SecProbe.io

CORRESP
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corresp

Karen N. Winnett

(949) 623-3536

kwinnett@prestongates.com

August 30, 2005

VIA EDGAR AND FEDERAL EXPRESS

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

         Re:

    Cornerstone Core Properties REIT, Inc.

Registration No. 333-121238

Dear Mr. Shady:

     This letter is provided in response to the comment letter of the Securities and Exchange
Commission (the “Staff”) dated June 29, 2005 with respect to the Registration Statement on Form
S-11 filed by Cornerstone Core Properties REIT, Inc. (formerly Cornerstone Realty Fund, Inc.) on
December 14, 2004 (Registration No. 333-121238), as amended by Pre-Effective Amendment No. 1 filed
on April 13, 2005, Pre-Effective Amendment No. 2 filed on May 25, 2005, and Pre-Effective Amendment
No. 3 filed on June 6, 2005. A Pre-Effective Amendment No. 4 is being filed concurrently herewith
via EDGAR and has been marked to show changes from Pre-Effective Amendment No. 3. This letter keys
the registrant’s responses to the Staff’s numbered comments and the Staff’s comments appear in
italicized text to facilitate your review.

General

     1.      We note from your response to comment 1 that you believe the NCREIF index is relevant to
illustrating the volatility of traded real estate companies. However, the current disclosure may
suggest to investors that NCREIF is a proxy for the performance of non-traded real estate
companies, and we do not believe that it is proper to use NCREIF for these purposes. Please revise
your disclosure accordingly. We specifically refer you to the first two sentences in the
penultimate paragraph on page 6. Also, please revise your disclosure to indicate, if true, that
you will purchase investment grade properties. Finally, if you retain references to the volatility
of publicly traded REITs, please balance that disclosure with disclosure clarifying that investors
in non-traded REITs will not realize appreciation in the value of the portfolio, if any, until the
company liquidates.

     The disclosure on page 6 has been revised as requested.

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

August 30, 2005

Page 2

     2.      We note your response to our comment 3. We also note that your advisor will invest
$200,000 in Cornerstone Operating Partnership, L.P. units in exchange for limited partnership
interest. Provide us with your analysis with respect to the potential for the integration of the
offers and sales of the limited partnership interests and the public offering of common stock,
including a discussion of any relevant staff interpretations.

     Introduction

     The issuance of the limited partnership interests (“units”) by Cornerstone Operating
Partnership, L.P. and the public offering of common stock by the Company should not be
integrated under the five factor test expressed in Release 33-4552 (November 6, 1962) issued
by the SEC under the Securities Act of 1933, as amended (the “Securities Act”).

     In addition, as a policy matter, the issuance of the units and the public offering of
common stock should not be integrated because registration of the unit issuance is not
necessary to protect the purchaser of the units, considering the number of offerees (only 1)
and the nature of that offeree (the REIT sponsor and an accredited investor).

     Finally, we believe that Rule 152 under the Securities Act (“Rule 152”) provides a safe
harbor from integration of the offerings.

     The Company is relying on the exemption from registration requirements found in Section
4(2) of the Securities Act (“Section 4(2)”) in connection with the issuance of the units.

     Discussion

     The doctrine of integration operates to prevent an issuer from circumventing the
registration and prospectus delivery requirements of the Securities Act by breaking a single
offering into two or more “exempt” offerings. In furtherance of this policy, the SEC and
courts have developed a five factor test that is useful in determining whether offerings
should be integrated. This five factor test, however, should be applied in a manner that is
consistent with the policy behind the prohibition on integration. An analysis of the five
factors in light of the facts and circumstances is set forth below, followed by an analysis
of relevant policy considerations.

