CORNERSTONE REALTY FUND, INC. PARTICIPATING BROKER AGREEMENT

 

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                                                                     EXHIBIT 1.2

 

                          CORNERSTONE REALTY FUND, INC.

 

                         PARTICIPATING BROKER AGREEMENT

 

                     Up to 55,400,000 Shares of Common Stock

 

Dear Sirs:

 

      Cornerstone Realty Company, Inc., a Maryland corporation (the "Company"),

is registering for public sale a maximum of 55,400,000 shares of its common

stock, $0.001 par value per share, (the "Shares"), to be issued and sold for an

aggregate maximum purchase price of $438,800,000 (44,400,000 Shares to be

offered to the public and 11,000,000 Shares to be offered pursuant to the

Company's dividend reinvestment plan ("DRP")). The Shares are to be sold to

selected persons or entities acceptable to the Company, upon the terms and

subject to the conditions set forth in the enclosed Prospectus.

 

      Pacific Cornerstone Capital, Incorporated, a California corporation

("Dealer Manager"), has entered into a dealer manager agreement ("Dealer Manager

Agreement") with the Company pursuant to which it has agreed to act as dealer

manager in connection with the offer and sale of the Shares. Dealer Manager has

agreed to use commercially reasonable efforts to find purchasers of Shares both

directly and indirectly through a selling group consisting of participating

brokers ("Participating Brokers").

 

      Dealer Manager hereby invites you to become a Participating Broker in

connection with the offer and sale of the Shares. By your acceptance hereof, you

agree to act in such capacity and to use your best efforts to find purchasers

for the Shares in accordance with the terms of the Prospectus and this

Agreement.

 

      Accompanying this Agreement is a copy of the Prospectus. We may also

provide you with written, audio or audio-visual material, including an

investment summary, audio tape, video tape and internet site ("Supplemental

Material") prepared by the Company for use in conjunction with the offer and

sale of the Shares. You are not authorized to use any solicitation material

other than the Prospectus and Supplemental Material referred to in this

paragraph, which material has been furnished by the Company.

 

      Except as described in the Prospectus or in SECTION 3(d) hereof, the

Shares are to be sold for a per Share cash price as follows:

 

<TABLE>

<CAPTION>

Distribution Channel                        Public Shares              DRP Shares

--------------------                        -------------              ----------

<S>                                         <C>                        <C>

Participating Brokers                         $8.00                      $7.60

 

Participating Brokers Deferring

Commission                                    $7.52                      $7.14

 

Fee for Service Investment Advisers           $7.44                      $7.07

</TABLE>

 

      1.    Sale of the Shares.

 

            A subscription agreement ("Subscription Agreement") must be

completed by each person desiring to purchase Shares, or, at your option, by you

on behalf of each such person, and returned by you together with any other

documents that may be required under state securities laws or by the Company, to

the Company at 4590 MacArthur Blvd., Suite 610, Newport Beach, California 92660,

Attention: Terry G. Roussel. You shall ascertain that the Subscription Agreement

has been properly completed in full and signed by the prospective purchaser

prior to its return.

 

            All subscription checks shall be made payable to the order of USB

ESCROW NO. ____________ FOR CORNERSTONE REALTY FUND, INC. until the Minimum

Subscription Date and thereafter all subscription checks shall be made payable

to CORNERSTONE REALTY FUND, INC. If you receive a check not conforming to the

foregoing instructions, you must return such check directly to the subscriber

not later than the end of the next

 

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business day following its receipt. Checks conforming to the foregoing

instructions shall be transmitted by you for deposit directly to Dealer Manager

at 4590 MacArthur Blvd., Suite 610, Newport Beach, California 92660 by the end

of the next business day following receipt by you. In the event your final

internal supervisory review is conducted at a different location, then checks

must be transmitted to your final review office by the end of the next business

day following receipt by you and your final review office must in turn, by the

end of the next business day following receipt by it, transmit the check for

deposit directly to the Dealer Manager.

 

            Upon receipt of the Subscription Agreement, the Company, will

determine promptly (and in any event within ten (10) days after such receipt)

whether it wishes to accept the proposed purchaser as a member in the Company,

it being understood that the Company reserves the right to reject the tender of

any Subscription Agreement and to reject all tenders after the Termination Date,

in each case in its sole discretion. Should the Company determine to accept the

tender of the Subscription Agreement, the Company will promptly advise you of

such action. Should the Company determine to reject the tender, it will promptly

notify in writing the prospective purchaser and you of such determination and

will promptly return the tendered Subscription Agreement and instruct the Escrow

Agent to return the purchase price of the Shares directly to the prospective

purchaser if the determination is made on or before the Minimum Subscription

Date or the Company will return the purchase price of the Shares directly to the

prospective purchaser if the determination is made after the Minimum

Subscription Date.

