UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009~~

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-50363

GLADSTONE COMMERCIAL CORPORATION

(Exact name of registrant as specified in its charter)


MARYLAND		02-0681276
(State or other jurisdiction of incorporation or ~~organization)~~		(I.R.S. Employer Identification No.)
organization)

1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)

(703) 287-5800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).


Large Accelerated Filero	Accelerated Filerþ	Non-Accelerated Filero		Smaller Reporting Companyo.
		(Do not check if a smaller reporting company)	~~Smaller Reporting Company~~ o.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of ~~July 27,~~October 30, 2009 was 8,563,264.

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30, 2009			December 31, 2008			September 30, 2009			December 31, 2008
ASSETS
Real estate, at cost	$	389,668,739		$	390,562,138		$	389,699,961		$	390,562,138
Less: accumulated depreciation		29,397,701			24,757,576			31,754,201			24,757,576

Total real estate, net		360,271,038			365,804,562			357,945,760			365,804,562

Lease intangibles, net		29,890,585			31,533,843			28,962,361			31,533,843
Real estate and related assets held for sale, net		956,916			—
Mortgage note receivable		10,000,000			10,000,000			10,000,000			10,000,000
Cash and cash equivalents		2,920,611			4,503,578			2,787,398			4,503,578
Restricted cash		3,345,712			2,677,561			3,049,099			2,677,561
Funds held in escrow		2,296,773			2,150,919			2,697,354			2,150,919
Deferred rent receivable		8,156,144			7,228,811			8,574,415			7,228,811
Deferred financing costs, net		3,763,181			4,383,446			3,344,509			4,383,446
Due from adviser (Refer to Note 2)		—			108,898			—			108,898
Prepaid expenses and other assets		644,822			707,167			920,787			707,167


TOTAL ASSETS	$	422,245,782		$	429,098,785		$	418,281,683		$	429,098,785


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Mortgage notes payable	$	253,950,925		$	255,111,173		$	253,372,911		$	255,111,173
Short-term loan and borrowings under line of credit		31,800,000			31,500,000			31,800,000			31,500,000
Deferred rent liability		2,754,690			3,147,472			2,558,299			3,147,472
Asset retirement obligation liability		2,232,940			2,190,192			2,268,997			2,190,192
Accounts payable and accrued expenses		1,495,284			2,673,787			1,417,884			2,673,787
Other liabilities related to assets held for sale		36,348			—
Due to adviser (Refer to Note 2)		1,299,850			—			1,271,766			—
Obligation under capital lease		241,532			235,378			244,609			235,378
Rent received in advance, security deposits and funds held in escrow		4,194,849			3,745,523			4,026,157			3,745,523


Total Liabilities		298,006,418			298,603,525			296,960,623			298,603,525


STOCKHOLDERS’ EQUITY
Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding		2,150			2,150			2,150			2,150
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264 shares issued and outstanding		8,563			8,563			8,563			8,563
Additional paid in capital		170,622,581			170,622,581			170,622,581			170,622,581
Notes receivable — employees		(2,588,965	)		(2,595,886	)		(2,551,601	)		(2,595,886	)
Distributions in excess of accumulated earnings		(43,804,965	)		(37,542,148	)		(46,760,633	)		(37,542,148	)


Total Stockholders’ Equity		124,239,364			130,495,260			121,321,060			130,495,260


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	422,245,782		$	429,098,785		$	418,281,683		$	429,098,785

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended September 30,						For the nine months ended September 30,
	2009			2008			2009			2008			2009			2008			2009			2008
Operating revenues
Rental income	$	10,379,172		$	9,896,143		$	20,767,420		$	19,059,732		$	10,383,002		$	10,131,678		$	31,150,423		$	29,191,410
Interest income from mortgage note receivable		189,583			218,805			377,083			457,102			191,667			216,446			568,750			673,548
Tenant recovery revenue		82,734			84,635			165,167			170,354			82,425			83,144			247,593			253,495

Total operating revenues		10,651,489			10,199,583			21,309,670			19,687,188			10,657,094			10,431,268			31,966,766			30,118,453


Operating expenses
Depreciation and amortization		3,282,629			3,178,718			6,590,438			6,160,187			3,284,723			3,256,602			9,875,156			9,416,786
Property operating expenses		230,785			203,405			467,595			442,459			219,537			222,647			687,129			665,103
Due diligence expense		6,886			40			16,433			2,125			—			2,158			16,433			4,282
Base management fee (Refer to Note 2)		357,650			419,857			730,298			851,725			342,743			404,108			1,073,041			1,255,833
Incentive fee (Refer to Note 2)		812,653			801,832			1,598,942			1,506,499			835,003			793,787			2,433,945			2,300,286
Administration fee (Refer to Note 2)		257,207			274,541			481,561			486,737			293,075			238,241			774,636			724,978
Professional fees		125,965			147,065			361,161			244,727			105,368			117,857			466,529			362,584
Insurance		48,125			41,797			96,804			83,594			50,757			43,354			147,561			126,947
Directors fees		50,386			52,251			100,088			106,500			49,459			54,702			149,547			161,202
Stockholder related expenses		88,245			102,775			171,892			229,198			32,914			42,232			204,806			271,430
Asset retirement obligation expense		35,476			32,325			70,384			62,361			36,060			34,711			106,441			97,077
General and administrative		15,453			18,326			26,005			30,506			19,643			10,079			45,647			40,582

Total operating expenses before credit from Adviser		5,311,460			5,272,932			10,711,601			10,206,618			5,269,282			5,220,478			15,980,871			15,427,090


Credit to incentive fee		(129,623	)		(173,697	)		(364,704	)		(736,052	)		(200,264	)		(205,876	)		(564,968	)		(941,928	)

Total operating expenses		5,181,837			5,099,235			10,346,897			9,470,566			5,069,018			5,014,602			15,415,903			14,485,162
									��

Other income (expense)
Interest income from temporary investments		184			6,689			17,465			16,237			524			4,559			17,989			20,796
Interest income — employee loans		48,862			50,852			97,748			102,996			48,130			49,624			145,878			152,620
Other income		11,320			39,697			11,320			48,993			—			7,500			11,320			56,493
Interest expense		(4,433,998	)		(3,996,453	)		(8,921,555	)		(7,752,501	)		(4,521,848	)		(4,354,381	)		(13,443,405	)		(12,106,885	)

Total other expense		(4,373,632	)		(3,899,215	)		(8,795,022	)		(7,584,275	)		(4,473,194	)		(4,292,698	)		(13,268,218	)		(11,876,976	)


Income from continuing operations		1,096,020			1,201,133			2,167,751			2,632,347			1,114,882			1,123,968			3,282,645			3,756,315


Discontinued operations
Income from discontinued operations		20,916			18,312			38,754			3,801			4,070			17,591			42,823			21,392
Gain on sale of real estate														160,038			—			160,038			—

Total discontinued operations		20,916			18,312			38,754			3,801			164,108			17,591			202,861			21,392


Net income		1,116,936			1,219,445			2,206,505			2,636,148			1,278,990			1,141,559			3,485,506			3,777,707


Distributions attributable to preferred stock		(1,023,437	)		(1,023,437	)		(2,046,875	)		(2,046,875	)		(1,023,437	)		(1,023,437	)		(3,070,312	)		(3,070,312	)


Net income available to common stockholders	$	93,499		$	196,008		$	159,630		$	589,273		$	255,553		$	118,122		$	415,194		$	707,395


Earnings per weighted average common share — basic & diluted
Income from continuing operations (net of distributions attributable to preferred stock)	$	0.01		$	0.02		$	0.02		$	0.07		$	0.01		$	0.01		$	0.03		$	0.08
Discontinued operations		0.00			0.00			0.00			0.00			0.02			0.00			0.02			0.00


Net income available to common stockholders	$	0.01		$	0.02		$	0.02		$	0.07		$	0.03		$	0.01		$	0.05		$	0.08


Weighted average shares outstanding- basic & diluted		8,563,264			8,565,264			8,563,264			8,565,264			8,563,264			8,565,264			8,563,264			8,565,264

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,						For the nine months ended September 30,
	2009			2008			2009			2008
Cash flows from operating activities:
Net income	$	2,206,505		$	2,636,148		$	3,485,506		$	3,777,707
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including discontinued operations		6,600,853			6,172,777			9,885,571			9,435,690
Amortization of deferred financing costs		723,828			505,757			1,144,991			806,075
Amortization of deferred rent asset and liability		(266,035	)		(266,034	)		(399,052	)		(399,049	)
Accretion of obligation under capital lease		6,154			4,156			9,232			7,234
Asset retirement obligation expense, including discontinued operations		70,845			63,232			106,902			98,394
Gain on sale of real estate								(160,038	)		—
Increase in prepaid expenses and other assets		(137,854	)		(286,200	)		(413,620	)		(110,382	)
Increase in deferred rent receivable		(1,082,278	)		(1,153,008	)		(1,564,298	)		(1,763,153	)
Increase in accounts payable, accrued expenses, and amount due adviser		230,245			703,460			124,761			182,694
(Decrease) increase in rent received in advance		(210,575	)		122,341			(90,904	)		171,191

Net cash provided by operating activities		8,141,688			8,502,629			12,129,051			12,206,401


Cash flows from investing activities:
Real estate investments		(54,319	)		(38,667,763	)		(85,534	)		(48,935,032	)
Leasing commissions paid		(298,270	)		—			(298,270	)		—
Proceeds from sale of real estate								1,089,031			—
Receipts from lenders for reserves held in escrow		773,187			259,538			853,264			630,033
Payments to lenders for reserves held in escrow		(919,041	)		(714,551	)		(1,399,699	)		(1,216,896	)
Increase in restricted cash		(668,151	)		(690,763	)		(371,538	)		(723,464	)
Deposits on future acquisitions		—			(1,650,000	)		—			(1,650,000	)
Deposits refunded or applied against real estate investments		200,000			1,700,000			200,000			1,750,000

Net cash used in investing activities		(966,594	)		(39,763,539	)		(12,746	)		(50,145,359	)


Cash flows from financing activities:
Borrowings under mortgage notes payable								—			48,015,000
Principal repayments on mortgage notes payable		(1,160,248	)		(773,779	)		(1,738,262	)		(1,171,849	)
Principal repayments on employee notes receivable		6,921			140,077			44,285			140,077
Borrowings from line of credit		39,300,000			45,150,000			49,700,000			62,600,000
Repayments on line of credit		(19,000,000	)		(5,000,000	)		(29,400,000	)		(56,800,000	)
Repayment of short-term loan		(20,000,000	)		—			(20,000,000	)		—
Receipts from tenants for reserves		1,996,723			1,119,390			2,541,657			1,746,804
Payments to tenants from reserves		(1,339,968	)		(840,433	)		(2,197,535	)		(1,555,146	)
Increase in security deposits		11,396			411,806			27,415			531,806
Payments for deferred financing costs		(103,563	)		(56,462	)		(106,054	)		(1,153,228	)
Distributions paid for common and preferred		(8,469,322	)		(8,470,823	)		(12,703,991	)		(12,706,239	)

Net cash (used in) provided by financing activities		(8,758,061	)		31,679,776			(13,832,485	)		39,647,225


Net (decrease) increase in cash and cash equivalents		(1,582,967	)		418,866			(1,716,180	)		1,708,267

Cash and cash equivalents, beginning of period		4,503,578			1,356,408			4,503,578			1,356,408


Cash and cash equivalents, end of period	$	2,920,611		$	1,775,274		$	2,787,398		$	3,064,675


NON-CASH INVESTING ACTIVITIES
Increase in asset retirement obligation	$	—		$	245,199		$	—		$	245,195

Fixed rate debt assumed in connection with acquisitions							$	—		$	6,461,603

GLADSTONE COMMERCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Significant Accounting Policies

Gladstone Commercial Corporation (the “Company”) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and was incorporated on February 14, 2003 under the General Corporation Law of Maryland, primarily for the purpose of engaging in the business of investing in real estate properties net leased to creditworthy entities and making mortgage loans to creditworthy entities. Subject to certain restrictions and limitations, the business of the Company is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”).

