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 MARCH 31,JUNE 30, 2010
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-33097
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
   
MARYLAND 02-0681276
(State or other jurisdiction of incorporation or (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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filero Accelerated filerþ Non-accelerated filero Smaller reporting companyo
    (Do not check if a smaller reporting company)  
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 AprilJuly 30, 2010 was 8,545,264.
 
 

 


 

GLADSTONE COMMERCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31,JUNE 30, 2010
TABLE OF CONTENTS
     
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EX-12
EX-31.1
EX-31.2
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EX-32.2

 


GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                
   March 31, 2010   December 31, 2009 June 30, 2010 December 31, 2009 
ASSETS  
Real estate, at cost  $        391,095,912  $        390,753,892  $391,329,596 $390,753,892 
Less: accumulated depreciation 36,502,598 34,111,952  38,886,713 34,111,952 
         
Total real estate, net 354,593,314 356,641,940  352,442,883 356,641,940 
  
Lease intangibles, net 27,250,453 28,177,461  26,246,904 28,177,461 
Mortgage note receivable 10,000,000 10,000,000  10,000,000 10,000,000 
Cash and cash equivalents 3,327,368 3,096,598  3,312,409 3,096,598 
Restricted cash 2,957,263 2,633,538  2,295,525 2,633,538 
Funds held in escrow 2,565,860 2,487,680  2,344,342 2,487,680 
Deferred rent receivable 9,358,748 8,975,196  9,697,709 8,975,196 
Deferred financing costs, net 2,913,702 3,136,055  2,653,246 3,136,055 
Prepaid expenses and other assets 1,653,392 1,716,905  2,186,373 1,716,905 
         
  
TOTAL ASSETS  $        414,620,100  $        416,865,373  $411,179,391 $416,865,373 
         
  
LIABILITIES AND STOCKHOLDERS’ EQUITY  
  
LIABILITIES  
Mortgage notes payable  $        252,117,127  $        252,761,651  $251,453,252 $252,761,651 
Short-term loan and borrowings under line of credit 34,900,000 33,200,000 
Borrowings under line of credit 36,300,000 33,200,000 
Deferred rent liability 2,970,159 3,213,195  2,738,784 3,213,195 
Asset retirement obligation liability 2,342,891 2,305,644  2,380,748 2,305,644 
Accounts payable and accrued expenses 1,618,406 2,086,741  1,530,275 2,086,741 
Due to adviser (Refer to Note 2) 1,394,007 1,213,640 
Due to Adviser (Refer to Note 2) 1,292,211 1,213,640 
Obligation under capital lease 250,764 247,686  253,841 247,686 
Rent received in advance, security deposits and funds held in escrow 3,922,738 3,386,274  3,321,442 3,386,274 
         
  
Total Liabilities 299,516,092 298,414,831  299,270,553 298,414,831 
         
  
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 at March 31, 2010 and December 31, 2009, respectively 2,150 2,150 
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,545,264 and 8,563,264 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively 8,545 8,563 
Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 2,150 2,150 
Senior common stock, $0.001 par value; 4,000,0000 shares authorized and 2,073 and 0 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 2  
Common stock, $0.001 par value, 43,700,000 shares authorized and 8,545,264 and 8,563,264 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 8,545 8,563 
Additional paid in capital 170,378,699 170,622,581  170,404,393 170,622,581 
Notes receivable - employees  (2,261,555  (2,304,999
Notes receivable — employees  (2,260,586)  (2,304,999)
Distributions in excess of accumulated earnings  (53,023,831)  (49,877,753)  (56,245,666)  (49,877,753)
         
  
Total Stockholders’ Equity 115,104,008 118,450,542  111,908,838 118,450,542 
         
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $        414,620,100  $        416,865,373  $411,179,391 $416,865,373 
         
The accompanying notes are an integral part of these consolidated financial statements.

3


GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                        
 For the three months ended March 31,  For the three months ended June 30, For the six months ended June 30, 
 2010 2009 2010 2009 2010 2009 
Operating revenues  
Rental income  $         10,415,066  $         10,388,244  $10,409,519 $10,379,172 $20,824,586 $20,767,420 
Interest income from mortgage note receivable 187,500 187,500  189,583 189,583 377,083 377,083 
Tenant recovery revenue 82,410 82,432  82,285 82,734 164,695 165,167 
             
Total operating revenues 10,684,976 10,658,176  10,681,387 10,651,489 21,366,364 21,309,670 
             
  
Operating expenses  
Depreciation and amortization 3,321,871 3,307,802  3,390,492 3,282,629 6,712,362 6,590,438 
Property operating expenses 244,354 236,812  229,733 230,785 474,088 467,595 
Due diligence expense 21,876 9,547   6,886 21,876 16,433 
Base management fee (Refer to Note 2) 312,564 372,648  296,141 357,650 608,705 730,298 
Incentive fee (Refer to Note 2) 846,192 786,289  829,264 812,653 1,675,456 1,598,942 
Administration fee (Refer to Note 2) 231,884 224,354  219,119 257,207 451,003 481,561 
Professional fees 175,610 235,198  201,801 125,965 377,411 361,161 
Insurance expense 56,325 48,678  56,513 48,125 112,838 96,804 
Directors’ fees 49,418 49,702  49,025 50,386 98,443 100,088 
Stockholder-related expenses 45,216 83,647  78,596 88,245 123,812 171,892 
Asset retirement obligation expense 37,247 34,907  37,857 35,476 75,104 70,384 
General and administrative 17,829 10,549  17,733 15,453 35,563 26,005 
             
Total operating expenses before credit from Adviser 5,360,386 5,400,133  5,406,274 5,311,460 10,766,661 10,711,601 
             
  
Credit to incentive fee -  (235,081  (56,073)  (129,623)  (56,073)  (364,704)
             
Total operating expenses 5,360,386 5,165,052  5,350,201 5,181,837 10,710,588 10,346,897 
             
  
Other income (expense)  
Interest income from temporary investments 265 17,281  113 184 378 17,465 
Interest income - employee loans 43,101 48,886 
Interest income — employee loans 42,574 48,862 85,674 97,748 
Other income 3,316 -  5,013 11,320 8,329 11,320 
Interest expense  (4,284,939  (4,487,560  (4,372,435)  (4,433,998)  (8,657,373)  (8,921,555)
             
Total other expense  (4,238,257)  (4,421,393)  (4,324,735)  (4,373,632)  (8,562,992)  (8,795,022)
             
  
Income from continuing operations 1,086,333 1,071,731  1,006,451 1,096,020 2,092,784 2,167,751 
             
  
Discontinued operations  
Income from discontinued operations - 17,838   20,916  38,754 
             
Total discontinued operations - 17,838   20,916  38,754 
             
  
Net income 1,086,333 1,089,569  1,006,451 1,116,936 2,092,784 2,206,505 
             
 
Distributions attributable to preferred stock  (1,023,438)  (1,023,437)  (1,023,437)  (1,023,437)  (2,046,876)  (2,046,875)
    
Net income available to common stockholders  $         62,895  $         66,132 
Distributions attributable to senior common stock  (375)   (375)  
             
  
Earnings per weighted average common share — basic & diluted 
Net (loss) income available to common stockholders $(17,361) $93,499 $45,533 $159,630 
         
 
Earnings per weighted average share of common stock — basic 
Income from continuing operations (net of distributions attributable to preferred stock)  $         0.01  $         0.01  $0.00 $0.01 $0.01 $0.02 
Discontinued operations 0.00 0.00  0.00 0.00 0.00 0.00 
             
  
Net income available to common stockholders  $         0.01  $         0.01  $0.00 $0.01 $0.01 $0.02 
             
  
Weighted average shares outstanding- basic & diluted 8,558,664 8,563,264 
Earnings per weighted average share of common stock — diluted 
Income from continuing operations (net of dividends attributable to preferred stock) $0.00 $0.01 $0.01 $0.02 
Discontinued operations 0.00 0.00 0.00 0.00 
             
 
Net income available to common stockholders $0.00 $0.01 $0.01 $0.02 
         
 
Weighted average shares of common stock outstanding — basic 8,545,264 8,563,264 8,551,927 8,563,264 
         
Weighted average shares of common stock outstanding — diluted 8,546,529 8,563,264 8,552,563 8,563,264 
         
 
Earnings per weighted average share of senior common stock $0.26 $0.00 $0.52 $0.00 
         
Weighted average shares of senior common stock outstanding — basic 1,435 0 722 0 
         
The accompanying notes are an integral part of these consolidated financial statements.

4


GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                
 For the three months ended March 31, For the six months ended June 30, 
 2010 2009 2010 2009 
Cash flows from operating activities:  
Net income  $         1,086,333  $         1,089,569  $2,092,784 $2,206,505 
Adjustments to reconcile net income to net cash
provided by operating activities:
  
Depreciation and amortization, including discontinued operations 3,321,871 3,314,100  6,712,362 6,600,853 
Amortization of deferred financing costs 272,353 375,194  544,080 723,828 
Amortization of deferred rent asset and liability, net  (179,662  (133,017  (347,663)  (266,035)
Accretion of obligation under capital lease 3,078 3,077  6,155 6,154 
Asset retirement obligation expense, including discontinued operations 37,247 35,367  75,104 70,845 
Increase in prepaid expenses and other assets  (430,387  (17,218  (963,368)  (137,854)
Increase in deferred rent receivable  (446,926  (562,789  (849,261)  (1,082,278)
(Decrease) increase in accounts payable, accrued expenses, and amount due adviser  (287,968 113,028 
(Decrease) increase in accounts payable, accrued expenses, and amount due Adviser  (478,074) 230,245 
Increase (decrease) in rent received in advance 212,739  (120,758 273,181  (210,575)
         
Net cash provided by operating activities 3,588,678 4,096,553  7,065,300 8,141,688 
         
  
Cash flows from investing activities:  
Real estate investments  (342,020  (54,308  (575,704)  (54,319)
Leasing commissions paid  (4,217 -   (7,044)  (298,270)
Receipts from lenders for reserves held in escrow 404,462 272,818  1,016,102 773,187 
Payments to lenders for reserves held in escrow  (482,642  (471,355  (872,764)  (919,041)
Increase in restricted cash  (323,725  (1,102,902
Decrease (increase) in restricted cash 338,013  (668,151)
Deposits refunded 250,000 200,000  250,000 200,000 
         
Net cash used in investing activities  (498,142  (1,155,747
Net cash provided by (used in) investing activities 148,603  (966,594)
         
  
Cash flows from financing activities:  
Proceeds from issuance of senior common stock 30,000  
Offering costs  (4,500)  
Principal repayments on mortgage notes payable  (644,524  (590,881  (1,308,399)  (1,160,248)
Principal repayments on employee notes receivable 43,444 5,671  44,413 6,921 
Borrowings from line of credit 4,200,000 28,000,000  13,400,000 39,300,000 
Repayments on line of credit  (2,500,000  (9,200,000  (10,300,000)  (19,000,000)
Repayment of short-term loan -  (20,000,000   (20,000,000)
Receipts from tenants for reserves 525,330 1,471,309  1,036,621 1,996,723 
Payments to tenants from reserves  (202,354  (378,940  (947,606)  (1,339,968)
Increase in security deposits 749 10,533 
(Decrease) increase in security deposits  (427,028) 11,396 
Payments for deferred financing costs  (50,000  (53,561  (61,271)  (103,563)
Distributions paid for common and preferred  (4,232,411  (4,234,665  (8,460,322)  (8,469,322)
         
Net cash used in financing activities  (2,859,766  (4,970,534  (6,998,092)  (8,758,061)
         
  
Net increase (decrease) in cash and cash equivalents 230,770  (2,029,728 215,811  (1,582,967)
  
Cash and cash equivalents, beginning of period 3,096,598 4,503,578  3,096,598 4,503,578 
  
         
Cash and cash equivalents, end of period  $         3,327,368  $         2,473,850  $3,312,409 $2,920,611 
         
  
NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION  
  
Increase in asset retirement obligation  $         -  $         245,196 
Forfeiture of common stock in satisfaction of employee note receivable $243,900 $ 
         
  
Fixed rate debt assumed in connection with acquisitions  $         -  $         6,461,603 
Senior common dividend issued in the dividend reinvestment program $375 $ 
         
 
Forfeiture of common stock in satisfaction of employee note receivable  $         243,900  $         - 
    
The accompanying notes are an integral part of these consolidated financial statements.

