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, 2009

~~FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008~~


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

COMMISSION FILE NUMBER: 0-50363

GLADSTONE COMMERCIAL CORPORATION

(Exact name of registrant as specified in its charter)


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

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. Yes þ 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).

Yes o No o

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 filer o (Do not check if a smaller reporting company)		Smaller reporting companyo

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

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of ~~October 31, 2008~~May 1, 2009 was ~~8,565,264.~~8,563,264.

GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2009

TABLE OF CONTENTS


		PAGE

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007~~2008		3

	Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2008 and 2007~~		4
	March 31, 2009 and 2008

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2008 and 2007~~		5
	March 31, 2009 and 2008

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2220

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

Item 4.	Controls and Procedures		34

PART II OTHER INFORMATION

Item 1.	Legal ~~Proceeding~~Proceedings		35

Item 1A.	Risk Factors		35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3635

Item 3.	Defaults Upon Senior Securities		3635

Item 4.	Submission of Matters to a Vote of Security Holders		3635

Item 5.	Other Information		3635

Item 6.	Exhibits		36

SIGNATURES			3837

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


							March 31, 2009			December 31, 2008
	September 30, 2008			December 31, 2007
ASSETS
Real estate, net	$	367,715,344		$	324,761,772
Real estate, at cost							$	390,616,450		$	390,562,138
Less: accumulated depreciation								27,127,861			24,757,576

Total real estate, net								363,488,589			365,804,562

Lease intangibles, net		32,467,191			28,989,556			30,590,024			31,533,843
Mortgage notes receivable		10,000,000			10,000,000			10,000,000			10,000,000
Cash and cash equivalents		3,064,675			1,356,408			2,473,850			4,503,578
Restricted cash		2,637,531			1,914,067			3,780,463			2,677,561
Funds held in escrow		1,988,558			1,401,695			2,349,456			2,150,919
Deferred rent receivable		6,667,829			5,094,799			7,728,226			7,228,811
Deferred financing costs, net		4,752,282			4,405,129			4,061,813			4,383,446
Due from adviser (Refer to Note 2)								—			108,898
Prepaid expenses and other assets		989,645			979,263			524,385			707,167


TOTAL ASSETS	$	430,283,055		$	378,902,689		$	424,996,806		$	429,098,785


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Mortgage notes payable	$	255,425,225		$	202,120,471		$	254,520,292		$	255,111,173
Short-term loan and borrowings under line of credit		30,200,000			24,400,000			30,300,000			31,500,000
Deferred rent liability		3,343,863			3,933,035			2,951,081			3,147,472
Asset retirement obligation liability		2,155,341			1,811,752			2,225,559			2,190,192
Accounts payable and accrued expenses		514,222			778,949			1,528,245			2,673,787
Due to adviser (Refer to Note 2)		1,231,722			784,301			1,149,672			—
Obligation under capital lease		232,301			—			238,455			235,378
Rent received in advance, security deposits and funds held in escrow		3,600,768			2,706,113			4,727,667			3,745,523


Total Liabilities		296,703,442			236,534,621			297,640,971			298,603,525


STOCKHOLDERS’ EQUITY
Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding		2,150			2,150			2,150			2,150
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,565,264 shares issued and outstanding		8,565			8,565
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264 shares issued and outstanding								8,563			8,563
Additional paid in capital		170,640,979			170,640,979			170,622,581			170,622,581
Notes receivable — employees		(2,629,846	)		(2,769,923	)		(2,590,215	)		(2,595,886	)
Distributions in excess of accumulated earnings		(34,442,235	)		(25,513,703	)		(40,687,244	)		(37,542,148	)


Total Stockholders’ Equity		133,579,613			142,368,068			127,355,835			130,495,260


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	430,283,055		$	378,902,689		$	424,996,806		$	429,098,785

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended March 31,
	2008			2007			2008			2007			2009			2008
Operating revenues
Rental income	$	10,157,553		$	8,024,305		$	29,269,036		$	22,834,663		$	10,414,120		$	9,189,465
Interest income from mortgage notes receivable		216,446			255,555			673,548			758,333			187,500			238,297
Tenant recovery revenue		83,144			80,648			253,495			230,851			82,434			85,719

Total operating revenues		10,457,143			8,360,508			30,196,079			23,823,847			10,684,054			9,513,481


