractors, telecommunications, general office/ warehouse, wholesale, service, high-tech and other fields. These properties diversify revenue by generating rental income from multiple businesses in a variety of industries instead of relying on one or two large tenants.   Other Potential Investments   While we intend to invest in multi-tenant industrial properties, we have the ability to invest in any type of real estate investment that we believe to be in the best interests of our stockholders, including other real estate funds or REITs, mortgage funds, mortgage loans and sale lease-backs. Furthermore, there are no restrictions on the number or size of properties we may purchase or on the amount or proportion of net proceeds of our initial public offering that we may invest in a single property. Although we can invest in any type of real estate investment, our charter restricts certain types of investments. We do not intend to make loans to other persons (other than mortgage loans permitted by our charter), to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than real estate investments.   Investment Strategies and Decisions   Our advisor will make recommendations to our board of directors, which will approve or reject all proposed property acquisitions. Our independent directors will review our investment policies at least annually to determine whether these policies continue to be in the best interests of our stockholders.   We will purchase properties based on the decision of our board of directors after an examination and evaluation by our advisor of many factors including but not limited to the functionality of the property, the historical financial performance of the property, current market conditions for leasing space at the property, proposed purchase price, terms and conditions, potential cash flows and potential profitability of the property. The number of properties that we will purchase will depend on the amount of funds we raise in this offering and upon the price we pay for the properties we purchase. To identify properties that best fit our investment criteria, our advisor will study regional demographics and market conditions and work through local commercial real estate brokers.   3        Leases and Tenant Improvements   The properties we acquire will generally have operating type leases. Operating type leases generally have either gross or modified gross payment terms. Under gross leases, the landlord pays all operating expenses of the property. Under modified gross leases, the tenant reimburses the landlord for certain operating expenses. A “net” lease, which is generally not considered an operating-type lease, provides that the tenant pays or reimburses the owner for all or substantially all property operating expenses. As landlord, we will generally have responsibility for certain capital repairs or replacement of specific structural components of a property such as the roof, heating and air conditioning systems, the interior floor or slab of the building as well as parking areas.   When a tenant at one of our properties vacates its space, it is likely that we will be required to expend funds for tenant improvements and refurbishments to the vacated space in order to attract new tenants. If we do not have adequate cash on hand to fund tenant improvements and refurbishments, we may use interim debt financing in order to fulfill our obligations under lease agreements with new tenants.   Joint Ventures and Other Arrangements   We may acquire some of our properties in joint ventures, some of which may be entered into with affiliates of our advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region, property type and tenant industry group. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, the advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria described elsewhere in this prospectus. These entities may employ debt financing. (See “Borrowing Policies” below.)   Borrowing Policies   We intend to be an all-cash REIT that will own and operate our properties with no permanent indebtedness. Generally, we will pay the entire purchase price of each property in cash or with equity securities, or a combination of each. Being an all-cash REIT mitigates the risks associated with mortgage debt, including the risk of default on the mortgage payments and a resulting foreclosure of a particular property.   During our initial public offering, we intend to use temporary financing to facilitate acquisitions of properties in anticipation of receipt of offering proceeds. We will endeavor to repay any debt financing promptly upon receipt of proceeds in the offering. To the extent sufficient proceeds from the offering are unavailable to repay such debt financing within a reasonable time as determined by our board of directors, we may sell properties or raise equity capital to repay the debt so that we will own our properties all-cash, with no permanent acquisition financing.   We may incur indebtedness for working capital requirements, tenant improvements, capital improvements, leasing commissions and to make distributions including but not limited to those necessary in order to maintain our qualification as a REIT for federal income tax purposes. We will endeavor to borrow funds on an unsecured basis but we may secure indebtedness with some or all of our portfolio of properties if a majority of our independent directors determine that it is in the best interests of us and our stockholders.   We may also acquire properties encumbered with existing financing which cannot be immediately repaid. To the extent we cannot repay the financing that encumbers these properties within a reasonable time as determined by a majority of our independent directors, we intend to sell properties or raise equity capital to pay debt in order to maintain our all-cash status or reserve an amount of cash sufficient to repay the loan to mitigate the risks of foreclosure.   4        We may invest in joint venture entities that borrow funds or issue senior equity securities to acquire properties, in which case our equity interest in the joint venture would be junior to rights of the lender or preferred stockholders. In some cases, our advisor may control the joint venture.   Our charter limits our borrowings to the equivalent of 75% of our cost, before deducting depreciation or other non-cash reserves, of all our assets unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report with an explanation from our independent directors of the justification for the excess borrowing. While there is no limitation on the amount we may borrow for the purchase of any single property, we intend to repay such debt within a reasonable time or raise additional equity capital or sell properties in order to maintain our all-cash status.   Competition   We compete with a considerable number of other real estate companies seeking to acquire and lease industrial space, most of which may have greater marketing and financial resources than we do. Principal factors of competition in our business are the quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator of quality office properties in the relevant market. Our ability to compete also depends on, among other factors, trends in the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.   We may hold interests in properties located in the same geographic locations as other entities managed by our advisor or our advisor’s affiliates. Our properties may face competition in these geographic regions from such other properties owned, operated or managed by other entities managed our advisor or our advisor’s affiliates. Our advisor or its affiliates have interests that may vary from those we may have in such geographic markets.   Government Regulations   Our company and the properties we expect to own are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.   Our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property.   Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which   5        property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could be substantial.   Significant Tenants   As of December 31, 2005, we have not purchased any properties, accordingly, we have no significant tenants.   Employees   We have no employees and our executive officers are all employees of our advisor’s affiliates. Substantially all of our work is performed by employees of our advisor’s affiliates.   Available Information   Information about us is available on our website (http:// www.cornerstonerealestatefunds.com). We make available, free of charge, on our Internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. These materials are also available at no cost in print to any person who requests it by contacting our Investor Services Department at 1920 Main Street, Suite 400, Irvine, California 92614; telephone (877) 805-3333Our filings with the SEC will be available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Room 1580, Washington D.C. Please call the SEC at (800) SEC-0330 for further information about the public reference rooms.   ITEM 1A. RISK FACTORS   General   Our lack of prior operating history makes it difficult for you to evaluate us.   We have no operating history. The past performance of other real estate investment programs sponsored by affiliates of our advisor may not be indicative of the performance we will achieve. We were formed on October 22, 2004 in order to invest primarily in investment real estate. We have no income, cash flow, funds from operations or funds from which we can make distributions to our shareholders. We have not acquired any properties. We may not be able to conduct business as we intend to.   Because there is no public trading market for our stock it will be difficult for stockholders to sell their stock. If stockholders do sell your stock, they will likely sell it at a substantial discount.   There is no current public market for our stock and there is no assurance that a public market will ever exist for our stock. Our charter contains restrictions on the ownership and transfer of our stock, and these restrictions may inhibit our stockholders’ ability to sell their stock. Our charter prevents any one person from owning more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our board of directors. Our charter also limits our stockholders’ ability to transfer their stock to prospective stockholders unless (i) they meet suitability standards regarding income or net worth and (ii) the transfer complies with minimum purchase requirements. We plan to adopt a stock repurchase program, but it will be limited in terms of the number of   6        shares of stock that may be redeemed annually. Our board of directors may also limit, suspend or terminate our stock repurchase program at any time.   It may be difficult for our stockholders’ to sell their stock promptly or at all. If our stockholders are able to sell shares of stock, they may only be able to sell them at a substantial discount from the price they paid. This may be the result, in part, of the fact that the amount of funds available for investment is expected to be reduced by sales commissions, dealer manager fees, organization and offering expenses, and acquisition fees and expenses. If our offering expenses are higher than we anticipate, we will have a smaller amount available for investment.   Competition with third parties for properties and other investments may result in our paying higher prices for properties, or impair our ability to sell our properties for an acceptable return, which could reduce our profitability.   We compete with many other entities engaged in real estate investment activities, including individuals, corporations, banks, insurance companies, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Some of these investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and increased prices. If competitive pressures cause us to pay higher prices for properties, our ultimate profitability may be reduced and the value of our properties may not appreciate or may decrease significantly below the amount paid for such properties. At the time we elect to dispose of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to dispose of the property due to the lack of an acceptable return.   If we are unable to find or experience delays in finding suitable investments, we may experience a delay in the commencement of distributions and a lower rate of return to investors.   Our ability to achieve our investment objectives and to make distributions depends upon the performance of our advisor in the acquisition and operation of our investments and upon the performance of property managers and leasing agents in the management of our properties and identification of prospective tenants. We may be delayed in making investments in properties due to delays in the sale of our stock, delays in negotiating or obtaining the necessary purchase documentation for properties, delays in locating suitable investments or other factors. We cannot be sure that our advisor will be successful in obtaining suitable investments on financially attractive terms or that our investment objectives will be achieved. We may also make other real estate investments such as investments in publicly traded REITs, mortgage funds and other entities that make real estate investments. Until we make real estate investments, we will hold the proceeds from our initial public offering in an interest-bearing account or invest the proceeds in short-term, investment-grade securities. We expect the rates of return on these short-term investments to be substantially less than the returns we make on real estate investments. If we are unable to invest the proceeds from our initial public offering in properties or other real estate investments for an extended period of time, distributions to our stockholders may be delayed and may be lower and the value of our stockholders’ investment could be reduced.   If we do not raise substantial funds, we will be limited in the number and type of investments we may make, and our performance will fluctuate with the performance of the specific properties we acquire.   Our initial public offering is being made on a “best efforts” basis and no individual, firm or corporation has agreed to purchase any of our stock. The amount of proceeds we raise in our initial public offering may be substantially less than the amount we would need to achieve a broadly diversified property portfolio. If we are unable to raise substantially more than the minimum offering amount, we will make fewer investments resulting in less diversification in terms of the number of investments owned and the geographic regions in which our investments are located. In that case, the likelihood that any single property’s performance would materially reduce our overall profitability will increase. We are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single   7        investment. In addition, any inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our net income and the distributions we make to stockholders would be reduced.   The cash distributions our stockholders receive may be less frequent or lower in amount than expected.   We expect to make distributions to our stockholders quarterly, if not more frequently. All expenses we incur in our operations are deducted from cash funds generated by operations prior to computing the amount of cash available to be paid as distributions to our stockholders. Our directors will determine the amount and timing of distributions. Our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditure and reserve requirements and general operational requirements. We cannot determine how long it may take to generate sufficient available cash flow to make distributions or that sufficient cash will be available to make distributions. We may borrow funds to enable us to make distributions. With no prior operations, we cannot predict the amount of distributions our stockholders may receive. We may be unable to pay or maintain cash distributions or increase distributions over time.   If we borrow money to meet the REIT minimum distribution requirement or for other working capital needs, our expenses will increase, our net income will be reduced by the amount of interest we pay on the money we borrow and we will be obligated to repay the money we borrow from future earnings or by selling assets, which will decrease future distributions to stockholders.   If we fail for any reason to distribute at least 90% of our REIT taxable income, then we would not qualify for the favorable tax treatment accorded to REITs. It is possible that 90% of our income would exceed the cash we have available for distributions due to, among other things, differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion/deduction of such income/expenses when determining our taxable income, nondeductible capital expenditures, the creation of reserves, the use of cash to purchase stock under our stock repurchase program, and required debt amortization payments. We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations. Distributions made in excess of net income will constitute a return of capital to stockholders.   The inability of our advisor to retain or obtain key personnel, property managers and leasing agents could delay or hinder implementation of our investment strategies, which could impair our ability to make distributions.   Our success depends to a significant degree upon the contributions of Terry G. Roussel, the President and Chief Executive Officer of our advisor. Our advisor does not have an employment agreement with Mr. Roussel. If Mr. Roussel was to cease his affiliation with our advisor, our advisor may be unable to find a suitable replacement, and our operating results could suffer. We believe that our future success depends, in large part, upon our advisor’s, property managers’ and leasing agents’ ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for highly skilled personnel is intense, and our advisor and any property managers we retain may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled personnel, property managers or leasing agents, our ability to implement our investment strategies could be delayed or hindered.   Conflicts of Interest   Our advisor will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could limit our investment opportunities and impair our ability to make distributions.   We rely on our advisor to identify suitable investment opportunities. We may be buying properties at the same time as other entities that are affiliated with or sponsored by our advisor. Other programs   8        sponsored by our advisor or its affiliates also rely on our advisor for investment opportunities. Many investment opportunities would be suitable for us as well as other programs. Our advisor could direct attractive investment opportunities or tenants to other entities. Such events could result in our investing in properties that provide less attractive returns, thus reducing the level of dividends that we may be able to pay to our stockholders.   If we acquire properties from affiliates of our advisor, the price may be higher than we would pay if the transaction was the result of arm’s-length negotiations.   The prices we pay to affiliates of our advisor for our properties will be equal to the prices paid by them, plus the costs incurred by them relating to the acquisition and financing of the properties or if the price to us is in excess of such cost, substantial justification for such excess will exist and such excess will be reasonable and consistent with current market conditions as determined by a majority of our independent directors. Substantial justification for a higher price could result from improvements to a property by the affiliate of our advisor or increases in market value of the property during the period of time the property is owned by the affiliates of our advisor as evidenced by an appraisal of the property. These prices will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. Even though we will use an independent third party appraiser to determine fair market value when acquiring properties from our advisor and its affiliates, we may pay more for particular properties than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders.   We may purchase properties from persons with whom our advisor or its affiliates have prior business relationships and our advisor’s interest in preserving its relationship with these persons could result in us paying a higher price for the properties than we would otherwise pay.   We may have the opportunity to purchase properties from third parties including affiliates of our independent directors who have prior business relationships with our advisor or its affiliates. If we purchase properties from such third parties, our advisor may experience a conflict between our interests and its interest in preserving any ongoing business relationship with these sellers.   Our advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our advisor, which conflicts could result in a disproportionate benefit to the other venture partners at our expense.   We may enter into joint venture agreements with third parties (including entities that are affiliated with our advisor or our independent directors) for the acquisition or improvement of properties. Our advisor may have conflicts of interest in determining which program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers. Co-venturers may thus benefit to our detriment.   Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale of our stock, our property acquisitions, the property we own and the sale of our properties and therefore our advisor and its affiliates may make recommendations to us that we buy, hold or sell property in order to increase their compensation. Our advisor will have considerable discretion with respect to the terms and timing of our acquisition, disposition and leasing transactions.   Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale of our stock and based on our investments. Therefore, our advisor may recommend that we purchase properties that generate fees for our advisor, but are not necessarily the most suitable investment for our portfolio. In some instances our advisor and its affiliates may benefit by us retaining ownership of our   9        assets, while our stockholders may be better served by sale or disposition. In other instances they may benefit by us selling the properties which may entitle our advisor to disposition fees and possible success-based sales fees. In addition, our advisor’s ability to receive asset management fees and reimbursements depends on our continued investment in properties and in other assets that generate fees to them. Therefore, the interest of our advisor and its affiliates in receiving fees may conflict with our interests.   Our advisor and its affiliates, including our officers and some of our directors, will face conflicts of interest caused by compensation arrangements with us and other advisor-sponsored programs, which could result in actions that are not in the long-term best interests of our stockholders.   Our advisor and its affiliates will receive substantial fees from us. These fees could influence our advisor’s advice to us, as well as the judgment of the affiliates of our advisor who serve as our officers or directors. Among other matters, the compensation arrangements could affect their judgment with respect to:   •      property acquisitions from other advisor-sponsored programs, which might entitle our advisor to disposition fees and possible success-based sale fees in connection with its services for the seller;   •      whether and when we seek to list our common stock on a national securities exchange or the Nasdaq National Market, which listing could entitle our advisor to a success-based listing fee but could also adversely affect its sales efforts for other programs if the price at which our stock trades is lower than the price at which we offered stock to the public; and   •      whether and when we seek to sell the company or its assets, which sale could entitle our advisor to success-based fees but could also adversely affect its sales efforts for other programs if the sales price for the company or its assets resulted in proceeds less than the amount needed to preserve our stockholders’ capital.   Considerations relating to their compensation from other programs could result in decisions that are not in the best interests of our stockholders, which could hurt our ability to make distributions.   If the competing demands for the time of our advisor, its affiliates and our officers result in them spending insufficient time on our business, we may miss investment opportunities or have less efficient operations which could reduce our profitability and result in lower distributions to stockholders.   We do not have any employees. We rely on the employees of our advisor and its affiliates for the day-to-day operation of our business. We estimate that over the life of the company, our advisor and its affiliates will dedicate, on average, less than half of their time to our operations. The amount of time that our advisor and its affiliates spend on our business will vary from time to time and is expected to be more while we are raising money and acquiring properties. Our advisor and its affiliates, including our officers, have interests in other programs and engage in other business activities. As a result, they will have conflicts of interest in allocating their time between us and other programs and activities in which they are involved. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than are necessary or appropriate to manage our business. We expect that as our real estate activities expand, our advisor will attempt to hire additional employees who would devote substantially all of their time to our business. There is no assurance that our advisor will devote adequate time to our business. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, it may allocate less time and resources to our operations. If any of these things occur, the returns on our investments, our ability to make distributions to stockholders may suffer.   Our officers and some of our directors face conflicts of interest related to the positions they hold with our advisor and its affiliates which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.   Our executive officers and some of our directors are also officers and directors of our advisor, our dealer manager and other affiliated entities. As a result, they owe fiduciary duties to these various entities   10        and their stockholders and members, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment, property management and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.   Our board’s possible loyalties to existing advisor-sponsored programs (and possibly to future advisor-sponsored programs) could result in our board approving transactions that are not in our best interest and that reduce our net income and lower our distributions to stockholders.   Some of our directors are also directors of our advisor which is an affiliate of the managing member of another affiliate-sponsored program. The loyalties of those directors to the other affiliate-sponsored program may influence the judgment of our board when considering issues for us that may affect the other affiliate-sponsored program, such as the following:   •      We could enter into transactions with the other program, such as property sales or acquisitions, joint ventures or financing arrangements. Decisions of our board regarding the terms of those transactions may be influenced by our board’s loyalties to the other program.   •      A decision of our board regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of the other program.   •      A decision of our board regarding the timing of property sales could be influenced by concerns that the sales would compete with those of the other program.   •      We could also face similar conflicts and some additional conflicts if our advisor or its affiliates sponsor additional REITs, assuming some of our directors are also directors of the additional REITs.   •      Our independent directors must evaluate the performance of our advisor with respect to whether our advisor is presenting to us our fair share of investment opportunities. If our advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other advisor-sponsored entities or if our advisor is giving preferential treatment to other advisor-sponsored entities in this regard, our independent directors may need to enforce our rights under the terms of the advisory agreement or seek a new advisor.   If our advisor is unable to adequately fund our offering and organizational activities, we may sell fewer shares in our initial public offering, we may be unable to acquire a diversified portfolio of properties, our operating expenses may be a larger percentage of our revenue and our net income may be lower.   Our advisor is newly formed, has limited capitalization, has incurred losses since its inception and is continuing to incur losses. Our advisor must raise funds through the sale of its own debt or equity securities, or obtain financial support from its affiliates or its sole member, to obtain the cash necessary to provide these advances. Our advisor’s sole member is also dependent on raising funds to provide financial support to our advisor. There can be no assurance as to the amount or timing of our advisor’s receipt of funds. If our advisor’s financial circumstances reduce the amount of funds available to us for offering and organizational activities, we may not be able to raise as much money in this offering. Cornerstone Industrial Properties, LLC, the sole member of our advisor, has limited capitalization, has incurred significant losses since its inception and is continuing to incur significant losses.   There is no separate counsel for our affiliates and us, which could result in conflicts of interest and actions not in our stockholders’ best interests.   Preston Gates & Ellis LLP is counsel both to us and to our advisor and its affiliates, including Pacific Cornerstone Capital, Inc. As discussed above, there is a possibility that the interests of the various parties may conflict. If we do not obtain separate counsel when our interests conflict with those of our advisor and   11        its affiliates, our counsel’s loyalties to our advisor and its affiliates could interfere with its independent professional judgment in considering alternatives that we should pursue, which could result in our pursuing courses of action that are not in our stockholders’ best interests.   Risks Related to Our Corporate Structure   A limit on the percentage of our securities a person may own may discourage a takeover or business combination, which could prevent our stockholders from realizing a premium price for their stock.   In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To assure that we do not fail to qualify as a REIT under this test, our charter restricts direct or indirect ownership by one person or entity to no more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our stockholders.   Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.   Our board of directors may increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.   The payment of the subordinated performance fee due upon termination, and the purchase of interests in our operating partnership held by our advisor and its affiliates as required in our advisory agreement, may discourage a takeover attempt that could have resulted in a premium price to our stockholders.   In the event of a merger in which we are not the surviving entity, and pursuant to which our advisory agreement is terminated, our advisor and its affiliates may require that we pay the subordinated performance fee due upon termination, and that we purchase all or a portion of the operating partnership units they hold at any time thereafter for cash, or our stock, as determined by the seller. The subordinated performance fee due upon termination ranges from a low of 5% if the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total dividends (other than stock dividends) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% if the sum of the appraised value of our assets minus our liabilities plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more. This deterrence may limit the opportunity for stockholders to receive a premium for their stock that might otherwise exist if an investor attempted to acquire us through a merger.   Our rights to recover claims against our directors, officers, employees and other agents are limited, which could reduce our recovery against them if they are liable to us for their conduct.   Maryland law provides that a director has no liability as a director if he performs his duties in good faith, in a manner he reasonably believes to be in the best interests of the company and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter also provides that we will generally indemnify our directors, our officers, our advisor and its affiliates and their   12        respective officers, directors, managers and employees for losses they may incur by reason of their service in those capacities unless:   •      their act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;   •      they actually received an improper personal benefit in money, property or services; or   •      in the case of any criminal proceeding, they had reasonable cause to believe that the act or omission was unlawful.   In addition to the above provisions of the Maryland General Corporation Law, our charter provides that in order for a director, an officer, our advisor or its affiliates to be exonerated from liability or receive indemnification, all of the following conditions must be met:   •      our directors, our advisor or its affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;   •      our directors, our officers, our advisor or its affiliates were acting on our behalf or performing services for us;   •      in the case of our independent directors, the liability or loss was not the result of gross negligence or willful misconduct by the party seeking indemnification;   •      in the case of our non-independent directors, our advisor or its affiliates, the liability or loss was not the result of negligence or misconduct by the party seeking indemnification; and   •      the indemnification is recoverable only out of our net assets or the proceeds of insurance and not from the stockholders.   As a result, we may have more limited rights against our directors, officers, employees and other agents than might otherwise exist under common law, which could reduce our recovery from such persons if they cause us to incur losses. In addition, we may be obligated to fund the defense costs incurred by our directors (as well as by our officers, employees and agents) in some cases, which would decrease the cash otherwise available to us to make distributions to our stockholders.   Payment of fees to our advisor and its affiliates will reduce cash available for investment and distribution.   Our advisor and its affiliates will perform services for us in connection with the offer and sale of our stock, the selection and acquisition of our properties, and possibly the management and leasing of our properties. They will be paid significant fees for these services, which will reduce the amount of cash available for investment in properties and distribution to stockholders. The fees to be paid to our advisor and its affiliates were not determined on an arm’s-length basis. A third-party unaffiliated with our advisor could be willing to provide such services to us at a lower price.   If we are unable to obtain funding for future capital needs, cash distributions to our stockholders could be reduced and the value of our investments could decline.   If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.   13        General Risks Related to Investments in Real Estate   Economic and regulatory changes that impact the real estate market may reduce our net income and the value of our properties.   We are subject to risks related to the ownership and operation of real estate, including but not limited to:   •      worsening general or local economic conditions and financial markets could cause lower demand, tenant defaults, and reduced occupancy and rental rates, some or all of which would cause an overall decrease in revenue from rents;   •      increases in competing properties in an area which could require increased concessions to tenants and reduced rental rates;   •      increases in interest rates or unavailability of permanent mortgage funds which may render the sale of a property difficult or unattractive; and   •      changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.   Some or all of the foregoing factors may affect our properties, which would reduce our net income, and our ability to make distributions to our stockholders.   Lease terminations could reduce our revenues from rents and our distributions to our stockholders.   The success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties and our company. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. We may be unable to re-lease the property for the rent previously received. We may be unable to sell a property with low occupancy without incurring a loss. These events and others could cause us to reduce the amount of distributions we make to stockholders.   Rising expenses at both the property and the company level could reduce our net income and our cash available for distribution to stockholders.   Our properties will be subject to operating risks common to real estate in general, any or all of which may reduce our net income. If any property is not substantially occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. If we are unable to lease properties on a basis requiring the tenants to pay such expenses, we would be required to pay some or all of those costs which would reduce our income and cash available for distribution to stockholders.   Costs incurred in complying with governmental laws and regulations may reduce our net income and the cash available for distributions.   Our company and the properties we expect to own are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. The properties we acquire will be subject to the Americans with Disabilities Act of 1990 which generally requires that certain types of buildings and services be made accessible and available to people with disabilities. These laws may require us to make modifications to our   14        properties. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.   Our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions.   Discovery of environmentally hazardous conditions may reduce our cash available for distribution to our stockholders.   Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could be substantial and reduce our ability to make distributions.   Any uninsured losses or high insurance premiums will reduce our net income and the amount of our cash distributions to stockholders.   Our advisor will attempt to obtain adequate insurance to cover significant areas of risk to us as a company and to our properties. However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.   We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholders may be limited.   