5


GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Gladstone Commercial Corporation (the “Company”) was incorporated on February 14, 2003 under the General Corporation Law of Maryland. The Company operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and exists primarily for the purposepurposes 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 discussed in more detail below, the financial position and results of operations of the Operating Partnership 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, each a subsidiary and business trust of the Company, were 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 in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of the Company’s Management, all adjustments, consisting solely

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of normal recurring accruals, necessary for the fair statement of the financial statements for the interim period have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on February 24, 2010.

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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 such costs are incurred. The Company computes depreciation using the straight-line method over the estimated useful life or 39 years for buildings and improvements, 5 to 7 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 Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which requires that the purchase price of real estate be recorded at fair value and 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. ASC 805 also 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.
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 hypothetical 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 $2.3$4.8 million for the three and six months ended March 31,June 30, 2010, respectively, and approximately $2.4 million and $4.7 million for the three and six months ended June 30, 2009, 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 for each ofboth the three and six months ended March 31,June 30, 2010 and 2009.2009, respectively. The capitalized below-market lease values, included in the accompanying consolidated balance sheet as deferred rent liability, are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to below-market lease values was approximately $243,000$231,000 and $196,000$474,000 for the three and six months ended March 31,June 30, 2010, respectively, and approximately $196,000 and $393,000 for the three and six months ended June 30, 2009, respectively.
The total amount of the remaining intangible assets acquired, which consist of in-place lease values,

7


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

7


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 the Company’s 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 $1.0 million and $1.9 million for the three and six months ended June 30, 2010, respectively, and approximately $0.9 million and $1.9 million for each of the three and six months ended March 31, 2010 andJune 30, 2009, respectively.
Impairment
Investments in Real Estate
The Company accounts for the impairment of real estate in accordance with ASC 360-10-35, “Property, Plant, and Equipment,” which requires that the Company to 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. 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 March 31,June 30, 2010. 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 to reflect in its financial statements an allowance for estimated credit losses with respect to mortgage loans that 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.

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Cash and Cash Equivalents
The Company considers cash equivalents to be 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 March 31,June 30, 2010 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 upon receipt by the Company of evidence of insurance and tax payments.
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 secured financing. The Company made payments of approximately $50,000$11,000 and $54,000$61,000 for deferred financing costs during the three and six months ended March 31,June 30, 2010, respectively, and approximately $50,000 and $104,000 for deferred financing costs during the three and six months ended June 30, 2009, respectively. Total amortization expense related to deferred financing costs was approximately $272,000 and $375,000$544,000 for the three and six months ended March 31,June 30, 2010, respectively, and $349,000 and $724,000 for the three and six months ended June 30, 2009, respectively.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid assets, prepaid offering costs 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 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 approximately $3,000 and $6,000 for each ofboth the three and six months ended March 31,June 30, 2010 and 2009.2009, 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

9


accompanying consolidated 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,

9


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 collectable. 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 geographic 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 uncollectable accounts or records a direct write-off of the specific rent receivable. No such reserves have been recorded as of March 31,June 30, 2010.
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.
Tenant recovery revenue includes payments from tenants as reimbursements for franchises taxes, management fees, insurance, and ground lease payments. The Company recognizes tenant recovery revenue in the same periods that it incurs the related expenses.
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 that 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 ASC 740, “Income Taxes.” Under 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
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 and other improvements), which is simultaneously leased to existing users, and the other segment originates mortgage loans and collects principal and interest payments.

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Asset Retirement Obligations
ASC 410, “Asset Retirement 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. 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. 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. There were no liabilities accrued during the threesix months ended March 31,June 30, 2010 or 2009. The Company also recorded expenses, including discontinued operations, of approximately $37,000$38,000 and $35,000$75,000 during the three and six months ended March 31,June 30, 2010, respectively, and approximately $35,000 and $71,000 during the three and six months ended June 30, 2009, respectively related to the cumulative accretion of the obligation.
Real Estate Held for Sale and Discontinued Operations
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
ASC 860, “Transfers and Servicing,” removes the concept of a qualifying special-purpose entity (“QSPE”) and removes the exception from applying 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, and is effective for the Company’s fiscal year beginning January 1, 2010. The Company adopted this pronouncement during the quarter ended March 31, 2010, and the adoption had no impact on the Company’s financial position or results of operations.
ASC 810-10-25-38, “Consolidation,” amends the consolidation guidance for variable-interest entities (“VIE”) and requires an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity has the power to direct matters that most significantly impact the activities of the VIE, and had the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. ASC 810 is effective for the Company’s fiscal year beginning January 1, 2010. The Company adopted this pronouncement during the quarter ended March 31, 2010, and the adoption had no impact on the Company’s financial position or 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
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

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the quarter ended June 30, 2009 and, as a result, the results of operations related to this property for all periods presented were reclassified from continuing operations to discontinued operations, see Note 5. These reclassifications had no effect on previously reported net income or stockholders’ equity.
2. Related-Party Transactions
The Company is externally managed pursuant to contractual arrangements with its Adviser and Gladstone Administration, LLC (the “Administrator”), which collectively employ all of the Company’s personnel and pays their payroll, benefits, and general expenses directly. The Company has an advisory agreement with its Adviser (the “Advisory Agreement”) and an administration agreement with its Administrator (the “Administration Agreement”). The management services and administrative fees under the Advisory and Administration Agreements are described below. As of March 31,June 30, 2010 and December 31, 2009, respectively, approximately $1.4$1.3 million and $1.2 million were due to the Adviser.

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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 (“common stockholders’ equity”), and an incentive fee based on funds from operations (“FFO”). For the three and six months ended March 31,June 30, 2010, the Company recorded a base management fee of approximately $296,000 and $609,000, respectively, and for the three and six months ended June 30, 2009, the Company recorded a base management fee of approximately $313,000$358,000 and $373,000,$730,000, 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 common stockholders’ equity. 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 common stockholders’ equity. The Adviser also receives an incentive fee of 20% of the amount of the Company’s pre-incentive fee FFO that exceeds 2.1875% of common stockholders’ equity.
For the three and six months ended March 31,June 30, 2010, and 2009, the Company recorded an incentive fee of approximately $846,000$829,000 and $786,000,$1,675,000, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $0$56,000 and $235,000,$56,000, respectively, resulting in a net incentive fee for the three and six months ended March 31,June 30, 2010, of approximately $773,000 and $1,619,000, respectively. For the three and six months ended June 30, 2009, the Company recorded an incentive fee of approximately $813,000 and $1,599,000, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of approximately $130,000 and $365,000, respectively, resulting in a net incentive fee for the three and six months ended June 30, 2009, of approximately $846,000$683,000 and $551,000,$1,234,000, 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 the three and six months ended March 31,June 30, 2010 and 2009, respectively, in order to support the current level of distributions to the Company’s stockholders. This waiver may not be recouped by the Adviser in the future. There was no waiver to the incentive fee for the three months ended March 31, 2010.
Administration Agreement
UnderPursuant to the Administration Agreement, the Company pays for its allocable portion of the Administrator’s overhead expenses in performing its obligations to the Company, 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, internal counsel, treasurer, investor relations 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 months ended March 31,June 30, 2010, the Company recorded an administration fee of approximately $219,000 and $451,000, respectively, and for the three and six months ended June 30, 2009, the Company recorded an administration fee of approximately $232,000$257,000 and $224,000,$482,000, respectively.

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3. Earnings per Share of Common ShareStock
The following tables set forth the computation of basic and diluted earnings per share of common stock for the three and six months ended March 31,June 30, 2010 and 2009:2009. The Company computed basic earnings per share for the three and six months ended June 30, 2010 and 2009 using the weighted average number of shares outstanding during the periods. Diluted earnings per share for the three and six months ended June 30, 2010, reflects additional shares of common stock, related to our convertible senior common stock, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net income available to common stockholders as applicable to common stockholders that would result from their assumed issuance.
         
  For the three months ended March 31, 
  2010 2009
Net income available to common stockholders  $           62,895   $           66,132 
 
Denominator for basic & diluted weighted average shares  8,558,664   8,563,264 
     
 
Basic & diluted earnings per share of common stock  $          0.01   $          0.01 
     
                 
  For the three months ended June 30,  For the six months ended June 30, 
  2010  2009  2010  2009 
Calculation of basic earnings per share of common stock:
                
                 
Net (loss) income available to common stockholders $(17,361) $93,499  $45,533  $159,630 
                 
Denominator for basic weighted average shares of common stock  8,545,264   8,563,264   8,551,927   8,563,264 
                 
Basic earnings per share of common stock $0.00  $0.01  $0.01  $0.02 
             
                 
Calculation of diluted earnings per share of comon stock:
                
                 
Net (loss) income available to common stockholders $(17,361) $93,499  $45,533  $159,630 
Add: Income impact of assumed conversion of senior common stock  375      375    
             
Net (loss) income available to common stockholders plus assumed conversions $(16,986) $93,499  $45,908  $159,630 
                 
Denominator for basic weighted average shares of common stock  8,545,264   8,563,264   8,551,927   8,563,264 
Effect of convertible senior common stock  1,265      636    
             
Denominator for diluted weighted average shares of common stock  8,546,529   8,563,264   8,552,563   8,563,264 
             
                 
Diluted earnings per share of common stock $0.00  $0.01  $0.01  $0.02 
             
4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of the Company’s investments in real estate, including capitalized leases, as of March 31,June 30, 2010 and December 31, 2009:
                
 March 31, 2010 December 31, 2009 June 30, 2010 December 31, 2009 
Real estate:  
Land  $       55,025,707 (1)      $       55,025,707  (1) $55,025,707(1) $55,025,707(1)
Building and improvements 326,249,499 325,907,479  326,483,183 325,907,479 
Tenant improvements 9,820,706 9,820,706  9,820,706 9,820,706 
Accumulated depreciation (36,502,598 (34,111,952  (38,886,713)  (34,111,952)
     
Real estate, net  $           354,593,314  $           356,641,940  $352,442,883 $356,641,940 
         
 
(1) Includes land held under a capital lease carried at approximately $1.1 million.
On May 4, 2010, the Company extended the lease with the tenant which occupies its property located in Grand Rapids, Michigan for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 10 years each. The lease was originally set to expire in July 2016, and will now expire in April 2025. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.1 million.
Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, in effect at March 31,for the remainder of 2010, wereeach of the five succeeding fiscal years and thereafter is as follows:

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 Tenant Tenant
Year Lease Payments Lease Payments
Nine months ending December 31, 2010  $   29,150,926 
Six months ending December 31, 2010 $19,392,848 
2011 38,657,936  38,589,674 
2012 38,751,645  38,698,289 
2013 33,402,994  33,356,072 
2014 29,172,473  29,132,246 
2015 25,078,235  25,044,969 
Thereafter 135,449,243  145,637,227 
 