Subsidiaries

The Company conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”). As the Company currently owns all of the general and limited partnership interests of the Operating Partnership through GCLP Business Trust I and II as disclosed below, the financial position and results of operations of the Operating Partnership are consolidated with those of the Company.

Gladstone Commercial Partners, LLC, a Delaware limited liability company (“Commercial Partners”) and a subsidiary of the Company, was organized to engage in any lawful act or activity for which a limited liability company may be organized in Delaware. Commercial Partners has the power to make and perform all contracts and to engage in all activities to carry out the purposes of the Company, and all other powers available to it as a limited liability company. As the Company currently owns all of the membership interests of Commercial Partners, the financial position and results of operations of Commercial Partners are consolidated with those of the Company.

Gladstone Commercial Lending, LLC, a Delaware limited liability company (“Gladstone Commercial Lending”) and a subsidiary of the Company, was created to conduct all operations related to real estate mortgage loans of the Company. As the Operating Partnership currently owns all of the membership interests of Gladstone Commercial Lending, the financial position and results of operations of Gladstone Commercial Lending are consolidated with those of the Company.

Gladstone Commercial Advisers, Inc., a Delaware corporation (“Commercial Advisers”) and a subsidiary of the Company, is a taxable REIT subsidiary (“TRS”), which was created to collect all non-qualifying income related to the Company’s real estate portfolio. It is currently anticipated that this income will predominately consist of fees received by the Company related to the leasing of real estate. There have been no such fees earned to date. Since the Company owns 100% of the voting securities of Commercial Advisers, the financial position and results of operations of Commercial Advisers are consolidated with those of the Company.

GCLP Business Trust I and GCLP Business Trust II, subsidiaries of the Company, each are business trusts formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. The Company transferred its 99% limited partnership interest in the Operating Partnership to GCLP Business Trust I in exchange for 100 trust shares. Commercial Partners transferred its 1% general partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100 trust shares.

Interim Financial Information

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period have been included.

Investments in Real Estate

The Company records investments in real estate at cost and capitalizes improvements and replacements when they extend the useful life or improve the efficiency of the asset. The Company expenses costs of repairs and maintenance as incurred. The Company computes depreciation using the straight-line method over the estimated useful life of 39 years for buildings and improvements, five to seven years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

The Company accounts for its acquisitions of real estate in accordance with ~~Statement of Financial~~ Accounting Standards Codification (“~~SFAS”~~ASC”) ~~No. 141(R),~~805, “Business Combinations,” which requires the purchase price of real estate to be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from nine to eighteen months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

The Company allocates purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, building, and tenant improvements based on management’s determination of the relative fair values of these assets. Real estate depreciation expense on these tangible assets, including discontinued operations, was approximately $2.4 million and ~~$4.7~~$7.1 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, and approximately $2.3 million and ~~$4.4~~$6.7 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively.

Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values, included in the accompanying balance sheet as part of deferred rent receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to above-market lease values was approximately $63,000 and ~~$127,000~~$190,000 for both the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. The capitalized below-market lease values,

over the remaining non-cancelable terms of the respective leases. Total amortization related to below-market lease values was approximately $196,000 and ~~$393,000~~$589,000 for both the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively.

The total amount of the remaining intangible assets acquired, which consist of in-place lease values, unamortized lease origination costs, and customer relationship intangible values, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which generally range from 10 to 15 years. The value of customer relationship intangibles, which is the benefit to the Company resulting from the likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining term and any anticipated renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the above-market and below-market lease values, in-place lease values, unamortized lease origination costs and customer relationship intangibles will be immediately charged to the related income or expense. Total amortization expense related to these intangible assets, including discontinued operations, was approximately $0.9 million and ~~$1.9~~$2.8 million for both the three and ~~six~~nine months ended ~~June~~September 30, 2009 ~~respectively,~~ and ~~approximately $0.9 million and $1.8 million for the three and six months ended June 30,~~ 2008, respectively.

Impairment

Investments in Real Estate

The Company accounts for the impairment of real estate in accordance with ~~SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,~~ASC 360-10-35, “Property, Plant, and Equipment,” which requires that the Company periodically review the carrying value of each property to determine if circumstances indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. There have been no impairments recognized on real estate assets in the Company’s history.

In light of current economic conditions, the Company performed an impairment analysis of its entire portfolio at ~~June~~September 30, 2009. In performing the analysis, the Company considered such factors as the tenants’ payment history and financial condition, the likelihood of lease renewal, business conditions in the industry in which the tenants operate and whether the carrying value of the real estate has decreased. The Company concluded that none of its properties were impaired, and will continue to monitor its portfolio for any indicators that may change this conclusion.

Provision for Loan Losses

The Company’s accounting policies require that it reflect in its financial statements an allowance for estimated credit losses with respect to mortgage loans it has made based upon its evaluation of known and inherent risks associated with its private lending assets. Management reflects provisions for loan losses based upon its assessment of general market conditions, its internal risk management policies and credit risk rating system, industry loss experience, its assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Actual losses, if any, could ultimately differ from these estimates. There have been no provisions for loan losses in the Company’s history.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents; except that any such investments purchased with funds held in escrow or similar accounts are classified as restricted cash. Items classified as cash equivalents include money-market deposit accounts. All of the Company’s cash and cash equivalents at ~~June~~September 30, 2009 were held in the custody of one financial institution, and the Company’s balance at times may exceed federally insurable limits.

Restricted Cash

Restricted cash consists of security deposits and funds held in escrow for certain tenants. These funds will be released to the tenants upon completion of agreed upon tasks as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been received by the Company.

Funds Held in Escrow

Funds held in escrow consist of funds held by certain of the Company’s lenders for properties held as collateral by these lenders. These funds will be released to the Company upon completion of agreed upon tasks as specified in the mortgage agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the lenders.

Deferred Financing Costs

Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees and administrative fees. The costs are deferred and amortized using the straight-line method, which approximates the effective interest method over the term of the financing secured. The Company made payments of approximately ~~$50,000~~$2,000 and ~~$104,000~~$106,000 for deferred financing costs during the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, and ~~$21,000~~$1,097,000 and ~~$56,000~~$1,153,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively. Total amortization expense related to deferred financing costs was approximately ~~$724,000~~$421,000 and ~~$349,000~~$1,145,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, and ~~$256,000~~$300,000 and ~~$506,000~~$806,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid assets and deposits on real estate.

Obligation Under Capital Lease

In conjunction with the Company’s acquisition of a building in Fridley, Minnesota in February 2008, the Company acquired a ground lease on the parking lot of the building, which had a purchase obligation to acquire the land under the ground lease at the end of the term in April 2014 for $300,000. In accordance with ~~SFAS No. 13 “Accounting for Leases,~~ASC 840-10-25, “Leases,” the Company accounted for the ground lease as a capital lease and recorded the corresponding present value of the obligation under the capital lease. The Company recorded total interest expense related to the accretion of the capital lease obligation of ~~$3,077~~approximately $3,100 and ~~$6,154~~$9,200 for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, and ~~$4,156~~approximately $3,100 and $7,200 for ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, ~~2008.~~2008, respectively.

Revenue Recognition

Rental revenue includes rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. Most of the Company’s leases contain rental increases at specified intervals. The Company recognizes such revenues on a straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred rent receivable in the accompanying balance sheet includes the cumulative difference between rental revenue as recorded on a straight line basis and rents received from the tenants in accordance with the lease terms, along with the capitalized above-market lease values of certain acquired properties. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews deferred rent receivable, as it relates to straight line rents, on a quarterly basis and takes 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 deferred rent with respect to any given tenant is in doubt, the Company records an allowance for uncollectible accounts or records a direct write-off of the specific rent receivable. No such reserves have been recorded as of ~~June~~September 30, 2009.

Management considers its loans and other lending investments to be held-for-investment. The Company reflects loans classified as long-term investments at amortized cost, less allowance for loan losses, acquisition premiums or discounts, and deferred loan fees. On occasion, the Company may acquire loans at small premiums or discounts based on the credit characteristics of such loans. These premiums or discounts are recognized as yield adjustments over the lives of the related loans. Loan origination fees, as well as direct loan origination costs, are also deferred and recognized over the lives of the related loans as yield adjustments. If loans with premiums, discounts, or loan origination fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis. Prepayment penalties or yield maintenance payments from borrowers are recognized as additional income when received.

Income Taxes

The Company has operated and intends to continue to operate in a manner that will allow it to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and accordingly will not be subject to federal income taxes on amounts distributed to stockholders (except income from foreclosure property), provided it distributes at least 90% of its REIT taxable income to its stockholders and meets certain other conditions. To the extent that the Company satisfies the distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to federal corporate income tax on its undistributed income.

Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though Commercial Advisers has had no activity to date, the Company would account for any future income taxes in accordance with the provisions of ~~SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).~~ASC 740, “Income Taxes.” Under ~~SFAS 109,~~ASC 740-10-25, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Segment Information

~~SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,~~ASC 280, “Segment Reporting,” provides standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker or decision making group in determining how to allocate resources and in assessing performance. Company management is the chief decision making group. As discussed in Note 9, the Company’s operations are derived from two operating segments, one segment purchases real estate (land, buildings

Asset Retirement Obligations

~~In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset~~ASC 410, “Asset Retirement ~~Obligations” (“FIN 47”). FIN 47~~and Environmental Obligation,” requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. ~~FIN 47~~ASC 410-20-20 clarifies that the term “Conditional Asset Retirement Obligation” refers to a legal obligation (pursuant to existing laws or by contract) to perform an asset retirement activity 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. ~~FIN 47 also~~ASC 410-20-25-6 clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company has accrued a liability and corresponding increase to the cost of the related properties for disposal related to all properties constructed prior to 1985 that have, or may have, asbestos present in the building. The Company accrued a liability during the ~~six~~nine months ended ~~June~~September 30, 2008 of ~~$245,199~~$245,195 related to properties acquired during the period, which reflected the present value of the future obligation. There was no liability accrued during the ~~six~~nine months ended ~~June~~September 30, 2009. The Company also recorded expense, including discontinued operations, of ~~$35,476~~approximately $36,000 and ~~$70,845~~$107,000 during the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, and ~~$32,764~~approximately $35,000 and ~~$63,232~~$98,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively related to the cumulative accretion of the obligation.

Real Estate Held for Sale and Discontinued Operations

~~SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),~~ASC 360-10, “Property, Plant, and Equipment,” requires that the results of operations of any properties which have been sold, or are held for sale, be presented as discontinued operations in the Company’s consolidated financial statements in both current and prior periods presented. Income items related to held for sale properties are listed separately on the Company’s consolidated income statement. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value, less the cost to sell, and are listed separately on the Company’s consolidated balance sheet. Once properties are listed as held for sale, no further depreciation is recorded.

Recently Issued Accounting Pronouncements

~~In December 2007,~~On July 1, 2009, the FASB issued ~~SFAS~~FASB Statement No. ~~141 (revised 2007),~~168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles also known as ASC 105, “Generally Accepted Accounting Principles.”ASC 105 establishes the FASB Accounting Standards Codification and identifies it as the single source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. GAAP was not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted this pronouncement during the quarter ended September 30, 2009, and the adoption had no material impact on the Company’s results of operations.

ASC 805, “Business Combinations,” ~~(“SFAS 141(R)”), which replaced SFAS No. 141, “Business Combinations.” SFAS 141(R) significantly changed the accounting for acquisitions involving business combinations, as it~~ requires that the assets and liabilities of all business combinations be recorded at fair value, with limited exceptions. ~~SFAS 141(R) also~~ASC 805-10-25-23 requires that all expenses related to the acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition as had been the previous ~~accounting under SFAS 141. SFAS 141(R)~~accounting. ASC 805 is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. The Company adopted this pronouncement effective for the fiscal year beginning January 1, 2009, and the

adoption could have a significant impact on its results of operations because of the requirement to expense costs associated with acquisitions rather than capitalize the costs as has been done in the past. There was no significant impact from the adoption of this pronouncement during the ~~six~~nine months ended ~~June~~September 30, 2009, because there was limited activity during the period related to potential acquisitions.

~~In September 2006, the FASB issued SFAS No. 157,~~ASC 820, “Fair Value ~~Measurements” (“SFAS 157”). SFAS 157~~Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ~~SFAS 157~~ASC 820-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption had no impact on the Company’s results of operations.