Equity real estate investments are relatively illiquid. We will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We will also have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any of our properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds from the sale of properties to our stockholders; for example, we may use such proceeds to:   •      purchase additional properties;   15        •      repay debt, if any;   •      buy out interests of any co-venturers or other partners in any joint venture in which we are a party;   •      create working capital reserves; or   •      make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties.   Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time, generally four years, and comply with certain other requirements in the Internal Revenue Code.   Real estate market conditions at the time we decide to dispose of a property may be unfavorable which could reduce the price we receive for a property.   We intend to hold the properties in which we invest until we determine that selling or otherwise disposing of properties would help us to achieve our investment objectives. General economic conditions, availability of financing, interest rates and other factors, including supply and demand, all of which are beyond our control, affect the real estate market. We may be unable to sell a property for the price, on the terms, or within the time frame we want.   As part of otherwise attractive portfolios of properties, substantially all of which we can own on an all-cash basis, we may acquire some properties with existing lock-out provisions which may inhibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.   Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Loan provisions may prohibit us from reducing the outstanding indebtedness with respect to properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.   Loan provisions could impair our ability to take actions that would otherwise be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our stock, relative to the value that would result if the loan provisions did not exist. In particular, loan provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.   If we sell properties by providing financing to purchasers of our properties, distribution of net sales proceeds to our stockholders would be delayed and defaults by the purchasers could reduce our cash available for distribution to stockholders.   If we provide financing to purchasers, we will bear the risk that the purchaser may default. Purchaser defaults could reduce our cash distributions to our stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of or completion of foreclosure proceedings.   Actions of our joint venture partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions that are in the best interests of our stockholders which could result in lower investment returns to our stockholders.   We are likely to enter into joint ventures with affiliates and other third parties to acquire or improve properties. We may also purchase properties in partnerships, co-tenancies or other co-ownership   16        arrangements. Such investments may involve risks not otherwise present when acquiring real estate directly.   Risks Associated with Debt Financing   We may use temporary acquisition financing to acquire properties and otherwise incur other indebtedness, which will increase our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.   We may, in some instances, acquire real properties using temporary acquisition financing. This will enable us to acquire properties before we have raised offering proceeds for the entire purchase price. We plan to use subsequently raised offering proceeds to pay off the temporary acquisition financing.   We may borrow funds for operations, tenant improvements, capital improvements or for other working capital needs. We may also borrow funds to make distributions including but not limited to funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. To the extent we borrow funds, we may raise additional equity capital or sell properties to pay such debt.   If there is a shortfall between the cash flow from a property and the cash flow needed to service temporary acquisition financing on that property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.   Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.   When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, or replace our advisor. These or other limitations may limit our flexibility and prevent us from achieving our operating plans.   High levels of debt or increases in interest rates could increase the amount of our loan payments, reduce the cash available for distribution to stockholders and subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.   Our policies do not limit us from incurring debt. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. Interest we pay could reduce cash available for distribution to stockholders. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to make distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss.   17        Risks Associated with Being a REIT   If we fail to qualify as a REIT, we will be subjected to tax on our income and the amount of distributions we make to our stockholders will be less.   We intend to qualify as a REIT under the Internal Revenue Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its stockholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.   If we elected to be taxed as a REIT and then were to fail to qualify as a REIT in any taxable year:   •      we would not be allowed to deduct our distributions to our stockholders when computing our taxable income;   •      we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;   •      we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;   •      we would have less cash to make distributions to our stockholders; and   •      we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification.   Even if we qualify and maintain our status as a REIT, we may be subject to federal and state income taxes in certain events, which would reduce our cash available for distribution to our stockholders.   Net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to pay sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of our Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce the cash available to make distributions to our stockholders.   If our operating partnership is classified as a “publicly-traded partnership” under the Internal Revenue Code, it will be subjected to tax on our income and the amount of distributions we make to our stockholders will be less.   We structured our operating partnership so that it would be classified as a partnership for federal income tax purposes. In this regard, the Internal Revenue Code generally classifies “publicly traded partnerships” (as defined in Section 7704 of the Internal Revenue Code) as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. In order to minimize the risk that the Internal Revenue Code would classify our operating partnership as a “publicly traded partnership” for tax purposes, we placed certain restrictions on the transfer and/or redemption of partnership units in our operating partnership. If the Internal Revenue Service were to assert successfully that our operating partnership is a “publicly traded partnership,” and substantially all of our operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat our operating partnership as an association taxable as a corporation. In such event, the character of our assets and items of gross income would change and would prevent us from qualifying and maintaining our status as a REIT. In addition, the   18        imposition of a corporate tax on our operating partnership would reduce the amount of cash distributable to us from our operating partnership and therefore would reduce our amount of cash available to make distributions to you.   ITEM 1B. UNRESOLVED STAFF COMMENTS   Not Applicable.   ITEM 2. PROPERTIES   As of December 31, 2005, we have not purchased any properties.   ITEM 3. LEGAL PROCEEDINGS   From time to time in the ordinary course of business, we may become subject to legal proceeding, claims, or disputes. As of the date hereof, we are not a party to any pending legal proceedings.   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   On December 20, 2005, our sole stockholder as of such date approved, by written consent, Articles of Amendment and Restatement of our Articles of Incorporation.   PART II   ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   Market Information   During the period covered by this report, there was no established public trading market for our shares of common stock.   Our board of directors intends to adopt a share repurchase plan that would enable our stockholders to sell their stock to us in limited circumstances. The plan will not be adopted until the earlier of the completion of our initial public offering, which may last until September of 2007, or the receipt by us of SEC exemptive relief from rules restricting issuer purchases during distributions.   Stockholders   As of March 17, 2006, we had 58 stockholders of record.   Distributions   For the periods ended December 31, 2005 and 2004, we declared no distributions.   The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.   Following our election of REIT status for federal income tax purposes beginning for the tax year ending December 31, 2006, we would be required to distribute 90% of our REIT taxable income on an annual basis.   19        Recent Sales of Unregistered Sale of Securities   In connection with our incorporation, on November 9, 2004 we issued 125 shares of our common stock to Terry G. Roussel, an affiliate of our advisor, for $1,000 cash in a private offering exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.   Use of Proceeds from Registered Securities   Our registration statement (SEC File No. 333-121238) for our initial public offering of up to 44,400,000 shares of our common stock at $8.00 per share and up to 11,000,000 additional shares at $7.60 per share pursuant to our distribution reinvestment plan was declared effective on September 22, 2005. The aggregate offering amount of the shares registered for sale in our initial public offering, assuming the maximum number of shares is sold, is $438,800,000. The offering commenced on January 13, 2006 and has not terminated. We had not sold any shares of common stock in our initial public offering and had not received any offering proceeds as of December 31, 2005.   From September 22, 2005 through December 31, 2005, we incurred no sales commissions or dealer manager expenses in connection with the issuance and distribution of the securities registered in our initial public offering.   ITEM 6. SELECTED FINANCIAL DATA   The following should be read with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto.              December 31,                 2005       2004         Balance   Sheet Data:                         Total assets       $   224,399       $   1,000         Stockholders’   equity (deficit)       $   (93,330   )   $   1,000                                   Operating   Data:                         Revenues       $   —       $   —         General and   administrative expense       $   95,134       $   —         Net loss       $   (94,330   )   $   —         Net loss per   common share, basic and diluted (1)       $   (755   )   $   —         Distributions   declared       $   —       $   —         Distributions   per common share (1)       $   —       $   —         Weighted   average number of shares outstanding (1):                         Basic and   diluted       125       125                                   Other   Data:                         Cash flows   used in operating activities       $   (83,658   )   $   —         Cash flows   provided by (used in) investing activities       $   —       $   —         Cash flows   provided by financing activities       $   200,000       $   1,000           (1)   Net loss and distributions per share are based upon the weighted average number of shares of common stock outstanding.   20        ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion should be read in conjunction with our consolidated financial statements and notes appearing elsewhere in this Form 10-K.   Overview   We were incorporated on October 22, 2004 for the purpose of engaging in the business of investing in and owning commercial real estate. Since our inception through the year ended December 31, 2005, our business activity primarily consisted of our formation and the registration of our initial offering of shares to the public, which was declared effective on September 22, 2005.   As of December 31, 2005, we had not received any proceeds from our initial public offering of our common stock and had not acquired any real estate assets. Accordingly, the results of our operations for the year ended December 31, 2005 and the period from inception to December 31, 2004 are indicative of an early-stage enterprise. We have no paid employees and are externally advised and managed by Cornerstone Realty Advisors, LLC.   Election as a REIT   We intend to elect to be taxed as a REIT for the year ended December 31, 2006 under the Internal Revenue Code of 1986, as amended. If we qualify as a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements in order to avoid taxation as a regular corporation, including a requirement that they generally distribute at least 90% of their annual taxable income to their stockholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Our failure to qualify as a REIT could result in us having a significant liability for taxes.   Results of Operations   We did not commence real estate operations during the period from inception (October 22, 2004) to December 31, 2005, as we had not received and accepted the minimum subscription of $1,000,000 before the end of the period. We had no revenue or expenses during the period from inception (October 22, 2004) to December 31, 2004. Our operating results for the twelve months ended December 31, 2005 consisted primarily of general and administrative expenses associated with insurance and third party professional, legal and accounting fees related to our periodic reporting requirements under the Securities Act of 1934. General and administrative expenses were $95,134 during the year ended December 31, 2005 and consisted primarily of insurance and professional and directors fees associated with activities of our board of directors. During 2005 certain third party legal and accounting fees were incurred but are accounted for by the manager of our advisor, as deferred organization and offering expenses. These expenses will be reimbursed to our advisor from the gross proceeds of our initial public offering.   Interest income was $1,154 during the year ended December 31, 2005, which amount is primarily attributable to the increased balance of cash in an interest bearing account resulting from the investment in our operating partnership by our advisor during 2005.   As a result of the above items, net loss for the year ended December 31, 2005 was ($94,330), or ($755) per basic and diluted share compared with net income of $0 per basic and dilutive share for the period from inception through December 31, 2004.   Liquidity and Capital Resources   As of December 31, 2005, we had $117,342 in cash and cash equivalents. Our primary source of future capital is anticipated to be from the sale of common stock in our initial public offering, which   21        commenced in January 2006. We had not received any offering proceeds as of December 31, 2005. As of March 17, 2006, we had sold 250,948 shares of common stock for gross proceeds of $$2 million,.   The primary use of cash is to fund capital investment in new acquisitions. We may also regularly require capital to invest in routine capital improvements, deferred maintenance on any properties acquired and leasing activities, including funding tenant improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures can vary significantly depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases.   We are dependent on our advisor to fund our organization and offering activities. As of the date of this report, we are relying on our advisor because we have not raised sufficient capital to pay these expenses and because the amount we can spend on organization and offering expenses is limited by our charter. Organization and offering expenses (other than sales commissions and dealer manager fees) consist of all expenses incurred by us or on our behalf in connection with our initial public offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to: (i) amounts to reimburse our advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of or advisor and its affiliates in connection with registering and marketing our shares (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. Our advisor will advance us money for these organization and offering expenses or pay those expenses on our behalf. Our advisor will not charge us interest on these advances. We will repay these advances and reimburse our advisor for expenses paid on our behalf using the gross proceeds of our initial public offering, but in no event will we have any obligation to reimburse our advisor for these costs totaling in excess of 3.5% of the gross proceeds from our primary offering. Our advisor will pay all of our organization and offering expenses described above that are in excess this 3.5% limitation. In addition, our advisor will pay all of our organization and offering expenses that, when combined with the sales commissions and dealer manager fees that we incur, exceed 13.5% of the gross proceeds from our initial public offering.   Organization and offering costs incurred by our advisor as of December 31, 2005, but not reflected in our consolidated financial statements, were $1.5 million which includes approximately $110,000 of organizational costs which will be expensed as incurred and approximately $1,390,000 of offering costs which will reduce the net proceeds of our offering. These costs are not recorded in our accompanying consolidated financial statements because we had not raised the $1,000,000 minimum offering amount as of December 31, 2005 and therefore we were not obligated to reimburse the advisor for organization and offering expenses as of such date. We raised the minimum offering amount and closed escrow in February 2006. Because our obligation to reimburse our advisor is limited as a percentage of the gross offering proceeds that we raise, the amount of such costs in excess of these limitations is not a liability of the company. Costs currently in excess of these limitations may become a liability of the company in the future as the amount of our gross offering proceeds increases, which would result in a corresponding increase in the dollar amount of the limitation, thereby creating a reimbursement obligation on our part. When recorded by the company, organizational costs will be expensed as incurred, and offering costs will be deferred and charged to stockholders’ equity as such amounts are reimbursed to the advisor from the gross proceeds of our initial public offering.   We will not rely on advances from our advisor to acquire properties but our advisor and its affiliates may loan funds to special purposes entities that may acquire properties on our behalf pending our raising sufficient proceeds from our initial public offering to purchase the properties from the special purpose entity.   Our advisor is newly formed, has limited capitalization, has incurred losses since its inception and is continuing to incur significant losses. Our advisor must obtain financial support from its affiliates or sole member or 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 our advisor’s receipt of funds. Adverse changes in the financial condition of our advisor could adversely affect us. If our advisor’s financial condition affects the amount of funds available to us for offering and organizational activities, our   22        ability to raise funds in our initial public offering could be adversely affected. Cornerstone Industrial Properties, LLC, the sole member of our advisor, has limited capitalization, has incurred significant losses since its inception and is continuing to incur significant losses.   We will require funds for property acquisitions, either directly or through investment interests, for paying operating expenses and distributions, and for paying interest on our outstanding indebtedness, if any. Generally, cash from operations will be used to pay for items other than property acquisitions, and the proceeds from the public offerings of our stock and debt financings, if any, will be used to fund property acquisitions.   We intend to own our properties all-cash, with no permanent financing by paying the entire purchase price of each property in cash, or with our equity securities, or equity securities of our operating partnership, or a combination thereof. During the offering period, we may use temporary debt financing to facilitate our acquisitions of properties in anticipation of receipt of offering proceeds. We will endeavor to repay any temporary acquisition debt financing promptly upon receipt of proceeds in our initial public offering. To the extent sufficient proceeds from our offering are unavailable to repay such debt financing within a reasonable time as determined by our board of directors, we will endeavor to raise additional equity or sell properties to repay such debt so that we will own our properties all-cash with no permanent financing. In the event that our initial public offering is not fully sold, our ability to diversify our investments may be diminished.   At certain times during our initial public offering, there may be a delay between the sale of our stock and our purchase of properties, which could result in a delay in our stockholders receiving distributions generated from our investment operations. To avoid this delay, we may arrange interim bridge financing to facilitate acquisitions.   During the period between the execution of the purchase contract and the satisfaction of any closing conditions, such as completion of financing arrangements, if any, review of the title insurance commitment, an appraisal, an environmental analysis and other due diligence, we may decide to temporarily invest any unused proceeds from the offering in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions. Additionally, we may invest excess cash in interest-bearing accounts and short-term interest-bearing securities. Such investments may include, for example, investments in marketable securities of publicly traded REITs, certificates of deposit and interest-bearing bank deposits.   Potential future sources of capital include proceeds from future equity offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital at the discretion of our board of directors.   Other Liquidity Needs   REIT Requirements   As of December 31, 2005, we have not elected to qualify as a REIT for federal income tax purposes, and accordingly, we are not required to make distributions of 90% of our REIT taxable income. In future periods, following our election to qualify as a REIT for federal income tax purposes, the amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deem relevant. We have not made distributions during the year ended December 31, 2005 or during the period from inception through December 31, 2004.   Property Acquisitions   We expect to purchase properties and have expenditures for capital improvements, tenant improvements and lease commissions in the next twelve months, however, those amounts cannot be   23        estimated at this time. We cannot assure, however, that we will have sufficient funds to make any acquisitions or related capital expenditures at all.   Debt Service Requirements   As of December 31, 2005, we were not subject to any long term debt arrangements nor did we have commitments from any financial institutions to provide debt financing to us.   Contractual Obligations   None. Currently, we are not considering any specific potential property acquisitions.   Off-Balance Sheet Arrangements   There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than organizational and offering costs which are described above.   Inflation   Although the real estate market has not been affected significantly by inflation in the recent past due to the relatively low inflation rate, we expect that the majority of our tenant leases will include provisions that would protect us to some extent from the impact of inflation. Where possible, our leases will include provisions for rent escalations and partial reimbursement to us of expenses. Our ability to include provisions in the leases that protect us against inflation is subject to competitive conditions that vary from market to market.   Subsequent Events   In January 2006, we began selling shares of our common stock through our affiliated dealer manager, Pacific Cornerstone Capital, Inc. On February 28, 2006 offering proceeds exceeded the $1,000,000 offering minimum. The number of shares of Cornerstone Core Properties, REIT, Inc. sold as of March 17, 2006 totaled 250,948, for aggregate gross proceeds of $2 million.   On January 16, 2006 we dismissed BDO Seidman, LLP and appointed Deloitte & Touche LLP as our independent registered public accounting firm.   Potential Property Acquisitions   We currently are not considering any specific potential property acquisitions.   Critical Accounting Policies   The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to real estate purchase price allocation, evaluation of possible impairment of real property assets, revenue recognition and valuation of receivables, and income taxes. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.   24        Real Estate Purchase Price Allocation   We will account for all acquisitions in accordance with Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard No. 141, “Business Combinations” (“FAS 141”). Upon acquisition of a property, we will allocate the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, tenant improvements, leasing commissions and intangible assets including in-place leases and above market and below market leases. We will allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. Acquired above and below market leases will be valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.   The purchase price will be allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and the our overall relationship with the respective tenant. The value of acquired above and below market leases will be amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on our consolidated statements of operations. The value of in-place lease intangibles, which will be included as a component of other assets, will be amortized to expense over the remaining lease term of the respective lease. If a lease is terminated prior to expiration, the unamortized portion of the tenant improvements, leasing commissions, above and below market leases and the in-place lease value will be immediately charged to expense.   Evaluation of Possible Impairment of Real Property Assets   Management will continually monitor events and changes in circumstances that could indicate that the carrying amounts of the our real estate assets, including those held through joint ventures, may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, we will assess the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the real estate assets to the fair value and recognize an impairment loss.   Projections of expected future cash flows require us to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. The use of certain assumptions in the future cash flows analysis would result in an incorrect assessment of the property’s future cash flows and fair value and could result in the overstatement of the carrying value of our real estate assets and net income if those assumptions ultimately prove to be incorrect.   Revenue Recognition and Valuation of Receivables   Our revenues, which will be comprised largely of rental income, will include rents reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, we will be required to straight-line the recognition of revenue, which will result in the recording of a receivable for rent not yet due under the lease terms. Accordingly, our management will be required to determine, in its judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. Management will review unbilled rent receivable on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of unbilled rent with respect to any given tenant is in doubt, we will record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable.   Income Taxes   We expect to make an election to be taxed as a REIT for federal income tax purposes beginning with its taxable year ending December 31, 2006. To qualify as a REIT, we must meet certain organizational and   25        operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service granted us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT, beginning with our taxable year ending December 31, 2006, and intend to operate in the foreseeable future in such a manner so that we will remain qualified as a REIT in subsequent tax years for federal income tax purposes.   Recently Issued Accounting Pronouncements   In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership. A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardless of the sole general partner’s ownership interest in the limited partnership. The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership. Other substantive participating rights by the limited partners may also overcome the control presumption. This consensus is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, this consensus would be effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not expect EITF 04-05 to have a significant impact on its financial statements.   In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN 47). FIN 47 is an interpretation of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The Company does not expect the adoption of FIN 47 to have a material impact on its financial statements.   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   We invest our cash and cash equivalents in an FDIC insured savings account which, by its nature, is subject to interest rate fluctuations.   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   See the index included at Item 15. Exhibits, Financial Statement Schedules.   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   BDO Seidman, LLP, the registrant’s independent registered public accounting firm, was dismissed on January 16, 2006. The registrant was formed on October 22, 2004. The reports of BDO Seidman, LLP on the registrant’s financial statements since inception did not contain an adverse opinion or a disclaimer of   26        opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the period from registrant’s inception through such dismissal, there were no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. During the same period, there have been no reportable events, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.   On January 16, 2006, the registrant engaged Deloitte & Touche LLP as its new independent registered public accounting firm. The decision to change accountants was recommended by the audit committee of the board of directors of the registrant and approved by the board of directors.   ITEM 9A. CONTROLS AND PROCEDURES   (a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. 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.   We are in the process of 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. We anticipate that additional changes may 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 period quarter ended December 31,2005 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.   Subject to the limitations notes above, our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on this evaluation, the chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at a reasonable assurance level.   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   None.   27        PART III   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   The following table and biographical descriptions set forth information with respect to our executive officers and directors. Our directors serve for a term of one year or until their successors are duly elected and qualified. Our executive officers serve at the pleasure of our board of directors and have no fixed term of office.      Name       Age       Position       Term of Office     Terry G. Roussel       52       President, Chief Executive Officer and Director       Since 2004     Paul Danchik       54       Director       Since 2005     Joseph H. Holland       47       Director       Since 2005     Daniel L. Johnson       49       Director       Since 2005     Lee Powell Stedman       51       Director       Since 2005     Sharon C. Kaiser       61       Chief Financial Officer       Since 2005     Dominic J. Petrucci       40       Chief Operating Officer       Since 2005     Robert C. Peterson       46       Chief Investment Officer       Since 2005     Alfred J. Pizzurro       49       Senior Vice President and Secretary       Since 2005      There are no family relationships between any directors, executive officers, or managers.   Executive Officers and Directors   Terry G. Roussel is one of the founding stockholders of the Cornerstone-related entities that commenced operations in 1989. Mr. Roussel has been our President and Chief Executive Officer and a director since 2004 and is the promoter of the company by initiating the founding and organizing of our business. Mr. Roussel is the Chief Executive Officer and a Director of Cornerstone Realty Advisors, LLC, our Advisor. Mr. Roussel is also the President, Chief Executive Officer, a Director and the majority shareholder of Cornerstone Ventures, Inc., an affiliate of our advisor. Mr. Roussel is also a principal and the majority shareholder of Pacific Cornerstone Capital, Inc., the dealer-manager for this offering. Under Mr. Roussel’s direction, Cornerstone and its affiliates formed nine separate real estate investment funds and joint ventures. In 1993, Cornerstone and its affiliates became managing joint venture partner with Koll Capital Markets Group, Inc., a wholly owned subsidiary of Koll Management Services, Inc. (now owned by CB Richard Ellis).   As managing partner of the above-described funds and joint ventures, Cornerstone and its affiliates were responsible for the acquisition, operation, leasing, and disposition of all jointly owned properties between Cornerstone and Koll. 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 for the acquisition of each property.   In 1985, Mr. Roussel started the Special Investments Group, a new division within Bank of America’s Capital Markets Group which provided real estate investment opportunities to the bank’s wealthiest private banking clients. Between 1980 and 1985, Mr. Roussel was employed by Bateman Eichler, Hill Richards, Inc., a regional securities firm headquartered in Los Angeles, California. In this capacity, Mr. Roussel was promoted to First Vice President and Manager of the partnership finance department where he was responsible for the due diligence and marketing of all publicly registered 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., the predecessor firm to Ernst & Young. Mr. Roussel became a Certified Public Accountant in 1979.   28        Sharon C. Kaiser joined Cornerstone in July 2005 as our Chief Financial Officer and in August 2005, she became the Chief Financial Officer of our advisor. Ms. Kaiser is responsible for our finance and accounting, MIS, human resources and administrative functions.   Prior to joining Cornerstone, Ms. Kaiser was Director of Financial Operations for Westfield America, Inc., an owner, manager and developer of regional shopping centers with approximately $9 billion in assets and the American subsidiary of one of the largest listed retail REITs in the world with approximately $25 billion in assets. From 1999 to 2002, Ms. Kaiser served as Chief Financial Officer of The StayWell Company, a subsidiary of Vivendi Universal, and from 1995 to 1999, she served as Chief Financial Officer and Senior Vice President of HemaCare Corporation, a publicly-traded biomedical company. Her responsibilities included financial accounting and reporting, information technology, investor relations and human resources, as well as strategic planning and acquisition due diligence and integration.   Before joining HemaCare Corporation, Ms. Kaiser served as the Chief Financial Officer of a publicly-traded (AMEX) REIT sponsored by The Koll Company. She started her career with Arthur Andersen and Co., leaving as a senior manager.   Ms. Kaiser holds a Bachelor of Science degree in Business Administration from the University of Southern California and has been a Certified Public Accountant since 1981.   Dominic J. Petrucci has been our Chief Operating Officer since 2004 and is also the Chief Operating Officer of our advisor and Cornerstone Ventures, Inc. Mr. Petrucci is responsible for overseeing all our operations.   Prior to joining Cornerstone Ventures in 2002, Mr. Petrucci served since 1998 as Division President of Koll Development Company. In this capacity he managed the commercial real estate development activities for a 2.8 million square foot portfolio. Mr. Petrucci’s responsibilities included business development, divisional oversight of operations and administration, and participation on Koll Development Company’s Executive Committee and Investment Committee.   Mr. Petrucci was a Vice President for Kitchell Development Company and Kitchell Corporation from 1996 to 1998. As Vice President for Kitchell Development Company, he oversaw Kitchell’s real estate development operations throughout the western United States. As Vice President — Finance for Kitchell Corporation, Mr. Petrucci provided total financial oversight of their domestic and international construction activities and managed the property management, financial services, human resources, and risk management departments for Kitchell ($300 million annual revenues).   From 1990 until early 1996, Mr. Petrucci worked with the Koll organization in various capacities. He was Chief Financial Officer and Corporate Secretary for Koll Construction, Vice President — Finance for Koll International, and Group Controller for Koll Development. In his capacities with Kitchell and Koll, Mr. Petrucci was involved in the origination and restructuring of nearly $1 billion in debt and equity investments in addition to participation in the marketing and selling of nearly $300 million of property.   Mr. Petrucci began his career in the real estate group at KPMG Peat Marwick in Los Angeles where he earned a Certified Public Accountant designation. Mr. Petrucci earned his Bachelor of Science degree in Commerce, with an accounting major from Rider University in Lawrenceville, New Jersey.   