In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, the Company would be required to pay property taxes on the respective properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the tenant fails to pay them. The total annualized property taxes for all properties held by the Company at March 31,June 30, 2010 was

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approximately $6.2 million, and the total annual ground lease payments on the property located in Tulsa, Oklahoma was approximately $153,000.
Intangible Assets
The following table summarizes the net value of other intangible assets and the accumulated amortization for each intangible asset class:
                
 March 31, 2010 December 31, 2009                
 Accumulated Accumulated June 30, 2010 December 31, 2009 
 Lease Intangibles Amortization Lease Intangibles Amortization Accumulated Accumulated 
 Lease Intangibles Amortization Lease Intangibles Amortization 
In-place leases  $       15,935,445    $       (7,159,647  $       15,935,445  $       (6,741,817 $15,935,445 $(7,577,354) $15,935,445 $(6,741,817)
Leasing costs 10,057,222  (4,049,312 10,053,004  (3,832,623 10,060,049  (4,263,737) 10,053,004  (3,832,623)
Customer relationships 17,136,501  (4,669,756 17,136,501  (4,373,049 17,136,501  (5,044,000) 17,136,501  (4,373,049)
                 
  $       43,129,168  $       (15,878,715  $       43,124,950  $       (14,947,489 $43,131,995 $(16,885,091) $43,124,950 $(14,947,489)
                 
The estimated aggregate amortization expense for the remainder of 2010, each of the five succeeding fiscal years and thereafter is as follows:
     
  Estimated
Year Amortization Expense
Nine months ending December 31, 2010  4,390,722 
2011  5,203,812 
2012  4,398,005 
2013  2,326,052 
2014  2,062,779 
2015  1,699,607 
Thereafter  $        7,169,476 
The following table summarizes the lease expirations by year for the Company’s properties for leases in place as of March 31, 2010:
                     
          Rental Revenue for       
Year of Lease         the Period Ended  Annualized Base  % of Annualized 
Expiration Square Feet  Number of Leases  March 31, 2010  Rental Revenue  Base Rent 
 
2010  215,581   3   $       352,423   $       1,409,692   3.4%
2011  -   0   -   -   0.0%
2012  479,982   3   1,107,401   4,429,604   10.6%
2013  438,422   6   1,168,337   4,673,348   11.2%
2014  614,132   5   770,549   3,082,196   7.4%
2015  896,876   8   1,717,794   6,871,176   16.5%
2016  898,257   5   1,048,793   4,195,172   10.1%
2017  102,200   1   230,731   922,924   2.2%
2018  59,894   1   67,010   268,040   0.6%
2019+  2,598,815   18   3,952,028   15,808,112   38.0%
           
                     
Total
          6,304,159   50   $       10,415,066   $       41,660,264   100%
           

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The following table summarizes the states in which the Company’s properties are located for leases in place as of March 31, 2010:
                     
          Rental Revenue for    
           Number of      the Period Ended Annualized Base    % of Annualized   
State Square Feet Leases March 31, 2010 Rental Revenue Base Rent
Ohio  1,185,411   11   $          1,867,614   $      7,470,456   17.9%
Minnesota  547,800   3   1,302,876   5,211,504   12.5%
North Carolina  695,876   6   948,585   3,794,340   9.1%
Pennsylvania  623,375   4   763,241   3,052,964   7.3%
Texas  188,178   4   588,963   2,355,852   5.7%
Michigan  596,104   2   548,959   2,195,836   5.3%
Illinois  164,131   2   546,504   2,186,016   5.2%
Massachusetts  338,508   3   543,522   2,174,088   5.2%
All Other States  1,964,776   15   3,304,802   13,219,208   31.8%
           
                     
Total
           6,304,159    50   $      10,415,066   $      41,660,264    100%
           
     
  Estimated
Year Amortization Expense
Six months ending December 31, 2010 $3,029,920 
2011  5,403,532 
2012  4,502,386 
2013  2,342,887 
2014  2,075,125 
2015  1,708,575 
Thereafter  7,184,479 
5. Real Estate Held for Sale and Discontinued Operations
As of June 30, 2009, the Company classified its property located in Norfolk, Virginia as held for sale under the provisions of ASC 360-10, which 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

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statements in both current and prior periods presented. The Company received an unsolicited offer from a buyer for this property. On July 17, 2009, the Company sold this property for $1.15 million, and recognized a gain on the sale of approximately $160,000.
The table below summarizes the components of income from discontinued operations:
        
 For the three months ended March 31,                 
 2010 2009 For the three months ended June 30, For the six months ended June 30, 
 2010 2009 2010 2009 
Operating revenue  $      -  $      25,876  $ $25,875 $ $51,751 
 
Operating expense -  (8,038   (4,959)   (12,997)
     
         
Income from discontinued
operations
  $      -  $      17,838  $ $20,916 $ $38,754 
             

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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 located in McLean, Virginia, wherein which 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 March 31,June 30, 2010, the interest rate was 7.5%.
The fair market value of the mortgage note receivable as of March 31, 2010 This loan was approximately $9.3 million, as compared to the carrying value stated above of approximately $10.0 million. The fair market value is calculated basedrepaid in full 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.July 22, 2010.

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7. Mortgage Notes Payable and Line of Credit
The Company’s mortgage notes payable and line of credit as of March 31,June 30, 2010 and December 31, 2009 are summarized below:
                                    
 Date of     Principal Balance Outstanding   
 Issuance/ Principal Stated Interest Rate at   Date of         
 Assumption Maturity Date March 31, 2010(1) March 31, 2010 December 31, 2009 Issuance/ Principal Stated Interest Rate at Principal Balance Outstanding 
 Assumption Maturity Date June 30, 2010(1) June 30, 2010 December 31, 2009 
Fixed-Rate Mortgage Notes Payable:
      
      
 03/16/05 04/01/30  6.33%   $       2,867,675  $       2,884,908  03/16/05 04/01/30  6.33% $2,792,532 $2,884,908 
 08/25/05 09/01/15  5.33%  21,011,020 21,093,917  08/25/05 09/01/15  5.33% 20,933,204 21,093,917 
 09/12/05 09/01/15  5.21%  12,343,251 12,389,647  09/12/05 09/01/15  5.21% 12,299,802 12,389,647 
 12/21/05 12/08/15  5.71%  18,923,663 18,991,934  12/21/05 12/08/15  5.71% 18,860,364 18,991,934 
 02/21/06 12/01/13  5.91%  9,145,484 9,188,044  02/21/06 12/01/13  5.91% 9,105,276 9,188,044 
 02/21/06 06/30/14  5.20%  19,020,790 19,116,277  02/21/06 06/30/14  5.20% 18,929,519 19,116,277 
 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%  13,935,975 14,009,918  04/27/06 05/05/16  6.58% 13,865,869 14,009,918 
 11/22/06 12/01/16  5.76%  14,089,522 14,136,921  11/22/06 12/01/16  5.76% 14,045,923 14,136,921 
 12/22/06 01/01/17  5.79%  21,533,427 21,605,106  12/22/06 01/01/17  5.79% 21,467,597 21,605,106 
 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%  4,343,357 4,361,144  09/06/07 12/11/15  5.81% 4,326,704 4,361,144 
 10/15/07 11/08/17  6.63%  15,609,132 15,657,330  10/15/07 11/08/17  6.63% 15,565,851 15,657,330 
 08/29/08 06/01/16  6.80%  6,263,831 6,296,505  08/29/08 06/01/16  6.80% 6,230,611 6,296,505 
 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:Total Fixed-Rate Mortgage Notes Payable:   252,117,127 252,761,651  251,453,252 252,761,651 
             
      
Variable-Rate Line of Credit:
 12/29/06 12/29/10 LIBOR + 1.9% 34,900,000 33,200,000  12/29/06 12/29/10 LIBOR + 2.15% 36,300,000 33,200,000 
             
      
             
Total Mortgage Notes Payable, Line of Credit and Short-Term Loan  $       287,017,127  $       285,961,651 
Total Mortgage Notes Payable and Line of Credit $287,753,252 $285,961,651 
             
 
(1) The weighted average interest rate on all debt outstanding at March 31,June 30, 2010 was approximately 5.57%5.60%.
 
(2) This note has three annual extension options, which gives us the ability to extend the term of the note until October 1, 2013.
Mortgage Notes Payable
As of March 31,June 30, 2010, the Company had 16 fixed-rate mortgage notes payable, collateralized by a total of 55 properties. The obligors under each of these notes are wholly-owned separate borrowing entities, which own the real estate collateral. The Company is not a co-borrower, but has limited recourse liabilities that could result from: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, and physical waste or damage to the property, resulting from a borrower’s gross negligence or willful misconduct. The Company will also indemnifiesindemnify lenders against

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claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. The weighted-average interest rate on the mortgage notes payable as of Marchboth June 30, 2010 and December 31, 20102009 was approximately 6.0%.
The Company has $48.0 million of balloon principal payments maturing under one of its long-term mortgages in 2010; however, the mortgage has three annual extension options through 2013, which the Company currently intends to exercise. At the time of notification of extension of the $48.0 million loan, the Company is required to remit a fee of 0.25% of the outstanding principal balance and a certification to the lender that its aggregate debt service coverage ratio is not less than 1.2. As of June 30, 2010, the Company was in compliance with this covenant. The interest rate for the extension periods will adjust based upon the 1-year swap rate at the time of extension and a fixed spread of 4.16% in the first year, 4.29% in the second year and 4.41% in the third year.
The fair market value of all fixed-rate mortgage notes payable outstanding as of March 31,June 30, 2010 was approximately $241.5$241.2 million, as compared to the carrying value stated above of approximately $252.1 $251.5

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million. The fair market value is calculated based on a discounted cash flow analysis, using interest rates based on Management’s estimate of interest rates on long-term debt with comparable terms.
Scheduled principal payments of mortgage notes payable are as follows:
        
 Scheduled principal  Scheduled principal
Year payments payments
Nine months ending December 31, 2010  $     49,925,983  (1)
Six months ending December 31, 2010 $49,458,334(1)
2011 2,795,411  3,055,867 
2012 3,083,429  3,379,984 
2013 11,840,020  12,176,273 
2014 20,401,572  20,781,319 
2015 54,102,017  54,529,438 
Thereafter 109,968,695  108,072,037 
     
  $     252,117,127    $251,453,252 
     
 
(1) The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise our options to extend the maturity date until October 2013.
Line of Credit
The Company has a $50.0 million senior revolving credit agreement (the “Credit Agreement”) with a syndicate of banks led by KeyBank National Association (“KeyBank”), which matures on December 29, 2010. Currently, eight properties are pledged as collateral under the Company’s line of credit. 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’s continued ability to meet customary lending requirements, such as compliance with financial and operating covenants and satisfaction of 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 ASC 805. In addition, the maximum amount that 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. The maximum amount that the Company may currently draw under the Credit Agreement is approximately $45.1 million. Furthermore, 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 the Company.
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 Credit Agreement by the advanced amount of the released property. Conversely, as the Company purchases new properties meeting the eligibility standards, the Company may pledge such 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 may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of March 31,June 30, 2010, there was $34.9$36.3 million outstanding under the line of credit at an interest rate of approximately 2.2%2.5%, and approximately $3.6