 

            All payments received prior to the Minimum Subscription Date, except

as hereinafter provided, from purchasers of Shares shall be transmitted directly

to the Escrow Agent and deposited in an escrow account (the "Escrow Account")

with Escrow Agent. Such funds may be temporarily invested in bank savings

accounts, bank or money market accounts, bank short-term certificates of deposit

of U.S. banks having a net worth of $100 million, or short-term U.S. government

issued or guaranteed obligations. Prior to the Minimum Subscription Closing

Date, the Company will have no right to obtain any funds from the Escrow Agent.

Funds for Shares purchased on or before the Minimum Subscription Date shall be

made available to the Company, or its order, by the Escrow Agent, on the Minimum

Subscription Closing Date.

 

            You will offer Shares only to persons who meet the financial

qualifications set forth in the Prospectus or in any suitability letter or

memorandum sent to you by the Company and you will only make offers to persons

in the states in which it is advised in writing that the Shares are qualified

for sale or that such qualification is not required. In offering Shares, the you

will comply with the provisions of all applicable rules and regulations relating

to suitability of investors, including without limitation, the provisions of

Article III.C. of the Statement of Policy Regarding Real Estate Investment

Trusts of the North American Securities Administrators Association, Inc. (the

"NASAA Guidelines"). Nothing contained in this Section 1 shall be construed to

impose upon the Company the responsibility of assuring that prospective

purchasers meet the suitability standards contained in the Prospectus and the

Subscription Agreement or to relieve you of the responsibility of complying with

the Conduct Rules of the National Association of Securities Dealers, Inc.

("NASD").

 

      2.    Termination Date and Minimum Subscription Closing Date.

 

            As used herein, the term "Termination Date" shall mean the earliest

to occur of (i) the date upon which subscriptions for the maximum number of

Shares offered have been accepted by the Company which date the Company shall

designate by notice to Dealer Manager in writing; or (ii) ______________, 2007.

The Company may terminate the offering of Shares at any time for any reason by

written notice to the Dealer Manager at least two (2) business days prior to the

date of termination.

 

            As used herein, the term "Minimum Subscription Date" shall mean the

earlier of the date on which the Company shall mail or otherwise furnish to

Dealer Manager notification that subscriptions and payments for an aggregate of

at least 125,000 Shares have been received and accepted by the Company and

deposited with the Escrow Agent. In the event that subscriptions and payments

for an aggregate of at least 125,000 Shares shall not have been received and

accepted by the Company on or prior to ________________, 2006, subject to

Section 10, this Agreement will terminate and the Company shall not have any

further obligation or liability hereunder to you. In the event of such

termination, all purchase payments deposited with the Escrow Agent shall be

returned to the subscribers and no selling commissions (as described below) will

be payable.

 

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      3.    Obligations and Compensation of Participating Broker.

 

            (a) The Dealer Manager hereby appoints you as a distributor during

the Offering Period (as defined in Section 3(b)) for the purpose of finding, on

a best efforts basis, purchasers for the Shares for cash. You hereby accepts

such agency and distributorship and agrees to use its best efforts to find

purchasers for the Shares on said terms and conditions, commencing as soon as

practicable.

 

            (b) The "Offering Period" shall mean that period during which Shares

may be offered for sale, commencing on the date the registration was filed with

the SEC, during which period offers and sales of the Shares shall occur

continuously unless and until the Offering is terminated as provided herein,

except that you shall suspend or terminate offering of the Shares upon request

of the Company or the Dealer Manager at any time and shall resume offering the

Shares upon subsequent request of the Company or the Dealer Manager. The

Offering Period shall in all events terminate upon the sale of all of the

Shares. Upon termination of the Offering Period, your agency and this Agreement

shall terminate without obligation on your part or the part of the Dealer

Manager or the Company except as set forth in this Agreement.

 

            (d) Except as may be provided in the "Plan of Distribution" section

of the Prospectus, as compensation for the services rendered by you, the Dealer

Manager agrees that it will pay to you selling commissions plus a marketing

allowance as follows:

 

<TABLE>

<CAPTION>

             Selling Commissions

             -------------------

Public Shares             DRP Shares

-------------             ----------

<S>                       <C>

____%                       5.0%

</TABLE>

 

<TABLE>

<CAPTION>

         Marketing Allowance

         -------------------

Public Shares             DRP Shares

-------------             ----------

<S>                       <C>

____%                       0.0%

</TABLE>

 

            The Dealer Manager will also reimburse you for its reimbursement of

your bona fide due diligence expenses in the amount of up to 0.5% of the gross

offering proceeds attributable to your sales of Shares to the public but not

sales of Shares pursuant to the dividend reinvestment plan.