Robert C. Peterson has been our Chief Investment Officer since 2004 and is also the Chief Investment Officer and a Director of our advisor. Mr. Peterson was previously Executive Vice President of Acquisitions and Dispositions for Koll Bren Schreiber Realty Advisors (“KBS”). KBS is one of the largest institutional real estate fund managers in the United States. KBS has acquired over $5 billion of commercial real estate on behalf of many of the largest private and public institutional investors in the United States. In his capacity, Mr. Peterson was the individual responsible for identifying, underwriting, acquiring and disposing of real estate opportunities in the western half of the United States for KBS. Mr. Peterson was with KBS since its inception in 1992 until 2003.   29        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 in 1993 and the second joint venture between Koll and Cornerstone in 1995.   Mr. Peterson has 24 years of real estate investment experience, including a diverse background in acquisitions, financing, and leasing through previous affiliations with Koll Management Services, Meyer Real Estate Advisors, VMS Realty, Inc. and Peat Marwick in Chicago.   Mr. Peterson earned a Certified Public Accountant (CPA) designation and is a Certified Commercial Investment Member (CCIM), Certified Property Manager (CPM) and a licensed Real Estate Broker in the state of California. Mr. Peterson also holds a Bachelor’s Degree in Accounting from the University of Illinois.   Alfred J. Pizzurro has been our Senior Vice President and Secretary since 2004. Mr. Pizzurro is also a Senior Vice President and Director of our advisor and a Senior Vice President, a Director and a principal of Cornerstone Ventures, Inc. and Pacific Cornerstone Capital, Inc., the dealer manager for this offering. Mr. Pizzurro joined Cornerstone Ventures, Inc. in April 1998 and has been the individual primarily responsible for Cornerstone Venture’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 helicopter 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.   Paul Danchik retired in 2003 as Senior Vice President of Warner Media Services, a division of Time Warner Inc. Mr. Danchik was a member of the Executive Management Team of Warner Media Services and was responsible for their Consumer Products Business unit. Mr. Danchik began his career with Ivy Hill Packaging in 1973 which was acquired by Time Warner, Inc. in 1989. Mr. Danchik also serves as a director of Acres of Love, a non-profit organization currently operating eight homes licensed in the Republic of South Africa for care of abandoned children living with or affected by HIV/ AIDS. Mr. Danchik earned a Bachelor of Science Degree in Business Administration from the University of LaVerne.   Joseph H. Holland is a Director of Cornerstone Realty Advisors, LLC. 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.   30        Daniel L. Johnson is a founder and since 2003 has been the Senior Vice President of Sales for InfoSpan, Inc., a developer and operator of customer interaction centers for United States based corporations with operations in Latin America. From 2000 to 2003, Mr. Johnson was the President of Rutilus Software, Inc. a developer of disk-based storage software. Prior to 2000, Mr. Johnson spent fourteen years with Toshiba America where he was Vice President of OEM Sales. In this capacity he was responsible for worldwide sales for products within his Division of Toshiba America. Mr. Johnson holds a Bachelor’s degree from Southern Illinois University.   Lee Powell Stedman is the founder and Chief Executive Officer of Realty Development Advisors, LLC (“RDA”) which he formed in 1996. RDA is a full service commercial real estate company specializing in development, leasing and real estate consulting. Since 1995, Mr. Stedman has been involved in the development, financing and leasing of twenty-two commercial properties in five states. Prior thereto, Mr. Stedman was employed in the real estate acquisition department of a real estate firm and was Manager, REO/ Commercial Sales Specialist for the Resolution Trust Corporation. Mr. Stedman received his Bachelor of Science Degree from the University of Minnesota.   Code of Business Conduct and Ethics   We do not have an audit committee financial expert. Because we are not exchange listed, we are not required to have one.   Code of Business Conduct and Ethics   Our board of directors has adopted a Code of Business Conduct and Ethics, which applies to all of our directors and officers. We have filed the Code of Business Conduct and Ethics as an exhibit to this report.   ITEM 11. EXECUTIVE COMPENSATION   Compensation of Executive Officers   We have no employees and our executive officers are all employees of our advisor and/or its affiliates. These executive officers are compensated by our advisor and/or its affiliates and will not receive any compensation from us for their services. See Item 13 below for discussion of the fees paid by us to our advisor and its affiliates.   Director Compensation   We pay each of our directors who are not employees of our advisor or its affiliates for attending board and committee meetings as follows:   •      $3,000 per regularly scheduled board meeting attended in person or by teleconference;   •      $1,000 per regularly scheduled committee meeting attended in person or by teleconference ($1,500 for the audit committee chairperson and $1,250 for other committee chairpersons); and   •      $750 per special board meeting attended, whether held in person or by teleconference.   All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors and committees.   In addition, we will issue stock options to the directors pursuant to our Employee and Director Incentive Stock Plan.   31        ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   The following table shows, as of March 17, 2006, the number and percentage of shares of our common stock owned by (1) any person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, (2) our chief executive officer, (3) each director and (4) all directors and executive officers as a group.      Name       Number of Shares of   Common Stock   Beneficially Owned       Percent of    Class         Terry G. Roussel, President, Chief   Executive Officer and Director       125       *         Paul Danchik, Director       -0   -   *         Joseph H. Holland, Director       -0   -   *         Daniel L. Johnson, Director       -0   -   *         Lee Powell Stedman, Director       -0   -   *                                   All Named Executive Officers and Directors   as a Group       125       *           * Represents less than 1% of the outstanding common stock.   Equity Compensation Plan Information   Our equity compensation plan information as of December 31, 2005 is as follows:       Plan Category       Number of Securities to be   Issued Upon Exercise of   Outstanding Options,   Warrants and Rights       Weighted Average   Exercise Price of   Outstanding Options,   Warrants and Rights       Number of Securities   Remaining Available   for Future Issuance         Equity   compensation plans approved by security holders       —       —       See footnote   (1)         Equity   compensation plans not approved by security holders       —       —       —         Total       —       —       See footnote   (1)           (1)   Our Employee and Director Incentive Stock Plan was approved by our security holders and provides that the total number of shares issuable under the plan is a number of shares equal to ten percent (10%) of our outstanding common stock. The maximum number of shares that may be granted under the plan with respect to “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code is 5,000,000. As of December 31, 2005, there were only 125 shares of our common stock issued and outstanding.   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   We will incur substantial fees and expenses in our organization and offering stage, our acquisition and operating stage and our property disposition stage. In most cases, these fees and expenses will be paid to our advisor or its affiliates, including our dealer manager for our initial public offering.   All of the membership interests in our advisor, Cornerstone Realty Advisors, LLC, are owned by Cornerstone Industrial Properties, LLC, which also serves as the managing member of our advisor. Cornerstone Ventures, Inc. is the managing member of Cornerstone Industrial Properties, LLC. Terry G. Roussel, our Chairman, Chief Executive Officer and President, is the Chief Executive Officer and a Director of our advisor, as well as the President, Chief Executive Officer, a Director and the majority    32        shareholder of Cornerstone Ventures, Inc. Mr. Roussel is also a principal and the majority shareholder of Pacific Cornerstone Capital, Inc., the dealer-manager for our initial public offering. Alfred J. Pizzurro, our Senior Vice President and Secretary is also a shareholder of Pacific Cornerstone Capital, Inc. and Cornerstone Ventures, Inc. We will pay fees to our advisor for services provided to us pursuant to an advisory agreement and will pay fees and commissions to Pacific Cornerstone Capital, Inc. the dealer-manager for our initial public offering pursuant to a Dealer Manager Agreement. The advisory agreement and dealer manager agreement are included as exhibits to this report. The fees that we will pay to our advisory and dealer manager are summarized below.   Offering Stage   •      Sales commissions (payable to our dealer manager) up to 7% of gross offering proceeds from our primary offering, some or all of which may be re-allowed to participating brokers.   •      Dealer manager fees (payable to our dealer manager) up to 3% of gross offering proceeds from our primary offering, some or all of which may be re-allowed to participating brokers.   •      Reimbursements to our advisor or its affiliates for organization and offering expenses (including bona fide due diligence expenses) expected to average between 2% and 3% of gross offering proceeds from our initial public offering, but which could be as much as 3.5%.   Acquisition and Operating Stage   •      Property acquisition fees (payable to our advisor or its affiliates) equal to 2% of gross offering proceeds from our primary offering.   •      Reimbursement of acquisition expenses to our advisor and its affiliates.   •      Monthly asset management fees (payable to our advisor) equal to one-twelfth of 1% of the book values of our assets invested, directly or indirectly, in real estate before non-cash reserves, plus direct and indirect costs and expenses incurred by our advisor in providing asset management services.   •      Reimbursement of operating expenses including our advisor’s direct and indirect cost of providing administrative services.   Listing/ Liquidation Stage   •      Property disposition fees (payable to our advisor or its affiliates), if our advisor or its affiliates perform substantial services in connection with property sales, up to 3% of the price of the properties sold.   •      After stockholders have received cumulative distributions equal to $8 per share (less any returns of capital) plus cumulative, non-compounded annual returns on net invested capital, our advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized returns of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.   •      Upon termination of the advisory agreement, our advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total dividends (other than stock dividends) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus our liabilities plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.   •      In the event we list our stock for trading, our advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of our common stock plus all prior dividends (other than   33        stock dividends) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.   ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES   BDO Seidman, LLP served as our independent registered public accounting firm from inception until they were dismissed by us on January 16, 2006. Deloitte and Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”), has served as our independent registered public accounting firm from January 16, 2006 and has audited our financial statements for the years ended December 31, 2005 and 2004.   The following table lists the fees for services rendered by the independent registered public accounting firms for 2005 and 2004:      Services       2005       2004         Audit Fees (1)       $   45,300       $   —         Audit-Related Fees (2)       56,300       88,933         Tax Fees (3)                         All Other Fees                         Total       $   101,638       $   88,933           (1)   Audit fees billed in 2005 and 2004 consisted of the audit of our annual financial statements, reviews of our quarterly financial statements, and statutory and regulatory audits, consents and other services related to filings with the SEC. These amounts include fees paid by our advisor and its affiliates for costs in connections with our initial public offering that are not included within our consolidated financial statements, as they are subject to the accounting policy described under Organizational and Offering Costs in the notes to the financial statements.   (2)   Audit-related fees billed in 2005 and 2004 consisted of financial accounting and reporting consultations.   (3)   Tax services billed in 2005 and 2004 consisted of tax compliance and tax planning and advice.   The Audit Committee preapproves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditor, subject to the de minims exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act and the rules and regulations of the SEC which are approved by the Audit Committee prior to the completion of the audit.   PART IV   ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES   (a) (1) Financial Statements   The financial statements are contained on pages F-2 through F-14of this Annual Report on Form 10-K, and the list of the financial statements contained herein is set forth on page F-1, which is hereby incorporated by reference.   (2) Financial Statement Schedules   All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.   (3) Exhibits   The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this annual report.   34        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      Report of Independent   Registered Public Accounting Firm         Consolidated Balance   Sheets         Consolidated   Statements of Operations         Consolidated   Statements of Stockholders’ (Deficit) Equity         Consolidated   Statements of Cash Flows         Notes to   Consolidated Financial Statements          F-1        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Board of Directors and Stockholders Cornerstone Core Properties REIT, Inc.   We have audited the accompanying consolidated balance sheets of Cornerstone Core Properties REIT, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholder’s (deficit) equity and cash flows for the year ended December 31, 2005 and for the period from October 22, 2004 (date of inception) through December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, such 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Core Properties REIT, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the year ended December 31, 2005 and the period from October 22, 2004 (date of inception) through December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.        /s/ DELOITTE & TOUCHE LLP               Costa Mesa, California     March 24, 2006      F-2        CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2005 and 2004              December 31,                 2005       2004         ASSETS                         Cash and cash equivalents       $   117,342       $   1,000         Accounts receivable from related parties       14,500       —         Prepaids and other assets       92,557       —         Total assets       $   224,399       $   1,000                                   LIABILITIES   AND STOCKHOLDER’S (DEFICIT) EQUITY                         Liabilities:                         Accounts payable and accrued liabilities       $   113,592       $   —         Accounts payable to related parties       3,787       —         Total liabilities       117,379       —         Minority interest       200,350       —         Commitments and contingencies (Note 8)                         Stockholder’s (deficit) equity:                         Common   stock, $.01 par value; 290,000,000 shares authorized; 125 shares issued and   outstanding at December 31, 2005 and 2004       —       —         Additional paid-in capital       1,000       1,000         Accumulated deficit       (94,330   )   —         Total stockholder’s (deficit) equity       (93,330   )   1,000         Total liabilities and stockholder’s   (deficit) equity       $   224,399       $   1,000          The accompanying notes are an integral part of these consolidated financial statements.   F-3        CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2005 and Period From October 22, 2004 (date of inception) to  December 31, 2004              2005       2004         Expenses:                         General and   administrative       $   95,134       $   —         Operating loss       (95,134   )   —         Other income:                         Interest and   dividend income       1,154       —         Loss before minority interest       (93,980   )   —         Minority   interest       (350   )   —         Net loss       $   (94,330   )   $   —                                   Loss per share - basic and diluted       $   (755   )   $   —         Weighted   average number of common shares outstanding - basic and diluted       125       125          The accompanying notes are an integral part of these consolidated financial statements.   F-4        CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDER’S (DEFICIT) EQUITY For the Year Ended December 31, 2005 and Period From October 22, 2004 (date of inception) to December 31, 2004              Common Stock                                 Number of   Shares       Common Stock   Par Value       Additional   Paid-In   Capital       Accumulated   Deficit       Total         BALANCE –   Octover 22, 2004 (date of inception)       —       $   —       $   —       $   —       $   —         Issuance of common stock       125       —       1,000       —       1,000         BALANCE – December 31, 2004       125       —       1,000       —       1,000         Net loss       —       —       —       (94,330   )   (94,330   )     BALANCE – December 31, 2005       125       $   —       $   1,000       $   (94,330   )   $   (93,330   )      The accompanying notes are an integral part of these consolidated financial statements.   F-5        CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS              Year Ended   December 31,   2005       October 22,   2004 (date of   inception)   Through   December 31,   2004         CASH FLOWS FROM OPERATING ACTIVITIES                         Net loss       $   (94,330   )   $   —         Adjustments to reconcile net loss to net   cash used in operating activities                         Minority interest expense       350                 Change in operating assets and liabilities:                         Accounts   receivable from related parties       (14,500   )   —         Prepaids and   other assets       (92,557   )   —         Accounts   payable and accrued expenses       113,592       —         Accounts   payable to related parties       3,787       —         Net cash   used in operating activities       (83,658   )   —         CASH FLOWS FROM FINANCING ACTIVITIES                         Proceeds from issuance of common stock, net       —       1,000         Minority interest contribution       200,000       —         Net cash   provided by financing activities       200,000       1,000         NET INCREASE IN CASH AND CASH EQUIVALENTS       116,342       1,000         CASH AND CASH EQUIVALENTS – beginning of   period       1,000       —         CASH AND CASH EQUIVALENTS – end of period       $   117,342       $   1,000          The accompanying notes are an integral part of these consolidated financial statements.   F-6        CORNERSTONE CORE PROPERTIES REIT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended December 31, 2005 and Period From October 22, 2004 (date of inception)  To  December 31, 2004   1.     Organization   Cornerstone Core Properties REIT, Inc., a Maryland corporation (the “Company”), was formed on October 22, 2004 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate. The Company is newly formed and is subject to the general risks associated with a start-up enterprise, including the risk of business failure. Subject to certain restrictions and limitations, the business of the Company will be managed by Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was formed on November 30, 2004 (the “advisor”) pursuant to an advisory agreement. The advisor is an affiliate of the Company.   On November 9, 2004, the sole stockholder, Terry G. Roussel, an affiliate of the advisor, purchased 125 shares of common stock for $1,000 and became the initial stockholder of the Company. The Company’s articles of incorporation authorize 290,000,000 shares of common stock with a par value of $.001 and 10,000,000 shares of preferred stock with a par value of $.001. On September 22, 2005, the Company commenced a public offering, on a best efforts basis, of a minimum of 125,000 (the “Minimum Number of Shares”) and a maximum of 55,400,000 shares of common stock, consisting of 44,400,000 shares for sale to the public (the Primary Offering”) and 11,000,000 shares for sale pursuant to the Company’s dividend reinvestment plan (collectively, the “Offering”). The Company has retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the advisor, to serve as the dealer manager for the Offering. PCC is responsible for marketing the Company’s shares being offered pursuant to the Offering. As of March 17, 2006, a total of 250,948 shares of our common stock had been sold for aggregate gross proceeds of $2 million. through our affiliated dealer manager. On February 28, 2006 Offering proceeds exceeded the $1,000,000 offering minimum and the proceeds were released to the Company from escrow. The Company intends to invest the net proceeds from the Offering primarily in investment real estate including multi-tenant industrial real estate located in major metropolitan markets in the United States. As of December 31, 2005, the Company has neither purchased nor contracted to purchase any properties, nor has the advisor identified any properties in which there is a reasonable probability that the Company will invest.   Cornerstone Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”) was formed on November 30, 2004. On July 15, 2005, the advisor purchased a 99% limited partnership interest in the Operating Partnership for $200,000 and the Company purchased a 1% general partner interest for $1,000. The Company anticipates that it will conduct all or a portion of its operations through the Operating Partnership. The Company’s financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.   2.     Summary of Significant Accounting Policies   The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such financial statements and accompanying notes are the representations of our management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.   Cash and Cash Equivalents   The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.   F-7        Real Estate Purchase Price Allocation.   The Company will account for all acquisitions in accordance with Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard No. 141, “Business Combinations” (“FAS 141”). Upon acquisition of a property, the Company will allocate the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, tenant improvements, leasing commissions and intangible assets including in-place leases and above market and below market leases. The Company will allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. Acquired above and below market leases will be valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.   The purchase price will be further allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. The value of acquired above and below market leases will be amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on the Company’s consolidated statements of operations. The value of in-place lease intangibles, which will be included as a component of Other Assets, will be amortized to expense over the remaining lease term and expected renewal periods of the respective lease. If a lease is terminated prior to its expiration, the unamortized portion of the tenant improvements, leasing commissions, above and below market leases and the in-place lease value will be immediately charged to expense.   Consolidation Considerations for the Company’s Investments in Joint Ventures   The FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. Before concluding that it is appropriate to apply the ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). The Company will evaluate, as appropriate, its interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate.   Revenue Recognition and Valuation of Receivables   The Company’s revenues, which will be comprised largely of rental income, will include rents reported on a straight-line basis over the initial term of the lease. Since the Company’s leases may provide for rental increases at specified intervals, the Company will be required to straight-line the recognition of revenue, which will result in the recording of a receivable for rent not yet due under the lease terms.   Depreciation of Real Property Assets   The Company will be required to make subjective assessments as to the useful lives of the Company’s depreciable assets. The Company will consider the period of future benefit of the asset to determine the appropriate useful lives.   Depreciation of the Company’s assets is expected to be charged to expense on a straight-line basis over the assigned useful lives.   Minority Interest in Consolidated Subsidiary   Due to the Company’s control through its general partnership interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership is consolidated with the Company and the limited partner interest is reflected as minority interest in the accompanying balance sheets.   F-8        Income Taxes   The Company expects to make an election to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and expects to be taxed as such beginning with its taxable year ending December 31, 2006. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service granted the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so that the Company will remain qualified as a REIT for federal income tax purposes.   During the year ended December 31, 2005, the Company generated a deferred tax asset of approximately $20,300. Because the Company intends to qualify as a REIT in 2006 which would not allow for the realization of the deferred tax asset, a valuation allowance of a like amount was recorded.   Concentration of Credit Risk   Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments; cash is generally invested in investment-grade short-term instruments and the amount of credit exposure to any one commercial issuer is limited. We have cash in financial institutions which is insured by the Federal Deposit Insurance Corporation, or FDIC, up to $100,000 per institution. At December 31, 2005, we had cash accounts in excess of FDIC insured limits.   Fair Value of Financial Instruments   The SFAS No. 107, Disclosures About Fair Value of Financial Instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. SFAS 107 defines fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques such as discounted cash flow analysis. The fair value estimates are made at the end of each year based on available market information and judgments about the financial instrument, such as estimates of timing and amount of expected future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider that tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.   The Company’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, amounts due from affiliate, accounts payable and accrued expenses. The Company considers the carrying values of cash and cash equivalents, due from affiliate, accounts payable and accrued expenses to approximate fair value for these financial instruments because of the short period of time between origination of the instruments and their expected realization.   Per Share Data   The Company reports earnings per share pursuant to SFAS No. 128, “Earnings Per Share.” Basic earnings per share attributable for all periods presented are computed by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed based on the weighted average number of shares and all potentially dilutive securities, if any. Currently, the Company has no potentially dilutive securities.   F-9        Net loss per share is calculated as follows:               Year Ended   December 31, 2005       Inception Through   December 31, 2004         Net loss       $   (94,330   )   $   —         Net loss per share — basic and diluted       $   (755   )   $   —         Weighted average number of shares   outstanding — basic and diluted       125       125           Use of Estimates   The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could materially differ from those estimates.   Stock Options   The Company has not issued any options under the Plan as of December 31, 2005.   Recently Issued Accounting Pronouncements   In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership. A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardless of the sole general partner’s ownership interest in the limited partnership. The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership. Other substantive participating rights by the limited partners may also overcome the control presumption. This consensus is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, this consensus would be effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not expect EITF 04-05 to have a significant impact on its financial statements.   In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN 47). FIN 47 is an interpretation of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The Company does not expect the adoption of FIN 47 to have a material impact on its financial statements.   3.     Accounts Receivable From and Accounts Payable to Related Party   Accounts receivable from related parties results from payments made by the Company for services received that were accounted for as deferred organization and offering costs by an affiliate of the Advisor. Accordingly, these amounts paid for by the Company are to be reimbursed by the Advisor’s affiliate for the outstanding balance of $14,500 as of December 31, 2005.   F-10        Accounts payable to related parties results from payments made by an affiliate of the Advisor for services received that related to operating expenses of the Company. Accordingly, the Company shall reimburse its Advisor’s affiliate for the outstanding balance of $3,787 as of December 31, 2005.   4.     Prepaids and Other Assets   Other assets consisted of prepaid insurance expense of $92,557, as of December 31, 2005.   5.     Minority Interests   Minority interests relate to our advisor’s equity interest in the earnings/losses of the Operating Partnership.   6.     Stockholders’ Equity   Common Stock   The Company’s articles of incorporation authorize 290,000,000 additional shares of common stock with a par value of $.001 and 10,000,000 shares of preferred stock with a par value of $.001. As of December 31, 2005, we have issued 125 shares of common stock for a total of $1,000 to Terry G. Roussel, an affiliate of the advisor.   Dividend Reinvestment Plan   The Company has adopted a dividend reinvestment plan that will allow its stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of the Company’s common stock. The Company has registered 11,000,000 shares of its common stock for sale pursuant to the dividend reinvestment plan. The purchase price per share is to be 95% of the price paid by the purchaser for the Company’s common stock, but not less than $7.60 per share. The Company may amend or terminate the dividend reinvestment plan for any reason at any time upon 10 days prior written notice to participants.   Employee and Director Incentive Stock Plan   The Company has adopted an Employee and Director Incentive Stock Plan (“the Plan”) which provides for the grant of awards to the Company’s directors and full-time employees, directors and full-time employees of the advisor, entities and full-time employees of entities that provide services to the Company, and certain consultants to the Company and to the advisor or to entities that provide services to the Company. Awards granted under the Plan may consist of nonqualified stock options, incentive stock options, restricted stock, share appreciation rights, and dividend equivalent rights. The term of the Plan is 10 years. The total number of shares of common stock reserved for issuance under the Plan is equal to 10% of the Company’s outstanding shares of stock at any time. No awards have been granted under the Plan.   7.     Related Party Transactions   Our company has no employees. Our advisor is primarily responsible for managing our business affairs and carrying out the directives of our board of directors. The Company has an advisory agreement with the advisor and a dealer manager agreement with PCC which entitle the advisor and PCC to specified fees upon the provision of certain services with regard to the Offering and investment of funds in real estate projects, among other services, as well as reimbursement for organizational and offering costs incurred by the advisor and PCC on behalf of the Company and reimbursement of certain costs and expenses incurred by the advisor in providing services to the Company.   Advisory Agreement   Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent    F-11        with the investment policies and objectives adopted by our board of directors. The advisory agreement calls for our advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties.   The fees and expense reimbursements payable to our advisor under the advisory agreement are described below.   Organizational and Offering Costs. Organizational and offering costs of the Offering are being paid by the advisor on behalf of the Company and will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with the offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of or advisor and its affiliates in connection with registering and marketing our shares (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. In no event will the Company have any obligation to reimburse the advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from the Primary Offering. As of December 31, 2005 and 2004, the advisor and its affiliates had incurred on behalf of the Company organizational and offering costs of approximately $1.5 million (unaudited) and $1.0 million (unaudited), respectively. The $1.5 million at December 31, 2005 includes approximately $110,000 of organizational costs which will be expensed as incurred and approximately $1,390,000 of offering costs which will reduce net proceeds of our offering. These costs are not recorded in the accompanying consolidated financial statements because the Company had not raised the $1,000,000 minimum offering amount as of December 31, 2005 and therefore the Company was not obligated to reimburse the advisor for organization and offering expenses as of such date. The Company raised the minimum offering amount and closed escrow in February 2006. Because the Company’s obligation to reimburse our advisor is limited as a percentage of the gross offering proceeds raise by the Company, the amount of such costs in excess of these limitations is not a liability of the Company. Costs currently in excess of these limitations may become a liability of the Company in the future as the amount of the Company’s gross offering proceeds increases, which would result in a corresponding increase in the dollar amount of the limitation, thereby creating a reimbursement obligation on the Company’s part. When recorded by the Company, organizational costs will be expensed as incurred and offering costs will be deferred and charged to stockholders’ equity as such amounts are reimbursed to the advisor from the gross proceeds of the Offering.   Acquisition Fees and Expenses. The advisory agreement requires the Company to pay the advisor acquisition fees in an amount equal to 2% of the gross proceeds of the Primary Offering. The Company will pay the acquisition fees upon receipt of the gross proceeds from the Offering. However, if the advisory agreement is terminated or not renewed, the advisor must return acquisition fees not yet allocated to one of the Company’s investments. In addition, the Company is required to reimburse the advisor for direct costs the advisor incurs and amounts the advisor pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired.   Management Fees. The advisory agreement requires the Company to pay the advisor a monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis book carrying values of the Company’s assets invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in accordance with generally accepted accounting principals in the United States of America (GAAP). In addition, the Company will reimburse the advisor for the direct costs and expenses incurred by the advisor in providing asset management services to the Company. These fees and expenses are in addition to management fees that the Company expects to pay to third party property managers. The advisor must reimburse the Company the amount by which the Company’s aggregate annual operating expenses exceed the greater of 2% of Company’s average invested assets or 25% of the Company’s net income unless a majority of the Company’s independent directors determine that such excess expenses were justified based on unusual and non-recurring factors.   F-12        Disposition Fee. The advisory agreement provides that if the advisor or its affiliate provides a substantial amount of the services (as determined by a majority of the directors of the Company, including a majority of the independent directors of the Company) in connection with the sale of one or more properties, the Company will pay the advisor or such affiliate shall receive at closing a disposition fee up to 3% of the sales price of such property or properties. This disposition fee may be paid in addition to real estate commissions paid to non-affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by the company for each property shall not exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each property or (ii) the competitive real estate commission for each property. The Company will pay the disposition fees for a property at the time the property is sold.   Subordinated Participation Provisions. The advisor is entitled to receive a subordinated participation upon the sale of the Company’s properties, listing of the Company’s common stock or termination of the advisor, as follows:   •      After stockholders have received cumulative distributions equal to $8 per share (less any returns of capital) plus cumulative, non-compounded annual returns on net invested capital, the advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized returns of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.   •      Upon termination of the advisory agreement, the advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of the Company’s assets minus its liabilities on the date the advisory agreement is terminated plus total dividends (other than stock dividends) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of the Company’s assets minus its liabilities plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.   •      In the event the Company lists its stock for trading, the advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of the Company’s common stock plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of the Company’s stock plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.   Dealer Manager Agreement   PCC, as dealer manager, is entitled to receive a sales commission of up to 7% of gross proceeds from sales in the Primary Offering. PCC, as Dealer Manager, is also entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the Primary Offering. The Dealer Manager is also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales in the Primary Offering. The advisory agreement requires the advisor to reimburse us to the extent that offering expenses including sales commissions, dealer manager fees and organization and offering expenses (but excluding acquisition fees and acquisition expenses discussed below) to the extent are in excess of 13.5% of gross proceeds from the Offering.   8.     Commitments and Contingencies   Litigation   The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company which if determined unfavorably to the Company would have a material adverse effect on the Company’s cash flows, financial condition or results of operations.   F-13        9.     Selected Quarterly Data (unaudited)   Set forth below is certain unaudited quarterly financial information. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements              Quarters Ended                 December 31,   2005       September 30,   2005       June 30,   2005       March 31,   2005       December 31,   2004         Expenses       $   89,679       $   5,455       $   —       $   —       $   —         Operating loss       $   (89,679   )   $   (5,455   )   $   —       $   —       $   —         Income (loss) before minority interest       $   (88,863   )   $   (5,117   )   $   —       $   —       $   —                                                           Net income (loss)       $   (89,213   )   $   (5,117   )   $   —       $   —       $   —         Earnings (loss) per share – basic and   diluted       $   714       $   41       $   —       $   —       $   —          F-14        SIGNATURES   Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.       CORNERSTONE CORE PROPERTIES REIT, INC.           BY:   /s/ TERRY G. ROUSSEL         Terry G. Roussel     Chief   Executive Officer, President and     Chairman   of the Board of Directors           Date: March 24, 2006            Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 2006.      Name       Title                   Chief Executive Officer and Director      /s/ Terry G. Roussel       (Principal Executive Officer)      Terry G. Roussel                       Chief Financial Officer (Principal      /s/ Sharon C. Kaiser       Financial and Accounting Officer)      Sharon C. Kaiser                    /s/ Paul Danchik       Director      Paul Danchik                    /s/ Joseph H. Holland       Director      Joseph H. Holland                    /s/ Daniel L. Johnson       Director      Daniel L. Johnson                    /s/ Lee Powell Stedman       Director      Lee Powell Stedman                        EXHIBIT INDEX      Ex.       Description                   1.1       Amended and Restated Dealer Manager Agreement (incorporated by   reference to Exhibit 1.1 to Post-Effective Amendment No. 1 to the   Registration Statement on Form S-11 (No. 333-121238) filed on December 23,   2005 (“Post-Effective Amendment No. 1”)                   1.2       Form of Participating Broker Agreement (incorporated by   reference to Exhibit 1.2 to Post-Effective Amendment No. 1)                   3.1       Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1   to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11   (No. 333-121238) filed on May 25, 2005)                   3.2       Amendment and Restatement of Articles of Incorporation (filed   herewith)                   3.3       Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3   to Post-Effective Amendment No. 1)                   4.1       Subscription Agreement (incorporated by reference to Appendix A to   the prospectus included on Post-Effective Amendment No. 1)                   4.2       Statement regarding restrictions on transferability of shares of   common stock (to appear on stock certificate or to be sent upon request and without   charge to stockholders issued shares without certificates) (incorporated by   reference to Exhibit 4.2 to the Registration Statement on Form S-11   (No. 333-121238) filed on December 14, 2004)                   4.3       Dividend Reinvestment Plan (incorporated by reference to Appendix B   to the prospectus included on Post-Effective Amendment No. 1)                   4.4       Escrow Agreement between registrant and U.S. Bank, N.A. (incorporated   by reference to Exhibit 4.4 to Pre-Effective Amendment No. 2 to the   Registration Statement on Form S-11 (No. 333-121238) filed on May 25,   2005)                   10.1       Amended and Restated Advisory Agreement (incorporated by reference to   Exhibit 10.1 to Post-Effective Amendment No. 1)                   10.2       Agreement of Limited Partnership of Cornerstone Operating Partnership,   L.P. (incorporated by reference to Exhibit 10.2 to Pre-Effective   Amendment No. 4 to the Registration Statement on Form S-11 (No. 333-121238)   filed on August 30, 2005)                   10.3       Form of Employee and Director Stock Incentive Plan (incorporated   by reference to Exhibit 10.3 to Pre-Effective Amendment No. 2 to   the Registration Statement on Form S-11 (No. 333-121238) filed on May 25,   2005)                   14.1       Code of Business Conduct and Ethics (filed herewith)                   31.1       Certification of Chief Executive Officer, pursuant to Section 302   of the Sarbanes-Oxley Act of 2002 (filed herewith)                   31.2       Certification of Interim Chief Financial Officer, pursuant to Section 302   of the Sarbanes-Oxley Act of 2002 (filed herewith)                   32.1       Certification of Chief Executive Officer and Chief Financial Officer,   pursuant to 18 U.S.C. Section 1350, as created by Section 906 of   the Sarbanes-Oxley Act of 2002 (filed herewith)              EX-3.2 2 a06-2622_1ex3d2.htm (I) ARTICLES OF INCORPORATION; (II) BYLAWS       Exhibit 3.2   ARTICLES OF AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION OF CORNERSTONE CORE PROPERTIES REIT, INC.             TABLE OF   CONTENTS                                   PAGE     ARTICLE 1       THE   COMPANY; DEFINITIONS   1     Section 1.1       Name   1     Section 1.2       Resident   Agent   1     Section 1.3       Nature   of Company   1     Section 1.4       Principal   Office of Company   1     Section 1.5       Purpose   1     Section 1.6       Definitions   1     ARTICLE 2       BOARD   OF DIRECTORS   10     Section 2.1       Number   10     Section 2.2       Experience   10     Section 2.3       Committees   10     Section 2.4       Term   10     Section 2.5       Fiduciary   Obligations   11     Section 2.6       Ratification   of Charter   11     Section 2.7       Resignation,   Removal or Death   11     ARTICLE 3       POWERS   OF DIRECTORS   11     Section 3.1       General   11     Section 3.2       Determinations   by the Board   11     Section 3.3       Specific   Powers and Authority   11     ARTICLE 4       ADVISOR   15     Section 4.1       Appointment   and Initial Investment of Advisor   15     Section 4.2       Supervision   of Advisor   15     Section 4.3       Fiduciary   Obligations   16     Section 4.4       Affiliation   and Licenses   16     Section 4.5       Payment   of Fees and Reimbursement of Expenses   16     Section 4.6       New   Advisor Fee Structures   16     Section 4.7       Termination   16     Section 4.8       Advisor   Stock Purchase   16     Section 4.9       Reimbursement   for Organizational and Offering Expenses   17     Section 4.10       Dealer   Manager Fee and Commissions and Due Diligence Expense Allowance   17     Section 4.11       Advisor   Acquisition Fees   17     Section 4.12       Reimbursement   for Acquisition Expenses   17     Section 4.13       Asset   Management Fee   17     Section 4.14       Reimbursement   for Operating Expenses   17     Section 4.15       Property   Management and Leasing Fees   17     Section 4.16       Disposition   Fees   17     Section 4.17       Subordinated   Share of Net Sale Proceeds   18     Section 4.18       Subordinated   Incentive Fee Due Upon Listing   18     Section 4.19       Fees   Upon Termination of Advisory Agreement   18     ARTICLE 5       PROVISIONS   FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE COMPANY AND ITS   DIRECTORS AND STOCKHOLDERS   18     Section 5.1       Limitation   on Organization and Offering Expenses   18     Section 5.2       Limitation   on Acquisition Fees and Acquisition Expenses   18     Section 5.3       Limitation   on Operating Expenses   18     Section 5.4       Limitation   on Real Estate Commissions   19     Section 5.5       Limitation   on Transactions with Affiliates   19     Section 5.6       Limitation   of Issuance of Securities   19     Section 5.7       Limitation   on Borrowing   20     ARTICLE 6       INVESTMENT   OBJECTIVES AND LIMITATIONS   20     Section 6.1       Investment   Objectives   20     Section 6.2       Review   of Objectives   21     Section 6.3       Certain   Permitted Investments   21     Section 6.4       Investment   Limitations   21     ARTICLE 7       CONFLICTS   OF INTEREST RESOLUTION PROCEDURES   22     Section 7.1       Independent   Directors Committee   22     Section 7.2       Voting   by Independent Directors Committee   22                Section 7.3       Meetings   of Independent Directors Committee   22     Section 7.4       Conflict   Resolution Procedures   23     Section 7.5       Compliance   with Code Requirements   23     ARTICLE 8       STOCK   23     Section 8.1       Authorized   Stock   23     Section 8.2       Common   Stock   23     Section 8.3       Preferred   Stock   24     Section 8.4       Preemptive   and Appraisal Rights   25     Section 8.5       No   Issuance of Share Certificates   26     Section 8.6       Suitability   of Stockholders   26     Section 8.7       Repurchase   of Shares   26     Section 8.8       Dividend   Reinvestment Plans   27     Section 8.9       Charter   and Bylaws   27     ARTICLE 9       RESTRICTIONS   ON OWNERSHIP AND TRANSFER OF STOCK   27     Section 9.1       Definitions   27     Section 9.2       Ownership   and Transfer Limitations   29     Section 9.3       Transfer   of Shares to Trust   30     Section 9.4       Remedies   for Breach   30     Section 9.5       Notice   of Restricted Transfer   30     Section 9.6       Owners   Required to Provide Information   31     Section 9.7       Remedies   Not Limited   31     Section 9.8       Ambiguity   31     Section 9.9       Waivers   by Board   31     Section 9.10       Increase   and Decrease in Common or Preferred Stock Ownership Limit   31     Section 9.11       Limitation   on Modifications   32     Section 9.12       Notice   to Stockholders Upon Issuance or Transfer   32     Section 9.13       Stock-In-Trust   33     Section 9.14       Remedies   Not Limited   34     Section 9.15       Settlements   34     Section 9.16       Severability   35     Section 9.17       Waiver   35     ARTICLE 10       STOCKHOLDERS   35     Section 10.1       Meetings   of Stockholders   35     Section 10.2       Voting   Rights of Stockholders   35     Section 10.3       Voting   Limitations on Stock Held by the Advisor, Directors and Affiliates   35     Section 10.4       Right   of Inspection   35     Section 10.5       Access   To Stockholder List   36     Section 10.6       Reports   36     ARTICLE 11       LIABILITY   OF STOCKHOLDERS, DIRECTORS, ADVISORS AND AFFILIATES   36     Section 11.1       Limitation   of Stockholder Liability   36     Section 11.2       Limitation   of Director and Officer Liability   37     Section 11.3       Indemnification   37     Section 11.4       Limitation   on Payment of Expenses   38     ARTICLE 12       AMENDMENT;   REORGANIZATION; MERGER, ROLL-UP TRANSACTIONS   38     Section 12.1       Amendment   38     Section 12.2       Reorganization   39     Section 12.3       Merger,   Consolidation or Sale of Property   39     Section 12.4       Limitations   on Roll-Up Transactions   39     ARTICLE 13       DURATION   OF COMPANY   40             CORNERSTONE CORE PROPERTIES REIT, INC.   ARTICLES OF AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION   FIRST: Cornerstone Core Properties REIT, Inc., a Maryland corporation, desires to amend and restate its charter as currently in effect and as hereinafter amended.   SECOND: The following provisions are all the provisions of the charter currently in effect and as hereinafter amended:   ARTICLE 1 THE COMPANY; DEFINITIONS   Section 1.1                                      Name. The name of the corporation (the “Company”) is: Cornerstone Core Properties REIT, Inc.   Section 1.2                                      Resident Agent. The name and address of the resident agent for service of process of the Company in the State of Maryland is The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202. The Registered Agent is a Maryland corporation.   Section 1.3                                      Nature of Company. The Company is a Maryland corporation within the meaning of the Maryland General Corporation Law.   Section 1.4                                      Principal Office of Company. The address of the Company’s principal office in the State of Maryland is c/o The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202.   Section 1.5                                      Purpose. The purposes for which the Company is formed are to engage in any lawful act or activity (including, without limitation or obligation, qualifying as a real estate investment trust under Sections 856 through 860, or any successor sections, of the Internal Revenue Code of 1986, as amended (the “Code”)), for which corporations may be organized under the MGCL and the general laws of the State of Maryland as now or hereafter in force.   Section 1.6                                      Definitions. As used in the Charter, the following terms shall have the following meanings unless the context otherwise requires (certain other terms used in Article 9 hereof):   Acquire is defined in Section 9.1.   Acquisition Expenses means expenses related to the Company’s sourcing, selection, evaluation and acquisition of, and investment in, Properties, whether or not acquired or made, including but not limited to legal fees and expenses, travel and communications expenses, costs of financial analysis, appraisals and surveys, nonrefundable option payments on Property not acquired, accounting fees and expenses, computer use-related expenses, architectural and engineering reports, environmental reports, title insurance and escrow fees, and personnel and other direct expenses related to the selection and acquisition of Properties.   Acquisition Fee means any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Company or the Advisor) in connection with the making or investing in mortgage loans or the purchase, development or construction of a Property, including, without limitation, real estate commissions, acquisition fees, finder’s fees, selection fees, Development Fees and Construction Fees (except as provided in the following sentence), nonrecurring management fees, consulting fees, loan fees, points, or any other fees or commissions of a similar nature. Excluded shall be any commissions or fees incurred in connection with the leasing of any Property, and Development Fees or Construction Fees paid to any Person or entity not affiliated with the Advisor in connection with the actual development and construction of any Property.   1        Advisor means the Person responsible for directing or performing the day-to-day business affairs of the Company, including a Person to which an Advisor subcontracts substantially, all such functions. The Advisor is Cornerstone Realty Advisors, LLC or any Person which succeeds it in such capacity.   Advisory Agreement means the agreement between the Company and the Advisor pursuant to which the Advisor will direct or perform the day-to-day business affairs of the Company, as it may be amended or restated from time to time.   Affiliate or Affiliated means, as to any individual, corporation, partnership, trust, limited liability company or other legal entity (other than the Company), (i) any Person or entity directly or indirectly through one or more intermediaries controlling, controlled by, or under common control with another Person or entity; (ii) any Person or entity, directly or indirectly owning, controlling, or holding with power to vote ten percent (10%) or more of the outstanding voting Securities of another Person or entity; (iii) any officer, director, general partner or trustee of such Person or entity; (iv) any Person ten percent (10%) or more of whose outstanding voting Securities are directly or indirectly owned, controlled or held, with power to vote, by such other Person; and (v) if such other Person or entity is an officer, director, general partner, or trustee of a Person or entity, the Person or entity for which such Person or entity acts in any such capacity.   Appraised Value means value according to an appraisal made by an Independent Appraiser.   Asset Management Fee means the fee paid to the Advisor for directing or performing the day-to-day business affairs of the Company in the amount established pursuant to Section 9(b) of the Advisory Agreement.   Assets means any and all GAAP assets including but not limited to all real estate investments (real, personal or otherwise), tangible or intangible, owned or held by, or for the account of, the Company, whether directly or indirectly through another entity or entities, including interests in any Person or in Joint Ventures which directly or indirectly own real estate.   Average Invested Assets means, for a specified period, the average of the aggregate GAAP basis book carrying values of the assets of the Company invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period.   Beneficial Ownership is defined in Section 9.1.   Beneficiary is defined in Section 9.1   Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.   Board of Directors or Board means the individuals holding such office, as of any particular time, under the Articles of Incorporation of the Company, whether they be the Directors named therein or additional or successor Directors.   Bylaws means the Bylaws of the Company, as the same may be amended from time to time.   Cash from Financings means the net cash proceeds realized by the Company from the financing of Property or from the refinancing of any Company indebtedness.   Cash from Sales means the net cash proceeds realized by the Company from the sale, exchange or other disposition of any of its Assets after deduction of all expenses incurred in connection therewith. Cash from Sales shall not include Cash from Financings.   Cash from Sales and Financings means Cash from Sales plus Cash from Financings.   2        Change of Control means any event (including, without limitation, issue, transfer or other disposition of shares of capital stock of the Company or equity interests in the Operating Partnership, merger, share exchange or consolidation) after which any “person” (as that term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the “beneficial owner” (as defined in Rule 13d-j of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company or the Operating Partnership representing greater than 50% or more of the combined voting power of the Company’s or the Operating Partnership’s then-outstanding securities, respectively; provided, that, a Change of Control shall not be deemed to occur as a result of any widely distributed public offering of the Common Stock.   Charter means the charter of the Company, including the Articles of Incorporation and all Articles of Amendment, Articles Supplementary and other modifications thereto as filed with the State Department of Assessments and Taxation of the State of Maryland (the “SDAT”).   Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.   Common Stock means shares of the Company’s common stock, $.001 par value per share, the terms and conditions of which are set forth in Section 8.2 hereof.   Common Stockholders. The holders of record of Common Stock.   Common Stock Ownership Limit is defined in Section 9.1.   Company means Cornerstone Core Properties REIT, Inc., a corporation organized under the laws of the State of Maryland.   Company Value means the Appraised Value of the Company’s assets less all of its liabilities as of the Termination Date, provided that if such Company Value is being determined in connection with a Change of Control that establishes the Company’s value, then the Company Value shall be the value established thereby.   Competitive Real Estate Commission. A real estate or brokerage commission paid for the purchase or sale of a Property that is reasonable, customary and competitive in light of the size, type and location of the Property.   Constructive Ownership Equity is defined in Section 9.1.   Construction Fee means a fee or other remuneration for acting as general contractor and/or construction manager to construct, supervise or coordinate leasehold or other improvements or projects, or to provide major repairs or rehabilitation for a Property.   Contract Purchase Price means the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property exclusive of Acquisition Fees and Acquisition Expenses.   Dealer Manager means Pacific Cornerstone Capital, Inc., an Affiliate of the Advisor, or such other Person or entity selected by the Board of Directors to act as the dealer manager for the offering of the Stock. Pacific Cornerstone Capital, Inc. is a member of the National Association of Securities Dealers, Inc.   Development Fee means a fee for the packaging of a Property, including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and financing for the specific Property, either initially or at a later date.   Director means an individual who is a member of the Board of Directors.   Disposition Fee means the Disposition Fee as defined in Section 9(d) of the Advisory Agreement.   3        Dividends means any dividends or other distributions of money or other property paid by the Company to the holders of Common Stock or Preferred Stock, including dividends that may constitute a return of capital for federal income tax purposes.   Excess Expense Guidelines is defined in Section 10(c)(iii) of the Advisory Agreement.   FFO means funds from operations which is net income, calculated in accordance with GAAP, excluding gains (or losses) from dispositions of real estate held for investment purposes and real estate-related depreciation and amortization, plus the Company’s pro rata share of funds from operations of consolidated and unconsolidated joint ventures.   GAAP means generally accepted accounting principles consistently applied as used in the United States.   Gross Proceeds means the aggregate purchase price of all Stock sold for the account of the Company, including Stock sold pursuant to the Reinvestment Plan, without deduction for Sales Commissions, volume discounts, fees paid to the Dealer Manager or other Organization and Offering Expenses. Gross Proceeds does not include Stock issued in exchange for OP Units.   Independent Appraiser means a person or entity, who is not an Affiliate of the Advisor or the Directors, who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company, and who is a qualified appraiser of real estate as determined by the Board. Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers shall be conclusive evidence of such qualification.   Independent Director means a Director who is not, and within the last two (2) years has not been, directly or indirectly associated with the Advisor by virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii) employment by the Advisor or its Affiliates, (iii) service as an officer or director of the Advisor or its Affiliates, (iv) performance of services, other than as a Director, for the Company, (v) service as a director or trustee of more than three (3) real estate investment trusts advised by the Advisor, or (vi) maintenance of a material business or professional relationship with the Advisor or any of its Affiliates. An indirect relationship shall include circumstances in which a Director’s spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law are or have been associated with the Advisor, any of its Affiliates or the Company. A business or professional relationship is considered material if the gross revenue derived by the Director from the Advisor and Affiliates exceeds five percent (5%) of either the Director’s annual gross revenue during either of the last two (2) years or the Director’s net worth on a fair market value basis.   Initial Public Offering means the offering and sale of Common Stock of the Company pursuant to the Company’s first effective registration statement covering such Common Stock filed under the Securities Act of 1933, as amended.   Invested Capital means the amount calculated by multiplying the total number of shares of Common Stock purchased by Stockholders by (i) the Offering Price for the Stock or (ii) for Stock not purchased in an Offering, the issue price for the Stock; in each case reduced by any Dividends or distributions, other than stock dividends, which represent a return of capital and any amounts paid by the Company to repurchase shares of Stock pursuant to a plan for repurchase of the Company’s Stock.   Joint Venture or Joint Ventures means those joint venture or general partnership arrangements in which the Company or the Operating Partnership is a co-venturer or general partner which are established to acquire Properties.   Leasing Agent means an entity that has been retained to perform and carry out leasing activities for one or more of the Properties.   Listed means the Securities are approved for trading on a national securities exchange or for quotation on the NASDAQ National Market System. The term “Listing” shall have the correlative meaning.   4        Listing Date means the date that the Common Stock is first Listed.   Market Value means the aggregate market value of all of the outstanding Common Stock, measured by taking the average closing price or average of bid and asked price, as the case may be, during the consecutive 30-day period commencing twelve (12) months following Listing and ending eighteen (18) months following Listing during which the average closing price or average of bid and asked price of the Stock is the highest.   Market Price is defined in Section 9.1.   MGCL. The Maryland General Corporation Law, as amended from time to time.   Mortgage means mortgages, deeds of trust or other security interests on or applicable to real property.   NASAA means the North American Securities Administrators Association, Inc.   NASAA Net Income means for any period, the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves; provided, however, NASAA Net Income for purposes of calculating total allowable Operating Expenses shall exclude the gain or loss from the sale of the Company’s Assets.   NASAA REIT Guidelines means the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association.   Net Asset Value means the total Assets including intangible assets relating to SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets (but not including other GAAP intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied.   Net Income means net income as calculated in accordance with GAAP.   Net Sale Proceeds means in the case of a transaction described in clause (A) of the definition of Sale, the net proceeds of any such transaction less the amount of all real estate commissions and closing costs paid by the Operating Partnership. In the case of a transaction described in clause (B) of such definition, Net Sale Proceeds means the net proceeds of any such transaction less the amount of any legal and other selling expenses incurred by the Operating Partnership in connection with such transaction. In the case of a transaction described in clause (C) of such definition, Net Sale Proceeds means the net proceeds of any such transaction actually distributed to the Operating Partnership from the Joint Venture less any expenses incurred by the Operating Partnership in connection with such transaction. In the case of a transaction or series of transactions described in clause (D) of the definition of Sale, Net Sale Proceeds means the net proceeds of any such transaction less the amount of all commissions and closing costs paid by the Operating Partnership. In the case of a transaction described in clause (E) of such definition, Net Sale Proceeds means the net proceeds of any such transaction less the amount of all selling costs and other expenses incurred by the Operating Partnership in connection with such transaction. Net Sale Proceeds shall also include, in the case of any lease of a Property consisting of a building only, any amounts from tenants, borrowers or lessees that the Company, as general partner of the Operating Partnership determines, in its discretion, to be economically equivalent to the proceeds of a Sale. Net Sale Proceeds shall not include any amounts used to repay outstanding indebtedness secured by the asset disposed of in the sale.   Offering means an offering of Stock that is registered with the U.S. Securities and Exchange Commission, excluding Stock offered under any employee benefit plan.   Offering Price means, with respect to each share of Stock, the highest price at which such Stock was offered by the Company in the Offering pursuant to which such Stock was issued, without regard to any price reductions for certain types of purchasers or volume discounts.   Operating Expenses means all direct and indirect costs and expenses incurred by the Company, as determined under generally accepted accounting principles, which in any way are related to the operation of the Company or to Company business, including advisory fees, but excluding (i) the expenses of raising capital such as   5        Organizational and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and Listing of the Stock, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves, (v) Acquisition Fees and Acquisition Expenses, (vi) real estate commissions on the Sale of property, and other expenses connected with the acquisition and ownership of real estate interests, mortgage loans, or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property) and (vii) any incentive fees which may be paid in compliance with the NASAA REIT Guidelines. The definition of “Operating Expenses” set forth above is intended to encompass only those expenses which are required to be treated as Operating Expenses under the NASAA REIT guidelines. As a result, and notwithstanding the definition set forth above, any expense of the Company which is not an Operating Expense under the NASAA REIT Guidelines shall not be treated as an Operating Expense for purposes hereof.   Operating Partnership means Cornerstone Operating Partnership, L.P. which is the partnership through which the Company may own Properties.   Operating Partnership Agreement means the Limited Partnership Agreement of the Operating Partnership, as amended and restated from time to time.   OP Unit means a unit of limited partnership interest in the Operating Partnership.   Organizational and Offering Expenses means any and all costs and expenses incurred by the Company, the Advisor or any Affiliate of either in connection with and in preparing the Company for registration of and subsequently offering and distributing its Stock to the public, which may include but are not limited to total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys), legal, accounting and escrow fees, expenses for printing, engraving, amending, supplementing and mailing, distribution costs, compensation to employees while engaged in registering, marketing and wholesaling the Stock, telegraph and telephone costs, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, and fees, expenses and taxes related to the filing, registration and qualification of the sale of the Securities under Federal and State laws, including accountants’ and attorneys’ fees and other accountable offering expenses. Organization and Offering Expenses may include, but are not limited to: (i) amounts to reimburse the Advisor for all marketing related costs and expenses such as compensation to and direct expenses of the Advisor’s employees or employees of the Advisor’s Affiliates in connection with registering and marketing the Stock; (ii) compensation to and direct expenses of employees of the Dealer Manager while preparing for the offering and marketing of the Stock and in connection with their wholesaling activities but not Sales Commissions; (iii) travel and entertainment expenses related to the offering and marketing of the Stock; (iv) facilities and technology costs and other costs and expenses associated with the offering and to facilitate the marketing of the Stock including Web site design and management; (v) costs and expenses of conducting training and educational conferences and seminars; (vi) costs and expenses of attending broker-dealer sponsored retail seminars or conferences; and (vii) payment or reimbursement of bona fide due diligence expenses.   Ownership Limit is defined in Section 9.1.   Person shall mean any natural person, partnership, corporation, association, trust, limited liability company or other legal entity.   Preferred Stock means shares of the Company’s preferred stock, $.001 par value per share, which may be issued in one or more classes or series in accordance with Section 8.3 hereof.   Preferred Stock Ownership Limit is defined in Section 9.1.   Property or Properties means the real properties or real estate investments which are acquired by the Company either directly or through the Operating Partnership, Joint Ventures, partnerships or other entities.   Property Manager means any entity that has been retained to perform and carry out at one or more of the Properties property management services.   6        Prospectus means any document, notice, or other communication satisfying the standards set forth in Section 10 of the Securities Act of 1933, as amended, and contained in a currently effective registration statement filed by the Company with, and declared effective by, the Securities and Exchange Commission, or if no registration statement is currently effective, then the Prospectus contained in the most recently effective registration statement.   Purported Beneficial Holder is defined in Section 9.1.   Purported Beneficial Transferee is defined in Section 9.1.   Purported Record Holder is defined in Section 9.1.   Purported Record Transferee is defined in Section 9.1.   REIT means a corporation, trust or association which is engaged in investing in equity interests in real estate (including fee ownership and leasehold interests and interests in partnerships and Joint Ventures holding real estate) or in loans secured by mortgages on real estate or both and that qualifies as a real estate investment trust under the REIT Provisions of the Code.   REIT Provisions of the Code means Sections 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder.   REIT Stock Amount has the meaning set forth in the Operating Partnership Agreement.   Reinvestment Plan is defined in Section 8.8.   Restriction Termination Date is defined in Section 9.1.   Roll-Up Entity means a partnership, real estate investment trust, corporation, trust or similar entity that would be created or would survive after the successful completion of a proposed Roll-Up Transaction.   Roll-Up Transaction means a transaction involving the acquisition, merger, conversion, or consolidation, directly or indirectly, of the Company and the issuance of securities of a Roll-Up Entity. Such term does not include: (i) a transaction involving securities of the Company that have been listed on a national securities exchange or included for quotation on the Nasdaq/NMS for at least 12 months; or (ii) a transaction involving the conversion to corporate, trust, or association form of only the Company if, as a consequence of the transaction, there will be no significant adverse change in Stockholder voting rights, the term of existence of the Company, compensation to the Advisor or the investment objectives of the Company.   Sale or Sales means any transaction or series of transactions whereby: (A) the Operating Partnership sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including the lease of any Property consisting of the building only, and including any event with respect to any Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (B) the Operating Partnership sells, grants, transfers, conveys or relinquishes its ownership of all or substantially all of the interest of the Operating Partnership in any Joint Venture in which it is a co-venturer or partner; (C) any Joint Venture in which the Operating Partnership is a co-venturer or partner sells, grants, transfers, conveys or relinquishes its ownership of any Property or portion thereof, including any event with respect to any Property which gives rise to insurance claims or condemnation awards; (D) the Operating Partnership sells, grants, conveys, or relinquishes its interest in any asset, or portion thereof, including any event with respect to any asset which gives rise to a significant amount of insurance proceeds or similar awards; or (E) the Operating Partnership sells or otherwise disposes of or distributes all of its assets in liquidation of the Operating Partnership.   Sales Commissions means any and all commissions payable to underwriters, dealer managers or other broker-dealers in connection with the sale of Stock, including, without limitation, commissions payable to the Dealer Manager.   7        Securities means any class or series of units or shares of the Company or the General Partner, including common shares or preferred units or shares and any other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “Securities” or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.   Securities Act means the Securities Act of 1933, as amended.   Soliciting Dealers means those broker-dealers that are members of the National Association of Securities Dealers, Inc., or that are exempt from broker-dealer registration, and that, in either case, enter into participating broker or other selling agreements with the Dealer Manager to sell shares of Stock.   Special 10% Stock Dividend means the 10% stock dividend authorized by the Board of Directors to be paid to the Stockholders of record on the date that the Company raises the first $125,000,000 in the Initial Public Offering.   