~~In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair~~ASC 820-10-35-15A, “Fair Value ~~of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3”). FSP No. 157-3~~Measurements and Disclosures,” further clarifies the application of

~~SFAS 157~~ the standard in a market that is not active. More specifically, ~~FSP No. 157-3~~ASC 820-10-35-51E states that significant judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of fair value in an orderly transaction. ~~FSP No. 157-3 also~~ASC 820-10-35-55A provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, ~~FSP No. 157-3~~ASC 820-10-35-55B provides guidance on the level of reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer. The guidance ~~in FSP No. 157-3~~ is effective upon issuance for all financial statements that have not been issued and any changes in valuation techniques as a result of applying ~~FSP No. 157-3~~the guidance are accounted for as a change in accounting estimate. The Company adopted ~~this pronouncement~~these pronouncements during the quarter ended December 31, 2008, and the adoption had no material impact on the Company’s results of operations.

~~In April 2009, the FASB issued FSP No. 157-4, “Determining the Fair~~ASC 820-10-35-51A, “Fair Value ~~When the Volume~~Measurements and ~~Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”). FSP No. 157-4~~Disclosures,” provides additional guidance for estimating fair value ~~in accordance with SFAS 157~~ when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability. ~~FSP No. 157-4 also~~ASC 820-10-35-51E provides guidance on identifying circumstances that indicate when a transaction is not orderly. ~~FSP No. 157-4~~ASC 820-10-35-51D emphasizes that the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The guidance ~~in FSP No. 157-4~~ is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this pronouncement during the quarter ended March 31, 2009, and the adoption had no material impact on the Company’s results of operations.

~~In April 2009, the FASB issued FSP No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1”). FSP No. 107-1~~ASC 825-10-50, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, whether recognized or not recognized in the statement of financial position. The guidance in ~~FSP No. 107-1~~ASC 825-10-50 is effective for interim periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this pronouncement during the quarter ended March 31, 2009, and the adoption had no material impact on the Company’s results of operations.

~~In May 2009, the FASB issued SFAS No. 165,~~ASC 855-10-50, “Subsequent ~~Events” (“SFAS 165”). SFAS 165~~Events,” requires disclosure of the date through which an entity has evaluated subsequent events and defines the types of subsequent events that should be recognized or nonrecognized. ~~SFAS 165~~ASC 855-10-50 is effective for interim or annual periods ending after June 15, 2009. The Company adopted this pronouncement during the quarter ended June 30, 2009, and the adoption had no material impact on the reporting of its ~~results of operations.~~subsequent events.

~~In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets~~ASC 860, “Transfers and Servicing,”~~(“SFAS 166”). SFAS 166~~ removes the concept of a qualifying special-purpose entity ~~(QSPE) from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”~~ (“~~SFAS 140”~~QSPE”) and removes the exception from applying ~~FIN 46R.~~to variable interest entities that are QSPEs. This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This statement is effective for fiscal years beginning after November 15, ~~2009. SFAS 166~~2009, and is effective for the Company’s fiscal year beginning January 1, 2010. The Company ~~is currently evaluating the~~does not expect there to be an impact offrom adopting this standard on the Company’s results of operations.

2010. The Company ~~is currently evaluating the~~does not expect there to be an impact ~~of adopting this standard on the Company’s results of operations.~~

~~In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162~~” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the impact offrom adopting this standard on the Company’s results of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Reclassifications

~~Some~~Certain amounts from prior years’ financial statements have been reclassified to conform to the current year presentation. The Company’s property located in Norfolk, Virginia was classified as held for sale during the quarter ended June 30, 2009 and, as a result, the results of operations related to this property for 2008 were reclassified from continuing operations to discontinued operations. Some items within the cash flow statement were reclassified between the financing and investing activities sections during 2008. These items related to payments received from tenants for reserves and payments made to lenders for reserves. These reclassifications had no effect on previously reported net income or stockholders’ equity.

2. Related Party Transactions

The Company is externally managed pursuant to a contractual ~~investment advisory arrangement~~arrangements with its Adviser and a wholly-owned subsidiary of the Adviser, Gladstone Administration, LLC (the “Administrator”), under which its Adviser ~~employs~~and Administrator employ all of the Company’s personnel and pays ~~its~~their payroll, benefits, and general expenses directly. The Company has an advisory agreement with its Adviser (the “Advisory Agreement”) and an administration agreement (the “Administration Agreement”) with ~~a wholly-owned subsidiary of the Adviser, Gladstone Administration, LLC (the “Administrator”).~~its Administrator. The management services and fees under the Advisory and Administration Agreements are described below.

Advisory Agreement

The Advisory Agreement provides for an annual base management fee equal to 2% of the Company’s total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations (“FFO”). For the three and ~~six~~nine months ended ~~June~~September 30, 2009, the Company recorded a base management fee of approximately ~~$358,000~~$343,000 and ~~$730,000,~~$1,073,000, respectively, and for the three and ~~six~~nine months ended ~~June~~September 30, 2008, the Company recorded a base management fee of approximately ~~$420,000~~$404,000 and ~~$852,000,~~$1,256,000, respectively. For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee rewards the Adviser if the Company’s quarterly FFO, before giving effect to any incentive fee (“pre-incentive fee FFO”), exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. The Adviser receives 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of the Company’s pre-incentive fee FFO. The Adviser also receives an incentive fee of 20% of the amount of the Company’s pre-incentive fee FFO that exceeds 2.1875%.

For the three and ~~six~~nine months ended ~~June~~September 30, 2009, the Company recorded an incentive fee of approximately ~~$813,000~~$835,000 and ~~$1,599,000, respectively, offset by a credit related to an unconditional and irrevocable~~

to an unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $206,000 and $942,000, respectively, for a net incentive fee for the three and nine months ended September 30, 2008 of approximately ~~$628,000~~$588,000 and ~~$770,000,~~$1,358,000, respectively. The board of directors of the Company accepted the Adviser’s offer to waive on a quarterly basis a portion of the incentive fee for both the three and ~~six~~nine months ended ~~June~~September 30, 2009 and ~~2008, respectively, in~~2008in order to support the current level of distributions to the Company’s stockholders. These waivers were applied through September 30, 2009 and any waived fees may not be recouped by the Adviser in the future.

Administration Agreement

Under the Administration Agreement, the Company pays separately for its allocable portion of the Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of the Administrator, and its allocable portion of the salaries and benefits expenses of its chief financial officer, chief compliance officer, treasurer and their respective staffs. The Company’s allocable portion of expenses is derived by multiplying the Administrator’s total allocable expenses by the percentage of the Company’s total assets at the beginning of each quarter in comparison to the total assets of all companies managed by the Adviser under similar agreements. For the three and ~~six~~nine months ended ~~June~~September 30, 2009, the Company recorded an administration fee of approximately ~~$257,000~~$293,000 and ~~$482,000,~~$775,000, respectively, and for the three and ~~six~~nine months ended ~~June~~September 30, 2008, the Company recorded an administration fee of approximately ~~$275,000~~$238,000 and ~~$487,000,~~$725,000, respectively.

3. Earnings per Common Share

The following tables set forth the computation of basic and diluted earnings per common share for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008:


	For the three months ended June 30,				For the six months ended June 30,
	2009		2008		2009		2008		For the three months ended September 30,				For the nine months ended September 30,
									2009		2008		2009		2008
Net income available to common stockholders	$	93,499	$	196,008	$	159,630	$	589,273	$	255,553	$	118,122	$	415,194	$	707,395

Denominator for basic & diluted weighted average shares		8,563,264		8,565,264		8,563,264		8,565,264		8,563,264		8,565,264		8,563,264		8,565,264

															��
Basic & diluted earnings per common share	$	0.01	$	0.02	$	0.02	$	0.07	$	0.03	$	0.01	$	0.05	$	0.08

in February 2010. Except for the extension of the lease term, all other existing provisions of the lease, including the current rental rate, will remain the same during the extension period.

On May 19, 2009, the Company extended the lease on its property located in Eatontown, New Jersey for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 5 years each. The lease was originally set to expire in August 2011, and will now expire in April 2024. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $540,000.

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and future operating lease payments for discontinued operations, in effect at ~~June~~September 30, 2009, were as follows:


	Tenant		Tenant
Year	Lease Payments		Lease Payments
Six months ending December 31, 2009	$	19,428,658
Three months ending December 31, 2009			$	9,831,618
2010		38,819,446		38,819,446
2011		38,525,805		38,525,805
2012		38,614,845		38,614,845
2013		33,261,384		33,261,384
2014		29,025,909		29,025,909
Thereafter	$	160,507,642	$	160,507,642

6. Mortgage Note Receivable

On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million, collateralized by an office building in McLean, Virginia, where the Company’s Adviser and Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the greater of 7.5% per year or the one month London Interbank Offered Rate (“LIBOR”) rate plus 6.0% per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of the term, with payments of principal commencing after the initial period. The balance of the principal and all interest remaining is due at the end of the 12 year term. At ~~June~~September 30, 2009, the interest rate was 7.5%.

The fair market value of the mortgage note receivable as of ~~June~~September 30, 2009 was approximately $9.5 million, as compared to the carrying value stated above of approximately $10.0 million. The fair market value is calculated based on a discounted cash flow analysis, using an interest rate based on management’s estimate of the interest rate on a mortgage note receivable with comparable terms.

On July 20, 2009, the borrower on the Company’s mortgage loan signed a purchase agreement with a third party to sell the building. Currently, the sale is expected to close during the fourth quarter of 2009. The Company signed a letter with its borrower agreeing that if the sale is completed, the Company will accept

full repayment of the mortgage loan at the time of sale along with any prepayment penalties associated with the early exit, which management estimates to be approximately $3.0 million.

7. Mortgage Notes Payable, Line of Credit and Short-Term Loan

The Company’s mortgage notes payable, line of credit and short-term loan as of ~~June~~September 30, 2009 and December 31, 2008 are summarized below:


						Stated
						Interest										Principal Balance Outstanding
	Date of		Principal			Rate at			Principal Balance Outstanding				Date of
	Issuance/		Maturity			June 30,			June 30,		December 31,		Issuance/	Principal	Stated Interest Rate at
	Assumption		Date			2009⁽¹⁾			2009		2008		Assumption	Maturity Date	September 30, 2009⁽¹⁾	September 30, 2009		December 31, 2008
Fixed-Rate Mortgage Notes Payable:
		03/16/05		04/01/30			6.33	%	$	2,917,085	$	2,948,753	03/16/05	04/01/30	6.33%	$	2,901,378	$	2,948,753
		08/25/05		09/01/15			5.33	%		21,247,266		21,399,644	08/25/05	09/01/15	5.33%		21,172,666		21,399,644
		09/12/05		09/01/15			5.21	%		12,475,382		12,560,673	09/12/05	09/01/15	5.21%		12,433,691		12,560,673
		12/21/05		12/08/15			5.71	%		19,116,806		19,241,117	12/21/05	12/08/15	5.71%		19,056,322		19,241,117
		02/21/06		12/01/13			5.91	%		9,266,886		9,344,908	02/21/06	12/01/13	5.91%		9,228,511		9,344,908
		02/21/06		06/30/14			5.20	%		19,295,456		19,472,740	02/21/06	06/30/14	5.20%		19,207,834		19,472,740
		03/29/06		04/01/16			5.92	%		17,000,000		17,000,000	03/29/06	04/01/16	5.92%		17,000,000		17,000,000
		04/27/06		05/05/16			6.58	%		14,146,730		14,281,616	04/27/06	05/05/16	6.58%		14,080,170		14,281,616
		11/22/06		12/01/16			5.76	%		14,223,075		14,309,000	11/22/06	12/01/16	5.76%		14,181,437		14,309,000
		12/22/06		01/01/17			5.79	%		21,735,219		21,846,000	12/22/06	01/01/17	5.79%		21,672,370		21,846,000
		02/08/07		03/01/17			6.00	%		13,775,000		13,775,000	02/08/07	03/01/17	6.00%		13,775,000		13,775,000
		06/05/07		06/08/17			6.11	%		14,240,000		14,240,000	06/05/07	06/08/17	6.11%		14,240,000		14,240,000
		09/06/07		12/11/15			5.81	%		4,393,893		4,426,393	09/06/07	12/11/15	5.81%		4,377,989		4,426,393
		10/15/07		11/08/17			6.63	%		15,742,955		15,828,612	10/15/07	11/08/17	6.63%		15,701,935		15,828,612
		08/29/08		06/01/16			6.80	%		6,360,172		6,421,717	08/29/08	06/01/16	6.80%		6,328,608		6,421,717
		09/15/08		10/01/10	⁽²⁾		6.85	%		48,015,000		48,015,000	09/15/08	10/01/10⁽²⁾	6.85%		48,015,000		48,015,000