 

            If you and the investor agree, the selling commissions can be paid

on a deferred basis for Shares sold in the primary offering or pursuant to the

DRP. In these instances, the Company will sell the Shares at a reduced price as

set forth above and the Dealer Manager will pay you a correspondingly reduced

sales commission at the time of sale. The balance of the normal commission would

be paid by the Company to the Dealer Manager and by the Dealer Manager to you

over six years for Shares sold in the primary offering, or four years for Shares

sold in the DRP, out of the dividends or other distributions that are declared

and paid with respect to the reduced-priced shares sold through you. The amount

by which by the investor's dividends are reduced in these cases would be paid by

the Company as deferred commissions to the Dealer Manager and by the Dealer

Manager to you.

 

            As an example, investors electing the deferred commission option for

Shares purchased in the primary offering will pay, on the date of purchase,

$7.52 per Share (which includes a commission of $0.08 per Share). For a period

of six years following the date of purchase, an additional $0.08 per Share will

be deducted annually from dividends or other cash distributions otherwise

payable to the investor and will be used to pay deferred commissions. The net

proceeds to the Company will not be affected by the election of the deferred

commission option. Under this arrangement, an investor electing the deferred

commission option will pay a 1% commission upon subscription, rather than a 7%

commission, and an amount equal to a 1% commission per year thereafter for the

next six years, or longer if required to satisfy outstanding deferred commission

obligations, will be deducted from dividends or other cash distributions

otherwise payable to such stockholder. The Company may also use other deferred

commission structures, but the Company will not pay total commissions in excess

of 7% of the offering price of the Shares.

 

            If at any time prior to the satisfaction of the Company's remaining

deferred commission obligations, the Company decides to list its common stock

for trading on national securities exchange, the Nasdaq

 

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National Market or other over-the-counter market, or the Company begins a

liquidation of its properties, the Company may accelerate the remaining

commissions due under the deferred commission option. To the extent that the

distributions prior to listing are insufficient to satisfy the remaining

commissions due, the obligations of the Company and the investor to pay any

further deferred commissions will terminate, and the Dealer Manager and you will

not be entitled to receive any further portion of their deferred commissions

following listing of the Company's common stock.

 

            The 5.0% commission payable on shares sold under the Company's

Dividend Reinvestment Plan ("DRP") shall be payable until such time that the

Company ceases offering Shares under the DRP on such terms. At such time, the

commission payable on sales made under the DRP shall be that contemplated

pursuant to any new commission structure for the sale of shares under the DRP.

Stockholders purchasing through advisers affiliated with a dealer, through

advisers not affiliated with a dealer, or through banks acting as trustees or

fiduciaries are referred to in this agreement as "Adviser Affiliated

Stockholders").

 

            (e) You will not represent or imply that U.S. Bank, N.A., as the

escrow agent identified in the Prospectus, has investigated the desirability or

advisability of investment in the Company or has approved, endorsed or passed

upon the merits of the Shares or the Company, nor will you use the name of said

escrow agent in any manner whatsoever in connection with the offer or sale of

the Shares other than by acknowledgment that it has agreed to serve as escrow

agent.

 

            (f) Notwithstanding anything else herein to the contrary, you agrees

that it will not sell any Shares through the DRP to any Adviser Affiliated

Stockholder while such stockholder may still purchase Shares in the primary

offering for a price less than the price available under the DRP. After the

primary offering closes, or if at any time the shares offered under the DRP are

offered at a price per share less than that offered pursuant to this agreement

to Adviser Affiliated Stockholders, you may sell Shares through the DRP to an

Adviser Affiliated Shareholder at the then applicable DRP purchase price.

 

      4.    Representations, Warranties and Covenants of Participating Broker.

You represent and warrant to and covenant to the Dealer Manager and the Company

that:

 

            (a) You are a member of the National Association of Securities

Dealers, Inc. (the "NASD") in good standing and a broker-dealer registered as

such under the Exchange Act and under the securities laws of the states in which

the Shares are to be offered and sold. You and your employees and

representatives have all required licenses and registrations to act under this

Agreement.

 

            (b) You have full legal right, power and authority to enter into

this Agreement and to perform the transactions contemplated hereby, and you have

duly authorized, executed and delivered this Agreement.

 

            (c) This Agreement is a valid, legal, and binding agreement of yours