Sponsor means any Person directly or indirectly instrumental in organizing, wholly or in part, the Company or any Person who will control, manage or participate in the management of the Company, and any Affiliate of such Person. Not included is any Person whose only relationship with the Company is as that of an independent Leasing Agent or Property Manager of the Company’s assets and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. A Person may also be deemed a Sponsor of the Company (as determined by a majority of the Directors, including a majority of the Independent Directors) by:   (a)                                     taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the Company, either alone or in conjunction with one or more other Persons;   (b)                                    receiving a material participation in the Company in connection with the founding or organizing of the business of the Company, in consideration of services or property, or both services and property;   (c)                                     having a substantial number of relationships and contacts with the Company;   (d)                                    possessing significant rights to control the Company’s properties;   (e)                                     receiving fees for providing services to the Company which are paid on a basis that is not customary in the industry; or   (f)                                       providing goods or services to the Company on a basis which was not negotiated at arms length with the Company.   Stock means shares of stock of the Company of any class or series, including Common Stock, Preferred Stock or Stock-in-Trust.   Stock-in-Trust is defined in Section 9.1.   Stockholders means the holders of record of Stock.   Stockholders’ 10% Return means, as of any date, an aggregate amount equal to a 10% cumulative, non-compounded, annual return on Invested Capital; provided, however, that for purposes of calculating the Stockholders’ 10% Return, any stock dividend shall not be included as a Dividend; and provided further that for   8        purposes of determining the Stockholders’ 10% Return, the return for each portion of the Invested Capital shall commence for purposes of the calculation upon the issuance of the shares issued in connection with such capital.   Stockholders’ 8% Return means, as of any date, an aggregate amount equal to a 8% cumulative, non-compounded, annual return on Invested Capital; provided, however, that for purposes of calculating the Stockholders’ 8% Return, any stock dividend shall not be included as a Dividend; and provided further that for purposes of determining the Stockholders’ 8% Return, the return for each portion of the Invested Capital shall commence for purposes of the calculation upon the issuance of the shares issued in connection with such capital.   Stockholders’ 6% Return means, as of any date, an aggregate amount equal to a 6% cumulative, non-compounded, annual return on Invested Capital; provided, however, that for purposes of calculating the Stockholders’ 6% Return, any stock dividend shall not be included as a Dividend; and provided further that for purposes of determining the Stockholders’ 6% Return, the return for each portion of the Invested Capital shall commence for purposes of the calculation upon the issuance of the shares issued in connection with such capital.   Subordinated Incentive Fee Due Upon Listing means:   (a)                                  if (i) the sum of the Market Value plus the total Dividends paid to Stockholders through the Listing Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 10% Return through the Listing Date, a fee equal to 15% of such excess amount;   (b)                                 if the requirements of paragraph (a) above are not met, and (i) the sum of the Market Value plus the total Dividends paid to Stockholders through the Listing Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 8% Return through the Listing Date, a fee equal to 10% of such excess amount; and   (c)                                  if the requirements of paragraphs (a) and (b) above are not met, and (i) the sum of Market Value plus the total Dividends paid to Stockholders through the Listing Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 6% Return through the Listing Date, a fee equal to 5% of such excess amount.   In the event that the Subordinated Incentive Fee Due Upon Listing is paid to the Advisor, thereafter, the Advisor will not be entitled to receive any payments of Subordinated Performance Fee Upon Termination or Subordinated Share of Net Sale Proceeds.   Subordinated Performance Fee Due Upon Termination means:   (a)                                  if (i) the sum of Company Value plus the total Dividends paid to Stockholders through the Termination Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 10% Return through the Termination Date, a fee equal to 15% of such excess amount;   (b)                                 if the requirements of paragraph (a) above are not met, and (i) the sum of the Company Value plus the total Dividends paid to Stockholders through the Termination Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 8% Return through the Termination Date, a fee equal to 10% of such excess amount; and   (c)                                  if the requirements of paragraphs (a) and (b) above are not met, and (i) the sum of Company Value plus the total Dividends paid to Stockholders through the Termination Date exceeds (ii) the sum of the aggregate Invested Capital plus the total Dividends required to be paid to the Stockholders in order to pay the Stockholders’ 6% Return through the Termination Date, a fee equal to 5% of such excess amount.   Subordinated Share of Net Sale Proceeds means a fee equal to the percentage set forth below of the balance of Net Sale Proceeds, if any, remaining after Stockholders have received cumulative Dividends and distributions equal to 100% of the Invested Capital, plus an amount equal to a cumulative, non-compounded per annum return on the Invested Capital, calculated on an aggregate weighted average daily basis. The Subordinated Share of Net Sale Proceeds will be (i) 5% of remaining Net Sale Proceeds if Stockholders have received cumulative Dividends and distributions equal to 100% of the Invested Capital plus a 6% cumulative, non-compounded per annum return on the Invested Capital, (ii) 10% of remaining Net Sale Proceeds if Stockholders have received cumulative Dividends and distributions equal to 100% of the Invested Capital plus an 8% cumulative, non-compounded per annum return on the Invested Capital, or (iii) 15% of remaining Net Sale Proceeds if Stockholders have received a cumulative   9        Dividends and distributions equal to 100% of the Invested Capital plus a 10% cumulative, non-compounded per annum return on the Invested Capital.   Successor means any successor in interest of the Company.   Termination Date means the date of termination of the Advisory Agreement.   Trading Day is defined in Section 9.1.   Transfer is defined in Section 9.1.   Unimproved Real Property. The real property of the Company that has the following three characteristics:   (a)                                     such property was not acquired for the purpose of producing rental or other operating income;   (b)                                    there is no development or construction in progress on such land; and   (c)                                     no development or construction on such land is planned in good faith to commence on such land within one year.   ARTICLE 2 BOARD OF DIRECTORS   Section 2.1                                      Number. The number of Directors shall be five (5), each of whom shall be elected by the Stockholders entitled to vote, except as otherwise provided herein. The number of Directors may be increased or decreased from time to time by resolution of the Directors then in office, provided, however, that the total number of Directors shall be not fewer than three (3) and not more than fifteen (15) , subject to increase or decrease by the affirmative vote of 80% of the members of the entire Board of Directors. A majority of the Board of Directors will be Independent Directors, except for a period of up to 60 days after the death, removal or resignation of an Independent Director pending the election of such Independent Director’s successor. The remaining Directors will be individuals nominated by the Advisor, provided that such director nominees are either directors of the Advisor or have been elected by the board of directors of the Advisor as executive officers of the Advisor. Any vacancies will be filled by the affirmative vote of a majority of the remaining Directors, though less than a quorum. The Independent Directors, by majority vote, shall nominate replacements for vacancies in the Independent Director positions. No reduction in the number of Directors shall cause the removal of any Director from office prior to the expiration of his term. For the purposes of voting for Directors, each share of Stock entitled to vote for the election of Directors may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted, or as may otherwise be required by the MGCL or other applicable law as in effect from time to time. The names of the directors who shall act until the first meeting or until their successors are duly elected and qualify are: Terry G. Roussel, Paul Danchik, Joseph H. Holland, Daniel L. Johnson and Lee Powell Stedman.   Section 2.2                                      Experience. A Director shall have had at least three (3) years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the Company. At least one of the Independent Directors shall have three (3) years of relevant real estate experience.   Section 2.3                                      Committees. Subject to the MGCL and to the extent allowed by the REIT Provisions of the Code, the Directors may establish such committees as they deem appropriate, in their discretion, provided that the majority of the members of each committee are Independent Directors.   Section 2.4                                      Term. Each Director shall hold office for one (1) year, until the next annual meeting of Stockholders and until his successor shall have been duly elected and shall have qualified. Directors may be elected to an unlimited number of successive terms.   10        Section 2.5                                      Fiduciary Obligations. The Directors serve in a fiduciary capacity to the Company and have a fiduciary duty to the Stockholders of the Company, including a specific fiduciary duty to supervise the relationship of the Company with the Advisor.   Section 2.6                                      Ratification of Charter. At the first meeting of the Board of Directors following the date of filing of the Charter, the Charter shall be reviewed and ratified by majority vote of the Directors (including a majority of the Independent Directors).   Section 2.7                                      Resignation, Removal or Death. Any Director may resign by written notice to the Board of Directors, effective upon execution and delivery to the Company of such written notice or upon any future date specified in the notice. A Director may be removed from office with or without cause only at a meeting of the Stockholders called for that purpose, by the affirmative vote of the holders of not less than a majority of the shares of the Stock then outstanding and entitled to vote, subject to the rights of any of the shares of Preferred Stock to vote for such Directors. The notice of such meeting shall indicate that the purpose, or one of the purposes, of such meeting is to determine if a Director should be removed   ARTICLE 3 POWERS OF DIRECTORS   Section 3.1                                      General. Subject to the express limitations herein or in the Bylaws and to the general standard of care required of directors under the MGCL and other applicable law, (i) the business and affairs of the Company shall be managed under the direction of the Board of Directors. The Directors shall monitor the administrative procedures, investment operations and performance of the Company and the Advisor to assure that the written policies on investments and borrowing set forth in Articles 3, 5 and 6 hereof are carried out. The Directors may take any actions that, in their sole judgment and discretion, are necessary or desirable to conduct the business of the Company. These Articles of Incorporation shall be construed with a presumption in favor of the grant of power and authority to the Directors. Any construction of these Articles of Incorporation or determination made in good faith by the Directors concerning their powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Directors included in this Article 3 shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of these Articles of Incorporation or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Directors under the general laws of the State of Maryland as now or hereafter in force.   Section 3.2                                      Determinations by the Board. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the Charter shall be final and conclusive and shall be binding upon the Company and every holder of shares of its Stock: the amount of the Net Income of the Company for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its Stock or the payment of other distributions on its Stock; the amount of paid-in surplus, Net Asset Value, other surplus, annual or other cash flow, FFO, net profit, Net Asset Value in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation of the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or distributions, qualifications or terms or conditions of redemption of any class or series of Stock; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Company or any shares of Stock; the number of shares of stock of any class of the Company; any matter relating to the acquisition, holding and disposition of any assets by the Company; or any other matter relating to the business and affairs of the Company or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.   Section 3.3                                      Specific Powers and Authority. Subject only to the express limitations herein, and in addition to all other powers and authority conferred by these Articles of Incorporation or by law, the Directors, without any vote, action or consent by the Stockholders, shall have and may exercise, at any time or times, in the name of the Company or on its behalf the following powers and authorities:   11          (a)                                      Investments. Subject to Section 3.3(b) and Articles 5 and 6 hereof, to invest in, purchase or otherwise acquire and to hold real, personal or mixed, tangible or intangible, property of any kind wherever located, or rights or interests therein or in connection therewith, all without regard to whether such property, interests or rights are authorized by law for the investment of funds held by trustees or other fiduciaries, or whether obligations the Company acquires have a term greater or lesser than the term of office of the Directors or the possible termination of the Company, for such consideration as the Directors may deem proper (including cash, property of any kind or Securities of the Company); provided, however, that the Directors shall take such actions as they deem necessary and desirable to comply with any requirements of the MGCL relating to the types of assets held by the Company.   (b)                                     REIT Qualification. The Company shall properly make a timely election to be a REIT and the Board of Directors shall use its commercially reasonable efforts to cause the Company and its Stockholders to qualify for U.S. federal income tax treatment in accordance with the REIT Provisions of the Code with respect to each taxable year of the Company. In furtherance of the foregoing, the Board of Directors shall use its commercially reasonable efforts to take such actions as are necessary, and may take such actions as it deems desirable (in its sole discretion) to preserve the status of the Company as a REIT; provided, however, that in the event that the Board of Directors determines, by vote of at least two-thirds (2/3) of the Directors, that it no longer is in the best interests of the Company to qualify as a REIT, the Board of Directors may revoke or otherwise terminate the Company’s REIT election pursuant to Section 856(g) of the Code.   (c)                                      Sale, Disposition and Use of Property. Subject to Articles 5 and 6 and Sections 3.3(b) and 12.3 hereof, the Board of Directors shall have the authority to sell, rent, lease, hire, exchange, release, partition, assign, mortgage, grant security interests in, encumber, negotiate, dedicate, grant easements in and options with respect to, convey, transfer (including transfers to entities wholly or partially owned by the Company) or otherwise dispose of any or all of the Property by deeds (including deeds in lieu of foreclosure with or without consideration), trust deeds, assignments, bills of sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes executed and delivered for and on behalf of the Company by one or more of the duly authorized Directors or by a duly authorized officer, employee, agent or nominee of the Company, on such terms as they deem appropriate; to give consents and make contracts relating to the Property and its use or other property or matters; to develop, improve, manage, use, alter or otherwise deal with the Property; and to rent, lease or hire from others property of any kind; provided, however, that the Company may not use or apply land for any purposes not permitted by applicable law.   (d)                                     Borrowing and Financing. To borrow or, in any other manner, raise money for the purposes and on the terms they determine, which terms may (i) include evidencing the same by issuance of Securities of the Company and (ii) have such provisions as the Directors determine; to reacquire such Securities of the Company; to enter into other contracts or obligations on behalf of the Company; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of any Person; to mortgage, pledge, assign, grant security interests in or otherwise encumber the Property to secure any such Securities of the Company, contracts or obligations (including guarantees, indemnifications and suretyships); and to renew, modify, release, compromise, extend, consolidate or cancel, in whole or in part, any obligation to or of the Company or participate in any reorganization of obligors to the Company. The aggregate borrowing of the Company shall be reviewed by the Board of Directors at least quarterly.   (e)                                      Lending. Subject to all applicable limitations in these Articles of Incorporation, to lend money or other Property on such terms, for such purposes and to such Persons as they may determine.   (f)                                        Issuance of Securities. Subject to the provisions of Article 8 hereof, to create and authorize and direct the issuance (on either a pro rata or a non-pro rata basis) by the Company, in shares, units or amounts of one or more types, series or classes, of Securities of the Company, which may have such voting rights, dividend or interest rates, preferences, subordinations, conversion or redemption prices or rights, maturity dates, distribution, exchange, or liquidation rights or other rights as the Directors may determine, without vote of or other action by the Stockholders, to such Persons for such consideration, at such time or times and in such manner and on such terms as the Directors determine, to list any of the Securities of the Company on any securities exchange; and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any Securities of the Company.   12          (g)                                     Expenses and Taxes. To pay any charges, expenses or liabilities necessary or desirable, in the sole discretion of the Directors, for carrying out the purposes of these Articles of Incorporation and conducting the business of the Company, including compensation or fees to Directors, officers, employees and agents of the Company, and to Persons contracting with the Company, and any taxes, levies, charges and assessments of any kind imposed upon or chargeable against the Company, the Properties or the Directors in connection therewith other than income or similar taxes imposed upon compensation and fees paid to Directors; and to prepare and file any tax returns, reports or other documents and take any other appropriate action relating to the payment of any such charges, expenses or liabilities.   (h)                                     Collection and Enforcement. To collect, sue for and receive money or other property due to the Company; to consent to extensions of the time for payment, or to the renewal, of any Securities or obligations; to engage or to intervene in, prosecute, defend, compound, enforce, compromise, release, abandon or adjust any actions, suits, proceedings, disputes, claims, demands, security interests or things relating to the Company, the Property or the Company’s affairs; and to exercise any rights and enter into any agreements and take any other action necessary or desirable in connection with the foregoing.   (i)                                         Deposits. To deposit funds or Securities constituting part of the assets of the Company in banks, trust companies, savings and loan associations, financial institutions and other depositories, whether or not such deposits will draw interest, subject to withdrawal on such terms and in such manner as the Directors determine.   (j)                                         Allocation;  Accounts. Subject to and in accordance with the Code and generally accepted accounting principles, to determine whether moneys, profits or other assets of the Company shall be charged or credited to, or allocated between, income and capital, including whether or not to amortize any premium or discount and to determine in what manner any expenses or disbursements are to be borne as between income and capital (regardless of how such items would normally or otherwise be charged to or allocated between income and capital without such determination); to treat any dividend or other distribution on any investment as, or apportion it between, income and capital; in their discretion to provide reserves for depreciation, amortization, obsolescence or other purposes in respect of any Property in such amounts and by such methods as they determine what constitutes net earnings, profits or surplus; to determine the method or form in which the accounts and records of the Company shall be maintained; and to allocate to the Stockholders’ equity account less than all of the consideration paid for Securities and to allocate the balance to paid in capital or capital surplus.   (k)                                      Valuation of Assets. To determine the value of all or any part of the Assets and of any services, Securities, property or other consideration to be furnished to or acquired by the Company, and from time to time to revalue all or any part of the Assets, all in accordance with such market quotations, appraisals or other information as are reasonable, in their sole judgment, and where required, in accordance with the Code and GAAP.   (l)                                         Ownership and Voting Powers. To exercise all of the rights, powers, options and privileges pertaining to the ownership of any Mortgages, Securities, Properties and other Assets to the same extent that an individual owner might, including without limitation to vote or give any consent, request or notice or waive any notice, either in person or by proxy or power of attorney, which proxies and powers of attorney may be for any general or special meetings or action, and may include the exercise of discretionary powers.   (m)                                   Officers. To elect, appoint or employ such officers for the Company and such committees of the Board of Directors with such powers and duties as the Directors may determine, the Company’s Bylaws provide or the MGCL requires; subject to restrictions advisable with respect to the qualification of the Company as a REIT, to engage, employ or contract with and pay compensation to any Person (including subject to Section 5.7 hereof, any Director and any Person who is an Affiliate of any Director) as agent, representative, Advisor, member of an advisory board, employee or independent contractor (including advisors, consultants, transfer agents, registrars, underwriters, accountants, attorneys-at-law, real estate agents, property and other managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, to perform such services on such terms as the Directors may determine; to delegate to one or more Directors, officers or other Persons engaged or employed as aforesaid or to committees of Directors or to the Advisor, the performance of acts or other things (including granting of consents), the making of decisions and the execution of such deeds, contracts, leases or other instruments, either in the names of the Company, the Directors or   13        as their attorneys or otherwise, as the Directors may determine; and to establish such committees as they deem appropriate.   (n)                                     Associations. Subject to Section 5.7 hereof, to cause the Company to enter into joint ventures, general or limited partnerships, participation or agency arrangements or any other lawful combinations, relationships or associations of any kind.   (o)                                     Reorganizations, Etc. Subject to Sections 3.3(b), 12.2 and 12.3 hereof, to cause to be organized or assist in organizing any Person under the laws of any jurisdiction to acquire all or any part of the Property, carry on any business in which the Company shall have an interest or otherwise exercise the powers the Directors deem necessary, useful or desirable to carry on the business of the Company or to carry out the provisions of these Articles of Incorporation; to merge or consolidate the Company with any Person; to sell, rent, lease, hire, convey, negotiate, assign, exchange or transfer all or any part of the Property to or with any Person in exchange for Securities of such Person or otherwise; and to lend money to, subscribe for and purchase the Securities of, and enter into any contracts with, any Person in which the Company holds, or is about to acquire, Securities or any other interests.   (p)                                     Insurance. To purchase and pay for insurance policies insuring the Stockholders, the Company and the Property against any and all risks, and insuring the Directors, the Advisor and Affiliates of the Company individually (each an “Insured”) against all claims and liabilities of every nature arising by reason of holding or having held any such status, office or position or by reason of any action alleged to have been taken or omitted by the Insured in such capacity, whether or not the Company would have the power to indemnify against such claim or liability, provided that such insurance be limited to the indemnification permitted by Section 11.3 hereof in regard to any liability or loss resulting from negligence, gross negligence, misconduct, willful misconduct or an alleged violation of federal or state securities laws. Nothing contained herein shall preclude the Company from purchasing and paying for such types of insurance, including extended coverage liability and casualty and workers’ compensation, as would be customary for any Person owning comparable assets and engaged in a similar business, or from naming the Insured as an additional insured party thereunder, provided that such addition does not add to the premiums payable by the Company. The Board of Directors’ power to purchase and pay for such insurance policies shall be limited to policies that comply with all applicable state laws and the NASAA REIT Guidelines.   (q)                                     Dividends. To authorize and cause the Company to declare and pay Dividends or other distributions to Stockholders, subject to the provisions of Section 8.2 hereof.   (r)                                        Discontinue Operations; Bankruptcy. To discontinue the operations of the Company (subject to Section 12.2 hereof); to petition or apply for relief under any provision of federal or state bankruptcy, insolvency or reorganization laws or similar laws for the relief of debtors; to permit any Property to be foreclosed upon without raising any legal or equitable defenses that may be available to the Company or the Directors or otherwise defending or responding to such foreclosure; to confess judgment against the Company (as hereinafter defined); or to take such other action with respect to indebtedness or other obligations of the Directors, the Property or the Company as the Directors, in such capacity, and in their discretion may determine.   (s)                                      Revocation of Status. To revoke the status of the Company as a real estate investment trust under the REIT Provisions of the Code; provided, however, that the Board of Directors shall take no action to revoke the Company’s status as a real estate investment trust under the REIT Provisions of the Code until such time that the Board of Directors adopts a resolution recommending that the Company revoke its status as a real estate investment trust under the REIT Provisions of the Code. Prior to such time as the Board of Directors adopts a resolution recommending that the Company revoke its status as a real estate investment trust under the REIT Provisions of the Code, the Board of Directors shall not undertake any action that will jeopardize the Company’s qualification as a REIT.   (t)                                        Fiscal Year. Subject to the Code, to adopt, and from time to time change, a fiscal year for the Company, provided that the fiscal year of the Company shall be the calendar year for all taxable periods prior to any termination or revocation of qualification of the Company as a REIT.   14        (u)                                     Seal. To adopt and use a seal, but the use of a seal shall not be required for the execution of instruments or obligations of the Company.   (v)                                     Bylaws. To adopt, implement and from time to time alter, amend or repeal the Bylaws of the Company relating to the business and organization of the Company, provided that such Bylaws and amendments are not inconsistent with the provisions of the Charter.   (w)                                   Listing Stock. To cause the Listing of the Common Stock or Preferred Stock at any time after completion of the Initial Public Offering.   (x)                                       Further Powers. To do all other acts and things and execute and deliver all instruments incident to the foregoing powers, and to exercise all powers which they deem necessary, useful or desirable to carry on the business of the Company or to carry out the provisions of these Articles of Incorporation, even if such powers are not specifically provided hereby.   ARTICLE 4 ADVISOR   Section 4.1                                      Appointment and Initial Investment of Advisor. The Directors are responsible for setting the general policies of the Company and for the general supervision of its business conducted by officers, agents, employees, advisors or independent contractors of the Company. However, the Directors are not required personally to conduct the business of the Company, and they may (but need not) appoint, employ or contract (to the extent permitted by Section 856(d)(1) of the Code) with any Person (including a Person Affiliated with any Director) as an Advisor and may grant or delegate such authority to the Advisor as the Directors may, in their sole discretion, deem necessary or desirable. The term of retention of any Advisor shall not exceed one (1) year, although there is no limit to the number of times that a particular Advisor may be retained. The Advisor and its Affiliates shall purchase OP Units for $200,000. The Advisor may not sell this initial investment while the Advisor remains a Sponsor but may transfer the initial investment to other Affiliates of the Advisor. Affiliates of the Advisor may not sell this initial investment while the Advisor remains a Sponsor but may transfer the initial investment to the Advisor or other Affiliates of the Advisor.   Section 4.2                                      Supervision of Advisor. The Directors shall evaluate the performance of the Advisor before entering into or renewing an advisory contract and the criteria used in such evaluation shall be reflected in the minutes of meetings of the Board. The Directors may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Company, to act as agent for the Company, to execute documents on behalf of the Company and to make executive decisions which conform to general policies and principles established by the Directors. The Directors shall monitor the Advisor to assure that the administrative procedures, operations and programs of the Company are in the best interests of the Company and its Stockholders and are fulfilled.   The Independent Directors are responsible for reviewing the fees and expenses of the Company at least annually or with sufficient frequency to determine that the expenses incurred are reasonable in light of the investment performance of the Company, its Net Asset Value, its Net Income and the fees and expenses of other comparable unaffiliated REITs. Each such determination shall be reflected in the minutes of the meetings of the Board of Directors.   The Independent Directors also will be responsible for reviewing the performance of the Advisor and determining that compensation to be paid to the Advisor is reasonable in relation to the nature and quality of services performed and the investment performance of the Company, and that the provisions of the Advisory Agreement are being carried out. Specifically, the Independent Directors will consider factors such as:   (a)                                     the amount of the fee paid to the Advisor in relation to the size, composition and performance of the Company’s portfolio;   (b)                                    the success of the Advisor in generating opportunities that meet the investment objectives of the Company;   15        (c)                                     rates charged to other REITs and to investors other than REITs by advisors performing the same or similar services;   (d)                                    additional revenues realized by the Advisor and its Affiliates through their relationship with the Company, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Company or by others with whom the Company does business;   (e)                                     the quality and extent of service and advice furnished by the Advisor;   (f)                                       the performance of the investment portfolio of the Company, including income, conservation or appreciation of capital;   (g)                                    frequency of problem investments and competence in dealing with distress situations; and   (h)                                    the quality of the portfolio of the Company relative to the investments generated by the Advisor for its own account.   The Independent Directors may also consider all other factors which they deem relevant and the findings of the Independent Directors on each of the factors considered shall be recorded in the minutes of the Board of Directors.   The Board of Directors shall determine whether any successor Advisor possesses sufficient qualifications to perform the advisory function for the Company and whether the compensation provided for in its contract with the Company is justified.   Section 4.3                                      Fiduciary Obligations. The Advisor has a fiduciary responsibility to the Company and to the Stockholders.   Section 4.4                                      Affiliations and Licenses. The Directors, by resolution or in the Bylaws, may provide guidelines or requirements concerning the professional affiliations and licenses of the Advisor as they relate to the Company and its business.   Section 4.5                                      Payment of Fees and Reimbursement of Expenses. The Company shall pay the Advisor the fees and reimburse the Advisor for Operating Expenses as provided in the Advisory Agreement but subject to the limitations contained herein and in the Advisory Agreement.   Section 4.6                                      New Advisor Fee Structures. In the event that the Common Stock becomes listed on a national securities exchange or traded on the Nasdaq/NMS market, the Company and the Advisor will negotiate in good faith a fee structure appropriate a listed company, subject to approval by a majority of the Independent Directors. In negotiating a new fee structure, the Independent Directors shall consider all of the factors they deem relevant. These are expected to include, but will not necessarily be limited to that factors set forth in Section 4.2 hereof. The Board of Directors, including a majority of the Independent Directors, may not approve a new fee structure that, in its judgment, is more favorable to the Advisor than the current fee structure.   Section 4.7                                      Termination. Either a majority of the Independent Directors or the Advisor may terminate the advisory contract on sixty (60) days’ written notice with or without cause and without penalty, and, in such event, the Advisor will cooperate with the Company and the Directors in making an orderly transition of the advisory function.   Section 4.8                                      Advisor Purchase. The Advisor and its Affiliates will purchase $200,000 of OP Units. The Advisor and its Affiliates may not sell the Stock issued to the Advisor or its Affiliates with respect to this investment until the Termination Date but the Advisor may transfer such Stock to Affiliates of the Advisor and the Affiliates of the Advisor may transfer such Stock to the Advisor or other Affiliates of the Advisor.   16          Section 4.9                                      Reimbursement for Organizational and Offering Expenses. The Company shall pay directly or reimburse the Advisor and its Affiliates an amount of up to 3.5% of the Gross Proceeds, other than Gross Proceeds from Stock purchased under the Reinvestment Plan, for Organizational and Offering Expenses (other than Sales Commissions and the dealer manager fee) incurred by the Advisor or its Affiliates. Provided the Company has first raised $1,000,000 in the Initial Public Offering, the Company shall reimburse the Advisor and its Affiliates periodically during the offering period as Gross Proceeds from Stock are received by the Company.   