Total Fixed-Rate Mortgage Notes Payable:										253,950,925		255,111,173					253,372,911		255,111,173


Variable-Rate Line of Credit:		12/29/06		12/29/09	⁽³⁾	LIBOR + 1.9%				31,800,000		11,500,000	12/29/06	12/29/09⁽³⁾	LIBOR + 1.9%		31,800,000		11,500,000


Variable-Rate Short-Term Loan:		12/21/07		06/20/09	⁽⁴⁾	LIBOR + 2.75%				—		20,000,000	12/21/07	06/20/09⁽⁴⁾	LIBOR + 2.75%		—		20,000,000


Total Mortgage Notes Payable, Line of Credit and Short-Term Loan									$	285,750,925	$	286,611,173				$	285,172,911	$	286,611,173

As long as the Company is in compliance with its covenants under the line of credit, the Company has the option to extend the line of credit for an additional year. The Company must notify KeyBank of its intention to exercise the renewal option 45 days prior to the maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of notification. The interest rate charged on the advances under the facility is based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. The Company’s ability to access this funding source is subject to the Company continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires the Company to limit its distributions to stockholders to 95% of its FFO less those acquisition related costs that are required to be expensed under ~~SFAS 141(R).~~ASC 805. In addition, the maximum amount the Company may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. KeyBank has requested that the ~~option to~~Company obtain updated appraisals for the properties pledged to the line of credit as borrowing base collateral ~~if they believe there has been a material adverse change to~~in connection with the ~~value of any~~upcoming extension of the ~~pledged properties.~~line of credit. If the aggregate value of the updated appraisals obtained is lower than the current aggregate value of appraisals, it would lower the amount of the Company’s borrowing base and reduce the amount the Company could borrow under its line of credit with that borrowing base. The Company is currently obtaining updated appraisals on its pledged properties, and does not believe that ~~if updated appraisals were obtained on its pledged properties that~~ any

eligibility standards, the Company may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit may also be reduced by letters of credit used in the ordinary course of business. The Company ~~anticipates that certain of its letters of credit will be returned during 2009, thus further increasing its availability. The Company~~ may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of ~~June~~September 30, 2009, there was ~~approximately~~ $31.8 million outstanding under the line of credit at an interest rate of approximately 2.2%, and approximately ~~$2.8~~$3.6 million outstanding pursuant to letters of credit at a weighted average interest rate of approximately 2.0%. At ~~June~~September 30, 2009, the remaining borrowing capacity available under the line of credit was approximately ~~$15.4~~$14.6 million. The Company was in compliance with all covenants under the line of credit as of ~~June~~September 30, 2009. The amount outstanding on the line of credit as of ~~June~~September 30, 2009 approximates fair market value, because the debt is short-term and variable rate.

Short-Term Loan

On December 21, 2007, the Company entered into a $20.0 million unsecured short-term loan with KeyBank, which matured on December 21, 2008. The Company exercised its option to extend the term for an additional six months and, on March 31, 2009, the Company repaid in full the unsecured short-term loan, using proceeds from borrowings under its line of credit. The interest rate charged on the loan was based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusted periodically.

8. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity for the ~~six~~nine months ended ~~June~~September 30, 2009:


							Notes			Distributions in												Notes			Distributions in
					Capital in		Receivable			Excess of			Total							Capital in		Receivable			Excess of			Total
	Common		Preferred		Excess of		From Sale of			Accumulated			Stockholders’			Preferred		Common		Excess of		From Sale of			Accumulated			Stockholders’
	Stock		Stock		Par Value		Common Stock			Earnings			Equity			Stock		Stock		Par Value		Common Stock			Earnings			Equity
Balance at December 31, 2008	$	8,563	$	2,150	$	170,622,581	$	(2,595,886	)	$	(37,542,148	)	$	130,495,260		$	2,150	$	8,563	$	170,622,581	$	(2,595,886	)	$	(37,542,148	)	$	130,495,260

Repayment of principal on notes receivable - employees		—		—		—		6,921			—			6,921			—		—		—		44,285			—			44,285

Distributions declared to common and preferred stockholders		—		—		—		—			(8,469,322	)		(8,469,322	)		—		—		—		—			(12,703,991	)		(12,703,991	)

Net income		—		—		—		—			2,206,505			2,206,505			—		—		—		—			3,485,506			3,485,506

Balance at September 30, 2009																$	2,150	$	8,563	$	170,622,581	$	(2,551,601	)	$	(46,760,633	)	$	121,321,060

Balance at June 30, 2009	$	8,563	$	2,150	$	170,622,581	$	(2,588,965	)	$	(43,804,965	)	$	124,239,364

~~On July 17,~~November 4, 2009, the Company ~~sold~~entered into an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies & Company, Inc. (“Jefferies”) under which the Company may, from time to time, offer and sell shares of its ~~property located in Norfolk, Virginia~~common stock with an aggregate sales price of up to $25.0 million through Jefferies, or to Jefferies for ~~$1.15 million, for a gain~~resale, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). Sales of its common stock through Jefferies, if any, will be executed by means of ordinary brokers’ transactions on the ~~sale~~NASDAQ Global Market or otherwise at market prices, in privately negotiated transactions, crosses or block transactions or such other transactions as may be agreed between the Company and Jefferies, including a combination of ~~approximately $160,000.~~any of these transactions. The ~~property was removed from~~Company will pay Jefferies a commission, or allow a discount, as the ~~borrowing base assets pledged against~~case may be, in each case equal to 2.0% of the ~~line~~gross sales proceeds of ~~credit, however, the removal from the borrowing base had no impact on the availability~~any common stock sold through Jefferies as agent, or to Jefferies as principal, under the line of credit. After the removal, there was still in excess of $50.0 million of availability from the remaining assets pledged against the line of credit, the maximum the Company is able to draw. The proceeds from the sale were used to partially pay down the Company’s line of credit.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of thisForm ~~10-Q~~.10-Q.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial and commercial real property and selectively making long-term industrial and commercial mortgage loans. Most of the portfolio of real estate we currently own is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which are corporations that do not have publicly rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having triple net leases with terms of approximately 10 to 15 years and built in rental increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We are actively communicating with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. At ~~June~~September 30, 2009, we owned 6564 properties totaling approximately 6.3 million square feet, and had one mortgage loan outstanding. The total gross investment in these acquisitions, including the $10.0 million mortgage loan investment, was approximately ~~$443.7~~$442.7 million at ~~June~~September 30, 2009.

Business Environment

The United States isremains in a recession, and, as a result, conditions within the global credit markets and the U.S. real estate credit markets in particular continue to experience ~~historic levels of~~ dislocation and stress. The economic downturn and the disruptions in the capital markets have increased the cost of, and decreased our ability to obtain, new debt and equity capital at reasonable prices. The longer these conditions persist, the greater the probability that these factors could have an adverse effect on our operations and financial results. The current economic conditions also make it difficult to price and finance new investment opportunities on attractive terms. While we are ~~starting~~beginning to see ~~some~~ signs of economic improvementand stabilization in the equity markets, the debt markets are still difficult at best, and we do not know if adverse conditions will again intensify or the full extent to which the disruptions will affect us. ~~Continued~~In addition, conditions continue to make it difficult to price and finance new investment opportunities on attractive terms. We believe it will be some time before the United States has recovered from the recession, and as a result the continued weak economic conditions could ~~also~~still adversely impact the financial condition of one or more of our tenants and therefore, could make a tenant bankruptcy and payment default on the related lease or loan more likely. Currently, all of our properties are fully leased and all of our tenants and our borrower are current and paying in accordance with their leases and loan, respectively. In addition, no balloon payments are due under our mortgage notes payable until 2010, and the only mortgage note that matures in 2010 has three annual extension options through 2013.

disappeared. With the closure of the CMBS market, many banks are not lending on commercial real estate as they are no longer able to sell these loans to the CMBS market and are not willing or able to keep these loans on their balance sheets. We are now seeing banks only willing to issue medium-term mortgages, between two to five years, at substantially less favorable terms. As a result, we intend to focus on using medium-term mortgages to finance our real estate until the market for long-term mortgages returns. Our ability to increase the availability under our line of credit is dependent upon us pledging additional properties as collateral. Traditionally, we have pledged new properties to the line of credit as we arrange for long-term mortgages for these pledged properties. Currently, only nine of our properties do not have long-term mortgages, and eight of those are pledged as collateral under our line of credit. Our line of credit matures in December 2009, however, we intend to exercise our option to extend the term for an additional year, through December ~~2010, unless~~2010.

On November 4, 2009, we entered into an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies & Company, Inc. (“Jefferies”) under which we may, from time to time, offer and sell shares of our common stock with an aggregate sales price of up to $25.0 million through Jefferies, or to Jefferies, for resale. To date, we have not sold any common stock under the Open Market Sale Agreemennt.If we are able to ~~secure more favorable financing.~~

~~If we are able to~~ raise ~~debt or~~ equity capital in the near term, in addition to continuing to invest in industrial and commercial real property, we will also seek to expand our investments to other categories such as retail and medical properties. In addition, we also intend ~~to seek~~ to expand our mortgage lending activity to include purchasing mortgage loans from banks and CMBS pools.

However, until we are able to raise debt or equity capital, our near-term strategy has become somewhat dependent upon building the value of our existing portfolio of properties by renegotiating existing leases and making capital improvements to our properties. Capital improvements will be limited to the extent we have available capital. We will continue to review potential acquisitions and we intend to continue our strategy of making conservative investments in properties that have existing financing that we believe will weather the current recession and that are likely to produce attractive long-term returns for our stockholders.

Recent Events

Financing Activities:

During the ~~six~~nine months ended ~~June~~September 30, 2009, we had net borrowings under our line of credit of approximately $20.3 million, with $31.8 million outstanding at ~~June~~September 30, 2009. The proceeds from borrowings under the line of credit were used to pay off the $20.0 million unsecured short-term loan with ~~KeyBank.~~KeyBank and fund other capital improvements at our properties.

On November 4, 2009, we entered into the Open Market Sale Agreement with Jefferies under which we may, from time to time, offer and sell shares of our common stock with an aggregate sales price of up to $25.0 million through Jefferies, or to Jefferies, for resale.

Leasing Activities:

On May 5, 2009, we extended the lease with one of our tenants in our property located in Akron, Ohio for a period of six months. The lease was originally set to expire in August 2009, and will now expire in February 2010. Except for the extension of the lease term, all other existing provisions of the lease, including the current rental rate, will remain the same during the extension period.

On May 19, 2009, we extended the lease on our property located in Eatontown, New Jersey for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 5 years each. The lease was originally set to expire in August 2011, and will now expire in April 2024. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $540,000.

Dispositions:

On July 17, 2009, we sold our property located in Norfolk, Virginia for $1.15 million, for a gain on the sale of approximately $160,000. The proceeds from the sale were used to pay down our line of credit.