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$3.9 million outstanding pursuant to letters of credit at a weighted average interest rate of approximately 2.0%2.2%. At March 31,June 30, 2010, the remaining borrowing capacity available under the line of credit was approximately $6.6$4.9 million. The Company’s ability to increase the availability under its line of credit is dependent upon its pledging additional properties as collateral. Traditionally, the Company has pledged new properties to its line of credit as it arranges for long-term mortgages for these pledged properties. Currently, only nine of the Company’s properties do not have long-term mortgages, and eight of those are pledged as collateral under its line of credit. Accordingly, the Company only has only one property which is unencumbered.unencumbered and which may

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be pledged as collateral to increase the borrowing capacity available under the line of credit. The Company was in compliance with all covenants under the Credit Agreement as of March 31,June 30, 2010. The amount outstanding on the line of credit as of March 31,June 30, 2010 approximates fair market value, because the debt is short-term and variable rate.
The Company’s line of credit matures in December 2010, and it is actively seeking to negotiatenegotiating a renewal of the line of credit orwith Key Bank and simultaneously in negotiations with other banks to find replacement financing, though its ability to obtain replacement financing at the time of maturity could be constrained by current economic conditions affecting the credit markets generally. Consequently, no assurance can be given that we will be successful in renewing or replacing the line of credit with terms similar to the Company’s existing line of credit or at all. In the event thatall; however, the Company is notoptimistic that it will be able to secure a new line of credit before December. The Company’s inability to obtain replacement financing for its line of credit facility on favorable terms, or at all, this could have a material adverse effect on the Company’s liquidity, its ability to make distributions to its stockholders and its ability to fund new investments. In the interim, in order to maintain sufficient liquidity and capital resources, the Company has, and will, continue to evaluate all available financing options.
8. Stockholders’ Equity
The following table summarizes the changes in stockholders’ equity for the threesix months ended March 31,June 30, 2010:
                        
 Notes Distributions in  
 Capital in Receivable Excess of Total                            
 Preferred Common Excess of From Sale of Accumulated Stockholders’ Notes Distributions in   
 Stock Stock Par Value Common Stock Earnings Equity Capital in Receivable Excess of Total 
  Preferred Senior Common Common Excess of From Sale of Accumulated Stockholders’ 
             Stock Stock Stock Par Value Common Stock Earnings Equity 
Balance at December 31, 2009  $       2,150    $       8,563  $     170,622,581 $(2,304,999 $(49,877,753  $       118,450,542  $2,150 $ $8,563 $170,622,581 $(2,304,999) $(49,877,753) $118,450,542 
                           
Repayment of Principal on Notes Receivable - - - 43,444 - 43,444 
  
Distributions Declared to Common and Preferred Stockholders - - - -  (4,232,411  (4,232,411
Issuance of senior common stock  2  25,694   25,696 
 
Repayment of principal on notes receivable     44,413  44,413 
 
Distributions declared to common, senior common and preferred stockholders       (8,460,697)  (8,460,697)
  
Forfeiture of common stock in satisfaction of employee note receivable(1)
 -  (18  (243,882 - -  (243,900    (18)  (243,882)    (243,900)
  
Net income - - - - 1,086,333 1,086,333       2,092,784 2,092,784 
  
                           
Balance at March 31, 2010  $       2,150  $       8,545  $     170,378,699 $(2,261,555 $(53,023,831  $       115,104,008 
Balance at June 30, 2010 $2,150 $2 $8,545 $170,404,393 $(2,260,586) $(56,245,666) $111,908,838 
                           
 
(1) On February 1, 2010, the maturity date of an employee stock option loan to a former employee of the Adviser was extended until August 2010. In connection with the extension of the loan, the recourse provision of the loan was removed, and the former employee was granted the option to either repay the principal and interest in full or return the 18,000 shares pledged against the loan to the Company in full satisfaction of the loan. On March 8, 2010, the date that the market price of the pledged shares equaled the balance of the outstanding loan, the pledged shares were returned to the Company, and the loan was deemed paid in full.

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The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options:

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 Outstanding        Outstanding Balance     
 Number of Strike Price of Amount of Balance of Outstanding Balance      Amount of Outstanding Balance of Employee Loans     
 Options Options Promissory Note Employee Loans of Employee Loans at Maturity Date Interest Rate  Number of Options Strike Price of Promissory Note of Employee Loans at December 31, Maturity Date of Interest Rate on 
Date Issued Exercised Exercised Issued to Employees at March 31, 2010 December 31, 2009 of Note on Note  Exercised Options Exercised Issued to Employees at June 30, 2010 2009 Note Note 
Sep 2004 25,000       $15.00       $375,000       $314,961       $358,405    Sep 2013  5.00%     25,000 $15.00 $375,000 $314,961 $358,405 Sep 2013  5.00%
Apr 2006 12,422    16.10    199,994    199,994    199,994    Apr 2015  7.77%     12,422 16.10 199,994 199,994 199,994 Apr 2015  7.77%
May 2006 50,000    16.85    842,500    842,500    842,500    May 2016  7.87%     50,000 16.85 842,500 842,500 842,500 May 2016  7.87%
May 2006 15,000    16.10    241,500    241,500    241,500    May 2016  7.87%     15,000 16.10 241,500 241,500 241,500 May 2016  7.87%
May 2006 2,000    16.10    32,200    32,200    32,200    May 2016  7.87%     2,000 16.10 32,200 32,200 32,200 May 2016  7.87%
May 2006 2,000    16.10    32,200    32,200    32,200    May 2016  7.87%     2,000 16.10 32,200 32,200 32,200 May 2016  7.87%
May 2006 2,000    15.00    30,000    30,000    30,000    May 2016  7.87%     2,000 15.00 30,000 30,000 30,000 May 2016  7.87%
Oct 2006 12,000    16.10    193,200    193,200    193,200    Oct 2015  8.17%     12,000 16.10 193,200 192,231 193,200 Oct 2015  8.17%
Nov 2006 25,000    15.00    375,000    375,000    375,000    Nov 2015  8.15%     25,000 15.00 375,000 375,000 375,000 Nov 2015  8.15%
                  
 145,422       $2,321,594       $2,261,555       $2,304,999     145,422 $2,321,594 $2,260,586 $2,304,999 
                  
In accordance with ASC 505-10-45-2, “Equity,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, these notes were recorded as full recourse loans to employees and are included in the equity section of the accompanying consolidated balance sheets. As of March 31,June 30, 2010, each loan maintained its full recourse status.
Distributions paid per share of common stock for each ofboth the three and six months ended March 31,June 30, 2010 and 2009 were $0.375 and $0.75 per share.share, respectively. Distributions paid per share of Series A Preferred Stock for each ofboth the three and six months ended March 31,June 30, 2010 and 2009 were $0.4843749 and $0.9687498 per share.share, respectively. Distributions paid per share of Series B Preferred Stock for each ofboth the three and six months ended March 31,June 30, 2010 and 2009 were $0.46875 and $0.9375 per share, respectively. Distributions paid per share of senior common stock for both the three and six months ended June 30, 2010 were $0.0849 per share. There were no distributions paid to senior common stockholders for either the three or six months ended June 30, 2009, as senior common stock was not issued until the three month period ended June 30, 2010.
On November 4, 2009, the Company entered into an open market sale agreement, or the Open Market Sale Agreement, with Jefferies & Company, Inc., or Jefferies, under which it may, from time to time, offer to sell shares of its common stock with an aggregate sales price of up to $25.0 million on the open market through Jefferies, as agent, or to Jefferies, as principal. To date, the Company has not sold any shares of common stock under the Open Market Sale Agreement.
On November 19, 2009, the Company entered into a dealer manager agreement, or the Dealer Manager Agreement, with Halcyon Capital Markets, LLC, or Halcyon, pursuant to which Halcyon will act as the Company’s dealer manager in connection with the Company’s continuous private offering of up to 3,333,333 shares of its newly designated senior common stock at $15.00 per share. Holders of the senior common stock will have the right, but not the obligation, following the fifth anniversary of the issuance of such shares proposed to be exchanged, to exchange any or all of such shares of senior common stock for shares of the Company’s common stock. On April 29, 2010, the Company issued 2,060 shares of senior common stock in the first closing of thea private offering. Net proceeds from the sale, after selling commissions and the dealer manager fee, were $27,675.$27,675 The net proceeds from the sale of the senior common stock will be used for investment in additional properties and mortgage loans, to repay indebtedness, to potentially purchase shares of the Company’s preferred stock on the open market, or other general corporate purposes.

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9. Segment Information
As of March 31,June 30, 2010, the Company’s operations were comprised of two operating segments. One segment purchases real estate (land, buildings and other improvements), which is simultaneously leased to existing users, and the other segment extends mortgage loans and collects principal and interest payments. The amounts included under the “other”“Other” column in the tables below include other income, which consists of interest income from temporary investments and employee loans and any other miscellaneous income earned, and operating and other expenses that were not specifically derived from either operating segment.

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The following table summarizes the Company’s consolidated operating results and total assets by segment as of and for the three and six months ended March 31,June 30, 2010 and 2009:
                
 As of and for the three months ended March 31, 2010
 Real Estate Real Estate                                     
 Leasing Lending Other Total As of and for the three months ended June 30, 2010 As of and for the six months ended June 30, 2010 
 Real Estate Leasing Real Estate Lending Other Total Real Estate Leasing Real Estate Lending Other Total 
Operating revenues    $   10,497,476    $   187,500    $   -    $   10,684,976  $10,491,804 $189,583 $ $10,681,387 $20,989,281 $377,083 $ $21,366,364 
Operating expenses  (3,625,348) -  (1,735,038)  (1)  (5,360,386)  (3,658,082)   (1,692,119)(1)  (5,350,201)  (7,283,430)   (3,427,158)(1)  (10,710,588)
Other expense  (4,045,644) -  (192,613)(2)  (4,238,257)  (4,090,012)   (234,723)(2)  (4,324,735)  (8,135,657)   (427,335)(2)  (8,562,992)
 
Discontinued operations - - - -          
                         
Net income    $   2,826,484    $   187,500    $(1,927,651)    $   1,086,333  $2,743,710 $189,583 $(1,926,842) $1,006,451 $5,570,194 $377,083 $(3,854,493) $2,092,784 
                         
  
                         
Total Assets    $   396,795,468    $   10,064,583    $   7,760,049    $   414,620,100  $393,575,318 $10,062,500 $7,541,573 $411,179,391 $393,575,318 $10,062,500 $7,541,573 $411,179,391 
                         
                
 As of and for the three months ended March 31, 2009
 Real Estate Real Estate                                    
 Leasing Lending Other Total As of and for the three months ended June 30, 2009 As of and for the six months ended June 30, 2009 
 Real Estate Leasing Real Estate Lending Other Total Real Estate Leasing Real Estate Lending Other Total 
Operating revenues    $   10,470,676    $   187,500    $   -    $   10,658,176  $10,461,906 $189,583 $ $10,651,489 $20,932,587 $377,083 $ $21,309,670 
Operating expenses  (3,589,068) -  (1,575,984)  (1)  (5,165,052)  (3,555,776)   (1,626,061)(1)  (5,181,837)  (7,144,850)   (3,202,047)(1)  (10,346,897)
Other expense  (4,082,638) -  (338,755)(2)  (4,421,393)  (4,114,021)   (259,611)(2)  (4,373,632)  (8,196,656)   (598,366)(2)  (8,795,022)
 
Discontinued operations 17,838 - - 17,838  20,916   20,916 38,754   38,754 
                         
Net income    $   2,816,808    $   187,500    $(1,914,739)    $   1,089,569  $2,813,025 $189,583 $(1,885,672) $1,116,936 $5,629,835 $377,083 $(3,800,413) $2,206,505 
                         
  
                         
Total Assets    $   404,272,994    $   10,064,583    $   10,659,229    $   424,996,806  $401,711,306 $10,062,500 $10,471,976 $422,245,782 $401,711,306 $10,062,500 $10,471,976 $422,245,782 
                         
 
(1) Operating expenses includes base management fees, incentive fees, administration 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,segment; thus, it isthese expenses are included in the “other”“Other” column.
 