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

August 30, 2005

Page 3

     A.      Five Factor Test

The following five factors are useful in most contexts in determining whether two or more
offerings should be integrated:

          1.      Are the offerings part of a single plan of financing?

     The units issued to Cornerstone Realty Advisors, LLC (the REIT sponsor, referred to
herein and in the Registration Statement as the “Advisor”) and the common stock to be issued
and sold in the public offering are not part of a single plan of financing. A “single plan
of financing” tends to refer to factors such as the method of offering the security and the
financial interdependence of the offerings, whereas, the “general purpose” is often viewed as
relating to the expected use of proceeds. In many cases, these two factors are considered to
be closely related and a similar analysis applies to both. Accordingly, please also refer to
the analysis set forth in the following paragraph. As a practical matter, the issuance of
units is less of an offering and more a satisfaction of regulatory requirement, as described
in the following paragraph. Moreover, the issuance of the units does not involve the
ordinary method of offering to sell or soliciting offers to purchase the securities, such as
selling efforts conducted by broker-dealers, that the Company plans to use in the public
offering of the common stock. Rather, the Advisor, as the sponsor of the REIT, has
essentially self-initiated its $200,000 capital contribution in order to qualify to serve as
the REIT’s advisor. The Advisor’s contribution is merely intended to meet minimum initial
capitalization requirements; it does not meaningfully advance the Company’s capital raising
goals and is not even counted towards the $1,000,000 minimum offering amount.

          2.      Do the offerings have the same general purpose?

     The units and the common stock to be issued and sold in the public offering are not
being sold for the same general purpose. The Advisor (or an affiliate) is required to
contribute a minimum of $200,000 in order to comply with the NASAA Statement of Policy
Regarding Real Estate Investment Trusts (the “NASAA Statement of Policy”), which is necessary
to satisfy blue sky requirements of all fifty states applicable to non-traded REITs. There
is no other purpose to be advanced by issuing the units other than meeting this blue sky
requirement. The proceeds will not be counted toward the minimum offering amount and are
insignificant relative to the total offering amount and the amount of capital necessary for
the Company to purchase properties. The common stock to be issued in the public offering, on
the other hand, will be for capital raising purposes.

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

August 30, 2005

Page 4

          3.      Are the offerings of the same class of securities?

     The sale of the units and the common stock to be issued in the public offering do not
involve the issuance of the same class of securities. First, the units will be issued by the
operating partnership and the common stock will be issued by the Company. Second, the units
are not redeemable or exchangeable for two years following the Company’s initial public
offering of common stock. We recognize the Staff’s historical position of treating an
offering of a class of securities and an offering of another security convertible into that
class of securities as offerings of the same class of securities for purposes of the
integration doctrine. (See Squadron, Ellenoff, Pleasant & Lehrer (February 28, 1992)). The
Staff has taken the position, however, that a convertible or exercisable security that is not
convertible or exercisable within one year of the date of issuance is not deemed to be a sale
of the underlying security pursuant to Section 2(a)(3) of the Securities Act. See Div. of
Corp. Fin. Manual of Pub. Avail. Tel. Interps. A.9. (July 1997). Therefore, under Section
2(a)(3) of the Securities Act, the common stock that may be issued in exchange for the units
is not offered and sold at the time of the issuance of the units.

     In addition, it is important to note that the units are not being offered as mere
surrogates for the common stock. The separate classes exist not for the purpose of
circumventing the registration requirements, but to facilitate the Company’s UPREIT structure
designed to enable potential tax benefits to sellers of real estate and therefore enable to
the Company to acquire desired properties from sellers that would otherwise be unwilling to
sell their properties to the Company.

          4.      Are the offerings being made at or about the same time?

     Although the actual issuance of the units occurred in June 2005, the Advisor made its
investment decision in August of 2004, when it decided to commit, and actually did commit,
substantial resources toward the organization of the Company. This factor is discussed
further in the context of the Rule 152 safe harbor analysis below. Once again, however, this
factor is less relevant in the context of this offering because it does not evidence an
attempt to circumvent the registration requirement by splitting a single offering into
separate offerings.

          5.      Are the securities being sold for the same type of consideration?

     The consideration to paid for the units for the common stock is cash, in each case.

     SEC no-action letters and other authority do not indicate clearly how many factors must
be present in order for offerings to be integrated, nor do they indicate in any definitive
way the relative weight to be given to each factor. In is clear, however, that all factors
need not be absent in order to justify non-integration, and the SEC has in the past not
required integration of offerings made at or about the same time. See, e.g., Black

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

August 30, 2005

Page 5

Box, Inc. (June 26, 1990), Pacific Physician Servs., Inc. (August 20, 1985); Delorean Motor
Co. (Sept. 15, 1977); Pacific Resources, Inc. (August 13, 1976). In conclusion, the five
factors above do not argue for integration of the offerings and application of the factors
does not provide evidence that a single offering has been split in two to avoid registration.
Therefore, unless the policy behind the integration doctrine dictates otherwise, the
offerings should not be integrated.