Industry Classifications

Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid dependence on any one particular tenant, geographic location or tenant industry. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic region. Our largest tenant at ~~June~~September 30, 2009 comprised approximately 7.3% of our total rental income, and our largest concentration of properties was located in Ohio, which accounted for approximately 17.7% of our total rental income. The table below reflects the breakdown of our total rental income by tenant industry classification for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively:


	June 30, 2009					June 30, 2008					September 30, 2009					September 30, 2008
			Percentage of					Percentage of					Percentage of					Percentage of
Industry Classification	Rental Income		Rental Income			Rental Income		Rental Income			Rental Income		Rental Income			Rental Income		Rental Income
Automobile	$	583,327		2.8	%	$	583,327		3.1	%	$	874,990		2.8	%	$	874,990		3.0	%
Beverage, Food & Tobacco		1,094,371		5.3	%		976,441		5.1	%		1,641,563		5.3	%		1,534,622		5.3	%
Buildings and Real Estate		1,012,834		4.9	%		1,000,682		5.3	%		1,519,251		4.9	%		1,507,099		5.2	%
Chemicals, Plastics & Rubber		1,598,724		7.7	%		1,000,838		5.3	%		2,395,845		7.7	%		1,655,620		5.7	%
Containers, Packaging & Glass		1,165,007		5.6	%		1,123,901		5.9	%		1,747,626		5.6	%		1,706,406		5.8	%
Diversified/Conglomerate Manufacturing		1,832,344		8.8	%		1,453,558		7.6	%		2,748,515		8.8	%		2,249,576		7.7	%
Diversified/Conglomerate Services		154,052		0.7	%		154,052		0.8	%		231,079		0.7	%		231,079		0.8	%
Electronics		3,082,895		14.8	%		3,082,895		16.2	%		4,624,341		14.8	%		4,624,341		15.8	%
Healthcare, Education & Childcare		3,072,707		14.8	%		2,646,309		13.9	%		4,609,061		14.8	%		4,182,663		14.3	%
Home & Office Furnishings		264,872		1.3	%		264,872		1.4	%		397,307		1.3	%		397,307		1.4	%
Insurance		361,433		1.7	%		361,433		1.9	%		542,150		1.7	%		542,150		1.9	%
Machinery		1,194,301		5.8	%		1,047,449		5.5	%		1,791,453		5.8	%		1,644,601		5.6	%
Oil & Gas		572,645		2.8	%		576,221		3.0	%		855,391		2.7	%		864,332		3.0	%
Personal & Non-Durable Consumer Products		677,361		3.3	%		677,700		3.6	%		1,016,041		3.3	%		1,016,380		3.5	%
Personal, Food & Miscellaneous Services		287,503		1.4	%		287,503		1.5	%		431,255		1.4	%		431,255		1.5	%
Printing & Publishing		1,089,693		5.2	%		1,099,366		5.8	%		1,639,363		5.3	%		1,644,212		5.6	%
Telecommunications		2,723,351		13.1	%		2,723,185		14.1	%		4,085,192		13.1	%		4,084,777		13.8	%

	$	20,767,420		100.0	%	$	19,059,732		100.0	%	$	31,150,423		100.0	%	$	29,191,410		100.0	%

Advisory and Administration Agreements

We ~~have been~~are externally managed pursuant to a contractual ~~investment advisory arrangement~~arrangements with our Adviser and our Administrator, under which our Adviser ~~has~~and Administrator have directly employed all of our personnel and paid ~~its~~their payroll, benefits, and general expenses directly. On January 1, 2007, we entered into an advisory agreement with our Adviser, which we refer to as the Advisory Agreement, and an administration agreement with our Administrator, which we refer to as the Administration ~~Agreement, with our Administrator.~~Agreement.

Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest on short-term debt and mortgages, tax preparation, directors and officers insurance, stock transfer services, stockholder related fees, consulting and related fees.

In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which may include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers). During the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, none of these expenses were incurred by us directly. The actual amount of such fees that we incur in the future will depend largely upon the aggregate costs of the properties we acquire, the aggregate amount of mortgage loans we make and the extent to which we are able to shift the burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the future is not determinable at this time.

Management Services and Fees under the Advisory Agreement

The Advisory Agreement provides for an annual base management fee equal to 2.0% of our total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations, or FFO.

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or the hurdle rate, of total stockholders’ equity, less the recorded value of any preferred stock. We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO in each calendar quarter as follows:

	•		no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized);

	•		100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized); and

	•		20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Quarterly Incentive Fee Based on FFO

Pre-incentive fee FFO
(expressed as a percentage of total common stockholders’ equity)

Percentage of pre-incentive fee FFO allocated to incentive fee

The incentive fee may be reduced because of our line of credit covenant which limits distributions to our stockholders to 95% of FFO. In order to comply with this covenant, our board of directors accepted our Adviser’s offer to unconditionally, irrevocably and voluntarily waive on a quarterly basis a portion of the incentive fee for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, which allowed us to maintain the current level of distributions to our stockholders. These waivers were applied through September 30, 2009 and any waived fees may not be recouped by our Adviser in the future. Our Adviser has indicated that it intends to continue to waive all or a portion of the incentive fee in order to support the current level of distributions to our stockholders, however, our Adviser is not required to issue any waiver, in whole or in part.

Administration Agreement

Under the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of our Administrator, and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, treasurer and their respective staffs. Our allocable portion of expenses is derived by multiplying our Administrator’s total expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all companies managed by our Adviser under similar agreements.

Critical Accounting Policies

The preparation of our financial statements in accordance with generally accepted accounting principles in the United States of America, or GAAP, requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Management relies on its experience, collects historical data and current market data, and analyzes this information in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements included elsewhere in this report. Below is a summary of accounting polices involving estimates and assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.

Allocation of Purchase Price

When we acquire real estate, we allocate the purchase price to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases,

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from 9 to 18 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. Management also considers the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. A change in any of the assumptions above, which are very subjective, could have a material impact on our results of operations.

The allocation of the purchase price directly affects the following in our consolidated financial statements:

	•		The amount of purchase price allocated to the various tangible and intangible assets on our balance sheet;

	•		The amounts allocated to the value of above-market and below-market lease values are amortized to rental income over the remaining non-cancelable terms of the respective leases. The amounts allocated to all other tangible and intangible assets are amortized to depreciation or amortization expense. Thus, changes in the purchase price allocation among our assets could have a material impact on our FFO, which is used by many REIT investors to evaluate our operating performance; and

	•		The period of time that tangible and intangible assets are depreciated over varies greatly and thus, changes in the amounts allocated to these assets will have a direct impact on our results of operations. Intangible assets are generally amortized over the respective life of the leases, which normally range from 10 to 15 years, we depreciate our buildings over 39 years, and land is not depreciated. These differences in timing could have a material impact on our results of operations.

Asset Impairment Evaluation

We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. In determining if impairment exists, management considers such factors as our tenants’ payment history, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industry in which our tenants operate and whether the carrying value of our real estate has decreased. If any of the factors above support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the carrying amount in such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate the hold periods of the properties and cap rates using information we obtain from market comparability studies and other comparable sources. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows using assumptions or market participants. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss we would recognize.

Using the methodology discussed above and in light of the current economic conditions discussed above in “Overview-Business Environment,” we performed an impairment analysis of our entire portfolio at ~~June~~September 30, 2009. We concluded that none of our properties are currently impaired, and we will continue to monitor our portfolio for any indicators that may change our conclusion.

Provision for Loan Losses

Our accounting policies require that we reflect in our financial statements an allowance for estimated credit losses with respect to mortgage loans we have made based upon our evaluation of known and inherent risks associated with our private lending assets. Management reflects provisions for loan losses based upon our assessment of general market conditions, our internal risk management policies and credit risk rating system, industry loss experience, our assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying our investments. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations. We did not make a loss allowance for our existing mortgage loan receivable as of ~~June~~September 30, 2009, as we believe the carrying value of the loan is fully collectible.

Recently Issued Accounting Pronouncements

Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently issued accounting pronouncements.

A comparison of our operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 is below:


																									For the three months ended September 30,												For the nine months ended September 30,
	For the three months ended June 30,												For the six months ended June 30,																					%
	2009			2008			$ Change			% Change			2009			2008			$ Change			% Change			2009			2008			$ Change			Change			2009			2008			$ Change			% Change
Operating revenues
Rental income	$	10,379,172		$	9,896,143		$	483,029			5	%	$	20,767,420		$	19,059,732		$	1,707,688			9	%	$	10,383,002		$	10,131,678		$	251,324			2	%	$	31,150,423		$	29,191,410		$	1,959,013			7	%
Interest income from mortgage notes receivable		189,583			218,805			(29,222	)		-13	%		377,083			457,102			(80,019	)		-18	%		191,667			216,446			(24,779	)		-11	%		568,750			673,548			(104,798	)		-16	%
Tenant recovery revenue		82,734			84,635			(1,901	)		-2	%		165,167			170,354			(5,187	)		-3	%		82,425			83,144			(719	)		-1	%		247,593			253,495			(5,902	)		-2	%

Total operating revenues		10,651,489			10,199,583			451,906			4	%		21,309,670			19,687,188			1,622,482			8	%		10,657,094			10,431,268			225,826			2	%		31,966,766			30,118,453			1,848,313			6	%


Operating expenses
Depreciation and amortization		3,282,629			3,178,718			103,911			3	%		6,590,438			6,160,187			430,251			7	%		3,284,723			3,256,602			28,121			1	%		9,875,156			9,416,786			458,370			5	%
Property operating expenses		230,785			203,405			27,380			13	%		467,595			442,459			25,136			6	%		219,537			222,647			(3,110	)		-1	%		687,129			665,103			22,026			3	%
Due diligence expense		6,886			40			6,846			17115	%		16,433			2,125			14,308			673	%		—			2,158			(2,158	)		-100	%		16,433			4,282			12,151			284	%
Base management fee		357,650			419,857			(62,207	)		-15	%		730,298			851,725			(121,427	)		-14	%		342,743			404,108			(61,365	)		-15	%		1,073,041			1,255,833			(182,792	)		-15	%
Incentive fee		812,653			801,832			10,821			1	%		1,598,942			1,506,499			92,443			6	%		835,003			793,787			41,216			5	%		2,433,945			2,300,286			133,659			6	%
Administration fee		257,207			274,541			(17,334	)		-6	%		481,561			486,737			(5,176	)		-1	%		293,075			238,241			54,834			23	%		774,636			724,978			49,658			7	%
Professional fees		125,965			147,065			(21,100	)		-14	%		361,161			244,727			116,434			48	%		105,368			117,857			(12,489	)		-11	%		466,529			362,584			103,945			29	%
Insurance		48,125			41,797			6,328			15	%		96,804			83,594			13,210			16	%		50,757			43,354			7,403			17	%		147,561			126,947			20,614			16	%
Directors fees		50,386			52,251			(1,865	)		-4	%		100,088			106,500			(6,412	)		-6	%		49,459			54,702			(5,243	)		-10	%		149,547			161,202			(11,655	)		-7	%
Stockholder related expense		88,245			102,775			(14,530	)		-14	%		171,892			229,198			(57,306	)		-25	%		32,914			42,232			(9,318	)		-22	%		204,806			271,430			(66,624	)		-25	%
Asset retirement obligation expense		35,476			32,325			3,151			10	%		70,384			62,361			8,023			13	%		36,060			34,711			1,349			4	%		106,441			97,077			9,364			10	%
General and administrative		15,453			18,326			(2,873	)		-16	%		26,005			30,506			(4,501	)		-15	%		19,643			10,079			9,564			95	%		45,647			40,582			5,065			12	%

Total operating expenses before credit from Adviser		5,311,460			5,272,932			38,528			1	%		10,711,601			10,206,618			504,983			5	%		5,269,282			5,220,478			48,804			1	%		15,980,871			15,427,090			553,781			4	%


Credit to incentive fee		(129,623	)		(173,697	)		44,074			-25	%		(364,704	)		(736,052	)		371,348			-50	%		(200,264	)		(205,876	)		5,612			-3	%		(564,968	)		(941,928	)		376,960			-40	%

Total operating expenses		5,181,837			5,099,235			82,602			2	%		10,346,897			9,470,566			876,331			9	%		5,069,018			5,014,602			54,416			1	%		15,415,903			14,485,162			930,741			6	%


Other income (expense)
Interest income from temporary investments		184			6,689			(6,505	)		-97	%		17,465			16,237			1,228			8	%		524			4,559			(4,035	)		-89	%		17,989			20,796			(2,807	)		-13	%
Interest income — employee loans		48,862			50,852			(1,990	)		-4	%		97,748			102,996			(5,248	)		-5	%		48,130			49,624			(1,494	)		-3	%		145,878			152,620			(6,742	)		-4	%
Other income		11,320			39,697			(28,377	)		-71	%		11,320			48,993			(37,673	)		-77	%		—			7,500			(7,500	)		-100	%		11,320			56,493			(45,173	)		-80	%
Interest expense		(4,433,998	)		(3,996,453	)		(437,545	)		11	%		(8,921,555	)		(7,752,501	)		(1,169,054	)		15	%		(4,521,848	)		(4,354,381	)		(167,467	)		4	%		(13,443,405	)		(12,106,885	)		(1,336,520	)		11	%