(2) Other expense includes interest expense on the Company’s line of credit and short-term loan of $239,292$282,424 and $404,922$521,716 (which is net of interest income on temporary investments, interest income on employee loans and other income) for the three and six months ended March 31,June 30, 2010 and $319,977 and $724,899 for the three and six months ended June 30, 2009, respectively. It is not practicable to allocate the interest expense from the line of credit or the short-term loan to either operating segment,segment; thus, itthe interest is included in the “other”“Other” column.
10. Subsequent Events
On AprilJuly 7, 2010, the Company’s Board of Directors declared a cash distribution of $0.125 per share of common stock, $0.1614583 per share of the Series A Preferred Stock, and $0.15625 per share of the Series B Preferred Stock for each of the months of April, MayJuly, August and JuneSeptember of 2010. Monthly distributions will be payable on AprilJuly 30, 2010, May 28,August 31, 2010 and JuneSeptember 30, 2010, respectively, to those stockholders of record as of the close of business on AprilJuly 22, 2010, May 20,August 23, 2010 and JuneSeptember 22, 2010, respectively. Additionally, the Company’s Board of Directors declared a cash distribution of $0.0875 per share of senior common stock for each of the months of July, August, and September of 2010. Senior common stock monthly distributions will be payable on August 6, 2010, September 8, 2010, and October 7, 2010.
On April 29,In July 2010, the Company issued 2,060 shares of senior common stock at a gross price per share of $15.00 in the first closing of its previously announced continuous private offering of up to 3,333,3338,227 additional shares of senior common stock. Net proceeds from the first closing,sales, after selling commissions and the dealer manager fee,fees, were $27,675.approximately $110,000. The net proceeds from the sale of the senior common stock will be used for

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investment in additional properties and mortgage loans, to repay indebtedness, to potentially purchase shares of the Company’s preferred stock on the open market, or other general corporate purposes.

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On July 22, 2010, the borrower on the Company’s $10.0 million mortgage loan, which was collateralized by an office building located in McLean, Virginia, repaid in full the outstanding principal balance and all accrued and unpaid interest. The mortgage loan was originally set to mature in May 2017. The Company received $3.3 million of additional interest and prepayment penalties in connection with the early payment. The proceeds were used to repay a portion of the Company’s line of credit.

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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.amended, or the Exchange Act. 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 actualbusiness, financial condition, liquidity, results levels of activity, performanceoperations, funds from operations or achievementsprospects to be materially different from any future business, financial condition, liquidity, results levels of activity, performanceoperations, funds from operations or achievementsprospects 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 this Quarterly Report on Form 10-Q.10-Q, or Report.
All references to “we,” “our,” “us” and the “Company” in this Quarterly Report on Form 10-Q (“Report”) mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.
OVERVIEW
General
We were incorporated under the General Corporation Law 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 that 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 ratedpublicly-rated debt. We have historically 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 rate 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 March 31,June 30, 2010, we owned 64 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 $444.2$444.5 million at March 31,June 30, 2010.
Business Environment
The United States is beginning to recover from the recession that it entered into during late 2007, though it continues to experience pervasive and fundamental disruptions in its financial and capital markets. As a result, conditions within the U.S. creditcapital markets generally and the U.S. real estate creditcapital markets, in particular, continue to experience significant dislocation and stress. While we are beginning to see signs of economic improvement and stabilization in both the equity and debt capital markets, these markets remain challenging, and we do not know if adverse conditions will again intensify, nor are we able to gauge the full extent to which the disruptions will affect us. Additionally, economic conditions continue to disrupt our ability to price and finance new investment opportunities on attractive terms. We believe that it will take some time for the United States to fully recover from the recession. As a result, the continued weak economic conditions could still materially and adversely impact the financial condition of one or more of our tenants, and, therefore, could makeincrease the likelihood that a tenant may declare bankruptcy and paymentor default on the related lease or loan more likely.

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upon its payment obligations arising under a related lease or loan, as applicable. Currently, alltwo of our properties are fully leased, and allbuildings, which comprise approximately 2.6% of our tenantstotal annualized rental income, are vacant. We also have one lease, which comprises less than 1% of our total annualized rental income that expires in December of this year. We are currently renegotiating this lease and are optimistic that we will be able to extend this lease prior to its expiration. All of our borrowerremaining tenants are current and paying in accordance with their leases and loan, respectively; however, we have three leases that expire in 2010, which comprise approximately 3.4% of our total annualized rental income. Two of these tenants have notified us that they will not renew their leases, and we are currently both seeking new tenants for and researching alternative uses for these properties.leases. In addition, we have $48.0 million of balloon principal payments maturing under one of our long-term mortgages in October 2010; however, the mortgage has three annual extension options through 2013, each of which we currently intend to exercise. We have no other balloon principal payments due under any of our mortgages until 2013.
Our ability to make new investments is highly dependent upon our ability to procure external financing. Our principal sources of external financing generally include the issuance of equity securities, long-term mortgages secured by properties, and borrowings under our line of credit. The market for long-term mortgages remains at a standstill,is extremely limited, as the collateralized mortgage-backed securities, or CMBS, market has virtually disappeared. With the closure of the CMBS market, many banks are not lending on industrial and 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. In addition, many banks have significantly curtailed their general lending practices, as they are having difficulty valuing the underlying real estate in this market. We are, now only seeinghowever, beginning to see banks that are willing to issue medium-term mortgages, between two and five years, on substantially less favorable terms than were previously available. Consequently, we intendcontinue to focus on using medium-term mortgages to finance our real estate activities until the market for long-term mortgages returns. In addition, the maximum amount that the Company may draw under its line of credit is based upon a percentage of the value of properties pledged as collateral against the line which must meet agreed upon eligibility standards. The maximum amount that the Company may currently draw under the line of credit is approximately $45.1 million.
Our ability to increase the availability under our line of credit is dependent upon our 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. Accordingly, we only have one property which is unencumbered and which may be pledged as collateral to increase the borrowing capacity available under our line of credit. Our line of credit matures in December 2010, and we are actively seeking to negotiate a renewal of the line of credit or findprocure replacement financing this year. We are anticipatinganticipate that the terms under a renewal or replacement line of credit will be less favorable then the terms under our current line of credit.
Further, we currently have two ongoing equity offerings pursuant to which we have raised an aggregate of $138,000 of net proceeds. If we are able to raise additional equity capital in the near term, we will continue to invest in industrial and commercial real property as well as expand our investment portfolio in tointo other real property sectors, such as retail and medical properties. Furthermore, we intend to expand our mortgage lending activity to include purchasing mortgage loans from banks and CMBS pools,pools; however, until we are able to raise significant debt or additional equity capital, our near-term strategy is contingent upon building the value of our existing portfolio of properties by renegotiating existing leases and making capital improvements to our properties. Capital improvements, however, will be limited to the extent that we have available capital. We will continue to actively seek potential acquisitions, and we will continue our strategy of making conservative investments in properties that have existing financing sufficient to withstand the current economic conditions, and that are likely to produce attractive long-term returns for our stockholders.
Recent Events
Financing Activities:
During the threesix months ended March 31,June 30, 2010, we had net borrowings under our line of credit of approximately $1.7$3.1 million, with $34.9a $36.3 million outstanding principal balance at March 31,June 30, 2010. The

23


proceeds from borrowings under the line of credit were used for working capital and to fund capital improvements at certain of our properties.
Equity Activities:
On November 4, 2009, we entered into an open market sale agreement, or the Open Market Sale Agreement, with Jefferies & Company, Inc., or Jefferies, under which we may, from time to time, offer to sell shares of our common stock with an aggregate sales price of up to $25.0 million on the open market

23


through Jefferies, as agent, or to Jefferies, as principal. To date, we have not sold any common stock under the Open Market Sale Agreement.
On November 19, 2009, we entered into a dealer manager agreement, or the Dealer Manager Agreement, with Halcyon Capital Markets, LLC, or Halcyon, pursuant to which Halcyon will act as our dealer manager in connection with our continuous private offering of up to 3,333,333 shares of our newly designated senior common stock at $15.00 per share. On April 29, 2010,To date, we have issued 2,06010,287 shares of senior common stock in our first closing of the private offering.stock. Net proceeds from the sale,these sales, after selling commissions and the dealer manager fee,fees, were $27,675.approximately $138,000. The net proceeds from the salefuture sales of the senior common stock will be used for investment in additional properties and mortgage loans, to repay indebtedness, to potentially purchase shares of our preferred stock on the open market, or other general corporate purposes.
Leasing Activities:
On May 4, 2010, we extended the lease on our property located in Grand Rapids, Michigan for a period of 15 years, and the tenant has two options to extend the lease for additional periods of 10 years each. The lease was originally set to expire in July 2016, and will now expire in April 2025. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.1 million.
Industry Classifications
Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid dependence on any one particular tenant, geographic market 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 market. Our largest tenant at March 31,June 30, 2010 comprised approximately 7.3% of our total rental income, and our largest concentration of properties was located in Ohio, which accounted for approximately 17.9% of our total rental income. The table below reflects the breakdown of our total rental income by tenant industry classification for both the threesix months ended March 31,June 30, 2010 and 2009, respectively:
                                
 March 31, 2010 March 31, 2009 June 30, 2010 June 30, 2009 
 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    $   291,663  2.8%      $   291,663  2.8%   $583,326  2.8% $583,327  2.8%
Beverage, Food & Tobacco 547,192  5.2%   547,180  5.3%   1,094,383  5.2% 1,094,371  5.3%
Buildings and Real Estate 506,417  4.9%   506,417  4.9%   1,022,674  4.9% 1,012,834  4.9%
Chemicals, Plastics & Rubber 782,534  7.5%   802,204  7.7%   1,565,065  7.5% 1,598,724  7.7%
Containers, Packaging & Glass 582,619  5.6%   582,503  5.6%   1,165,237  5.6% 1,165,007  5.6%
Diversified/Conglomerate Manufacturing 916,172  8.8%   916,172  8.8%   1,832,341  8.8% 1,832,344  8.8%
Diversified/Conglomerate Services 77,026  0.7%   77,026  0.8%   154,052  0.7% 154,052  0.8%
Electronics 1,541,448  14.8%   1,541,447  14.9%   3,083,187  14.8% 3,082,895  14.8%
Healthcare, Education & Childcare 1,536,353  14.8%   1,536,353  14.8%   3,072,703  14.8% 3,072,707  14.8%
Home & Office Furnishings 132,436  1.3%   132,436  1.3%   264,871  1.3% 264,872  1.3%
Insurance 180,717  1.7%   180,717  1.7%   361,433  1.7% 361,433  1.7%
Machinery 597,155  5.7%   597,151  5.7%   1,194,308  5.7% 1,194,301  5.8%
Oil & Gas 329,391  3.2%   288,111  2.8%   647,121  3.1% 572,645  2.8%
Personal & Non-Durable Consumer Products 338,681  3.2%   338,680  3.3%   677,090  3.2% 677,361  3.3%
Personal, Food & Miscellaneous Services 143,752  1.4%   143,752  1.4%   287,503  1.4% 287,503  1.4%
Printing & Publishing 549,669  5.3%   544,845  5.3%   1,095,611  5.3% 1,089,693  5.3%
Telecommunications 1,361,841  13.1%   1,361,587  12.9%   2,723,681  13.2% 2,723,351  12.9%
                 