Section 4.10                                Dealer Manager Fee and Commissions and Due Diligence Expense Allowance. The Company shall pay the Dealer Manager a fee in the amount of up to 3% of the Gross Proceeds, other than Gross Proceeds from Stock purchased under the Reinvestment Plan for acting as dealer manager. The Company shall pay sales commissions in an amount of up to 7% of the Gross Proceeds to the Dealer Manager or other broker-dealers who sell Securities other than Gross Proceeds from Stock purchased under the Reinvestment Plan. The Company shall also provide the Dealer Manager with an allowance for bona fide due diligence expenses of up to 0.5% of the Gross Proceeds, other than Gross Proceeds from Stock purchased under the Reinvestment Plan. Provided the Company has first raised $1,000,000 in the Initial Public Offering, the Company shall pay the Dealer Manager the dealer manager fee, sales commissions and non-accountable due diligence expense allowance periodically during the offering period as Gross Proceeds from the sale of Securities are received by the Company.   Section 4.11                                Advisor Acquisition Fees. The Company shall pay the Advisor, as compensation for services rendered in connection with the investigation, selection and acquisition (by purchase, investment or exchange) of Properties, Advisor Acquisition Fees in an amount equal to 2% of Gross Proceeds, other than Gross Proceeds from Stock purchased under the Reinvestment Plan, payable by the Company upon the Company’s receipt of Gross Proceeds; provided that upon termination of this Agreement, the Advisor will be obligated to reimburse the Company for any Advisor Acquisition Fee that has not been allocated to the purchase price of Company Properties as provided for in Section 5.2. The Acquisition Fees we pay our Advisor may be increased with the approval of a majority of our independent directors.   Section 4.12                                Reimbursement for Acquisition Expenses. Subject to the limitations contained in Section 5.2 hereof, the Company shall reimburse the Advisor and its Affiliates for Acquisition Expenses incurred by the Advisor or its Affiliates.   Section 4.13                                Asset Management Fee. Commencing on the date hereof, the Company shall pay the Advisor for the asset management services included in the services described in Section 4 a monthly fee (the “Asset Management Fee”) in an amount equal to one-twelfth of 1.0% of the Average Invested Assets, calculated on a monthly basis as of the last day of each month. The Asset Management Fee shall be reduced if the Independent Directors determine that compensation to be paid to the Advisor is not reasonable in relation to the nature and quality of services performed and the investment performance of the Company and that the provisions of the Advisory Agreement are being carried out in accordance with Section 4.2.   Section 4.14                                Reimbursement for Operating Expenses. Subject to the limitations contained in Section 5.3 hereof, the Company shall reimburse the Advisor for Operating Expenses incurred by the Advisor on behalf of the Company.   Section 4.15                                Property Management and Leasing Fees. If the Company retains the Advisor or its Affiliates to manage or lease any of our Properties, the Company will pay the Advisor or its Affiliates a market-based fee which is what other management or leasing companies generally charge for the management or leasing of similar properties, and which may include reimbursement for the costs and expenses the Advisor or its Affiliates incurs in managing or leasing the Properties.   Section 4.16                                Disposition Fees. Provided the Advisor or an Affiliate provides a substantial amount of the services (as determined by a majority of the Directors, including a majority of the Independent Directors) in connection with the Sale of one or more Properties, the Advisor or such Affiliate shall receive at closing a Disposition Fee equal to 3% of the sales price of such Property or Properties. Any Disposition Fee payable under this section may be paid in addition to real estate commissions paid to non-Affiliates, provided that the total real estate commissions (including such Disposition Fee) paid to all Persons by the Company for each Property shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price of each Property or (ii) the Competitive Real Estate Commission for each Property. The Company will pay the Disposition Fees for a property at the time the property is sold.   17        Section 4.17                                Subordinated Share of Net Sale Proceeds. The Subordinated Share of Net Sale Proceeds shall be payable to the Advisor at the time or times that the Company determines that the Subordinated Share of Net Sale Proceeds has been earned by the Advisor. In the case of multiple advisors, advisors and Affiliates shall be allowed incentive fees in accordance with the foregoing limitation, provided such fees are distributed by a proportional method reasonably designed to reflect the value added to the Company’s Assets by each respective advisor or Affiliate.   Section 4.18                                Subordinated Incentive Fee Due Upon Listing Upon Listing, the Advisor shall be entitled to the Subordinated Incentive Fee Due Upon Listing. The Subordinated Incentive Fee Due Upon Listing shall be payable to the Advisor during the thirty (30) day period following eighteen (18) months after Listing. The Company shall have the option to pay such fee in the form of cash, Stock, a promissory note or any combination of the foregoing as determined by the Board of Directors. In the event the Subordinated Incentive Fee Due Upon Listing is paid to the Advisor following Listing, the Advisor will not be entitled to receive any payments of Subordinated Performance Fee Upon Termination or Subordinated Share of Net Sale Proceeds following receipt of the Subordinated Incentive Fee Due Upon Listing.   Section 4.19                                Fees Upon Termination of Advisory Agreement. Upon termination of the Advisory Agreement, the Company shall pay to the Advisor all unpaid reimbursable expenses and all earned but unpaid fees payable to the Advisor prior to termination of the Advisory Agreement, and the Subordinated Performance Fee Due Upon Termination, provided that no Subordinated Performance Fee Due Upon Termination will be paid if the Company has paid or is obligated to pay the Subordinated Incentive Fee Due Upon Listing.   ARTICLE 5 PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE COMPANY AND ITS DIRECTORS AND STOCKHOLDERS   Section 5.1                                      Limitation on Organization and Offering Expenses. The Company shall pay only reasonable Organization and Offering Expenses and in no event shall such expenses incurred by the Company, including the Sales Commissions, the dealer manager fee and the allowance for bona fide due diligence expenses payable to the Dealer Manager, exceed 13.5% of Gross Proceeds of any applicable offering.   Section 5.2                                      Limitation on Acquisition Fees and Acquisition Expenses. The total of all Acquisition Fees and Acquisition Expenses paid by the Company in connection with the purchase of a Property by the Company shall be reasonable, and shall in no event exceed an amount equal to 6% of the Contract Purchase Price, or in the case of a mortgage loan, 6% of the funds advanced; provided, however, that a majority of the Directors (including the majority of the Independent Directors) not otherwise interested in the transaction may approve fees and expenses in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company.   Section 5.3                                      Limitation on Operating Expenses. The Board of Directors shall have the responsibility of limiting Operating Expenses to amounts that do not exceed the greater of 2% of Average Invested Assets or 25% of NASAA Net Income (the “Excess Expense Guidelines”) for the four consecutive fiscal quarters then ended unless a majority of the Directors (including a majority of the Independent Directors) has made a finding that, based on unusual and non-recurring factors that they deem sufficient, a higher level of expenses (an “Excess Amount”) is justified. Any such finding and the reasons in support thereof shall be reflected in the minutes of the meetings. Within 60 days after the end of any fiscal quarter of the Company for which there is an Excess Amount for the 12 months then ended, there shall be sent to the Stockholders a written disclosure of such fact, together with an explanation of the factors considered in determining that such Excess Amount was justified. In the event that a majority of the Directors (including a majority of the Independent Directors) does not determine that excess expenses are justified, the Advisor shall reimburse the Company within a reasonable time after the end of the 12-month period the amount by which the aggregate annual expenses paid or incurred by the Company exceeded the Excess Expense Guidelines.   18        Section 5.4                                      Limitation on Real Estate Commissions. If the Advisor or a director or Sponsor or any Affiliate thereof provides a substantial amount of the services in the effort to sell the property of the Company, that Person may receive an amount up to 3% of the sales price of such property or properties; provided, however, that the amount paid when added to all other real estate commissions paid to unaffiliated parties in connection with such sale shall not exceed the lesser of the Competitive Real Estate Commission or an amount equal to 6% of the sales price of such property or properties.   Section 5.5                                      Limitation on Transactions with Affiliates.   (a)                               Sales and Leases to the Company. The Company shall not purchase Property from the Sponsor, Advisor, Directors or any Affiliate thereof, unless a majority of Directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair and reasonable to the Company and at a price to the Company no greater than the cost of the asset to such Sponsor, Advisor, Director or any Affiliate thereof, or if the price to the Company is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable and consistent with current market conditions. In no event shall the cost of such asset to the Company exceed its Appraised Value at the time of acquisition of the Property by the Company.   (b)                              Sales and Leases to Sponsor, Advisor, Director or any Affiliate. A Sponsor, Advisor, Director or any Affiliate thereof shall not acquire assets from the Company unless approved by a majority of Directors (including a majority of Independent Directors), not otherwise interested in such transaction, as being fair and reasonable to the Company. The Company may lease assets to a Sponsor, Advisor, Director or any Affiliate thereof only if approved by a majority of the Directors (including a majority of Independent Directors), not otherwise interested in such transaction, as being fair and reasonable to the Company.   (c)                               Loans. No loans may be made by the Company to the Sponsor, Advisor, Director or any Affiliate thereof except that loans may be made to wholly owned subsidiaries of the Company. Notwithstanding the foregoing, subject to the Excess Expense Guidelines, the Company may advance funds to the Advisor for expenses the Advisor anticipates will be incurred by the Advisor within the current month and any such advances shall be deducted from the amounts reimbursed by the Company to the Advisor. The Company may not borrow money from the Sponsor, Advisor, Director or any Affiliate thereof, unless a majority of Directors (including a majority of Independent Directors) not otherwise interested in such transactions, approve the transaction as being fair, competitive and commercially reasonable and no less favorable to the Company than loans between unaffiliated parties under the same circumstances.   (d)                              Other Transactions. All other transactions between the Company and the Sponsor, Advisor, Director or any Affiliate thereof, shall require approval by a majority of the Directors (including a majority of Independent Directors) not otherwise interested in such transactions as being fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.   (e)                               Additional Limitations. Transactions between the Company and its Affiliates are further subject to any express restrictions in the Charter and further subject to any disclosure and ratification requirements of the MGCL and other applicable law.   Section 5.6                                      Limitation of Issuance of Securities. The Company shall not issue (A) equity securities redeemable solely at the option of the holder (except that Stockholders may offer their Common Stock to the Company pursuant to that certain redemption plan adopted or to be adopted by the Board of Directors on terms outlined in the section relating to Common Stock entitled “Stock Repurchase Program” in the Company’s Prospectus relating to the Initial Public Offering); (B) debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt; (C) Stock on a deferred payment basis or under similar arrangements; or (D) assessable equity securities. Options may not be issued to the Advisor, Director, Sponsor or any Affiliate thereof except on the same terms as the securities underlying such Options are sold to the general public. Options may be issued to persons other than the Advisor, Directors, Sponsor or any Affiliate thereof but not at exercise prices less than the fair market value of the underlying securities on the date of grant and not for consideration that in the judgment of the Independent Directors has a market value less than the value of such Option on the date of grant. Options issuable to   19        the Advisor, Directors, Sponsor or any Affiliate thereof shall not exceed 10% of the outstanding shares of Stock on the date of grant. The voting rights per share of Stock of the Company (other than the publicly held Stock of the Company) sold in a private offering shall not exceed the voting rights which bear the same relationship to the voting rights of the publicly held Stock as the consideration paid to the Company for each privately offered share of Stock of the Company bears to the book value of each outstanding publicly held share of Stock.   Section 5.7                                      Limitation on Borrowing. The aggregate borrowing of the Company, secured and unsecured, shall be reasonable in relation to the Net Asset Value of the Company and shall be reviewed by the Board of Directors at least quarterly. Prior to the Listing of the Common Stock, (i) the aggregate amount of Company borrowings in relation to the Net Asset Value shall, in the absence of a satisfactory showing that a higher level of borrowing is appropriate, not exceed 300% of the Net Asset Value and (ii) any excess in borrowing over such 300% of the Net Asset Value shall be approved by a majority of the Independent Directors and disclosed to Stockholders in the Company’s next quarterly report to Stockholders, along with justification for such excess.   The Company may incur indebtedness including to enable it to pay Dividends including those necessary to satisfy the requirement that the Company distribute at least the percentage of its REIT taxable income required for annual distribution of dividends by the Code or otherwise as necessary or advisable to assure that the Company maintains its qualification as a REIT for federal income tax purposes.   ARTICLE 6 INVESTMENT OBJECTIVES AND INVESTMENT LIMITATIONS   Section 6.1                                      Investment Objectives. The Company will endeavor to:   (i)                                           preserve Stockholder capital by owning and operating real estate on an all-cash basis with no permanent debt financing;   (ii)                                     purchase Properties with the potential for capital appreciation to Stockholders;   (iii)                                     purchase income-producing Properties which will allow the Company to pay cash Dividends to Stockholders at least quarterly, if not more frequently; and   (iv)                                    provide liquidity to Stockholders within the shortest reasonable time necessary to accomplish the above objectives.   Within five years from the closing of the Initial Public Offering, the Board must take one or more of the following actions:   (i)                                           modify the Company’s stock redemption program to allow the Company to use proceeds from the sale of Properties to redeem Stock;   (ii)                                     list the Stock for trading on a national securities exchange or the Nasdaq/NMS;   (iii)                              seek Stockholder approval to begin an orderly liquidation of the Company’s assets and distribute the available proceeds of such Sales to Stockholders; or   (iv)                             seek Stockholder approval of another liquidity event such as a Sale of our assets or a merger with another entity.   The sheltering from tax of income from other sources is not an objective of the Company. Subject to the restrictions set forth herein, the Directors will use their commercially reasonable efforts to conduct the affairs of the Company in such a manner as to continue to qualify the Company for the tax treatment provided in the REIT Provisions of the Code; provided, however, no Director, officer, employee or agent of the Company shall be liable for any act or omission resulting in the loss of tax benefits under the Code, except to the extent provided in Section 11.2 hereof.   20        Section 6.2             Review of Objectives. The Independent Directors shall review the investment policies of the Company with sufficient frequency and at least annually to determine that the policies being followed by the Company at any time are in the best interests of its Stockholders. Each such determination and the basis therefore shall be set forth in the minutes of the meetings of the Board of Directors. The Board of Directors may amend the Charter to change the Company’s investment policies or investment restrictions in a manner which adversely affect the rights, preferences and privileges of Stockholders only with the approval of a majority of the Independent Directors.   Section 6.3             Certain Permitted Investments.   (a)             The Company may invest in Properties.   (b)            The Company may invest in Joint Ventures with unrelated parties. The Company may also invest in Joint Ventures with the Sponsor, Advisor, one or more Directors or any Affiliate, but only if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction, approve such investment as being fair and reasonable to the Company and on substantially the same terms and conditions as those received by the other joint venturers.   (c)             Subject to any limitations set forth in Section 6.4, the Company may invest in equity securities if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction approve such investment as being fair, competitive and commercially reasonable.   Section 6.4             Investment Limitations. In addition to other investment restrictions imposed by the Directors from time to time, and consistent with the Company’s objective of qualifying as a REIT, the following shall apply to the Company’s investments prior to, but not after, the Listing of the Common Stock:   (a)             The Company shall not invest in Unimproved Real Property or mortgage loans on Unimproved Real Property.   (b)            The Company shall not invest in commodities or commodity future contracts. This limitation is not intended to apply to futures contracts, when used solely for hedging purposes in connection with the Company’s ordinary business of investing in real estate assets and mortgages, provided that income and gain with respect to such futures contracts is treated as qualifying income under Section 856(c)(2) of the Code.   (c)             The Company may make or invest in mortgage loans provided an appraisal is obtained concerning the underlying property except for those loans insured or guaranteed by a government or government agency. In cases in which a majority of Independent Directors so determine, and in all cases in which the transaction is with the Advisor, Directors, or any Affiliates, such appraisal of the underlying property must be obtained from an Independent Appraiser. Such appraisal shall be maintained in the Company’s records for at least five (5) years and shall be available for inspection and duplication by any Stockholder. In addition to the appraisal, a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or condition of the title must be obtained.   (d)            The Company shall not make or invest in mortgage loans on any one (1) Property if the aggregate amount of all mortgage loans outstanding on the Property, including the loans of the Company, would exceed an amount equal to eighty-five percent (85%) of the Appraised Value of the Property as determined by an Independent Appraiser unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the “aggregate amount of all Mortgage Loans outstanding on the Property, including the loans of the Company” shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged Property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds five percent (5%) per annum of the principal balance of the loan.   (e)             The Company shall not make or invest in construction loans.   (f)             The Company shall not invest in indebtedness secured by a mortgage on real property which is subordinate to the lien of other indebtedness.   21        (g)            The Company shall not make or invest in any mortgage loans that are subordinate to any mortgage, other indebtedness or equity interest of the Advisor, the Directors, the Sponsor or an Affiliate of the Company.   (h)            The Company shall not underwrite the securities of other issuers. In addition, the Company shall not invest in securities of other issuers, except for investments in Joint Ventures as described herein, unless a majority of the Directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair, competitive and commercially reasonable.   (i)              The Company will not make any investment that the Company believes will be inconsistent with its objectives of qualifying and remaining qualified as a REIT.   (j)              The Company shall not invest in real estate contracts of sale, otherwise known as land sale contracts.   (k)             The Company shall not invest in joint ventures with the Sponsor, Advisor, Director or any Affiliate thereof, unless a majority of Directors (including a majority of Independent Directors) not otherwise interested in such transactions, approve the transaction as being fair and reasonable to the Company and on substantially the same terms and conditions as those received by the other joint ventures.   (l)              The Company shall not invest in equity securities unless a majority of Directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable.   (m)            The Company shall not ordinarily pay consideration for a Property acquired by the Company which is not based on the fair market value of the Property as determined by a majority of the Directors. In cases in which a majority of the Independent Directors so determine, and in all cases in which assets are acquired from the Advisor, Directors, Sponsor or their Affiliates, such fair market value shall be as determined by an Independent Appraiser selected by the Independent Directors.   ARTICLE 7 CONFLICTS OF INTEREST RESOLUTION PROCEDURES   Section 7.1             Independent Directors Committee. During any time that the Company is advised by the Advisor, there shall be a committee (the “Independent Directors Committee”) of the Board of Directors comprised of all of the Independent Directors. The Independent Directors Committee shall have the maximum power delegable to a committee under the MGCL and is authorized to select and retain its own legal and financial advisors. The Independent Directors Committee may act on any matter permitted by the MGCL if its minutes reflect that it first determined that the matter at issue was such that the exercise of independent judgment by the directors who are not Independent Directors could reasonably be compromised, provided that this condition shall not apply if the charter otherwise requires that the action shall be taken by the Independent Directors Committee. If this condition is met but the matter cannot be delegated to a committee under the MGCL, both the Board of Directors and the Independent Directors Committee must approve the matter. Any board action regarding Organization and Offering Expenses or the selection of an Independent Appraiser or the matters covered in any of Sections 2.1, 2.6, 3.1, 4.2, 4.6, 4.7, 4.12, 4.16, 5.2, 5.3, 5.5, 5.6, 5.7, 6.2, 6.3, 6.4, 8.3, 10.1, 10.6 and 12.3 shall require the approval of the Independent Directors Committee.   Section 7.2             Voting by Independent Directors Committee. For an action to be taken by the Independent Directors Committee, the matter must be approved by (i) a majority of the Independent Directors and (ii) a majority of the Independent Directors not otherwise interested in the transaction.   Section 7.3             Meetings of Independent Directors Committee. A meeting of the Independent Directors Committee shall be held immediately following and at the same place as any meeting of the board of directors. Any notice of a meeting of the Board of Directors shall be deemed to be a notice of a meeting of the Independent Directors Committee.   22        Section 7.4             Conflict Resolution Procedures. Before the Advisor presents an investment opportunity that would in its judgment be suitable for the Company to another Advisor-sponsored entities, the Advisor shall determine in its sole discretion that the investment opportunity is more suitable for such other program than for the Company based on factors such as the following: as the investment objectives and criteria of each program, the cash requirements and anticipated cash flow of each entity, the size of the investment opportunity, the effect of the acquisition both on diversification of each entity’s investments, the income tax consequences of the purchase on each entity, the policies of each program relating to leverage, the amount of funds available to each program, and the length of time such funds have been available for investment. In the event that an investment opportunity becomes available that is, in the sole discretion of the Advisor, equally suitable for both the Company and another Advisor-sponsored program, then the Advisor may offer the other program the investment opportunity if it has had the longest period of time elapse since it was offered an investment opportunity. The Advisor will use its reasonable efforts to fairly allocate investment opportunities in accordance with such allocation method and will promptly disclose any material deviation from such policy or the establishment of a new policy, which shall be allowed provided (1) the Board is provided with notice of such policy at least 60 days prior to such policy becoming effective and (2) such policy provides for the reasonable allocation of investment opportunities among such programs. The Advisor shall provide the Independent Directors Committee with any information reasonably requested so that the Independent Directors Committee can insure that the allocation of investment opportunities is applied fairly. Nothing herein shall be deemed to prevent the Advisor or an Affiliate from pursuing an investment opportunity directly rather than offering it to the Company or another Advisor-sponsored program so long as the Advisor is fulfilling its obligation to present a continuing and suitable investment program to the Company which is consistent with the investment policies and objectives of the Company. If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of the Board of Directors and the Advisor, to be more appropriate for an entity other than the entity which committed to make the investment, however, the Advisor has the right to agree that the other entity affiliated with the Advisors or its Affiliates may make the investment.   Section 7.5             Compliance with Code Requirements. The provisions of this Article 7 shall be applied consistently with the requirements of Section 856(d)(1) of the Code.   ARTICLE 8 STOCK   Section 8.1             Authorized Stock. The total number of shares of Stock which the Company is authorized to issue is three hundred million (300,000,000), consisting of two hundred ninety million (290,000,000) shares of common stock, $0.001 par value per share (as defined in Section 8.2 hereof), and ten million (10,000,000) shares of preferred stock, $0.001 par value per share (as defined in Section 8.3 hereof). All shares of Stock shall be fully paid and nonassessable when issued. Stock may be issued for such consideration as the Directors determine, or if issued as a result of a share dividend or share split, without any consideration. If shares of one class of Stock are classified or reclassified into shares of another class of Stock pursuant to Sections 8.2(b) or 8.3, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of Stock of all classes that the Company has authority to issue shall not be more than the total number of shares of Stock set forth in the first sentence of this Section 8.1. The Board of Directors, with the approval of a majority of the entire Board and without any action by the Stockholders, may amend the Charter from time to time to increase or decrease the aggregate number of shares of Stock or the number of shares of Stock of any class or series that the Company has authority to issue.   Section 8.2             Common Stock.   (a)             Common Stock Subject to Terms of Preferred Stock. The Common Stock shall be subject to the express terms of any series of Preferred Stock.   (b)            Description. Shares of Common Stock shall have a par value of $0.001 per share and, subject to the provisions of Article IX and except as may otherwise be specified in the terms of any class or series of Common Stock, shall entitle the holders to one (1) vote per share on all matters upon which Stockholders are entitled to vote pursuant to Section 8.2 hereof, and shares of a particular class of issued shares of Common Stock shall have equal dividend, distribution, liquidation and other rights, and shall have no preference,   23        cumulative, preemptive, conversion or exchange rights. The Directors may classify or reclassify any unissued shares of Common Stock from time to time in one or more classes or series of Stock by designating a class or series to distinguish the class or series of classified or reclassified shares from all other classes and series of Stock, specifying the number of shares to be included in such class or series, setting or changing, subject to the provisions of Article IX and the express terms of any class or series of Stock outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any such shares of Common Stock and, in such event, the Company shall file for record with the SDAT articles supplementary in substance and form as prescribed by Title 2 of the MGCL. Any of the terms of any class or series of Stock set or changed may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board of Directors or other facts or events within the control of the Company) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other charter document.   (c)             Distribution Rights. The holders of shares of Common Stock shall be entitled to receive such Dividends as may be authorized by the Board of Directors of the Company out of funds legally available therefor.   (d)            Dividend or Distribution Rights. The Directors from time to time may authorize and the Company shall pay to holders of shares of Common Stock such Dividends or distributions in cash or other property as the Directors in their discretion shall determine. The Directors shall endeavor to authorize and the Company shall pay such Dividends and distributions as shall be necessary for the Company to qualify as a real estate investment trust under the REIT Provisions of the Code; provided, however, Stockholders shall have no right to any dividend or Distribution unless and until authorized by the Directors. The exercise of the powers and rights of the Directors pursuant to this section shall be subject to the provisions of any senior class or series of Stock at the time outstanding. The receipt by any Person in whose name any shares of Stock are registered on the records of the Company or by his duly authorized agent shall be a sufficient discharge for all Dividends or distributions payable or deliverable in respect of such Stock and from all liability to see to the application thereof. Distributions in kind shall not be permitted, except for (i) distributions of equity securities of the Company pursuant to the Special 10% Stock Dividend; (ii) distributions of readily marketable securities, including readily marketable equity securities of the Company and (iii) distributions of beneficial interests in a liquidating trust established for the dissolution of the Company and the liquidation of its assets in accordance with the terms of these Articles of Incorporation.   (e)             Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets of the Company, the aggregate assets available for distribution to holders of the shares of Common Stock shall be determined in accordance with applicable law. Each holder of Common Stock of a particular class shall be entitled to receive, ratably with (i) each other holder of Common Stock of such class and (ii) each holder of Stock-in-Trust, that portion of such aggregate assets available for distribution to such class as the number of the outstanding shares of Common Stock held by such holder bears to the total number of outstanding shares of Common Stock of such class and Stock-in-Trust of such class then outstanding.   (f)             Voting Rights. Except as may be provided otherwise in these Articles of Incorporation, and subject to the express terms of any series of Preferred Stock, the holders of the Common Stock shall have the exclusive right to vote on all matters (as to which a common Stockholder shall be entitled to vote pursuant to applicable law) at all meetings of the Stockholders of the Company.   Section 8.3             Preferred Stock. The Directors may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, in one or more classes or series of Stock. Notwithstanding the foregoing authority, (i) the authorization of any class or series of Preferred Stock shall be approved by a majority of the Independent Directors and (ii) shares of Preferred Stock of any class or series may not be issued to the Advisor, any Director or any of their Affiliates unless and until the rights and preferences of such class or series of Preferred Stock have been approved by holders of Common Stock. Prior to the issuance of each such class or series, the Board of Directors, by resolution, shall (i) designate that class or series to distinguish it from all other classes and series of Stock, (ii) specify the number of shares to be included in the class or series, (iii) set or change, subject to the provisions of Article IX and to the express terms of any class or series of Stock outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions,   24        limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series and (iv) cause the Company to file articles supplementary with the SDAT. Any of the terms of any class or series of stock set or changed may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board of Directors or other facts or events within the control of the Company) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other charter document. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:   (a)             The designation of the series, which may be by distinguishing number, letter or title.   (b)            The dividend rate on the shares of the series, if any, whether any dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series.   (c)             The redemption rights, including conditions and the price or prices, if any, for shares of the series.   (d)            The terms and amounts of any sinking fund for the purchase or redemption of shares of the series.   (e)             The rights of the shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, and the relative rights of priority, if any, of payment of shares of the series.   (f)             Whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Company or any other corporation or other entity, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates on which such shares shall be convertible and all other terms and conditions upon which such conversion may be made.   (g)            Restrictions on the issuance of shares of the same series or of any other class or series.   (h)            The voting rights of the holders of shares of the series subject to the limitations contained in this Section 8.3; provided, however, that the voting rights of the holders of shares of any series of Preferred Stock shall not exceed the voting rights that bear the same relationship to the voting rights of the holders of Common Stock as the consideration paid to the Company for each share of Preferred Stock bears to the book value of each outstanding share of Common Stock.   (i)              Any other relative rights, preferences and limitations on that series, subject to the express provisions of any other series of Preferred Stock then outstanding. Notwithstanding any other provision of these Articles of Incorporation, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares, or alter the designation or classify or reclassify any unissued shares of a particular series of Preferred Stock, by fixing or altering, in one or more respects, from time to time before issuing the shares, the terms, rights, restrictions and qualifications of the shares of any such series of Preferred Stock.   Section 8.4             Preemptive and Appraisal Rights. Except as may be provided by the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 8.2 or 8.3 or as may otherwise be provided by contract, holders of Stock shall not have any preemptive or other right to purchase or subscribe for any class of securities of the Company which the Company may at any time issue or sell. Holders of Stock shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon the affirmative vote of a majority of the Board of Directors, shall determine that such rights apply, with respect to all or any classes or series of Stock, to one or more   25        transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights.   Section 8.5             No Issuance of Share Certificates. Until Listing, the Company shall not issue share certificates except to Stockholders who make a written request to the Company. A Stockholder’s investment shall be recorded on the books of the Company. To transfer his or her Stock a Stockholder shall submit an executed form to the Company, which form shall be provided by the Company upon request. Such transfer will also be recorded on the books of the Company. Upon issuance or transfer of Stock, the Company will provide the Stockholder with information concerning his or her rights with regard to such Stock, in a form substantially similar to Section 9.12, and as required by the Bylaws and the MGCL or other applicable law.   