Total other expense		(4,373,632	)		(3,899,215	)		(474,417	)		12	%		(8,795,022	)		(7,584,275	)		(1,210,747	)		16	%		(4,473,194	)		(4,292,698	)		(180,496	)		4	%		(13,268,218	)		(11,876,976	)		(1,391,242	)		12	%


Income from continuing operations		1,096,020			1,201,133			(105,113	)		-9	%		2,167,751			2,632,347			(464,596	)		-18	%		1,114,882			1,123,968			(9,086	)		-1	%		3,282,645			3,756,315			(473,670	)		-13	%


Discontinued operations
Income from discontinued operations		20,916			18,312			2,604			14	%		38,754			3,801			34,953			920	%		4,070			17,591			(13,521	)		-77	%		42,823			21,392			21,431			100	%
Gain on sale of real estate																										160,038			—			160,038			100	%		160,038			—			160,038			100	%

Total discontinued operations		20,916			18,312			2,604			14	%		38,754			3,801			34,953			920	%		164,108			17,591			146,517			833	%		202,861			21,392			181,469			848	%


Net income		1,116,936			1,219,445			(102,509	)		-8	%		2,206,505			2,636,148			(429,643	)		-16	%		1,278,990			1,141,559			137,431			12	%		3,485,506			3,777,707			(292,201	)		-8	%


Distributions attributable to preferred stock		(1,023,437	)		(1,023,437	)		—			0	%		(2,046,875	)		(2,046,875	)		—			0	%		(1,023,437	)		(1,023,437	)		—			0	%		(3,070,312	)		(3,070,312	)		—			0	%


Net income available to common stockholders	$	93,499		$	196,008		$	(102,509	)		-52	%	$	159,630		$	589,273		$	(429,643	)		-73	%	$	255,553		$	118,122		$	137,431			116	%	$	415,194		$	707,395		$	(292,201	)		-41	%

Operating Revenues

Rental income increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of the ~~two properties acquired subsequent to June 30, 2008, coupled with~~ properties acquired during the ~~six~~nine months ended ~~June~~September 30, 2008 that were held for the full ~~six-month~~nine-month period in 2009.

Interest income from mortgage notes receivable decreased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily because interest income on our mortgage loan is based on the London Interbank Offered Rate, or LIBOR, which has significantly decreased over the past year.

Tenant recovery revenue decreased slightly for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of a decrease in the insurance premiums on some of our properties in which the tenants reimburse us for insurance expense.

Operating Expenses

Depreciation and amortization expenses increased during the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, as a result of the ~~two properties acquired subsequent to June 30, 2008, and~~ properties acquired during the ~~six~~nine months ended ~~June~~September 30, 2008 that were held for the full ~~six-month~~nine-month period in 2009.

Property operating expenses consist of franchise taxes, management fees, insurance, ground lease payments and overhead expenses paid on behalf of certain of our properties. Property operating expenses ~~increased~~remained relatively flat during the three ~~and six~~ months ended ~~June~~September 30, 2009, as compared to the three ~~and six~~ months ended ~~June~~September 30, 2008, and increased slightly for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, primarily because of an increase in franchise taxes paid in certain states coupled with repairs and maintenance performed at certain of our properties.

Due diligence expense primarily consists of legal fees and fees incurred for third-party reports prepared during our due diligence work. There was no due diligence expense incurred for the three months ended September 30, 2009. Due diligence expenses increased for the ~~three and six~~nine months ended ~~June~~September 30, 2009, as compared to the ~~three and six~~nine months ended ~~June~~September 30, 2008, primarily due to the adoption of ~~SFAS 141(R)~~ASC 805 on January 1, 2009, discussed in detail in Note 1 of the accompanying consolidated financial statements, which ~~required~~requires us to no longer capitalize due diligence costs into the price of the acquisition.

The base management fee decreased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, as a result of a decrease in total common stockholders’ equity, the main component of the calculation. Total common stockholders’ equity decreased because distributions to common stockholders for the ~~six~~nine months ended ~~June~~September 30, 2009 ~~were approximately $8.5 million as compared to~~exceeded net income during the period ofby approximately ~~$2.2~~$6.1 million. The calculation of the base management fee is described in detail above under“~~—Advisory~~-Advisory and Administration Agreements.”

The incentive fee increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, due to the increase in pre-incentive fee FFO as a result of our increased rental income discussed above, coupled with the decrease in total common stockholders’ equity. The calculation of the incentive fee is described in detail above under“~~—Advisory~~-Advisory and Administration Agreements.”

The administration fee ~~decreased~~increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of ~~a decrease in the amount of salaries paid by our Administrator, coupled with~~ an increase in our total assets in comparison to the total assets of all companies managed by our Adviser under similar ~~agreements.~~agreements, coupled with the costs incurred by our Administrator, which are directly allocable to us, for the implementation of real estate software. The calculation of the administrative fee is described in detail above under “—“-Advisory and Administration Agreements.”

Professional fees, consisting primarily of legal and accounting fees, decreased during the three months ended ~~June~~September 30, 2009, as compared to the three months ended ~~June~~September 30, 2008, primarily as a result of ~~timing of our costs related to~~a decrease in legal fees incurred during the ~~annual tax return filings, which were not extended as in the prior year.~~three months ended September 30, 2009. Professional fees increased during the ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of an increase in legal and other professional fees relating to ongoing lease renegotiations and reviews of our legal work with our existing tenants, coupled with research on state tax issues incurred during 2009.

Insurance expense consists of the premiums paid for directors’ and officers’ insurance, which is renewed annually each September. Insurance expense increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, because of an increase in the premiums for the period from September 2008 through September 2009.

Directors’ fees decreased during the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of one of the independent directors becoming an interested director in January 2008, and thus not being paid an annual stipend during 2009.

Stockholder related expense decreased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of decreased costs associated with printing and filing our proxy materials.

Asset retirement obligation expense increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of a property acquired in March 2008, which was required to recognize an asset retirement ~~liability.~~liability, coupled with the increase in the accretion of the expense over the term of the lease including renewal periods.

General and administrative expenses ~~decreased~~increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily as a result of ~~a decrease~~an increase in the amount of travel for site visits to our properties, coupled with ~~a decrease~~an increase in ~~conferences attended.~~bank service charges.

Other Income and Expense

Interest income from temporary investments decreased during the three and nine months ended ~~June~~September 30, 2009, as compared to the three and nine months ended ~~June~~September 30, 2008, primarily because of lower interest rates earned on our money market ~~accounts. Interest income from temporary investments increased during the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily as a result of~~accounts, partially offset by interest received in 2009 from funds held on deposit for a prospective real estate acquisition, coupled with interest earned on amounts held in reserve accounts with our lenders.

Interest income on employee loans decreased during the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008. This decrease was a result of loan payoffs by employees ~~who paid off their loans~~ during 2008, coupled with other partial principal repayments over the periods.

Other income decreased during the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008, primarily because we no longer receive management fees from our tenant in our Burnsville, Minnesota property.

Interest expense increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008. This was primarily a result of ~~an increased amount outstanding on our line of credit during the three and six months ended June 30, 2009, coupled with~~ long-term financings, which closed during 2008, that were held for the full period during 2009.

Discontinued Operations

Income from discontinued operations primarily relates to ~~our~~the property we sold, which was located in Norfolk, ~~Virginia.~~Virginia, including a gain on the sale of the property of approximately $160,000. This is partially offset by continuing expenses related to the two Canadian properties, which we sold in July 2006. The

~~The~~ expenses for the two Canadian properties relate to legal fees associated with the dissolution of the entities, which sold the properties.

Net Income Available to Common Stockholders

Net income available to common stockholders ~~decreased~~increased for the three and ~~six~~nine months ended ~~June~~September 30, 2009, as compared to the three and ~~six~~nine months ended ~~June~~September 30, 2008. This ~~decrease~~increase was primarily a result of ~~increased interest expense from~~ the ~~increased number~~gain on sale of ~~properties which have long-term financing, partially offset by~~our property in Norfolk, Virginia coupled with the ~~increase in the size~~growth of our portfolio of investments in the past year and the corresponding increase in our revenues and the other events described above. This increase was partially offset by increased interest expense from the increased number of properties which have long-term financing.

Liquidity and Capital Resources

Future Capital Needs

At ~~June~~September 30, 2009, we had approximately ~~$2.9~~$2.8 million in cash and cash equivalents. We have access to our existing line of credit with an available borrowing capacity of ~~$15.4~~$14.6 million, and have obtained mortgages on 55 of our properties. We had investments in 6564 real properties for a net carrying value, including intangible assets, of approximately ~~$390.2~~$386.9 million and one mortgage loan receivable for $10.0 million.

As discussed in “Overview-Business Environment”above, ~~continued~~while there have been improvements in the economy, we continue to be impacted by weak economic conditions, which have ~~adversely~~ affected our ability to obtain additional mortgages, as well as our ability to borrow funds and issue equity securities, our principal sources of external financing. Until economic conditions ~~stabilize,~~recover, we intend to fund our existing contractual obligations with our cash flows from operations and borrowing against our existing line of credit. AsIf economic conditions continue to improve, we ~~intend~~are hopeful that we will be able to ~~fund our contractual obligations and acquire additional properties by issuing~~issue additional equity securities under our effective shelf registration ~~statement.~~statement in order to acquire additional properties, make mortgage loans, purchase shares of our preferred stock on the open market or pay down borrowing under our line of credit. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities consisting of common or preferred stock, all of which was available as of ~~June~~September 30, 2009. On November 4, 2009, we entered into the Open Market Sale Agreement with Jefferies under which we may, from time to time, offer and sell shares of our common stock with an aggregate sales price of up to $25.0 million through Jefferies, or to Jefferies for resale, based upon our instructions (including any price, time or size limits or other customary parameters or conditions we may impose).. Sales of our common stock through Jefferies, if any, will be executed by means of ordinary brokers’ transactions on the NASDAQ Global Market or otherwise at market prices, in privately negotiated transactions, crosses or block transactions as may be agreed between us and Jefferies, including a combination of any of these transactions. We will pay Jefferies a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross sales proceeds of any common stock sold through Jefferies as agent under the Open Market Sale Agreement.

In addition, as discussed in “Overview-Business Environment”above, as banks begin lending again we intend ~~to seek~~ to obtain mortgages on any additional acquired properties by collateralizing the mortgages with some or all of our real property, or by borrowing against our existing line of credit. We may also use these funds for general corporate needs. If we are unable to make any required debt payments on any borrowings, our lenders could foreclose on the properties collateralizing their loans, which could cause us to lose part or all of our investments in such properties. We do not have any balloon principal payments due under any of our long-term mortgages until 2010, and the $48.0 million mortgage that matures in 2010 has three annual extension options through 2013.

~~In addition, we~~We also need sufficient capital to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, and fund our current operating costs. We may require credits to our management fees, issued from our Adviser, in order to meet these obligations, although our Adviser is under no obligation to provide such credits, in whole or in part. We routinely review our liquidity

interest payments on our mortgage notes payable, interest payments on our line of credit, distributions to our stockholders, management fees to our Adviser, and other entity level expenses.

Investing Activities

Net cash used in investing activities during the ~~six~~nine months ended ~~June~~September 30, 2009 was approximately ~~$1.0 million,~~$13,000, which primarily consisted of an increase in the amount of restricted cash, net payments to lenders for reserves and leasing commissions paid related to the extension of the lease for our property located in Eatontown, New Jersey, partially offset by the proceeds from the sale of our property located in Norfolk, Virginia, as compared to net cash used in investing activities during the ~~six~~nine months ended ~~June~~September 30, 2008 of approximately ~~$39.8~~$50.1 million, which primarily consisted of the purchase of ~~four~~six properties. We have not purchased any properties since August 2008 because of the lack of access to capital as discussed in “Overview-Business Environment”above, which resulted in the significant decrease in the cash used in investing activities from 2008 to 2009.