    $   10,415,066  100.0%      $   10,388,244  100.0%   $20,824,586  100.0% $20,767,420  100.0%
                 

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Lease Expirations
The following table summarizes the lease expirations by year for the Company’s properties for leases in place as of June 30, 2010:
                     
          Rental Revenue       
          for the Six Month       
Year of Lease     Number of  Period Ended  Annualized Base  % of Annualized 
Expiration Square Feet  Leases  June 30, 2010  Rental Revenue  Base Rent 
2010  215,581   3  $704,844  $1,409,688   3.4%
2011     0         0.0%
2012  479,982   3   2,214,824   4,429,648   10.6%
2013  438,422   6   2,336,675   4,673,350   11.2%
2014  614,132   5   1,541,098   3,082,196   7.4%
2015  896,876   8   3,423,921   6,847,842   16.4%
2016  898,257   5   2,107,425   4,214,850   10.1%
2017  102,200   1   461,462   922,924   2.2%
2018  59,894   1   134,020   268,040   0.6%
2019+  2,598,815   18   7,900,317   15,800,634   38.1%
                
                     
Total
  6,304,159   50  $20,824,586  $41,649,172   100%
                
The following table summarizes the states in which the Company’s properties are located for leases in place as of June 30, 2010:
                     
          Rental Revenue       
          for the Six Month       
      Number of  Period Ended  Annualized Base  % of Annualized 
State Square Feet  Leases  June 30, 2010  Rental Revenue  Base Rent 
Ohio  1,185,411   11  $3,723,561  $7,447,122   17.9%
Minnesota  547,800   3   2,605,773   5,211,546   12.5%
North Carolina  695,876   6   1,897,167   3,794,334   9.1%
Pennsylvania  623,375   4   1,522,752   3,045,504   7.3%
Texas  188,178   4   1,177,926   2,355,852   5.7%
Michigan  596,104   2   1,107,759   2,215,518   5.3%
Illinois  164,131   2   1,093,010   2,186,020   5.2%
Massachusetts  338,508   3   1,087,044   2,174,088   5.2%
All Other States  1,964,776   15   6,609,594   13,219,188   31.8%
                
                     
Total
  6,304,159   50  $20,824,586  $41,649,172   100%
                
Our Adviser and Administrator
Our Adviser is led by a management team which has extensive experience in our lines of business.purchasing real estate and originating mortgage loans. Our Adviser is controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone is also the chairman and chief executive officer of our Adviser. Terry Lee Brubaker, our vice chairman, chief operating officer, secretary and director, is a member of the board of directors of our Adviser as well as its vice chairman and chief operating officer. George Stelljes III, our president, chief investment officer and director, is a member of the board of directors of our Adviser and its president and chief investment officer. Gladstone Administration, LLC, or our Administrator, employs our chief financial officer, chief compliance officer, internal counsel, treasurer, investor relations and their respective staffs.
Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly

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tradedpublicly-traded business development companies, as well as Gladstone Land Corporation, a private agricultural real estate company. With the exception of our chief financial officer, all of our executive officers serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment

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Corporation. In the future, our Adviser may provide investment advisory services to other funds, both public and private, of which it is the sponsor.
Advisory and Administration Agreements
We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator. Our Adviser and Administrator employ all of our personnel and pay their payroll, benefits, and general expenses directly. On January 1, 2007, we entered into an advisory agreement with our Adviser, which we refer to asor the Advisory Agreement, and an administration agreement with our Administrator, which we refer to asor the Administration 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 months ended March 31,June 30, 2010 and 2009, 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 that we acquire, the aggregate amount of mortgage loans that 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, or total common stockholders’ equity, and for an incentive fee based on funds from operations, or FFO. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common with other externally-advised REITs. Furthermore, there are no fees charged when our Adviser secures longlong-term or short-term credit or arranges mortgage loans on our properties.
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 common stockholders’ equity, less the recorded value of any preferred stock.equity. 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).

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Quarterly Incentive Fee Based on FFO
Pre-incentive fee FFO
(expressed as a percentage of total common stockholders’ equity)
(GRAPH)(GRAPHIC)
Percentage of pre-incentive fee FFO allocated to incentive fee
The incentive fee may be reduced because of a covenant which exists in our line of credit agreement 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 both the three and six months ended March 31,June 30, 2010 and 2009, respectively, which allowed us to maintain the current level of distributions to our stockholders. These waived fees may not be recouped by our Adviser in the future. There was no waiver to the incentive fee for the three months ended March 31, 2010. 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 such waiver, either in whole or in part.
Administration Agreement
UnderPursuant to the Administration Agreement, we pay for our allocable portion of our Administrator’s overhead expenses incurred while performing its obligations to us, 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, internal counsel, treasurer, investor relations 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 regarding 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.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, less any expenses related to the acquisition, to (i) the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and (ii) the 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

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values. All expenses related to the acquisition are expensed as incurred, rather than capitalized into the cost of the acquisition as had been the previous accounting.
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 hypothetical 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 Management’s 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, depending on the amounts allocated between land and other depreciable assets, changes in the purchase price allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating performance; and
 
  The period of time over which tangible and intangible assets are depreciated 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. Also, we depreciate our buildings over 39 years, but do not depreciate our land. 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 holdholding periods of the properties and cap rates using information that 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 orfrom 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 that we would recognize.

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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 March 31,as then existing on June 30, 2010. We concluded that none of our properties are currentlywere 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 that 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 March 31,June 30, 2010 as we believe that the carrying value of the loan is fully collectable.
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently issued accounting pronouncements.

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Results of Operations
Our weighted-average yield on our portfolio as of March 31,June 30, 2010 was approximately 9.57%9.58%. The weighted-average yield on our portfolio is calculated by taking the annualized straight-line rents, reflected as rental income on our consolidated statements of operations, or mortgage interest payments, reflected as interest income from mortgage notes receivable on our consolidated statements of operations, of each acquisition or mortgage loan as a percentage of the acquisition or loan price, as applicable. The weighted-average yield does not account for the interest expense incurred on the mortgages placed on our properties.
A comparison of our operating results for the three and six months ended March 31,June 30, 2010 and 2009 is below:
                                                
 For the three months ended March 31, For the three months ended June 30, For the six months ended June 30, 
 2010 2009 $ Change % Change 2010 2009 $ Change % Change 2010 2009 $ Change % Change 
Operating revenues  
Rental income    $10,415,066    $10,388,244    $26,822  0%   $10,409,519 $10,379,172 $30,347  0% $20,824,586 $20,767,420 $57,166  0%
Interest income from mortgage notes receivable 187,500 187,500 -  0%  
Interest income from mortgage note receivable 189,583 189,583   0% 377,083 377,083   0%
Tenant recovery revenue 82,410 82,432  (22)  0%   82,285 82,734  (449)  -1% 164,695 165,167  (472)  0%
                        
Total operating revenues 10,684,976 10,658,176 26,800  0%   10,681,387 10,651,489 29,898  0% 21,366,364 21,309,670 56,694  0%
                        
  
Operating expenses  
Depreciation and amortization 3,321,871 3,307,802 14,069  0%   3,390,492 3,282,629 107,863  3% 6,712,362 6,590,438 121,924  2%
Property operating expenses 244,354 236,812 7,542  3%   229,733 230,785  (1,052)  0% 474,088 467,595 6,493  1%
Due diligence expense 21,876 9,547 12,329  129%    6,886  (6,886)  -100% 21,876 16,433 5,443  33%
Base management fee 312,564 372,648  (60,084)  -16%   296,141 357,650  (61,509)  -17% 608,705 730,298  (121,593)  -17%
Incentive fee 846,192 786,289 59,903  8%   829,264 812,653 16,611  2% 1,675,456 1,598,942 76,514  5%
Administration fee 231,884 224,354 7,530  3%   219,119 257,207  (38,088)  -15% 451,003 481,561  (30,558)  -6%
Professional fees 175,610 235,198  (59,588)  -25%   201,801 125,965 75,836  60% 377,411 361,161 16,250  4%
Insurance expense 56,325 48,678 7,647  16%   56,513 48,125 8,388  17% 112,838 96,804 16,034  17%
Directors’ fees 49,418 49,702  (284)  -1%   49,025 50,386  (1,361)  -3% 98,443 100,088  (1,645)  -2%
Stockholder-related expense 45,216 83,647  (38,431)  -46%  
Stockholder-related expenses 78,596 88,245  (9,649)  -11% 123,812 171,892  (48,080)  -28%
Asset retirement obligation expense 37,247 34,907 2,340  7%   37,857 35,476 2,381  7% 75,104 70,384 4,720  7%
General and administrative expenses 17,829 10,549 7,280  69%  
General and administrative 17,733 15,453 2,280  15% 35,563 26,005 9,558  37%
                        
Total operating expenses before credit from Adviser 5,360,386 5,400,133  (39,747)  -1%   5,406,274 5,311,460 94,814  2% 10,766,661 10,711,601 55,060  1%
                        
  
Credit to incentive fee -  (235,081) 235,081  -100%    (56,073)  (129,623) 73,550  -57%  (56,073)  (364,704) 308,631  -85%
                        
Total operating expenses 5,360,386 5,165,052 195,334  4%   5,350,201 5,181,837 168,364  3% 10,710,588 10,346,897 363,691  4%
                        
  
Other income (expense)  
Interest income from temporary investments 265 17,281  (17,016)  -98%   113 184  (71)  -39% 378 17,465  (17,087)  -98%
Interest income - employee loans 43,101 48,886  (5,785)  -12%  
Interest income — employee loans 42,574 48,862  (6,288)  -13% 85,674 97,748  (12,074)  -12%
Other income 3,316 - 3,316  100%   5,013 11,320  (6,307)  -56% 8,329 11,320  (2,991)  -26%
Interest expense  (4,284,939)  (4,487,560) 202,621  -5%    (4,372,435)  (4,433,998) 61,563  -1%  (8,657,373)  (8,921,555) 264,182  -3%
                        
Total other expense  (4,238,257)  (4,421,393) 183,136  -4%    (4,324,735)  (4,373,632) 48,897  -1%  (8,562,992)  (8,795,022) 232,030  -3%
                        
  
Income from continuing operations 1,086,333 1,071,731 14,602  1%   1,006,451 1,096,020  (89,569)  -8% 2,092,784 2,167,751  (74,967)  -3%
                        
  
Discontinued operations  
Income from discontinued operations - 17,838  (17,838)  -100%    20,916  (20,916)  -100%  38,754  (38,754)  -100%
                        
Total discontinued operations - 17,838  (17,838)  -100%  
 
Distributions attributable to preferred stock  (1,023,437)  (1,023,437)   0%  (2,046,876)  (2,046,875)  (1)  0%
Distributions attributable to senior common stock  (375)   (375)  -100%  (375)   (375)  -100%
                        
  
Net income 1,086,333 1,089,569  (3,236)  0%  
Net (loss) income available to common stockholders $(17,361) $93,499 $(110,860)  -119% $45,533 $159,630 $(114,097)  -71%
                        