Operating expenses
Depreciation and amortization		3,262,903			2,668,383			9,435,690			7,722,349			3,314,100			2,987,760
Property operating expenses		225,020			204,972			670,442			597,273			237,156			239,483
Due diligence expense														9,547			2,085
Base management fee (Refer to Note 2)		404,108			459,202			1,255,833			1,412,337			372,648			431,868
Incentive fee (Refer to Note 2)		793,787			677,104			2,300,286			1,896,677			786,289			704,667
Administration fee (Refer to Note 2)		238,241			175,852			724,978			592,996			224,354			212,196
Professional fees		117,857			118,371			362,584			442,479			235,198			97,662
Insurance		43,354			53,943			126,947			171,275			48,678			41,797
Directors fees		54,702			66,250			161,202			174,750			49,702			54,250
Stockholder related expenses		42,232			40,991			271,430			215,969			83,647			126,423
Asset retirement obligation expense		35,157			29,440			98,394			86,542			35,367			30,468
General and administrative		105,999			17,452			139,151			79,119			11,487			14,631

Total operating expenses before credit from Adviser		5,323,360			4,511,960			15,546,937			13,391,766			5,408,173			4,943,290


Credit to incentive fee (Refer to Note 2)		(205,876	)		(526,991	)		(941,928	)		(1,746,564	)
Credit to incentive fee														(235,081	)		(562,355	)

Total operating expenses		5,117,484			3,984,969			14,605,009			11,645,202			5,173,092			4,380,935


Other income (expense)
Interest income from temporary investments		4,559			33,105			20,796			325,390			17,281			9,548
Interest income — employee loans		49,624			52,728			152,620			169,608			48,886			52,144
Other income		7,500			9,896			56,493			28,127			—			9,296
Interest expense		(4,258,461	)		(2,920,270	)		(12,008,316	)		(8,137,343	)		(4,487,560	)		(3,753,604	)

Total other expense		(4,196,778	)		(2,824,541	)		(11,778,407	)		(7,614,218	)		(4,421,393	)		(3,682,616	)


Income from continuing operations		1,142,881			1,550,998			3,812,663			4,564,427			1,089,569			1,449,930


Discontinued operations
(Loss) income from discontinued operations		(1,322	)		5,975			(34,956	)		471
Net realized income from foreign currency transactions		—			33,487			—			33,550
Taxes refunded on sale of real estate		—			—			—			78,667
Loss from discontinued operations														—			(33,228	)

Total discontinued operations		(1,322	)		39,462			(34,956	)		112,688			—			(33,228	)


Net income		1,141,559			1,590,460			3,777,707			4,677,115			1,089,569			1,416,702


Dividends attributable to preferred stock		(1,023,437	)		(1,023,438	)		(3,070,312	)		(3,070,312	)
Distributions attributable to preferred stock														(1,023,437	)		(1,023,437	)


Net income available to common stockholders	$	118,122		$	567,022		$	707,395		$	1,606,803		$	66,132		$	393,265


Earnings per weighted average common share — basic & diluted
Income from continuing operations (net of dividends attributable to preferred stock)	$	0.01		$	0.07		$	0.08		$	0.18
Income from continuing operations (net of distributions attributable to preferred stock)													$	0.01		$	0.05
Discontinued operations		0.00			0.00			0.00			0.01			0.00			0.00


Net income available to common stockholders	$	0.01		$	0.07		$	0.08		$	0.19		$	0.01		$	0.05


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

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


							For the three months ended March 31,
	For the nine months ended September 30,						2009			2008
	2008			2007
Cash flows from operating activities:
Net income	$	3,777,707		$	4,677,115		$	1,089,569		$	1,416,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,435,690			7,722,349			3,314,100			2,987,760
Amortization of deferred financing costs		806,075			509,990			375,194			249,323
Amortization of deferred rent asset and liability, net		(399,049	)		(399,051	)
Amortization of deferred rent asset and liability								(133,017	)		(133,017	)
Accretion of obligation under capital lease		7,234			—			3,077			—
Asset retirement obligation expense		98,394			86,542			35,367			30,468
Decrease (increase) in prepaid expenses		(110,382	)		28,815
Increase in prepaid expenses and other assets								(17,218	)		(76,011	)
Increase in deferred rent receivable		(1,763,153	)		(1,247,345	)		(562,789	)		(543,943	)
Increase in accounts payable, accrued expenses, and amount due adviser		182,694			516,996
Increase in rent received in advance		171,191			137,534
Increase (decrease) in accounts payable, accrued expenses, and amount due adviser								113,028			(81,710	)
(Decrease) increase in rent received in advance								(120,758	)		101,518