Financing Activities

Net cash used in financing activities for the ~~six~~nine months ended ~~June~~September 30, 2009 was approximately ~~$8.8~~$13.8 million, which primarily consisted of repayment of our short-term loan, repayments on our line of credit, principal repayments on mortgage notes payable and distributions paid to our ~~stockholders.~~stockholders, partially offset by borrowing on our line of credit. Net cash provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2008 was approximately ~~$31.7~~$39.6 million, which primarily consisted of the proceeds from borrowings from mortgage notes payable, borrowings on our line of credit, partially offset by payments for deferred financing costs, principal repayments on mortgage notes payable, repayments on our line of credit and distributions paid to our stockholders.

Mortgage Notes Payable

As of ~~June~~September 30, 2009 we had 16 fixed-rate mortgage notes payable in the aggregate principal amount of approximately ~~$254.0~~$253.4 million, collateralized by a total of 55 properties with terms at issuance ranging from 2 years to 25 years. The weighted-average interest rate on the mortgage notes payable as of ~~June~~September 30, 2009 was approximately 6.0%.

Line of Credit

We have a $50.0 million senior revolving credit agreement, or Credit Agreement, with a syndicate of banks led by KeyBank National Association, or KeyBank, which ~~matures~~mature on December 29, ~~2009.~~2009; however, we intend to exercise our option to extend the line of credit through December 29, 2010. On June 30, 2009, we amended our Credit Agreement to reduce our commitment from $95.0 million to $50.0 million, in exchange for modifications to certain terms under the Credit Agreement. The definition of FFO was modified to exclude from the calculation of FFO acquisition related costs that are required to be expensed under ~~SFAS No. 141(R).~~ASC 805. In addition, the aggregate amount we can issue under the Credit Agreement as letters of credit was reduced from $20.0 million to $10.5 million.

As long as we are in compliance with covenants under our line of credit, we have the option to extend the line of credit for an additional year, and we currently intend to exercise this option. We must notify KeyBank of our intention to exercise the renewal option 45 days prior to the maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of notification. The interest rate charged on the advances under the facility is based on LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. Our ability to access this funding source is subject to us continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 95% of our funds from operations, or FFO, less those acquisition related costs that are required to be expensed under ~~SFAS 141(R).~~ASC 805. In addition, the maximum amount we may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. In addition those properties that are pledged as collateral to the banks are pledged through a perfected first priority lien in the equity interest of the special purpose entity (“SPE”) that owns the property. In addition the Operating Partnership, which is the entity that owns the SPEs, is precluded from transferring the SPEs or unconsolidated affiliates to us.

If and when long-term mortgages are arranged for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit

by the advanced amount of the removed property. Conversely, as we purchase new properties meeting the eligibility standards, we may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit will also be reduced by letters of credit used in the ordinary course of business. We may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of ~~June~~September 30, 2009, there was $31.8 million outstanding under the line of credit at an interest rate of approximately 2.2%, and approximately ~~$2.8~~$3.6 million outstanding under letters of credit at a weighted average interest rate of approximately 2.0%. At ~~June~~September 30, 2009, the remaining borrowing capacity available under the line of credit was approximately ~~$15.4~~$14.6 million. We were in compliance with all covenants under the line of credit as of ~~June~~September 30, 2009.

Short-Term Loan

On December 21, 2007, we entered into a $20.0 million unsecured short-term loan with KeyBank, which matured on December 20, 2008. We exercised our option to extend the term for an additional six months and, on March 31, 2009, we repaid in full the unsecured short-term loan, using proceeds from borrowings under our line of credit. The interest rate charged on the loan was based on LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusted periodically.

Contractual Obligations

The following table reflects our significant contractual obligations as of ~~June~~September 30, 2009:


	Payments Due by Period										Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Debt Obligations⁽¹⁾	$	285,750,925	$	34,359,312	$	53,562,845	$	32,322,354	$	165,506,414	$	285,172,911	$	34,397,254	$	53,728,980	$	32,256,072	$	164,790,605
Interest on Debt Obligations⁽²⁾		86,135,280		16,214,405		24,973,032		22,711,158		22,236,685		82,209,977		16,166,528		24,049,137		22,255,673		19,738,639
Capital Lease Obligations⁽³⁾		300,000		—		—		—		300,000		300,000		—		—		—		300,000
Operating Lease Obligations⁽⁴⁾		1,612,800		134,400		268,800		268,800		940,800		1,791,997		152,510		305,021		305,021		1,029,445

Total	$	373,799,005	$	50,708,117	$	78,804,677	$	55,302,312	$	188,983,899	$	369,474,885	$	50,716,292	$	78,083,138	$	54,816,766	$	185,858,689

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K as of ~~June~~September 30, 2009.

Funds from Operations

The National Association of Real Estate Investment Trusts, or NAREIT, developed FFO as a relative non-GAAP supplemental measure of operating performance of an equity REIT, in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income, and should not be considered an alternative to net income as an indication of our performance or to cash flows

from operations as a measure of liquidity or ability to make distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

FFO available to common stockholders is FFO adjusted to subtract preferred share distributions. We believe that net income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders.

Basic funds from operations per share, or Basic FFO per share, and diluted funds from operations per share, or Diluted FFO per share, is FFO available to common stockholders divided by weighted average common shares outstanding and FFO available to common stockholders divided by weighted average common shares outstanding on a diluted basis, respectively, during a period. We believe that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share, or EPS, in evaluating net income available to common stockholders. In addition, since most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures for comparing us to other REITs. We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share.

The following table provides a reconciliation of our FFO for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, to the most directly comparable GAAP measure, net income, and a computation of basic and diluted FFO per weighted average common share and basic and diluted net income per weighted average common share:

For the three months ended June 30, For the six months ended June 30,
2009 2008 2009 2008
Net income $ 1,116,936 $ 1,219,445 $ 2,206,505 $ 2,636,148
Less: Distributions attributable to preferred stock (1,023,437 ) (1,023,437 ) (2,046,875 ) (2,046,875 )

Net income available to common stockholders 93,499 196,008 159,630 589,273

Add: Real estate depreciation and amortization, including discontinued operations 3,286,743 3,185,017 6,600,853 6,172,777

FFO available to common stockholders $ 3,380,242 $ 3,381,025 $ 6,760,483 $ 6,762,050

Weighted average shares outstanding — basic & diluted 8,563,264 8,565,264 8,563,264 8,565,264

Basic & diluted net income per weighted average common share $ 0.01 $ 0.02 $ 0.02 $ 0.07

Basic & diluted FFO per weighted average common share $ 0.39 $ 0.39 $ 0.79 $ 0.79

Distributions declared per common share $ 0.375 $ 0.375 $ 0.750 $ 0.750

Percentage of FFO paid per common share 95 % 95 % 95 % 95 %

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary risk that we believe we will be exposed to is interest rate risk. We currently own one variable rate loan receivable, certain of our leases contain escalations based on market interest rates, and the interest rate on our existing line of credit is variable. Although we seek to mitigate this risk by structuring such provisions of our loans and leases to contain a minimum interest rate or escalation rate, as applicable, these features do not eliminate this risk. We are also exposed to the effects of interest rate changes as a result of the holding of our cash and cash equivalents in short-term, interest-bearing investments. We have not entered into any derivative contracts to attempt to further manage our exposure to interest rate fluctuations.

To illustrate the potential impact of changes in interest rates on our net income for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, we have performed the following analysis, which assumes that our balance sheet remains constant and no further actions beyond a minimum interest rate or escalation rate are taken to alter our existing interest rate sensitivity.

The following table summarizes the impact of a 1% increase and 1% decrease in the one month LIBOR for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008.

For the three months ended June 30, For the six months ended June 30,
1% increase in the one month LIBOR 2009 2008 2009 2008

Rental & interest income $ 5 $ 31,192 $ 5 $ 54,797
Interest expense 80,383 79,625 159,883 159,250

Net decrease $ (80,378 ) $ (48,433 ) $ (159,878 ) $ (104,453 )

Net income available to common stockholders (as reported) $ 93,499 $ 196,008 $ 159,630 $ 589,273
Net decrease as percentage of
Net income available to common stockholders (as reported) -86.0 % -24.7 % -100.2 % -17.7 %


													For the three months ended September 30,						For the nine months ended September 30,
													2009			2008			2009			2008
1% increase in the one month LIBOR

Rental & interest income													$	—		$	27,308		$	5		$	82,106
Interest expense														81,267			77,178			241,150			229,856

Net decrease													$	(81,267	)	$	(49,869	)	$	(241,145	)	$	(147,750	)

Net income available to common stockholders (as reported)													$	255,553		$	118,122		$	415,194		$	707,395
Net decrease as percentage of
Net income available to common stockholders (as reported)														-31.8	%		-42.2	%		-58.1	%		-20.9	%

1% decrease in the one month LIBOR

Rental & interest income	$	—		$	(24,924	)	$	0		$	(51,160	)	$	—		$	(24,779	)	$	—		$	(75,939	)
Interest expense	$	(80,383	)	$	(79,625	)	$	(159,883	)	$	(159,250	)	$	(81,267	)	$	(77,178	)	$	(241,150	)	$	(229,856	)

Net increase	$	80,383		$	54,701		$	159,883		$	108,090		$	81,267		$	52,399		$	241,150		$	153,917

Net income available to common stockholders	$	93,499		$	196,008		$	159,630		$	589,273		$	255,553		$	118,122		$	415,194		$	707,395
Net increase as percentage of
Net income available to common stockholders		86.0	%		27.9	%		100.2	%		18.3	%		31.8	%		44.4	%		58.1	%		21.8	%

related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees and borrowers, all of which may affect our ability to refinance debt if necessary.

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

As of ~~June~~September 30, 2009, our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2009 in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of necessarily achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~June~~September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3738

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Neither we nor any of our subsidiaries are currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries.

Item 1A. Risk Factors

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2008, filed by us with the Securities and Exchange Commission on February 25, 2009. In connection with our preparation of this quarterly report, we have reviewed and considered these risk factors and have determined that the following risk factor should be read in connection with the existing risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008

Our real estate investments have a limited number of tenants and are concentrated in a limited number of industries, which subjects us to an increased risk of significant loss if any one of these tenants is unable to pay or if particular industries experience downturns.

As of September 30, 2009, we owned 64 properties and had 50 tenants in these properties, and our 5 largest tenants accounted for approximately 24.0% of our total rental income. A consequence of a limited number of tenants is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of tenants. We do not have fixed guidelines for industry concentration and our investments could potentially be concentrated in relatively few industries. As of September 30, 2009, 14.8% of our total rental income was earned from tenants in the electronic industry, 14.8% of our total rental income was earned from tenants in the healthcare, education and childcare industry and 13.1% of our total rental income was earned from tenants in the telecommunications industry. As a result, a downturn in an industry in which we have invested a significant portion of our total assets could have a material adverse effect on us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

~~The 2009 Annual Meeting~~No matters were submitted to a vote of ~~Stockholders was held on May 7,~~security holders during the three months ended September 30, 2009. ~~The stockholders voted and approved the following matters:~~

~~The election of three directors to hold office until the 2012 Annual Meeting of Stockholders.~~

Nominee Shares Voted For Authority Withheld
David A.R. Dullum 7,635,093 105,559
Maurice W. Coulon 7,672,195 68,457
Terry Brubaker 7,682,319 58,333

~~The following directors will continue to hold office until the 2010 Annual Meeting of Stockholders:~~

~~David Gladstone~~
~~Paul W. Adelgren~~
~~John H. Outland~~

~~The following directors will continue to hold office until the 2011 Annual Meeting of Stockholders:~~

~~Michela A. English~~
~~Anthony W. Parker~~
~~Gerard Mead~~
~~George Stelljes III~~

Item 6. Exhibits

Exhibit Index


Exhibit		Description of Document
3.1		Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S - -11 (File No. 333-106024), filed September 11, 2003.

3.1.1		Articles of Amendment to Articles of Amended and Restated Articles of ~~Incorporation.~~Incorporation, incorporated by reference to Exhibit 3.1.1 to the Form 10-Q (File No. 001-33097), filed July 30, 2009.