 
Distributions attributable to preferred stock  (1,023,438)  (1,023,437)  (1)  0%  
       
 
Net income available to common stockholders    $62,895    $66,132 $(3,237)  -5%  
       

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Operating Revenues
Rental income remained flat for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because no properties have been acquired since 2008.2008, nor did we have a change in occupancy over the period.
Interest income from mortgage notes receivable remained flat for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because interest income on our mortgage loan is calculated based on a floor rate of 7.5% per year or the one month London Interbank Offered Rate, or LIBOR, rate plus 6.0% per year and has a ceiling rate of 10.0%. LIBOR plus the 6.0% spread has remained below the floor rate of 7.5% over the past year, resulting in interest remaining flat.
Tenant recovery revenue remained relatively flat for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because no properties have been acquired since 2008.2008, nor did we have a change in occupancy over the period.
Operating Expenses
Depreciation and amortization expenses remained relatively flat for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because no properties have been acquired since 2008.
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 remained relatively flat during the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because no properties have been acquired since 2008.
Due diligence expense primarily consists of legal fees and fees incurred for third-party reports prepared duringin connection with potential acquisitions and our due diligence work.analyses related thereto. Due diligence expenses increaseddecreased for the three months ended March 31,June 30, 2010, as compared to the three months ended March 31,June 30, 2009, primarily because ofno legal fees were incurred during the period three months ended June 30, 2010 for potential acquisitions. Due diligence expense increased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, due to legal fees incurred in connection with a potential acquisition that did not closeacquisitions initiated during the quarter.first quarter of 2010. Total due diligence expenses remain relatively low; however, with our adoption of Accounting Standards Codification, or ASC, 805 “Business Combinations,” on January 1, 2009, which requires that we no longer capitalize due diligence costs into the price of thean acquisition, we expect that our due diligence expense will increase significantly once we begin to acquire properties again.
The base management fee decreased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, as a result ofdue to 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 threesix months ended March 31,June 30, 2010 exceeded net income during the period by approximately $2.1$4.3 million. The calculation of the base management fee is described in detail above under“Advisory and Administration Agreements.”
The incentive fee increased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, due to the increase in pre-incentive fee FFO caused by a decrease in certain of our operating expenses, coupled with the decrease in total common stockholders’ equity. The calculation of the incentive fee is described in detail above under“Advisory and Administration Agreements.”
The administration fee increaseddecreased slightly for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily as a result of an increase in our total assets in comparison to the total assets of all companies managed by our Adviser under similar agreements, which was partially offset by a decrease in the amount of the total

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expenses allocated from our Administrator during the quarter.periods. The calculation of the administration fee is described in detail above under “Advisory and Administration Agreements.”
Professional fees, consisting primarily of legal and accounting fees, decreasedincreased during the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily because ofdue to increased legal and other professional fees incurred relatingin 2010 related to ongoing lease renegotiations and reviewslegal work with certain of our legal work

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with our existing tenants during the three months ended March 31, 2009 that were incurred to a lesser extent during the three months ended March 31, 2010, coupled with tax research fees paid during 2009, which were not paid during 2010.tenants.
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 months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because of an increase in the premiums for the period from September 2009 through September 2010.
Directors’ fees remained relatively flat during the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, as we made no changes to the compensation paid to our non-employee directors for 2010.
Stockholder-related expense decreased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily as a result of decreased costs associated with printing and filing our proxy materials and annual report.
Asset retirement obligation expense increased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, because of the increase in the accretion of the expense over the term of the lease including renewal periods.
General and administrative expenses increased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily as a result of an increase in the amount of travel for site visits to our properties, coupled with an increase in bank service charges.
Other Income and Expense
Interest income from temporary investments decreased during the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily because of lower interest rates earned on our money market accounts, coupled with interest received during the threesix months ended March 31,June 30, 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 months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009. This decrease was a result of loan payoffs made by employees during 2009 and other principal repayments during the first quartersix months of 2010, coupled with a stock option loan to a former employee of our Adviser whereby interest on her loan is now recorded in other income. The loan was paid in full in March 2010.
Other income increaseddecreased during the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009, primarily because of income earned in 2009 related to the resolution of a lease agreement, partially offset by income earned on a stock option loan to a former employee of our Adviser.Adviser during the 2010 period. In connection with that employee’s termination of employment with our Adviser and the later amendment of the loan, the interest on the loan from the date of termination, November 2009, is included in other income on the consolidated statement of operations. The loan was paid in full in March 2010.
Interest expense decreased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009. This decrease was primarily a result of a decrease in LIBOR from the first quartertwo quarters of 2009, which reduced our interest expense under our line of credit, coupled with reduced interest expense on our long-term financings from amortizing principal payments made during 2009.2009 and 2010.

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Discontinued Operations
Income from discontinued operations for the three and six months ended March 31,June 30, 2009 primarily relates to the property that we sold in July 2009, which was located in Norfolk, Virginia.

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Net Income Available to Common Stockholders
Net income available to common stockholders remained relatively flatdecreased for the three and six months ended March 31,June 30, 2010, as compared to the three and six months ended March 31,June 30, 2009 as we had minimal activitydue to increased professional fees incurred during the periods.2010 period, coupled with an increased net incentive fee paid to our Advisor. The calculation of the incentive fee is described in detail above under“Advisory and Administration Agreements.”
Liquidity and Capital Resources
Future Capital Needs
At March 31,June 30, 2010, we had approximately $3.3 million in cash and cash equivalents. We have an available borrowing capacity of $6.6$4.9 million under our line of credit and have obtained mortgages on 55 of our properties. As of March 31,June 30, 2010, we had investments in 64 real properties for a net carrying value, including intangible assets, of approximately $381.8$378.7 million and one mortgage loan receivable for $10.0 million.
As discussed in “Overview-Business Environment”above, while there have been improvements in the U.S. economy, we continue to be impacted by weak capital market conditions, which have 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 fully recover and stabilize, we intend to fund our existing contractual obligations with our cash flows from operations and with borrowings made against our existing line of credit. If economic conditions continue to improve, we are hopeful that we will be able to issue additional equity securities under our effective shelf registration statement, including pursuant to our Open Market Sale Agreement, and through a continuous private offering of our senior common stock. If we are able to raise significant equity capital, we would intend to use the proceeds to acquire additional properties, make mortgage loans, repurchase shares of our preferred stock on the open market or pay down outstanding borrowings under our line of credit.
Our existing shelf registration statement permits us to issue, through one or more transactions, up to an aggregate salesales price of $300.0 million in securities consisting of common or preferred stock, of which $25.0 million was reserved for sales under our Open Market Sale Agreement, discussed below, as of March 31,June 30, 2010. On November 4, 2009, we entered into an 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, as agent, or to Jeffries,Jefferies, as principal, based upon our instructions (including any price, time or size limits or other customary parameters or conditions that we may impose). Sales of shares of our common stock through Jefferies, if any, will be executed by means of ordinary brokers’ transactions on the NASDAQ Global Select 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 equal to 2.0% of the gross sales proceeds of any common stock sold through Jefferies as agent under the Open Market Sale Agreement. To date, we have not sold any shares of our common stock under the Open Market Sale Agreement, and there is no guarantee that we will sell any common stock under such agreement in the future.
In addition, on November 19, 2009, we entered into a dealer manager agreement with Halcyon who will act as our dealer manager in connection with our continuous private offering of up to 3,333,333 shares of our newly designated senior common stock at $15.00 per share. This offering is only being made to accredited investors. On April 29,Holders of the senior common stock will have the right, but not the obligation, following the fifth anniversary of the issuance of such shares proposed to be exchanged, to exchange any or all of such shares of senior common stock for shares of our common stock. As of July 23, 2010, we have issued 2,060

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10,287 shares of senior common stock at a gross price per share of $15.00 in the first closing of senior common stock.$15.00. Net proceeds from these sales, after selling commissions and dealer manager fees, were approximately $138,000. The net proceeds from the sale of the senior common stock will be used for investment in additional properties and mortgage loans, to repay indebtedness, to potentially purchase shares of our preferred stock on the open market, or other general corporate purposes.
As banks recommence their general lending practices, we intend 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 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

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collateralizing their loans, which could cause us to lose part or all of our investments in such properties. We have $48.0 million of balloon principal payments maturing under one of our long-term mortgages in 2010; however, the mortgage has three annual extension options through 2013, each of which we currently intend to exercise. At the time of each notification of extension of the $48.0 million loan, we are required to remit a fee of 0.25% of the outstanding principal balance and a certification to the lender that our aggregate debt service coverage ratio is not less than 1.2 and as1.2. As of March 31,June 30, 2010 we were in compliance with this covenant. The interest rate for the extension periods will adjust based upon the 1-year swap rate at the time of extension and a fixed spread of 4.16% in the first year, 4.29% in the second year and 4.41% in the third year. Based upon the current 1-year swap rate, the adjusted interest rate would be less than the current rate on the mortgage loan, though this rate could increase prior to our delivery of the extension notice later this year.notice. We have no other balloon principal payments due under any of our mortgages until 2013.
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 any such credits, either in whole or in part.
Our line of credit is a material source to satisfy our long-term liquidity requirements. As our line of credit matures in December 2010, we are actively seeking to negotiate a renewal of the line of credit or to find replacement financing. The ability to renew or find other replacement financing is not guaranteed and the cost of any such financing could be substantially higher than current debt costs. We routinely review our liquidity requirements, and, provided that we are able to obtain a renewal of our line of credit or a new source of financing, either of which we expect to be able to procure, we believe that our current cash flows from operations, coupled with our line of credit, are sufficient to continue operations and pay distributions to our stockholders.
Operating Activities
Net cash provided by operating activities during the threesix months ended March 31,June 30, 2010 was approximately $3.6$7.1 million, as compared to net cash provided by operating activities of approximately $4.1$8.1 million for the threesix months ended March 31,June 30, 2009. This decrease was primarily a result of an increase in the amount of operating expenses and the net incentive fee paid to our Adviser coupled with an increase in capitalized expenses associated with our ongoing equity offerings. AThe majority of cash from operating activities is generated from the rental payments that we receive from our tenants and from the interest payments that we receive from our borrower. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and 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 inprovided by investing activities during the threesix months ended March 31,June 30, 2010 was approximately $500,000,$149,000, which primarily consisted of net receipts from lenders for reserves and a decrease in the amount of our restricted cash, partially offset by tenant improvements performed at certain of our properties, located in Eatontown, New Jersey and Maple Heights, Ohio and net payments to lenders for reserves, as compared to net cash used in investing activities during the threesix months ended March 31,June 30, 2009 of approximately $1.2$1.0 million, which primarily consisted of an increase in the amount of restricted cash, and net payments

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to lenders for reserves.reserves and leasing commissions paid related to the extension of the lease for our property located in Eatontown, New Jersey. 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 has resulted in a significant decrease in the cash used in investing activities.
Financing Activities
Net cash used in financing activities for the threesix months ended March 31,June 30, 2010 was approximately $2.9$7.0 million, which primarily consisted of distributions paid to our stockholders and principal repayments on mortgage notes payable, partially offset by net borrowings on our line of credit. Net cash used in financing activities for the threesix months ended March 31,June 30, 2009 was approximately $5.0$8.8 million, which primarily

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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.
Mortgage Notes Payable
As of March 31,June 30, 2010, we had 16 fixed-rate mortgage notes payable in the aggregate principal amount of approximately $252.1$251.5 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 March 31,June 30, 2010 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 on December 29, 2010. Currently, eight of our properties are pledged as collateral under our line of credit. 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 of financing is subject to our continued ability to meet customary lending requirements such as compliance with financial and operating covenants and our meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 95% of our FFO less those acquisition relatedacquisition-related costs that are required to be expensed under ASC 805. In addition, the maximum amount that 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. The maximum amount that we may currently draw under the Credit Agreement is approximately $45.1 million. Furthermore, those eight 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, or SPE, that owns the property. In addition, Gladstone Commercial Limited Partnership, a Delaware limited partnership that owns the SPEs, or the Operating Partnership, 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 released 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.
At March 31,June 30, 2010, there was $34.9$36.3 million outstanding under the line of credit at an interest rate of approximately 2.2%2.5% and approximately $3.6$3.9 million outstanding under letters of credit at a weighted average interest rate of approximately 2.0%2.2%. At March 31,June 30, 2010, the remaining borrowing capacity available under the line of credit was approximately $6.6$4.9 million. Our ability to increase the availability under our line of credit is dependent upon our 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