Net cash provided by operating activities		12,206,401			12,032,945			4,096,553			3,951,090


Cash flows from investing activities:
Real estate investments		(48,935,032	)		(85,742,539	)		(54,308	)		(33,167,003	)
Increase in funds held in escrow related to acquisition								—			(762,123	)
Receipts from lenders for reserves held in escrow		630,033			1,007,684			272,818			215,325
Payments to lenders for reserves held in escrow		(1,216,896	)		(1,010,385	)		(471,355	)		(352,180	)
Increase in restricted cash		(723,464	)		(275,696	)		(1,102,902	)		(494,998	)
Deposits on future acquisitions		(1,650,000	)		(1,310,000	)		—			(1,300,000	)
Deposits applied against real estate investments		1,750,000			1,610,000
Deposits refunded or applied against real estate investments								200,000			1,400,000

Net cash used in investing activities		(50,145,359	)		(85,720,936	)		(1,155,747	)		(34,460,979	)


Cash flows from financing activities:
Borrowings under mortgage notes payable		48,015,000			32,521,691
Principal repayments on mortgage notes payable		(1,171,849	)		(599,328	)		(590,881	)		(384,421	)
Principal repayments on employee notes receivable from sale of common stock		140,077			400,598
Principal repayments on employee notes receivable								5,671			132
Borrowings from line of credit		62,600,000			24,200,000			28,000,000			36,150,000
Repayments on line of credit		(56,800,000	)		(4,200,000	)		(9,200,000	)		(1,500,000	)
Receipts from tenants from reserves		1,746,804			1,446,577
Repayment of short-term loan								(20,000,000	)		—
Receipts from tenants for reserves								1,471,309			573,189
Payments to tenants from reserves		(1,555,146	)		(1,311,406	)		(378,940	)		(435,102	)
Increase in security deposits		531,806			140,525			10,533			356,910
Payments for deferred financing costs		(1,153,228	)		(770,761	)		(53,561	)		(35,934	)
Dividends paid for common and preferred		(12,706,239	)		(12,320,797	)
Distributions paid for common and preferred								(4,234,665	)		(4,235,409	)

Net cash provided by financing activities		39,647,225			39,507,099
Net cash (used in) provided by financing activities								(4,970,534	)		30,489,365


Net increase (decrease) in cash and cash equivalents		1,708,267			(34,180,892	)
Net decrease in cash and cash equivalents								(2,029,728	)		(20,524	)

Cash and cash equivalents, beginning of period		1,356,408			36,005,686			4,503,578			1,356,408


Cash and cash equivalents, end of period	$	3,064,675		$	1,824,794		$	2,473,850		$	1,335,884


NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION

Additions to real estate included in accounts payable, accrued expenses, and amount due adviser	$	—		$	409,000

NON-CASH INVESTING ACTIVITIES

Increase in asset retirement obligation	$	245,195		$	150,523		$	—		$	259,435


Fixed rate debt assumed in connection with acquisitions	$	6,461,603		$	4,506,689

GLADSTONE COMMERCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Significant Accounting Policies

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

Subsidiaries

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

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

Gladstone Lending, LLC, a Delaware limited liability company (“Gladstone 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 Lending, the financial position and results of operations of Gladstone Lending are consolidated with those of the Company.

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

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

Interim ~~financial information~~Financial Information

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

Investments in ~~real estate~~Real Estate

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

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

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

The Company allocates purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, building, and tenant improvements based on management’s determination of the relative fair values of these assets. Real estate depreciation expense on these tangible assets was approximately $2.3 million and ~~$6.7~~$2.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~respectively, and approximately $1.8 million and $5.2 million for the three and nine months ended September 30, 2007,~~ 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 ~~$63,374 and $190,123~~approximately $63,000 for both the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 and ~~2007, respectively.~~2008. The capitalized below-market lease values, included in the accompanying 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 ~~$196,391 and $589,173~~approximately $196,000 for both the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 and ~~2007, respectively.~~2008.

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

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which generally range from 10 to 15 years. The value of customer relationship intangibles, which is the benefit to the Company resulting from the likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining term and any anticipated renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the above-market and below-market lease values, in-place lease values, unamortized lease origination costs and customer relationship intangibles will be charged to expense. Total amortization expense related to these intangible assets was approximately $0.9 million ~~and $2.8 million~~ for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~respectively, and approximately $0.8 million and $2.5 million for the three and nine months ended September 30, 2007,~~ respectively.