     B.      Policy Considerations Under Black Box

     Integration of the offerings would not serve the basic policies behind the Securities
Act registration requirement, which is to protect investors by providing them with full and
fair disclosure concerning the securities being sold, thus enabling them to make informed
investment decisions. (See Preamble of the Securities Act and Preliminary Note to Rule 144
promulgated thereunder).

     In Black Box Incorporated (June 26, 1990), integration was not required in an offering
that would likely have been integrated based solely upon the five factor test above. In
addition, a portion of the Black Box no action letter dealt specifically with the situation
where Rule 152 was not available because the offerings would occur simultaneously. The Staff
nevertheless took a no action stance based on a “policy position” that requiring registration
would not further the purposes of the Securities Act registration requirement. This
constituted a “formal articulation of an informal position the staff had taken previously
with respect to simultaneous registered offerings and unregistered offerings.” (Squadron,
page 2). Although this policy position had not been previously formally articulated in a
No-Action Letter, Linda C. Quinn, then Director of the Division of Corporation Finance, had
previously referred to this position. She stated that a “limited exception” to the
“concurrent” integration rule is “when the nature of the private placement purchaser is such
that it is capable of fending for itself and does not need the protections afforded by
registration under the Securities Act.” (Quinn, Developments Under the 1933 and 1934 Acts:
Exempt Transaction, Fifteenth Annual Sec. Reg. Inst. Univ. of Cal., San Diego (Jan. 20, 1988)
at 31-32 (emphasis added), as discussed in Haft, Robert J., Analysis of Key SEC No-Action
Letters, 2002-2003 Edition, page 127). The position was applied formally in Black Box, where
the issuer proposed to perform a non-registered private offering under Section 4(2) of the
Securities Act simultaneously with a registered initial public offering. The Rule 152 safe
harbor would not be available because the agreement to be entered into with the private
placement investors would not be executed at the time the registration statement for the
public offering was to be filed. Since the private placement investors would not be bound at
the commencement of the public offering, the private placement could not be deemed
“completed” prior to the public offering, rendering Rule 152 unavailable. The non-registered
private offering was to consist of debentures that were convertible into the same class of shares that was to be offered in the initial public offering. The staff took a no action
stance, stating:

Jeffrey A. Shady, Esq.

Securities and Exchange Commission

August 30, 2005

Page 6

“The Division of Corporation Finance, for policy reasons, is of the view that offers
and sales of the Convertible Debentures to a limited number of purchasers, as
described, in a transaction subsequent to the filing of the registration statement
covering the Company’s proposed public common stock offering need not be integrated
with the registered public offering.” (Black Box, page 2, paragraph 3. (emphasis
added)).

In the Squadron no-action letter, the Staff clarified its policy position behind not
requiring registration of the convertible debentures in Black Box under the circumstances
delineated above:

“The staff’s position with respect to integration of the Black Box registered initial
public offering and a simultaneous unregistered offering by Black Box of convertible
debentures was a policy position taken primarily in consideration of the nature and
number of the offerees. (Squadron, page 2.) (emphasis added).

In explaining what nature and number of offerees could qualify for similar treatment, the
staff continued:

“[T]he staff interprets the position to be limited in applicability to situations
where a registered offering would otherwise be integrated with an unregistered
offering to 1) persons who would be qualified institutional buyers for purposes of
Rule 144A and 2) no more than two or three large institutional accredited investors.”
(Id.) (emphasis added)

     As described above under the discussion of the five factor test, we believe that the
offerings should not “otherwise be integrated” and so the Squadron analysis may not be
directly applicable. Nevertheless, similar to the Black Box unregistered offering, the
Squadron letter is instructive for the proposition that the issuance of the units should not
be integrated with the public offering of common stock taking into account the nature and
number of purchasers in the unit offering. The number of purchasers of units is one: the
Advisor of the REIT.

     While any large institutional or accredited investor might be expected to know the risks
behind investing in the units, it would be hard to imagine an investor more informed than the
Advisor. In fact, if the issuance of the units were to be registered, the Advisor woul