Section 8.6             Suitability of Stockholders.   (a)             Investor Suitability Standards. Subject to suitability standards established by individual states, to become a Stockholder in the Company, if such prospective Stockholder is an individual (including an individual beneficiary of a purchasing Individual Retirement Account), or if the prospective Stockholder is a fiduciary (such as a trustee of a trust or corporate pension or profit sharing plan, or other tax-exempt organization, or a custodian under a Uniform Gifts to Minors Act), such individual or fiduciary, as the case may be, must represent to the Company, among other requirements as the Company may require from time to time:   (1)           that such individual (or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase the Shares) has a minimum annual gross income of $45,000 and a net worth (excluding home, furnishings and automobiles) of not less than $45,000; or   (2)           that such individual (or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase the Stock) has a net worth (excluding home, furnishings and automobiles) of not less than $150,000.   (b)            Determination of Suitability of Sale. The Sponsor and each Person selling Stock on behalf of the Sponsor or the Company shall make every reasonable effort to determine that the purchase of Stock is a suitable and appropriate investment for each Stockholder. In making this determination, the Sponsor or each Person selling Stock on behalf of the Sponsor or the Company shall ascertain that the prospective Stockholder: (i) meets the minimum income and net worth standards established for the Company; (ii) can reasonably benefit from the Company based on the prospective Stockholder’s overall investment objectives and portfolio structure; (iii) is able to bear the economic risk of the investment based on the prospective Stockholder’s overall financial situation; and (iv) has apparent understanding of the fundamental risks of the investment; the risk that the Stockholder may lose the entire investment; the lack of liquidity of Stock; the restrictions on transferability of Stock; the background and qualifications of the Sponsor or the Advisor; and the tax consequences of the investment. The Sponsor or each Person selling Stock on behalf of the Sponsor or the Company shall make this determination on the basis of information it has obtained from a prospective Stockholder. Relevant information for this purpose will include at least the age, investment objectives, investment experiences, income, net worth, financial situation, and other investments of the prospective Stockholder, as well as any other pertinent factors.   The Sponsor or each Person selling Stock on behalf of the Sponsor or the Company shall maintain records of the information used to determine that an investment in Stock is suitable and appropriate for a Stockholder. The Sponsor or each Person selling Stock on behalf of the Sponsor or the Company shall maintain these records for at least six years.   (c)             Minimum Investment. Subject to certain individual state requirements, no sale of Stock by the Company to initial investors will be permitted of less than $2,000 except that no sale of Stock by the Company to initial investors which are retirement plans including Keoghs and IRAs will be permitted of less than $1,000.   Section 8.7             Repurchase of Shares. The Board of Directors may establish, from time to time, a program or programs by which the Company voluntarily repurchases Stock from its Stockholders, provided, however, that such repurchase does not impair the capital or operations of the Company and does not violate any   26        provision of this Article 8 or applicable law. The Sponsor, Advisor, Directors or any Affiliates thereof may not receive any fees on the repurchase of Shares by the Company.   Section 8.8             Dividend Reinvestment Plans. The Board of Directors may establish, from time to time, a dividend reinvestment plan or plans (a “Reinvestment Plan”). Pursuant to such Reinvestment Plan, (i) all material information regarding the Dividends to the Stockholders and the effect of reinvesting such Dividends, including the United States federal income tax consequences of the reinvestment, shall be provided to the Stockholders at least annually, and (ii) each Stockholder participating in such Reinvestment Plan shall have a reasonable opportunity to withdraw from the Reinvestment Plan at least annually after receipt of the information required in clause (i) above.   Section 8.9             Charter and Bylaws. The rights of all Stockholders and the terms of all Stock are subject to the provisions of the Charter and the Bylaws.   ARTICLE 9 RESTRICTIONS ON OWNERSHIP AND TRANSFER OF STOCK   Section 9.1             Definitions. For purposes this Article 9, the following terms shall have the following meanings:   Acquire means the acquisition of Beneficial or Constructive Ownership of Stock by any means, including, without limitation, the exercise of any rights under any option, warrant, convertible security, pledge or other security interest or similar right to acquire Stock, but shall not include the acquisition of any such rights unless, as a result, the acquirer would be considered a Beneficial Owner or Constructive Owner. The terms “Acquires” and “Acquisition” shall have correlative meanings.   Beneficial Ownership means ownership of Stock by a Person who would be treated as an owner of such Stock either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms “Beneficial Owner,” “Beneficially Owns,” “Beneficially Own” and “Beneficially Owned” shall have correlative meanings.   Beneficiary means the beneficiary of the Trust as determined pursuant to Section 9.13(e)(1) hereof.   Common Stock Ownership Limit means, with respect to any class of Common Stock, 9.8% of the outstanding Common Stock, subject to adjustment pursuant to Section 9.10 (but not more than 9.8% of the outstanding Common Stock, as so adjusted) and to any other limitations contained in this Article 9. The Common Stock Ownership Limit may be based on either the number of shares of Common Stock or the value of such stock, whichever is more restrictive.   Constructive Ownership Equity means ownership of Stock by a Person who could be treated as an owner of such Stock, either actually or constructively, directly or indirectly, through the application of Section 318 of the Code, as modified by Section 856(d)(5) thereof. The terms “Constructive Owner,” “Constructively Owns,” “Constructively Own” and “Constructively Owned” shall have correlative meanings.   Market Price means, on any date, the average of the Closing Price for the five consecutive Trading Days ending on such date. The “Closing Price” on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if the Stock is not listed or admitted to trading on the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Stock is listed or admitted to trading or, if the Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the Nasdaq/NMS market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the Stock is not quoted by any such organization, as determined in good faith by the Board of Directors.   Ownership Limit means the Common Stock Ownership Limit or the Preferred Stock Ownership Limit, or both, as the context may require.   27        Preferred Stock Ownership Limit means, with respect to the Preferred Stock, 9.8% of the outstanding Stock of a particular series of Preferred Stock of the Company, subject to adjustment pursuant to Section 9.10 (but not more than 9.8% of any outstanding series of Preferred Stock, as so adjusted) and to any other limitations contained in this Article 9. The Preferred Stock Ownership Limit may be based on either the number of shares of Common Stock or the value of such stock, whichever is more restrictive.   Purported Beneficial Holder means, with respect to any purported Transfer or Acquisition or other event or transaction which results in Stock-in-Trust, the Person for whom the applicable Purported Record Holder held the shares of Stock that were, pursuant to this Article 9, automatically transferred to the Trust upon the occurrence of such event or transaction. The Purported Beneficial Holder and the Purported Record Holder may be the same Person.   Purported Beneficial Transferee means, with respect to any purported Transfer or Acquisition or other event or transaction which results in Stock-in-Trust, the purported beneficial transferee for whom the Purported Record Transferee would have acquired Stock if such Transfer or Acquisition which results in Stock-in-Trust had been valid under Section 9.2. The Purported Beneficial Transferee and the Purported Record Transferee may be the same Person.   Purported Record Holder means, with respect to any purported Transfer or Acquisition or other event or transaction which results in Stock-in-Trust, the record holder of the shares of Stock that were, pursuant to Section 9.3, automatically deemed to be Stock-in-Trust upon the occurrence of such an event or transaction. The Purported Record Holder and the Purported Beneficial Holder may be the same Person.   Purported Record Transferee means, with respect to any purported Transfer or Acquisition or other event or transaction which results in Stock-in-Trust, the record holder of the Stock if such Transfer or Acquisition which results in Stock-in-Trust had been valid under Section 9.2. The Purported Record Transferee and the Purported Beneficial Transferee may be the same Person.   Restriction Termination Date means the first day after the date of the closing of the Initial Public Offering on which the Board of Directors of the Company, pursuant to Section 3.3 hereof, determines that it is no longer in the best interests of the Company to attempt or continue to qualify as a REIT.   Stock-in-Trust means those shares of Stock that are automatically transferred to the Trust as a result of a purported Transfer, Acquisition, change in the capital structure of the Company, other purported change in the Beneficial or Constructive Ownership of Stock or other event or transaction as described in Section 9.3.   Trading Day means a day on which the principal national securities exchange on which the affected class or series of Stock is listed or admitted to trading is open for the transaction of business or, if the affected class or series of Stock is not so listed or admitted to trading, shall mean any day other than a Saturday, Sunday or other day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.   Transfer means any sale, transfer, gift, hypothecation, assignment, devise or other disposition of a direct or indirect interest in Stock or the right to vote or receive dividends on Stock, including without limitation (i) the granting of any option (including any option to acquire an option or any series of such options) or entering into any agreement for the sale, transfer or other disposition of Stock or the right to vote or receive dividends on Stock or (ii) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Stock, whether voluntary or involuntary, of record, constructively or beneficially, and whether by operation of law or otherwise. The terms “Transfers,” “Transferred” and “Transferable” shall have correlative meanings.   Trust means the trust created pursuant to Section 9.13(a) hereof.   Trustee means the trustee of the Trust, as appointed by the Company or any successor trustee thereof, which Trustee shall not be an Affiliate of the Company or of the Purported Record Holder, the Purported Beneficial Holder, the Purported Record Transferee, or the Purported Beneficial Transferee.   28        Section 9.2             Ownership and Transfer Limitations.   (a)             Notwithstanding any other provision of the Charter, except as provided in Section 9.9 and subject to Section 9.15, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, no Person shall Beneficially or Constructively Own Stock in excess of the Common or Preferred Stock Ownership Limits.   (b)            Notwithstanding any other provision of these Articles of Incorporation, except as provided in Section 9.9(a) and subject to Section 9.15, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership of Stock or other event or transaction that, if effective, would result in any Person Beneficially or Constructively Owning Stock in excess of the Common or Preferred Stock Ownership Limits shall be void ab initio as to the Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or other event or transaction with respect to that number of shares of Stock which would otherwise be Beneficially or Constructively Owned by such Person in excess of the Common or Preferred Stock Ownership Limits, and none of the Purported Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial Holder or the Purported Record Holder shall acquire any rights in that number of such shares.   (c)             Notwithstanding any other provision of these Articles of Incorporation, subject to Section 9.15, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer, Acquisition, change in the capital structure of the Company, or other purported change in Beneficial or Constructive Ownership (including actual ownership) of Stock or other event or transaction that, if effective, would result in the Stock being actually owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership (including actual ownership) or other event or transaction with respect to that number of shares of Stock which otherwise would be owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee or subsequent owner (including a Beneficial Owner or Constructive Owner) shall acquire no rights in such shares of Stock.   (d)            Notwithstanding any other provision of these Articles of Incorporation, subject to Section 9.15, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership of Stock or other event or transaction that, if effective, would cause the Company to fail to qualify as a REIT by reason of being “closely held” within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or other event or transaction with respect to that number of shares of Stock which would cause the Company to be “closely held” within the meaning of Section 856(h) of the Code, and none of the Purported Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial Holder or the Purported Record Holder shall acquire any rights in such shares of Stock.   (e)             Notwithstanding any other provision of these Articles of Incorporation, subject to Section 9.15, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer, Acquisition, change in capital structure of the Company, or other purported change in Beneficial or Constructive Ownership of Stock or other event or transaction that, if effective, would cause the Company to Constructively Own 9.8% or more of the ownership interests in a tenant of the real property of the Company, the Operating Partnership or any direct or indirect subsidiary (including, without limitation, partnerships, joint ventures and limited liability companies) of the Company or the Operating Partnership (a “Subsidiary”), within the meaning of Section 856(d)(2)(B) of the Code or otherwise, directly or indirectly, would cause the Company to fail to qualify as a REIT, shall be void AB INITIO as to the Transfer, Acquisition, change in capital structure of the Company, other purported change in Beneficial or Constructive Ownership or other event or transaction with respect to that number of shares of Stock which would cause the Company to Constructively Own 9.8% or more of the ownership interests in a tenant of the Company’s, the Operating Partnership’s or a Subsidiary’s real property, within the meaning of Section 856(d)(2)(B) of the Code, or otherwise, directly or indirectly, would cause the Company to fail to qualify as a REIT, and none of the Purported Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial Holder or the Purported Record Holder shall acquire any rights such shares of Stock.   29          (f)             Notwithstanding any other provision of these Articles of Incorporation, subject to Section 9.16, from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership of Stock or other event or transaction that, if effective, would cause the Company to fail to qualify as a REIT by reason of the fact that such Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership of Stock or other event or transaction violates any applicable jurisdiction’s securities laws or regulations shall be void ab initio as to the Transfer, Acquisition, change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or other event or transaction with respect to such Stock and none of the Purported Beneficial Transferee, the Purported Record Transferee, the Purported Beneficial Holder or the Purported Record Holder shall acquire any rights in that number of shares of Stock.   Section 9.3             Transfer of Shares to Trust.   (a)             If, notwithstanding the other provisions contained in this Article 9, at any time from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Acquisition or a change in the capital structure of the Company, other purported change in the Beneficial or Constructive Ownership of Stock or other event or transaction such that any Person would either Beneficially or Constructively Own Stock in excess of the Common or Preferred Stock Ownership Limit, then, except as otherwise provided in Section 9.9, such shares of Stock (rounded up to the next whole number of shares) in excess of the Common or Preferred Stock Ownership Limit automatically shall be transferred to the Trust. Such transfer to the Trust shall be effective as of the close of business on the business day next preceding the date of the purported Transfer or Acquisition or change in capital structure, other purported change in Beneficial or Constructive Ownership of Stock, or other event or transaction.   (b)            If, notwithstanding the other provisions contained in this Article 9, at any time from the first closing date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Acquisition or a change in the capital structure of the Company, other purported change in the Beneficial or Constructive Ownership of Stock or other event or transaction which, if effective, would result in a violation of any of the restrictions described in paragraphs (c), (d), (e) and (f) of Section 9.2, or otherwise, directly or indirectly, would cause the Company to fail to qualify as a REIT, then the shares of Stock (rounded up to the next whole number of shares) purportedly being Transferred or Acquired or which are otherwise affected by the change in capital structure or other purported change in Beneficial or Constructive Ownership or other event or transaction and which, in any case, would result in a violation of any of the restrictions described in paragraphs (c), (d), (e) and (f) of Section 9.2 or otherwise would cause the Company to fail to qualify as a REIT automatically shall be transferred to the Trust. Such transfer to the Trust shall be effective as of the close of business on the business day prior to the date of the purported Transfer or Acquisition or change in capital structure, other purported change in Beneficial or Constructive Ownership or other event or transaction.   Section 9.4             Remedies for Breach. If the Board of Directors or its designee shall at any time determine in good faith that a purported Transfer, Acquisition, change in the capital structure of the Company or other purported change in Beneficial or Constructive Ownership or other event or transaction has taken place in violation of Section 9.2 or in violation of any securities law or regulations of any applicable jurisdiction, or that a Person intends to Acquire or has attempted to Acquire Beneficial or Constructive Ownership of any Stock in violation of this Article 9 (whether or not such violation is intended), the Board of Directors or its designee shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer, Acquisition, change in the capital structure of the Company, other attempt to Acquire Beneficial or Constructive Ownership of any Stock or other event or transaction, including, but not limited to, causing the Company to redeem shares, refusing to give effect thereto on the books of the Company or instituting injunctive proceedings with respect thereto; provided, however, that any Transfer, Acquisition, change in the capital structure of the Company, attempted Transfer or other attempt to Acquire Beneficial or Constructive Ownership of any Stock or other event or transaction in violation of paragraphs (b), (c), (d) and (e) of Section 9.2 (as applicable) shall be void ab initio and where applicable automatically shall result in the transfer to the Trust described in Section 9.3, irrespective of any action (or inaction) by the Board of Directors or its designee.   Section 9.5             Notice of Restricted Transfer. Any Person who acquires or attempts to Acquire Beneficial or Constructive Ownership of Stock in violation of Section 9.2 and any Person who Beneficially or Constructively Owns Stock-in-Trust as a transferee of Stock resulting in a transfer of Stock to the Trust, pursuant to   30        Section 9.3, or otherwise shall immediately give written notice to the Company, or, in the event of a proposed or attempted Transfer, Acquisition, or purported change in Beneficial or Constructive Ownership, shall give at least fifteen (15) days prior written notice to the Company, of such event and shall promptly provide to the Company such other information as the Company, in its sole discretion, may request in order to determine the effect, if any, of such Transfer, proposed or attempted Transfer, Acquisition, proposed or attempted Acquisition or purported change in Beneficial or Constructive Ownership on the Company’s status as a REIT.   Section 9.6             Owners Required to Provide Information. From the date of the Initial Public Offering and prior to the Restriction Termination Date:   (a)             Every Beneficial or Constructive Owner of more than five percent (5%), or such lower percentages as determined pursuant to regulations under the Code or as may be requested by the Board of Directors, in its sole discretion, of the outstanding shares of any class or series of Stock of the Company shall annually, no later than January 30 of each calendar year, give written notice to the Company stating (i) the name and address of such Beneficial or Constructive Owner; (ii) the number of shares of each class or series of Stock Beneficially or Constructively Owned; and (iii) a description of how such shares are held. Each such Beneficial or Constructive Owner promptly shall provide to the Company such additional information as the Company, in its sole discretion, may request in order to determine the effect, if any, of such Beneficial or Constructive Ownership on the Company’s status as a REIT and to ensure compliance with the Common or Preferred Stock Ownership Limit and other restrictions set forth herein.   (b)            Each Person who is a Beneficial or Constructive Owner of Stock and each Person (including the Stockholder of record) who is holding Stock for a Beneficial or Constructive Owner promptly shall provide to the Company such information as the Company, in its sole discretion, may request in order to determine the Company’s status as a REIT, to comply with the requirements of any taxing authority or other governmental agency, or to determine any such compliance or to ensure compliance with the Common or Preferred Stock Ownership Limits and other restrictions set forth herein.   Section 9.7             Remedies Not Limited. Subject to Section 9.15, nothing contained in this Article 9 shall limit the scope or application of the provisions of Sections 9.1 through 9.12, the ability of the Company to implement or enforce compliance with the terms hereof or the authority of the Board of Directors to take any such other action or actions as it may deem necessary or advisable to protect the Company and the interests of its Stockholders by preservation of the Company’s status as a REIT and to ensure compliance with the Ownership Limit for any class or series of Stock and other restrictions set forth herein, including, without limitation, refusal to give effect to a transaction on the books of the Company.   Section 9.8             Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article 9, including any definition contained in Sections 1.6 and 9.1, the Board of Directors shall have the power and authority, in its sole discretion, to determine the application of the provisions of this Article 9 with respect to any situation based on the facts known to it. In the event Section 9.2, 9.3 or 9.4 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 9.1, 9.2, 9.3 or 9.4. Absent a decision to the contrary by the Board of Directors (which the Board may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Section 9.2) acquired Beneficial or Constructive Ownership of Stock in violation of Section 9.2, such remedies (as applicable) shall apply first to the shares of Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Stock based upon the relative number of the shares of Stock held by each such Person.   Section 9.9             Waivers by Board. Upon notice of an Acquisition or Transfer or a proposed Acquisition or Transfer which results or would result in the intended transferee having Beneficial Ownership of shares in excess of the Ownership Limit, the Board of Directors may, upon receipt of evidence deemed to be satisfactory by the Board of Directors, in its sole discretion, that such Acquisition or Transfer does not or will not violate the “closely held” provisions of Section 856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT, waive the Ownership Limit with respect to such transferee upon such conditions as the Board of Directors may direct.   Section 9.10           Increase and Decrease in Common or Preferred Stock Ownership Limit. Subject to the limitations contained in Section 9.11, the Board of Directors may from time to time increase the Common or   31        Preferred Stock Ownership Limits for any Person and decrease the Common or Preferred Stock Ownership Limits for all other Persons; provided, however, that the decreased Common or Preferred Stock Ownership Limit will not be effective for any Person whose percentage ownership in Stock is in excess of such decreased Common or Preferred Stock Ownership Limit until such time as such Person’s percentage of Stock equals or falls below the decreased Common or Preferred Stock Ownership Limit, but any further acquisition of Stock in excess of such percentage ownership of Stock will be in violation of the Common or Preferred Stock Ownership Limit and, provided further, that the new Common or Preferred Stock Ownership Limit would not allow five or fewer Persons to Beneficially Own more than 49.9% in value of the outstanding Stock.   Section 9.11           Limitation on Modifications.   (a)             The Ownership Limit for a class or series of Stock may not be increased and no additional ownership limitations may be created if, after giving effect to such increase or creation, the Company would be “closely held” within the meaning of Section 856(h) of the Code.   (b)            Prior to any modification of the Ownership Limit with respect to any Person, the Board of Directors may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary, advisable or prudent, in its sole discretion, in order to determine or ensure the Company’s status as a REIT.   (c)             Neither the Preferred Stock Ownership Limit nor the Common Stock Ownership Limit may be increased to a percentage that is greater than 9.8%.   Section 9.12           Notice to Stockholders Upon Issuance or Transfer. Upon issuance or transfer of Stock, the Company shall provide the recipient with a notice containing information about the shares purchased or otherwise transferred, in lieu of issuance of a share certificate, in a form substantially similar to the following:   “The securities issued or transferred are subject to restrictions on transfer and ownership for the purpose of maintenance of the Company’s status as a real estate investment trust (a “REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). Except as otherwise provided pursuant to the Articles of Incorporation of the Company, no Person may (i) Beneficially or Constructively Own any class of Common Stock of the Company in excess of 9.8% (or such greater percent as may be determined by the Board of Directors of the Company) in number of shares or value, whichever is more restrictive, of such outstanding Common Stock; (ii) Beneficially or Constructively Own shares of any series of Preferred Stock of the Company in excess of 9.8% (or such greater percent as may be determined by the Board of Directors of the Company) in number of shares or value, whichever is more restrictive, of the outstanding shares of such series of Preferred Stock; (iii) Beneficially or Constructively Own Common Stock or Preferred Stock (of any class or series) which would result in the Company being “closely held” under Section 856(h) of the Code; (iv) Beneficially or Constructively Own Common Stock or Preferred Stock that would cause the Company to Constructively Own 9.8% or more of the ownership interests in a tenant of the Company’s, the Operating Partnership’s or a Subsidiary’s real property, within the meaning of Section 856(d)(2)(B) of the Code or which otherwise would cause the Company to fail to qualify as a REIT; or (v) Beneficially or Constructively own Common Stock or Preferred Stock that would cause the Company to fail to qualify as a REIT by reason of a violation of an applicable jurisdiction’s securities laws or regulations. No Person may Transfer shares of Stock if such Transfer would result in the Stock being owned by fewer than 100 Persons. Any Person who has Beneficial or Constructive Ownership, or who Acquires or attempts to Acquire Beneficial or Constructive Ownership of Common Stock and/or Preferred Stock in excess of the above limitations and any Person who Beneficially or Constructively Owns Stock-in-Trust as a transferee of Common or Preferred Stock resulting in a transfer of Stock to the Trust (as described below) immediately must notify the Company in writing or, in the event of a proposed or attempted Transfer or Acquisition or purported change in Beneficial or Constructive Ownership, must give written notice to the Company at least 15 days prior to the proposed or attempted transfer, transaction or other event. Any Transfer or Acquisition of   32        Common Stock and/or Preferred Stock or other event which results in a violation of the ownership or transfer limitations set forth in the Company’s Articles of Incorporation shall be void ab initio and none of the Purported Beneficial or Record Transferees or the purported Beneficial or Record Holders shall have or acquire any rights in such Common Stock and/or Preferred Stock. If the transfer and ownership limitations referred to herein are violated, the Common Stock or Preferred Stock represented hereby automatically will be transferred to the Trust and deemed to be Stock-in-Trust to the extent of violation of such limitations, and such Stock-in-Trust will be held in trust by a trustee appointed by the Company, all as provided by the Articles of Incorporation of the Company. In addition, the Company may redeem shares upon the terms and conditions specified by the Board of Directors in its sole discretion if the Board of Directors determines that ownership or a Transfer or Acquisition or other event may violate the restrictions described above. All defined terms used in this legend have the meanings identified in the Company’s Articles of Incorporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each Stockholder who so requests.”   Section 9.13           Stock-In-Trust.   (a)             Ownership in Trust. Upon any purported Transfer or Acquisition or a change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or event or transaction that results in Stock-in-Trust pursuant to Section 9.3, such Stock-in-Trust shall be deemed to have been transferred to a trust (“Trust”) for the exclusive benefit of the Beneficiary. Stock-in-Trust so held in trust shall be issued and outstanding stock of the Company. The Purported Record Transferee or Purported Record Holder shall have no rights in such Stock-in-Trust except as provided in Section 9.13(c) and Section 9.13(e).   (b)            Distribution Rights. Stock-in-Trust shall be entitled to the same rights and privileges as all other shares of the same class or series. The Trustee will receive all distributions and Dividends on the Stock-in-Trust and will hold such Dividends and distributions in trust for the benefit of the Beneficiary. Any Dividend or distribution with a record date on or after the date that Stock becomes Stock-in-Trust which were paid on such Stock to the Purported Record Transferee or to the Purported Record Holder shall be repaid to the Trust, and any such Dividend or distribution declared on such Stock but unpaid shall be paid to the Trustee to hold in trust for the benefit of the Beneficiary. The Company shall take all measures that it determines are reasonably necessary to recover the amount of any such dividend or Distribution paid to the Purported Record Transferee or Purported Record Holder, including, if necessary, withholding any portion of future Dividends or distributions payable on Stock Beneficially Owned or Constructively Owned by such Persons and, as soon as reasonably practicable following the Company’s receipt or withholding thereof, paying over to the Trust for the benefit of the Beneficiary the Dividends so received or withheld, as the case may be.   (c)             Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any other distribution of the assets, of the Company, each holder of Stock-in-Trust resulting from the transfer to the Trust of any specified class or series shall be entitled to receive, ratably with each other holder of Stock-in-Trust resulting from the transfer to the Trust of such class or series and each holder of Stock of such class or series, that portion of the remaining assets of the Company, as are due to holders of Preferred Stock of such series or available for distribution to the holders of such class of Common Stock, as applicable.   The Trustee shall distribute to the Purported Record Transferee or Purported Record Holder the amounts received upon such liquidation, dissolution, winding up or distribution, provided that the Purported Record Transferee or Purported Record Holder shall not be entitled to receive amounts pursuant to this Section 9.13(c) in excess of the price per share in the transaction that created such Stock-in-Trust (or, in the case of a gift or devise, the Market Price per share on the date of such transfer). Any remaining amounts shall be distributed to the Beneficiary.   (d)            Voting Rights. The Trustee shall be entitled to vote the Stock-in-Trust on any matters on which holders of Stock of the same class or series are entitled to vote (except as required otherwise by the MGCL). Any vote taken with respect to shares of Stock prior to the discovery by the Company that such shares of Stock have become Stock-in-Trust shall, subject to applicable law, be rescinded and be void ab initio and be recast   33        by the Trustee, in its sole and absolute discretion, provided that if the Company has already taken irreversible corporate action based on such vote, then the Trustee shall not have the authority to rescind and recast such vote. The Purported Record Transferee or Purported Record Holder shall be deemed to have given, as of the date of the transfer of such Stock to the Trust pursuant to Section 9.3, an irrevocable proxy to the Trustee to vote the Stock-in-Trust in the manner in which the Trustee, in its sole and absolute discretion, desires.   (e)             Restrictions on Transfer; Designation of Beneficiary; Sales of Stock-in-Trust.   (1) Except as described in this Section 9.13(e) and in Section 9.13(c), Stock-in-Trust shall not be transferable. The Beneficiary shall be one or more charitable organizations that is described in Section 501(c)(3), 170(b)(1)(A) or 170(c)(2) of the Code named by the Company within five (5) days after the Trust is established. However, for purposes of sales by the Trustee as set forth herein, the Trustee shall designate a permitted transferee of the Stock represented by such Stock-in-Trust provided that the transferee (i) purchases such Stock for valuable consideration and (ii) acquires such Stock without such acquisition resulting in another automatic transfer of Stock into the Trust. If the Company does not purchase the Stock-in-Trust, the Trustee shall (i) sell that number of shares of Stock represented by such Stock-in-Trust to the permitted transferee, (ii) cause to be recorded on the books of the Company that the permitted transferee is the holder of record of such number of shares of Stock and (iii) cause the Stock-in-Trust to be canceled.   (2) In the event of a sale by the Trustee of the Stock represented by such Stock-in-Trust, the Purported Record Transferee or Purported Record Holder shall receive from the Trustee a per share price equal to the lesser of (i) the price per share in the transaction that created such Stock-in-Trust (or, in the case of a gift or devise, the Market Price per share on the date of such transfer) and (ii) the price per share received by the Trustee, provided that such price per share shall be net of any commissions and other expenses of the sale. The Trustee may reduce the amount payable to the Purported Record Transferee or Purported Record Holder by the amount of Dividends and distributions which have been paid to the Purported Record Transferee or Purported Record Holder and are owed by the Purported Record Transferee or Purported Record Holder to the Trustee pursuant to Section 9.13(b). The proceeds shall be sent to such Person within five business days after the closing of such sale transaction.   (3) All Stock-in-Trust will be deemed to have been offered for sale to the Company, or its designee, and the Company will have the right to accept such offer for a period of twenty (20) days after the later of (i) the date of the purported Transfer or Acquisition or a change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or event or transaction which resulted in such Stock-in-Trust and (ii) the date the Company determines in good faith that a purported Transfer or Acquisition or a change in the capital structure of the Company, other purported change in Beneficial or Constructive Ownership or event or transaction resulting in such Stock-in-Trust occurred, if the Company does not receive a notice pursuant to Section 9.5. If the Company accepts the offer to purchase such Stock-in-Trust, the purchase price per share shall be equal to the lesser of (i) the price per share in the transaction that created such Stock-in-Trust (or, in the case of a gift or devise, the Market Price at the time of such gift or devise) and (ii) the Market Price on the date the Company, or its designee, accepts such offer.   (4) Any amounts received by the Trustee in excess of the amounts paid to the Purported Record Transferee or Purported Record Holder shall be distributed to the Beneficiary.   Section 9.14           Remedies Not Limited. Subject to Section 9.15, nothing contained in this Article 9 shall limit the scope or application of the provisions of Section 9.13, the ability of the Company to implement or enforce compliance with the terms hereof or the authority of the Board of Directors to take any such other action or actions as it may deem necessary or advisable to protect the Company and the interests of its Stockholders by preservation of the Company’s status as a REIT and to ensure compliance with the applicable Ownership Limits and the other restrictions set forth herein, including, without limitation, refusal to give effect to a transaction on the books of the Company.   Section 9.15           Settlements. Nothing in this Article 9 shall preclude the settlement of any transaction with respect to the Stock entered into through the facilities of the New York Stock Exchange or other national securities exchange on which the Stock are listed. The fact that the settlement of any transaction occurs shall not   34        negate the effect of any other provisions of this Article 9 and any transferee in such a transaction shall be subject to all of the provision and limitations set forth in such Sections.   Section 9.16           Severability. If any provision of this Article 9 or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions of this Article 8 shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.   Section 9.17           Waiver. The Company shall have authority at any time to waive the requirements that Stock be transferred to the Trust in accordance with the provisions of this Article 9 if the Company determines, based on an opinion of nationally recognized tax counsel, that such transfer of Stock to a trust, would jeopardize the status of the Company as a REIT (as that term is defined in Section 1.6).   ARTICLE 10 STOCKHOLDERS   Section 10.1           Meetings of Stockholders. There shall be an annual meeting of the Stockholders, to be held at such time and place as shall be determined by or in the manner prescribed in the Bylaws, at which the Directors shall be elected and any other proper business may be conducted. The annual meeting will be held on a date which is a reasonable period of time following the distribution of the Company’s annual report to Stockholders but not less than thirty (30) days after delivery of such report. Stockholders who are entitled to cast a majority of all votes and who are present in person or by proxy at an annual meeting at which a quorum is present, may, without the necessity for concurrence by the Directors, vote to elect the Directors. A quorum shall be 50% of the then outstanding Shares. Special meetings of Stockholders may be called in the manner provided in the Bylaws, including by the chief executive officer, by a majority of the Independent Directors or by a majority of the Directors, and shall be called by an officer of the Company upon written request of Stockholders holding in the aggregate not less than ten percent (10%) of the outstanding Stock entitled to vote on any issue proposed to be considered at any such special meeting. Upon receipt of a written request, either in person or by mail, stating the purpose(s) of the meeting, the sponsor shall provide all Stockholders within ten (10) days after receipt of said request, written notice, either in person or by mail, of a meeting and the purpose of such meeting to be held on a date not less than fifteen (15) nor more than sixty (60) days after the distribution of such notice, at a time and place specified in the request, or if none is specified, at a time and place convenient to the Stockholders. If there are no Directors, the officers of the Company shall promptly call a special meeting of the Stockholders entitled to vote for the election of successor Directors. Any meeting may be adjourned and reconvened as the Directors determine or as provided by the Bylaws.   Section 10.2           Voting Rights of Stockholders. Subject to the provisions of any class or series of Stock then outstanding and the mandatory provisions of any applicable laws or regulations, the Stockholders shall be entitled to vote only on the following matters: (a) election or removal of Directors, without the necessity for concurrence by the Directors, as provided in Sections 10.1, 2.4 and 2.7 hereof; (b) amendment of the Charter, without the necessity for concurrence by the Directors, as provided in Section 12.1 hereof; (c) dissolution of the Company, without the necessity for concurrence by the Directors; (d) reorganization of the Company as provided in Section 12.2 hereof; (e) merger, consolidation or sale or other disposition of all or substantially all of the Property, as provided in Section 12.3 hereof; and (f) such other matters with respect to which the Board of Directors has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the Stockholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the Stockholders at any meeting shall in any way bind the Board.   Section 10.3           Voting Limitations on Stock Held by the Advisor, Directors and Affiliates. With respect to Stock owned by the Advisor, the Directors, or any of their Affiliates, neither the Advisor, nor the Directors, nor any of their Affiliates may vote or consent on matters submitted to the Stockholders regarding the removal of the Advisor, Directors or any of their Affiliates or any transaction between the Company and any of them. In determining the requisite percentage in interest of Stock necessary to approve a matter on which the Advisor, Directors and any of their Affiliates may not vote or consent, any Stock owned by any of them shall not be included.   Section 10.4           Right of Inspection. Any Stockholder and any designated representative thereof shall be permitted access, without charge, to all records of the Company at all reasonable times. Any Stockholder and any designated representative thereof may inspect and copy any of such records upon the payment of reasonable copying   35        charges. Inspection of the Company books and records by the office or agency administering the securities laws of a jurisdiction shall be provided upon reasonable notice and during normal business hours.   Section 10.5           Access to Stockholder List. An alphabetical list of the names, addresses and telephone numbers of the Stockholders of the Company, along with the number of Shares held by each of them (the “Stockholder List”), shall be maintained as part of the books and records of the Company and shall be available for inspection by any Stockholder or the Stockholder’s designated agent at the home office of the Company upon the request of the Stockholder. The Stockholder List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of such list shall be mailed to any Stockholder so requesting within ten (10) days of the request. The copy of the Stockholder List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). The Company may impose a reasonable charge for expenses incurred in reproduction pursuant to the Stockholder request. A Stockholder may request a copy of the Stockholder List in connection with matters relating to Stockholders’ voting rights, and the exercise of Stockholder rights under federal proxy laws.   If the Advisor or Directors neglect or refuse to exhibit, produce or mail a copy of the Stockholder List as requested, the Advisor and/or the Directors shall be liable to any Stockholder requesting the list for the costs, including attorneys’ fees, incurred by that Stockholder for compelling the production of the Stockholder List, and for actual damages suffered by any Stockholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Stockholder List is to secure such list of Stockholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Stockholder relative to the affairs of the Company. The Company may require the Stockholder requesting the Stockholder List to represent that the list is not requested for a commercial purpose unrelated to the Stockholder’s interest in the Company. The remedies provided hereunder to Stockholders requesting copies of the Stockholder List are in addition, to and shall not in any way limit, other remedies available to Stockholders under federal law, or the laws of any state.   Section 10.6           Reports. The Directors, including the Independent Directors, shall take reasonable steps to insure that the Company shall cause to be prepared and mailed or delivered to each Stockholder as of a record date after the end of the fiscal year and each holder of other publicly held securities of the Company within one hundred twenty (120) days after the end of the fiscal year to which it relates an annual report for each fiscal year ending after the initial public offering of its securities which shall include: (i) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; (ii) the ratio of the costs of raising capital during the period to the capital raised; (iii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and any Affiliate of the Advisor by the Company and including fees or charges paid to the Advisor and any Affiliate of the Advisor by third parties doing business with the Company; (iv) the Operating Expenses of the Company, stated as a percentage of Average Invested Assets and as a percentage of its NASAA Net Income and FFO; (v) a report from the Independent Directors that the policies being followed by the Company are in the best interests of its Stockholders and the basis for such determination; (vi) separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the Company, Directors, Advisors, Sponsors and any Affiliate thereof occurring in the year for which the annual report is made, and the Independent Directors shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions; and (vii) Dividends to the Stockholders for the period, identifying the source of such Dividends, and if such information is not available at the time of the distribution, a written explanation of the relevant circumstances will accompany the Dividends (with the statement as to the source of Dividends to be sent to Stockholders not later than sixty (60) days after the end of the fiscal year in which the distribution was made).   ARTICLE 11 LIABILITY OF STOCKHOLDERS, DIRECTORS, ADVISORS AND AFFILIATES   Section 11.1           Limitation of Stockholder Liability. No Stockholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Company by reason of his being a Stockholder, nor shall any Stockholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Company’s assets or the affairs of the Company by reason of his being a Stockholder.   36        Section 11.2.          Limitation of Director and Officer Liability. Provided that the applicable conditions set forth under Maryland law are met, no director or officer of the Company shall be liable to the Company or its Stockholders for money damages; provided, however, that notwithstanding anything to the contrary contained in this Section 11.2, the Company shall not provide for indemnification of or hold harmless the directors, the Advisor or any Affiliates of the Advisor for any liability or loss suffered by any of them, unless all of the following conditions are met:   (a)             The directors or the Advisor or its Affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in the best interests of the Company;   (b)            The directors or the Advisor or its Affiliates were acting on behalf of or performing services for the Company;   (c)             Such liability or loss was not the result of:   (i)              negligence or misconduct by the directors (excluding the Independent Directors) or the Advisor or its Affiliates; or   (i)              gross negligence or willful misconduct by the Independent Directors;   (d)            Such indemnification or agreement to hold harmless is recoverable only out of the Company’s Net Asset Value and not from its Stockholders; and   (e)             with respect to losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws, one or more of the following conditions are met:   (i)              there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee;   (ii)             such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or   (iii)            a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.   Neither the amendment nor repeal of this Section 11.2, nor the adoption or amendment of any other provision of the charter or bylaws inconsistent with this Section 11.2, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act that occurred prior to such amendment, repeal or adoption.   Section 11.3.          Indemnification. Provided that the applicable conditions set forth under Maryland law are met, the Company shall indemnify and pay or reimburse reasonable expenses in advance of the final disposition of a proceeding to (i) any individual who is a present or former director or officer of the Company; (ii) any individual who, while a director of the Company and at the request of the Company, serves or has served as a director, officer, partner or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his service in such capacity; or (iii) the Advisor or any of its Affiliates acting as an agent of the Company and their respective officers, directors, managers and employees; provided, however, that notwithstanding anything to the contrary contained in this Section 11.3, the Company shall not provide for indemnification of or hold harmless the directors, the Advisor or any Affiliates of the Advisor for any liability or loss suffered by any of them, unless all of the following conditions are met:   (a)             The directors or the Advisor or its Affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in the best interests of the Company;   37        (b)            The directors or the Advisor or its Affiliates were acting on behalf of or performing services for the Company;   (c)             Such liability or loss was not the result of:   (1)           negligence or misconduct by the directors (excluding the Independent Directors) or the Advisor or its Affiliates; or   (2)           gross negligence or willful misconduct by the Independent Directors;   (d)            Such indemnification or agreement to hold harmless is recoverable only out of the Company’s Net Asset Value and not from its Stockholders; and   (e)             with respect to losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws, one or more of the following conditions are met:   (1)           there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee;   (2)           such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or   (3)           a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.   The Company shall have the power with the approval of the Board of Directors to provide such indemnification and advancement of expenses to any employee or agent of the Company. No amendment of the Charter or repeal of any of its provisions shall limit or eliminate the right of indemnification or advancement of expenses provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.   Section 11.4           Limitation on Payment of Expenses. The Company shall pay or reimburse reasonable legal expenses and other costs incurred by the directors or the Advisors or its Affiliates in advance of the final disposition of a proceeding only if (in addition to the procedures required by the MGCL) all of the following are satisfied: (a) the proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Company, (b) the legal proceeding was initiated by a third party who is not a Stockholder or, if by a Stockholder acting in his or her capacity as such, a court of competent jurisdiction approves such advancement and (c) the directors or the Advisor or its Affiliates undertake to repay the amount paid or reimbursed by the Company, together with the applicable legal rate of interest thereon, if it is ultimately determined that the particular indemnitee is not entitled to indemnification.   ARTICLE 12 AMENDMENT; REORGANIZATION; MERGER, ROLL-UP TRANSACTIONS   Section 12.1           Amendment. The Company reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any outstanding shares of Stock. All rights and powers conferred by the Charter on Stockholders, Directors and officers are granted subject to this reservation. Except for those amendments permitted to be made without stockholder approval by specific provision in the Charter, any amendment to the Charter shall be valid only if approved by the affirmative vote of a majority of all votes entitled to be cast on the matter, including without limitation, (i) any amendment which would change any rights with respect to any outstanding class of securities, by reducing the amount payable thereon upon liquidation, or by diminishing or eliminating any voting rights pertaining thereto; (ii) any amendment of Section 12.2 hereof and this Section 12.1 (or any other provision of these Articles of Incorporation the amendment of or addition to which would have the effect of amending such sections); (iii) any amendment of provisions relating to the removal of directors, Independent Directors, Director qualifications, fiduciary duty, conflicts of interest, investment policies or investment restrictions,   38        preemptive rights of holders of Stock and indemnification and limitation of liability of officers and directors and (iv) any amendment that would impose cumulative voting in the election of directors.   Section 12.2           Reorganization. Subject to the provisions of any class or series of Stock at the time outstanding, the Directors shall have the power (i) to cause the organization of a corporation, association, trust or other organization to take over the Property and to carry on the affairs of the Company, or (ii) merge the Company into, or sell, convey and transfer the Property to any such corporation, association, trust or organization in exchange for Securities thereof or beneficial interests therein, and the assumption by the transferee of the liabilities of the Company, and upon the occurrence of (i) or (ii) above dissolve the Company and deliver such Securities or beneficial interests ratably among the Stockholders according to the respective rights of the class or series of Stock held by them provided, however, that any such action shall have been approved, at a meeting of the Stockholders called for that purpose, by the affirmative vote of a majority of all votes entitled to be cast on the matter.   Section 12.3           Merger, Consolidation or Sale of Property. Subject to the provisions of any class or series of Stock at the time outstanding, the Directors shall have the power to (i) merge the Company with or into another entity, (ii) consolidate the Company with one (1) or more other entities into a new entity; (iii) sell or otherwise dispose of all or substantially all of the Property; or (iv) dissolve or liquidate the Company, other than before the initial investment in Property; provided, however, that such action shall have been approved by the affirmative vote of a majority of all votes entitled to be cast on the matter. Any such transaction involving an Affiliate of the Company or the Advisor also must be approved by a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transaction as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.   Section 12.4           Limitations on Roll-Up Transactions. In connection with any proposed Roll-Up Transaction, an appraisal of all Assets shall be obtained from a competent independent appraiser. The Assets shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the Assets as of a date immediately prior to the announcement of the proposed Roll-Up Transaction. The appraisal shall assume an orderly liquidation of Assets over a 12-month period. The terms of the engagement of the independent appraiser shall clearly state that the engagement is for the benefit of the Company and the Stockholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to Stockholders in connection with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction, the person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of:   (a)             accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or   (b)            one of the following:   (1)           remaining as Stockholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or   (2)           receiving cash in an amount equal to the Stockholder’s pro rata share of the appraised value of the Assets of the Company.   The Company is prohibited from participating in any proposed Roll-Up Transaction:   (c) which would result in the Stockholders having democracy rights in a Roll-Up Entity that are less than the rights provided for in Sections 10.1, 10.2, 10.5, 10.6 and 10.1 of these Articles of Incorporation;   (d) which includes provisions that would operate as a material impediment to, or frustration of, the accumulation of shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity), or which would limit the ability of an investor to exercise the voting rights of its Securities of the Roll-Up Entity on the basis of the number of Stock held by that investor;   (e)             in which investor’s rights to access of records of the Roll-Up Entity will be less than those described in Sections 10.4 and 10.5 hereof; or   39        (f)             in which any of the costs of the Roll-Up Transaction would be borne by the Company if the Roll-Up Transaction is not approved by the Stockholders.   ARTICLE 13 DURATION OF COMPANY   The Company shall continue perpetually unless dissolved pursuant to the provisions contained herein.   THIRD: The amendment and restatement of the charter of the Company as hereinabove set forth were duly advised by the Board of Directors and approved by the Stockholder of the Company as required by law.   FOURTH: The current address of the principal office of the Company is as set forth in Section 1.4 of the foregoing amendment and restatement of the Charter.   FIFTH: The name and address of the Company’s current resident agent are as set forth in Section 1.2 of the foregoing amendment and restatement of the Charter.   SIXTH: The number of directors of the Company and the names of those currently in office are as set forth in Section 2.1 of the foregoing amendment and restatement of the Charter.   SEVENTH: The undersigned President acknowledges the foregoing amendment and restatement of the Charter to be the corporate act of the Company and as to all matters and facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury.   40        IN WITNESS WHEREOF, Cornerstone Core Properties REIT, Inc., has caused the foregoing amendment and restatement of the Charter to be signed in its name and on its behalf by its President and attested to by its Secretary on this 21st day of February, 2006.              /s/ TERRY G.   ROUSEL             TERRY G.   ROUSSEL,             President                   ATTEST:                           By:    /s/ ALFRED J. PIZZURRO                 ALFRED J.   PIZZURRO,                 Secretary              41         EX-14.1 3 a06-2622_1ex14d1.htm CODE OF ETHICS       Exhibit 14.1   CORNERSTONE CORE PROPERTIES REIT, INC.   Code of Business Conduct and Ethics   Introduction   This Code of Business Conduct and Ethics (“Code”) embodies the commitment of Cornerstone Core Properties REIT, Inc. to conduct our business in accordance with all applicable laws, rules and regulations and the highest ethical standards. We insist that all of our employees maintain the highest level of integrity in their dealings with and on behalf of the company including dealings with stakeholders and with others from whom the company obtains financing.   This Code of Business Conduct and Ethics is intended to document the principles of conduct and ethics to be followed by the company’s directors, officers and employees, including its principal financial officer and its principal accounting officer. Its purpose is to:   •             Promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,   •             Promote compliance with applicable governmental rules and regulations,   •             Provide guidance to directors, officers and employees to help them recognize and deal with ethical issues,   •             Provide mechanisms to report unethical conduct, and   •             Help foster a culture of honesty and accountability.   The company will expect all its directors, officers and employees to comply at all times with the principles in this Code. A violation of this Code by an employee is grounds for disciplinary action up to and including discharge and possible legal prosecution. We also expect the consultants we retain to generally abide by this Code. (For purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, Section II of this Code shall be our code of ethics for Senior Financial Officers (as defined below).)   SECTION I   BUSINESS PRINCIPALS   A. Clients’ and Tenants’ Interests   Our clients’ and tenants’ interests always come first. Our experience shows that if we serve our clients and tenants well, our own success will follow.   B. Our Assets   Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.          C. Teamwork   We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the company and its clients and tenants.   D. Dedication   The dedication of our people to the company and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this will be an important part of our success.   E. Confidential Information   We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.   F. Fairness in Competition   Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other companies.   G. Integrity and Honesty   Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the company and in their personal lives.   SECTION II   A. Compliance and Reporting   Directors, officers and employees should strive to identify and raise potential issues before they lead to problems, and should ask about the application of this Code whenever in doubt. Any director, officer or employee who becomes aware of any existing or potential violation of this Code should promptly notify, in the case of officers and employees, the Chief Executive Officer or the Chief Financial Officer (the “Senior Financial Officers”), and in the case of directors, the Chairman of the Audit Committee (we refer to such contacts as “Appropriate Ethics Contacts”). The company will take such disciplinary or preventive action as it deems appropriate to address any existing or potential violation of this Code brought to its attention.   The identity of the employee who reports a possible violation of this Code will be kept confidential, except to the extent the employee who reports the possible violation consents to be identified or the identification of that employee is required by law. The company will not allow retaliation for reports of possible violations made in good-faith. Possible violations may be reported orally or in writing and may be reported anonymously.   Any questions relating to how these policies should be interpreted or applied should be addressed to an Appropriate Ethics Contact.          B. Conflicts of Interest   Directors, officers and employees must do everything they reasonably can to avoid conflicts of interest or the appearance of conflicts of interest.   A “conflict of interest” occurs when an individual’s private interest is different from the interests of the company as a whole. Conflict situations include:   •             When a director, officer or employee, or a member of his or her family, will benefit personally from something the director, officer or employee does or fails to do that is not in the best interests of the company,   •             When an employee, officer or director takes actions or has interests that may make it difficult to perform his or her company work objectively and effectively, and   •             When an employee, officer or director, or a member of his or her family, receives personal benefits from somebody other than the company as a result of his or her position in the company. Loans to, or guarantees of obligations of, such persons are of special concern.   If a conflict of interest becomes unavoidable, a director, officer of employee must promptly report the conflict of interest to the Appropriate Ethics Contact. In each instance the director, officer or employee will work with the person or persons to whom a conflict of interest is reported to devise an arrangement by which (1) that person or those persons (or their designee) will monitor the situation which creates, or gives the appearance of creating, a conflict of interest, (2) the director, officer or employee who has a conflict will, to the fullest extent possible, be kept out of any decisions that might be affected by the conflict of interest, (3) arrangements will be made to ensure that the director, officer or employee will not profit personally from the situation that causes the conflict of interest, and (4) every reasonable effort will be made to eliminate the conflict of interest as promptly as possible.   C. Public Disclosure   It is the company’s policy that the information in its public communications, including SEC filings, be full, fair, accurate, timely and understandable. All employees and directors who are involved in the company’s disclosure process, including the Senior Financial Officers, are responsible for acting in furtherance of this policy. In particular, these individuals are required to maintain familiarity with the disclosure requirements applicable to the company and are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit, material facts about the company to others, whether within or outside the company, including the company’s independent auditors. In addition, any employee or director who has a supervisory role in the company’s disclosure process has an obligation to discharge his or her responsibilities diligently.   D. Compliance with Laws, Rules and Regulations   It is the company’s policy to comply with all applicable laws, rules and regulations. It is the personal responsibility of each employee and director to adhere to the standards and restrictions imposed by those laws, rules and regulations.   Generally, it is both illegal and against company policy for any employee or director who is aware of material nonpublic information relating to any of the company’s tenants to buy or sell any securities of those issuers. Any employee or director who is uncertain about the legal rules involving his or her purchase or sale of any securities in issuers that he or she is familiar with by virtue of his or her work for the company should consult with an Appropriate Ethics Contact before making any such purchase or sale.          SECTION III   A. Corporate Opportunities   No director, officer or employee will:   •             take for himself or herself personally any opportunity of which he or she becomes aware, or to which he or she obtains access, through the use of corporate property, information or position;   •             make it possible for somebody other than the company to take advantage of an opportunity in any of the company’s areas of business of which the director, officer or employee becomes aware in the course of his or her activities on behalf of the company, unless the company has expressly decided not to attempt to take advantage of the opportunity;   •             otherwise use corporate property, information, or position for personal gain; or   •             compete with the company generally or with regard to specific transactions or opportunities.   Directors, officers and employees owe a duty to the company to advance its legitimate interests when the opportunity to do so arises.   Sometimes the line between personal and company benefits is difficult to draw, and sometimes both personal and company benefits may be derived from certain activities. The only prudent course of conduct for our employees and directors is to make sure that any use of company property or services that is not solely for the benefit of the company is approved beforehand through the Appropriate Ethics Contact.   B. Confidentiality   In carrying out the company’s business, employees and directors often learn confidential or proprietary information about the company, its clients/customers, prospective clients/customers or other third parties. Employees and directors must maintain the confidentiality of all information so entrusted to them, except when disclosure is authorized or legally mandated. Confidential or proprietary information includes, among other things, all information that may be of use to the company’s competitors, or that could be harmful to the company or its clients/customers if disclosed, any non-public information concerning the company, including its businesses, financial performance, results or prospects, and any non-public information provided by a third party with the expectation that the information will be kept confidential and used solely for the business purpose for which it was conveyed.   C. Fair Dealing   Each employee will at all times deal fairly with the company’s tenants, suppliers, competitors and employees. While we expect our employees to try hard to advance the interests of the company, we expect them to do so in a manner that is consistent with the highest standards of integrity and ethical dealing. No employee is to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of facts, or any other unfair-dealing practice.          D. Equal Employment Opportunity and Harassment   Our focus in personnel decisions is on merit and contribution to the company’s success. Concern for the personal dignity and individual worth of every person is an indispensable element in the standard of conduct that we have set for ourselves. The company affords equal employment opportunity to all qualified persons without regard to any impermissible criterion or circumstance. This means equal opportunity in regard to each individual’s terms and conditions of employment and in regard to any other matter that affects in any way the working environment of the employee. We do not tolerate or condone any type of discrimination prohibited by law, including harassment.   E. Protection and Proper Use of Company Assets   All employees should protect the company’s assets and ensure their efficient use. All company assets should be used for legitimate business purposes only.   SECTION IV   WAIVERS OF THIS CODE   From time to time, the company may waive certain provisions of this Code. Any employee or director who believes that a waiver may be called for should discuss the matter with an Appropriate Ethics Contact. Waivers for executive officers (including Senior Financial Officers) or directors of the company may be made only by the Board of Directors or a committee of the Board.   Any waiver of provisions of this Code will be reported in filings with the SEC and otherwise reported to the company’s stockholders to the full extent required by the rules of the SEC.          CORNERSTONE CORE PROPERTIES REIT, INC.   BUSINESS CODE OF CONDUCT AND ETHICS   Annual Compliance Certificate   This Certificate is to acknowledge that I have read Cornerstone Core Properties REIT, Inc.’s Business Code of Conduct and Ethics and I understand its meaning. If a change in circumstances occurs which should be reported in accordance with the Code, I will promptly report this change in circumstances to the Appropriate Ethics Contact identified in the Code and file a revised Certificate with Cornerstone Core Properties REIT, Inc. I further certify that, to the best of my knowledge, neither I nor any of my family members or affiliates have engaged in any activity or has any interest which violates the Code, nor am I aware of a violation of the Code by any director, officer or employee except as follows (if none, write “None” below):            Date:                     ,   200                        Signature                                                               Printed Name                         EX-31.1 4 a06-2622_1ex31d1.htm 302 CERTIFICATION       Exhibit 31.1   CERTIFICATIONS   I, Terry G. Roussel, certify that:   1.                                       I have reviewed this annual report on Form 10-K of Cornerstone Core Properties REIT, Inc.;   2.                                       Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and   3.                                       Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.   4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:   (a)                                  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;   (b)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and   (c)                                  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):   (a)                                  all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   (b)                                 any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.          /s/ TERRY G. ROUSSEL     Date: March 24, 2006   Terry G. Roussel         Chief Executive Officer (Principal Executive Officer)                EX-31.2 5 a06-2622_1ex31d2.htm 302 CERTIFICATION       Exhibit 31.2   CERTIFICATIONS   I, Sharon C. Kaiser, certify that:   1.                                       I have reviewed this annual report on Form 10-K of Cornerstone Core Properties REIT, Inc.;   2.                                       Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and   3.                                       Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.   4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:   (a)                                  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;   (b)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this annual report based on such evaluation; and   (c)                                  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and   5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):   (a)                                  all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   (b)                              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.               /s/ SHARON C. KAISER     Date: March 24, 2006   Sharon C. Kaiser         Chief Financial Officer (Principal Financial   Officer and   Principal Accounting Officer)                EX-32 6 a06-2622_1ex32.htm 906 CERTIFICATION       Exhibit 32   CERTIFICATIONS PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   Terry G. Roussel and Sharon C. Kaiser, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his or her knowledge, the Annual Report of Cornerstone Core Properties REIT, Inc. on Form 10-K for the twelve month period ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Cornerstone Core Properties REIT, Inc.            /s/ TERRY G. ROUSSEL     Date: March 24, 2006   Terry G. Roussel         Chief Executive Officer (Principal Executive   Officer)                             /s/ SHARON C. KAISER     Date: March 24, 2006   Sharon C. Kaiser         Chief Financial Officer (Principal Financial   Officer and   Principal Accounting Officer)                -----END PRIVACY-ENHANCED MESSAGE-----