Impairment

Investments in Real Estate

The Company accounts for the impairment of real estate in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that the Company 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, 2009. In performing the analysis, the Company considered such factors as the tenants’ payment history and financial condition, the likelihood of lease renewal, business conditions in the industry in which the tenants operate and whether the carrying value of the real estate has decreased. The Company concluded that none of its properties were impaired, and will continue to monitor its portfolio for any indicators that may change this conclusion.

Provision for Loan Losses

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

Restricted ~~cash~~Cash

Restricted cash consists of security deposits and funds held in escrow for certain tenants. The funds held in escrow are for capital improvements, taxes, insurance and other replacement reserves for certain of our tenants. These funds will be released to the tenants upon completion of agreed upon tasks as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the Company.

Funds ~~held~~Held in ~~escrow~~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 consist of replacement reserves for capital improvements, repairs and maintenance, insurance and taxes. 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~~Financing Costs

Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees, and administrative fees. The costs are deferred and amortized using the straight-line method, which approximates the effective interest method over the term of the financing secured. The Company made payments of ~~$1,096,766~~approximately $54,000 and ~~$1,153,228~~$36,000 for deferred financing costs during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~respectively, and $82,736 and $770,761 for the three and nine months ended September 30, 2007,~~ respectively. Total amortization expense related to deferred financing costs was ~~$300,318~~approximately $375,000 and ~~$806,075~~$249,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, respectively, and $176,817 and $509,990 for the three and nine months ended September 30, 2007, respectively. Accumulated amortization was $2,990,567 and $2,184,492 as of September 30, 2008 and December 31, 2007, respectively.

Prepaid ~~expenses~~Expenses and ~~other assets~~Other Assets

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

Obligation ~~under capital lease~~Under Capital Lease

In conjunction with the Company’s acquisition of a building in Fridley, Minnesota onin February ~~26,~~ 2008, ~~it was assigned~~the Company acquired a ground lease on the parking lot of the building, ~~at the time of closing,~~ which had a purchase obligation to acquire the land under the ground lease at the end of the term in April ~~1, 2014.~~2014 for $300,000. In accordance with SFAS No. 13 “Accounting for Leases,” the Company accounted for the ground lease as a capital lease and recorded the corresponding present value of the obligation under the capital lease. The Company recorded total interest expense related to the accretion of the capital lease obligation of $3,077 for the three months ended March 31, 2009. There was no expense recorded related to the accretion of the capital lease obligation during the three months ended March 31, 2008.

Revenue ~~recognition~~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. ~~Certain~~Most of the Company’s leases ~~currently~~ contain rental increases at specified intervals. We recognize such revenues on a straight-line basis by averaging the ~~non-cancelable~~non-

cancelable rental revenues over the lease terms. Deferred rent receivable in the accompanying balance sheet includes the cumulative difference between rental revenue as recorded on a straight line basis and rents received from the tenants in accordance with the lease terms, along with the capitalized above-market lease values of certain acquired properties. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews deferred rent receivable, as it relates to straight line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectibility of deferred rent with respect to any given tenant is in doubt, the Company records an ~~increase in the~~ allowance for uncollectible accounts or records a direct write-off of the specific rent receivable, which would have an adverse effect on the net income for the year in which the reserve is increased or the direct write-off is recorded and would decrease total assets and stockholders’ equity.receivable. No such reserves have been recorded as of ~~September 30, 2008.~~March 31, 2009.

Management considers its loans and other lending investments to be held-for-investment. The Company reflects ~~held-for-investment~~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.

~~Certain~~Some of the Company’s mortgage loans and leases have embedded derivatives in the form of interest rate floors and ceilings. These embedded derivatives do not require separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Income ~~taxes~~Taxes

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

Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though Commercial Advisers has had no activity to date, the Company would account for any future income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, 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~~Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” 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.

~~Foreign currency transactions~~

The Company purchased two properties in Canada in October 2004. These properties were classified as held for sale as of June 30, 2006, and were sold in July 2006. All gains and losses from foreign currency transactions are reflected in discontinued operations in the Company’s consolidated financial statements. The Company had a bank account in Canada, which was closed in December 2007. The cash account was re-valued at each balance sheet date to reflect the then current exchange rate. The gains or losses from the valuation of the cash were recorded on the income statement as a realized gain or loss. Realized foreign currency gains of $33,487 and $33,550 were recorded for the three and nine months ended September 30, 2007, respectively. There were no realized foreign currency gains or losses recorded for the three and nine months ended September 30, 2008 since the account was closed in December 2007.