3.2		Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11 (File No. 333-106024), filed September 11, 2003.

3.2.1		First Amendment to Bylaws, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K (File No. 000-50363), filed July 10, 2007.

4.1		Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File No. 000-50363), filed January 19, 2006.

4.2		Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.5% Series B Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.4 of Form 8-A (File No. 000-50363), filed October 19, 2006.

4.3		Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363), filed January 19, 2006.

4.4		Form of Certificate for 7.5% Series B Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.2 of Form 8-A (File No. 000-50363), filed October 19, 2006.

~~10.1~~		Second Amendment to Credit Agreement by and among Gladstone Commercial Limited Partnership and KeyBank National Association, dated as of June 30, 2009, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-50363), filed July 1, 2009.

11		Computation of Per Share Earnings from Operations (included in the notes to the unaudited consolidated financial statements contained in this report).

31.1		Certification of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.


	June 30, 2009⁽²⁾			December 31, 2008			September 30, 2009			December 31, 2008
Real estate:
Land	$	55,036,042	⁽¹⁾	$	55,226,042	⁽¹⁾	$	55,035,962	⁽¹⁾	$	55,226,042	⁽¹⁾
Building		324,811,991			325,515,390			324,843,293			325,515,390
Tenant improvements		9,820,706			9,820,706			9,820,706			9,820,706
Accumulated depreciation		(29,397,701	)		(24,757,576	)		(31,754,201	)		(24,757,576	)

Real estate, net	$	360,271,038		$	365,804,562		$	357,945,760		$	365,804,562


(1)		Includes land held under a capital lease carried at approximately $1.1 million.

~~(2)~~		~~Does not include real estate held for sale as of June 30, 2009.~~


	June 30, 2009						December 31, 2008
	Lease			Accumulated					Accumulated			September 30, 2009					December 31, 2008
	Intangibles			Amortization			Lease Intangibles		Amortization					Accumulated					Accumulated
												Lease Intangibles		Amortization			Lease Intangibles		Amortization
In-place leases	$	15,935,445	(1)	$	(5,906,158	)	$	15,981,245	$	(5,079,343	)	$	15,935,445	$	(6,323,990	)	$	15,981,245	$	(5,079,343	)
Leasing costs		9,909,528			(3,405,095	)		9,662,731		(2,987,360	)		9,909,528		(3,618,782	)		9,662,731		(2,987,360	)
Customer relationships		17,136,501			(3,779,636	)		17,136,501		(3,179,931	)		17,136,501		(4,076,341	)		17,136,501		(3,179,931	)

	$	42,981,474		$	(13,090,889	)	$	42,780,477	$	(11,246,634	)	$	42,981,474	$	(14,019,113	)	$	42,780,477	$	(11,246,634	)


	Estimated
	Amortization		Estimated
Year	Expense		Amortization Expense
Six months ending December 31, 2009	$	2,646,295
Three months ending December 31, 2009			$	1,363,565
2010		5,190,966		5,339,721
2011		4,774,396		4,875,279
2012		4,164,999		4,229,792
2013		2,280,699		2,292,544
2014		2,027,307		2,036,328
Thereafter	$	8,805,923	$	8,825,133


	Scheduled
	principal		Scheduled principal
Year	payments		payments
Six months ending December 31, 2009	$	1,293,727
Three months ending December 31, 2009			$	715,713
2010		50,533,486		50,533,486	⁽¹⁾
2011		2,799,601		2,799,601
2012		3,087,824		3,087,824
2013		11,828,375		11,828,375
2014		20,367,143		20,367,143
Thereafter		164,040,769		164,040,769

	$	253,950,925	$	253,372,911


				PAGE
PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

Consolidated Balance Sheets as of ~~June~~September 30, 2009 and December 31, 2008		3

Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008		4

Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008		5

Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
~~Item 4.~~	~~Controls and Procedures~~		37

Item 4. Controls and Procedures		38

PART II OTHER INFORMATION

Item 1. Legal Proceedings		39

Item 1.1A. Risk Factors	~~Legal Proceedings~~		3839
~~Item 1A.~~	~~Risk Factors~~		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3839

Item 3.	Defaults Upon Senior Securities		3839

Item 4.	Submission of Matters to a Vote of Security Holders		38
~~Item 5.~~	~~Other Information~~		39

Item 6.5. Other Information		39

Item 6. Exhibits		40

SIGNATURES		41
41EX-31.1
EX-31.2
EX-32.1
EX-32.2


~~(1)~~		~~Does not include intangible assets held for sale as of June 30, 2009.~~


	June 30, 2009
Real estate, net	$	858,024
Lease intangibles, net		70,495
Prepaid expenses		199
Deferred rent receivable		28,198

Real estate and related assets held for sale, net	$	956,916


Rent received in advance		8,250
Asset retirement obligation liability		28,098


Other liabilities related to assets held for sale	$	36,348


⁽¹⁾		The weighted average interest rate on all debt outstanding at ~~June~~September 30, 2009 was approximately ~~5.62%~~5.61%.

⁽²⁾		This note has three annual extension options, which extends the term of the note until October 1, 2013.

⁽³⁾		The line of credit may be extended for a one-year period at the Company’s option, subject to certain conditions.

⁽⁴⁾		The short-term loan was repaid in full on March 31, 2009.


⁽¹⁾		The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise our options to extend through October 2013.


							Outstanding
	Number of		Strike Price		Amount of		Balance of										Amount of		Outstanding Balance
	Options		of Options		Promissory Note		Employee Loans at		Maturity Date	Interest Rate			Number of Options		Strike Price of		Promissory Note		of Employee Loans		Maturity Date of	Interest Rate on
Date Issued	Exercised		Exercised		Issued to Employees		6/30/09		of Note	on Note			Exercised		Options Exercised		Issued to Employees		at 9/30/09		Note	Note

Sep 2004		25,000	$	15.00	$	375,000	$	360,501	Sep 2013		5.00	%		25,000	$	15.00	$	375,000	$	360,007	Sep 2013		5.00	%
Apr 2006		12,422		16.10		199,994		199,994	Apr 2015		7.77	%		12,422		16.10		199,994		199,994	Apr 2015		7.77	%
May 2006		50,000		16.85		842,500		842,500	May 2016		7.87	%
May 2006		15,000		16.10		241,500		241,500	May 2016		7.87	%		50,000		16.85		842,500		842,500	May 2016		7.87	%
May 2006		2,500		16.01		40,000		36,870	May 2016		7.87	%		15,000		16.10		241,500		241,500	May 2016		7.87	%
May 2006		2,000		16.10		32,200		32,200	May 2016		7.87	%		2,000		16.10		32,200		32,200	May 2016		7.87	%
May 2006		2,000		16.10		32,200		32,200	May 2016		7.87	%		2,000		16.10		32,200		32,200	May 2016		7.87	%
May 2006		2,000		15.00		30,000		30,000	May 2016		7.87	%		2,000		15.00		30,000		30,000	May 2016		7.87	%
Oct 2006		12,000		16.10		193,200		193,200	Oct 2015		8.17	%		12,000		16.10		193,200		193,200	Oct 2015		8.17	%
Nov 2006		25,000		15.00		375,000		375,000	Nov 2015		8.15	%		25,000		15.00		375,000		375,000	Nov 2015		8.15	%
Dec 2006		25,000		15.00		375,000		245,000	Feb 2010		8.12	%		25,000		15.00		375,000		245,000	Feb 2010		8.12	%


		172,922			$	2,736,594	$	2,588,965						170,422			$	2,696,594	$	2,551,601


	As of and for the three months ended June 30, 2009											As of and for the six months ended June 30, 2009
	Real Estate			Real Estate								Real Estate			Real Estate								As of and for the three months ended September 30, 2009											As of and for the nine months ended September 30, 2009
	Leasing			Lending		Other			Total			Leasing			Lending		Other			Total			Real Estate			Real Estate								Real Estate			Real Estate
																							Leasing			Lending		Other			Total			Leasing			Lending		Other			Total
Operating revenues	$	10,461,906		$	189,583	$	—		$	10,651,489		$	20,932,587		$	377,083	$	—		$	21,309,670		$	10,465,427		$	191,667	$	—		$	10,657,094		$	31,398,016		$	568,750	$	—		$	31,966,766
Operating expenses		(3,555,776	)		—		(1,626,061	)⁽¹⁾		(5,181,837	)		(7,144,850	)		—		(3,202,047	)⁽¹⁾		(10,346,897	)		(3,540,320	)		—		(1,528,698	)⁽¹⁾		(5,069,018	)		(10,685,159	)		—		(4,730,744	)⁽¹⁾		(15,415,903	)
Other expense		(4,114,021	)		—		(259,611	)⁽²⁾		(4,373,632	)		(8,196,656	)		—		(598,366	)⁽²⁾		(8,795,022	)		(4,146,341	)		—		(326,853	)⁽²⁾		(4,473,194	)		(12,343,000	)		—		(925,218	)⁽²⁾		(13,268,218	)

Discontinued operations		20,916			—		—			20,916			38,754			—		—			38,754			164,108			—		—			164,108			202,861			—		—			202,861

Net income	$	2,813,025		$	189,583	$	(1,885,672	)	$	1,116,936		$	5,629,835		$	377,083	$	(3,800,413	)	$	2,206,505		$	2,942,874		$	191,667	$	(1,855,551	)	$	1,278,990		$	8,572,718		$	568,750	$	(5,655,962	)	$	3,485,506



Total Assets	$	401,711,306		$	10,062,500	$	10,471,976		$	422,245,782		$	401,711,306		$	10,062,500	$	10,471,976		$	422,245,782		$	398,456,908		$	10,062,500	$	9,762,275		$	418,281,683		$	398,456,908		$	10,062,500	$	9,762,275		$	418,281,683


(1)		Operating expenses includes base management fees, incentive fees, adminstration fees, professional fees, insurance expense, directors fees, stockholder related expenses and general and administrative expenses that are not practicable to allocate to either operating segment, thus it is included in the “other” column.

(2)		Other expense includes interest expense on the Company’s line of credit and short-term loan of ~~$319,977~~$375,507 and ~~$724,899~~$1,100,405 for the three months ended ~~June~~September 30, 2009 and 2008, respectively, and ~~$911,548~~$1,100,405 and ~~$1,584,745~~$2,512,968 for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. It is not practicable to allocate the interest from the line of credit or short-term loan to either operating segment, thus it is included in the “other” column.


(1)		Debt obligations represent borrowings under our line of credit, which represents $31.8 million of the debt obligation due in less than 1 year, and mortgage notes payable that were outstanding as of ~~June~~September 30, 2009.

		The line of credit matures in December 2009, and we expect to exercise our option to extend the term for an additional year.

		The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise our options to extend the term through October 2013.

(2)		Interest on debt obligations includes estimated interest on our borrowings under our line of credit.

		The balance and interest rate on our line of credit is variable, thus the amount of interest calculated for purposes of this table was based upon rates and balances as of ~~June~~September 30, 2009.

(3)		Capital lease obligations represent the obligation to purchase the land held under the ground lease on our property located in Fridley, Minnesota.

(4)		Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021.


	For the three months ended June 30,						For the six months ended June 30,
1% increase in the one month LIBOR	2009			2008			2009			2008

Rental & interest income	$	5		$	31,192		$	5		$	54,797
Interest expense		80,383			79,625			159,883			159,250

Net decrease	$	(80,378	)	$	(48,433	)	$	(159,878	)	$	(104,453	)

Net income available to common stockholders (as reported)	$	93,499		$	196,008		$	159,630		$	589,273
Net decrease as percentage of
Net income available to common stockholders (as reported)		-86.0	%		-24.7	%		-100.2	%		-17.7	%


Nominee	Shares Voted For	Authority Withheld
David A.R. Dullum	7,635,093	105,559
Maurice W. Coulon	7,672,195	68,457
Terry Brubaker	7,682,319	58,333


	Shares Voted		Authority
Shares Voted For	Against		Withheld
7,681,942		22,142		36,566


	Gladstone Commercial Corporation
Date: ~~July 30,~~November 4, 2009	By:	/s/ Danielle Jones
		Danielle Jones
		Chief Financial Officer