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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. Accordingly, we have only one property which is unencumbered.unencumbered, and which may be pledged as collateral to increase the borrowing capacity available under the line of credit. We were in compliance with all covenants under the Credit Agreement as of March 31,June 30, 2010.
As our line of credit matures in December 2010, we are actively seeking to negotiatenegotiating a renewal of the line of credit orwith KeyBank and simultaneously are in negotiations with other banks to find replacement financing, though our ability to obtain replacement financing at the time of maturity could be constrained by current economic conditions affecting the credit markets generally. Consequently, no assurance can be given that we will be successful in renewing or replacing our line of credit with terms similar to our existing line of credit or at all. In the eventall; however, we are optimistic that we are notwill be able to secure a new line of credit before December. Our inability to obtain replacement financing for our line of credit facility on favorable terms, or at all, this could have a material adverse effect on our liquidity, our ability to make distributions to our stockholders and our ability to fund new

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investments. In the interim, in order to maintain sufficient liquidity and capital resources, we have and will continue to evaluate all available financing options.
Contractual Obligations
The following table reflects our material contractual obligations as of March 31,June 30, 2010:
                    
 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)
 287,017,127    $   85,373,365    $   6,037,099    $   32,207,473    $   163,399,190  287,753,252 $87,100,228 $6,773,238 $32,882,071 $160,997,715 
Interest on Debt Obligations(2)
 74,733,711 11,730,500 23,698,172 21,930,064 17,374,975  69,564,532 13,080,805 23,549,443 21,059,786 11,874,498 
Capital Lease Obligations(3)
 300,000 - - 300,000 -  300,000   300,000  
Operating Lease Obligations(4)
 1,715,742 152,510 305,021 305,021 953,190  1,677,614 152,510 305,021 305,021 915,062 
                     
Total    $   363,766,580    $   97,256,375    $   30,040,292    $   54,742,558    $   181,727,355  $359,295,398 $100,333,543 $30,627,702 $54,546,878 $173,787,275 
                     
 
(1) Debt obligations represent borrowings under our line of credit, which represents $34.9$36.3 million of the debt obligation due in less than 1 year, and mortgage notes payable that were outstanding as of March 31,June 30, 2010. The line of credit matures in December 2010. The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise each of our options to extend the term throughmaturity date until 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,variable; thus, the amount of interest calculated for purposes of this table was based upon rates and balances as of March 31,June 30, 2010.
 
(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.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31,June 30, 2010.

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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 same 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 distributions made to holders of preferred share distributions.and senior common stock. 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 the number of weighted average shares of common stock outstanding and FFO available to common stockholders divided by the number of weighted average shares of common stock 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, because 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 when 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.

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The following table provides a reconciliation of our FFO for the three and six months ended March 31,June 30, 2010 and 2009, to the most directly comparable GAAP measure, net income, and a computation of basic and diluted FFO per weighted average share of common stock and basic and diluted net income per weighted average share of common stock:
                        
 For the three months ended March 31, For the three months ended June 30, For the six months ended June 30, 
 2010 2009 2010 2009 2010 2009 
Net income    $1,086,333    $1,089,569  $1,006,451 $1,116,936 $2,092,784 $2,206,505 
Less: Distributions attributable to preferred stock  (1,023,438)  (1,023,437)
Less: Distributions attributable to preferred and senior common stock  (1,023,812)  (1,023,437)  (2,047,251)  (2,046,875)
             
Net income available to common stockholders 62,895 66,132 
Net (loss) income available to common stockholders  (17,361) 93,499 45,533 159,630 
  
Add: Real estate depreciation and amortization, including discontinued operations 3,321,871 3,314,100  3,390,492 3,286,743 6,712,362 6,600,853 
             
FFO available to common stockholders    $3,384,766    $3,380,232  $3,373,131 $3,380,242 $6,757,895 $6,760,483 
  
Weighted average shares outstanding — basic 8,545,264 8,563,264 8,551,927 8,563,264 
Weighted average shares outstanding — diluted 8,546,529 8,563,264 8,552,563 8,563,264 
  
Weighted average shares outstanding - basic & diluted 8,558,664 8,563,264 
Basic net income per weighted average share of common stock $0.00 $0.01 $0.01 $0.02 
          
Basic & diluted net income per weighted average share of common stock    $0.01    $0.01 
Diluted net income per weighted average share of common stock $0.00 $0.01 $0.01 $0.02 
             
Basic & diluted FFO per weighted average share of common stock    $0.40    $0.39 
 
Basic FFO per weighted average share of common stock $0.39 $0.39 $0.79 $0.79 
         
Diluted FFO per weighted average share of common stock $0.39 $0.39 $0.79 $0.79 
             
  
Distributions declared per share of common stock    $0.375    $0.375  $0.375 $0.375 $0.750 $0.750 
             
 
Percentage of FFO paid per share of common stock  95%    95%    95%  95%  95%  95%
             

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Item 3.Quantitative and Qualitative Disclosures about Market Risk
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 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 months ended March 31,June 30, 2010 and 2009, we have performed the following analysis, which assumes that our balance sheet remains constant and that 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 months ended March 31,June 30, 2010 and 2009.
                        
 For the three months ended March 31,  For the three months ended June 30, For the six months ended June 30, 
 2010 2009 2010 2009 2010 2009 
1% increase in the one month LIBOR
  
  
Rental & interest income    $-    $-  $ $5 $ $5 
  
Interest expense 87,250 83,000  91,758 80,383 182,508 159,883 
  
             
Net decrease    $(87,250)    $(83,000) $(91,758) $(80,378) $(182,508) $(159,878)
             
  
Net income available to common stockholders (as reported)    $62,895    $66,132 
Net (loss) income available to common stockholders (as reported) $(17,361) $93,499 $45,533 $159,630 
  
Net decrease as percentage of
Net income available to common stockholders (as reported)
  -138.7%  -125.5%
Net decrease as percentage of
Net (loss) income available to common stockholders (as reported)
  528.5%  -86.0%  -400.8%  -100.2%
  
1% decrease in the one month LIBOR
  
  
Rental & interest income    $-    $-  $ $ $ $ 
  
Interest expense    $(87,250)    $(83,000) $(91,758) $(80,383) $(182,508) $(159,883)
  
             
Net increase    $87,250    $83,000  $91,758 $80,383 $182,508 $159,883 
             
  
Net income available to common stockholders    $62,895    $66,132 
Net (loss) income available to common stockholders (as reported) $(17,361) $93,499 $45,533 $159,630 
  
Net increase as percentage of
Net income available to common stockholders
  138.7%  125.5%
Net increase as percentage of
Net (loss) income available to common stockholders (as reported)
  -528.5%  86.0%  400.8%  100.2%
As of March 31,June 30, 2010, the fair value of our fixed rate debt outstanding was approximately $241.5$241.2 million. Interest rate fluctuations may affect the fair value of our fixed rate debt instruments. If interest rates on our fixed rate debt instruments, using rates at March 31,June 30, 2010, had been one percentage point higher or lower, the fair value of those debt instruments on that date would have decreased or increased by approximately $9.3$9.0 million and $9.9$9.5 million, respectively.

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In the future, we may be exposed to additional effects of interest rate changes primarily as a result of our line of credit or long-term mortgage debt which we use to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve this objective, we will borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate the interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

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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
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
As of March 31,June 30, 2010, 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 RuleRules 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 March 31,June 30, 2010 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, as amended, 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 March 31,June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION
Item 1.Legal Proceedings
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
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 section captioned “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, filed by us with the Securities and Exchange Commission on February 24, 2010.
Recent healthcare reform legislation may affect our revenue and financial condition.
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act of 2010 and our Quarterly Report on Form 10-Q for the three months ended March 30,31, 2010, filed by us with the President signed into law the Health CareSecurities and Education Reconciliation Act, which in part modified the Patient Protection and Affordable Care Act. Together, the two Acts serve as the primary vehicle for comprehensive health care reform in the United States. The Acts are intended to reduce the number of individuals in the United States without health insurance and effect significant other changes to the ways in which health care is organized, delivered and reimbursed. The complexities and ramifications of the new legislation are significant, and will be implemented in a phased approach beginning in 2010 and concluding in 2018. At this time, the effects of health care reform and its impactExchange Commission on our business, our revenues and financial condition and those of are tenants are not yet known. Accordingly, the reform could adversely affect the cost of providing healthcare coverage generally and the financial success of our tenants and consequently us.May 3, 2010.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.Defaults Upon Senior Securities
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4.Removed and Reserved
Item 4. Removed and Reserved
Item 5.Other Information
Item 5. Other Information
Not applicable.

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Item 6.Exhibits
Item 6. Exhibits
Exhibit Index
   
Exhibit Number Exhibit Description of Document
3.1 Articles of Amendment and Restatement to Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S -11S-11 (File No. 333-106024), filed June 11, 2003.2003
   
3.1.1 Articles of Amendment to Articles of Articles of Amendment and Restatement toof Articles of Incorporation, incorporated by reference to Exhibit 3.1.1 to the Quarterly Report on Form 10-Q, (File No. 001-33097), filed July 30, 2009.2009
   
3.1.2 Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, (File No. 001-33097), filed March 19, 2010.2010
   
3.2 Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003.2003
   
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, 2007.2007
   
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 12G (File No. 000-50363), filed January 19, 2006.2006
   
4.2Articles of Amendment to Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 99.1 of Form 8-K, filed on April 13, 2006
4.3 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 12B (File No. 000-50363), filed October 19, 2006.2006
   
4.34.4Amended and Restated Articles Supplementary Establishing and Fixing the Rights and Preferences of Senior Common Stock, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed June 10, 2010
4.5Form of Certificate for Common Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-11 (File No. 333-106024), filed August 8, 2003
4.6 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 12G (File No. 000-50363), filed January 19, 2006.2006
   
4.44.7 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 12B (File No. 000-50363), filed October 19, 2006.
4.5Articles Supplementary Establishing and Fixing the Rights and Preferences of Senior Common Stock, incorporated by reference to Exhibit 3.1 to the Form 8-K (File No. 001-33097), filed April 29, 2010.October 19, 2006
   
10.1 Amendment to First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 toof the Current Report on Form 8-K, (File No. 001-33097), filed April 29, 2010.2010

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Exhibit NumberExhibit Description
10.2 Gladstone Commercial Limited Partnership Schedule 4.2(a)(3) to First Amended and Restated Agreement of Limited Partnership:Partnership; Designation of Senior Common Units, incorporated by reference to Exhibit 10.2 toof the Form 8-K, (File No. 001-33097), filed April 29, 2010.2010
   
11 Computation of Per Share Earnings from Operations (included in the notes to the unaudited financial statements contained in this report).Report.
   
12 Statements re: computation of ratios (filed herewith).

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ExhibitDescription of Document
31.1 Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (filed herewith).
   
31 .231.2 Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (filed herewith).
   
32 .132.1 Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (furnished herewith).
   
32 .232.2 Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (furnished herewith).

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 Gladstone Commercial Corporation
 
 
Date: MayAugust 3, 2010 By:  ��/s/ Danielle Jones   
  Danielle Jones  
  Chief Financial Officer  
 

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