Asset ~~retirement obligations~~Retirement Obligations

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term “Conditional Asset Retirement Obligation” refers to a legal obligation (pursuant to existing laws or by contract) to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company has accrued a liability and corresponding increase to the cost of the related properties for disposal related to all properties constructed prior to 1985 that have, or may have, asbestos present in the building. The Company accrued a liability during the ~~nine~~three months ended ~~September 30,~~March 31, 2008 of ~~$245,195~~$259,435 related to properties acquired during the ~~period.~~period, which reflected the present value of the future obligation. There was no liability accrued during the three months ended March 31, 2009. The Company also recorded expense of ~~$35,157~~$35,367 and ~~$98,394 for~~$30,468 during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~respectively, and $29,440 and $86,542 for the three and nine months ended September 30, 2007,~~ respectively, related to the cumulative accretion of the obligation.

Real ~~estate held~~Estate Held for ~~sale~~Sale and ~~discontinued operations~~Discontinued Operations

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

Recently Issued Accounting Pronouncements

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

In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3). FSP No. 157-3 clarifies the application of SFAS 157 ~~because~~in a market that is not active. More specifically, FSP No. 157-3 states that significant judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of the issuance of FSP SFAS 157-2 (the “FSP”), which allows companies to delay the effective date of SFAS 157 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in an orderly transaction. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 provides guidance on the level of reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer. The guidance in FSP No. 157-3 is effective upon issuance for all financial statements onthat have not been issued and any changes in valuation techniques as a ~~recurring basis.~~result of applying FSP No. 157-3 are accounted for as a change in accounting estimate. The ~~partial~~Company adopted this pronouncement during the quarter ended December 31, 2008, and the adoption had no material impact on the Company’s results of operations.

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

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 effective for the fiscal year beginning January 1, 2008, and the adoption had no impact on the Company’s results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“ SFAS ~~No.~~ 141(R)”), which ~~replaces~~replaced SFAS No. 141, “Business Combinations” (“SFAS ~~141R”~~141”). SFAS ~~141R~~141 (R) significantly ~~changes~~changed the accounting for acquisitions involving business combinations, as it requires that the assets and liabilities of all business combinations be recorded at fair value, with limited exceptions. SFAS ~~141R~~141(R) 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 under SFAS ~~No.~~ 141. SFAS ~~141R~~141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. ~~If SFAS 141R had been in effect as of~~The Company adopted this pronouncement effective for the fiscal year beginning January 1, ~~2008,~~2009, and the ~~Company would~~adoption could have expensed approximately $0.73 million of transaction costs related to the six acquisitions completed during the nine months ended September 30, 2008, or approximately 1.4% of the total purchase price of the acquired properties, which would have resulted in a ~~decrease in funds from operations (“FFO”) of approximately 7.2%. The~~significant impact on ~~the Company’s~~its results of operations ~~could differ significantly when~~because of the requirement to expense costs associated with acquisitions rather than capitalize the costs as has been done in the past. There was no significant impact from the adoption of this pronouncement ~~is adopted on January 1, 2009.~~during the quarter ending March 31, 2009, because there was limited activity during the quarter related to potential acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company ~~does not believe~~adopted this pronouncement, and the adoption ~~of this pronouncement will have a~~had no material impact on its results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), which is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this pronouncement during the quarter ended December 31, 2008, and the adoption had no material impact on the Company’s results of operations.

In April 2008, the FASB issued ~~FASB Staff Position~~FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP ~~SFAS~~No. 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ~~FASB Statement~~SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). FSP ~~SFAS~~No. 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS ~~141R.~~141(R). FSP ~~SFAS~~ No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years, and must be applied prospectively to intangible assets acquired after the effective date. The Company ~~is currently evaluating~~adopted this pronouncement effective for the ~~impact~~fiscal year beginning January 1, 2009, and the adoption ~~of the pronouncement will have~~had no material impact on its results of operations.

2. Management Advisory Fee

The Company ~~has been~~is externally managed pursuant to a contractual investment advisory arrangement with its Adviser, under which its Adviser ~~has directly employed~~employs all of the Company’s personnel and ~~paid~~pays its payroll, benefits, and general expenses directly. The ~~Company’s initial investment advisory agreement with its Adviser was in place from August 12, 2003 through December 31, 2006 (the “Initial Advisory Agreement”). On January 1, 2007, the~~ Company ~~entered into~~has an ~~amended and restated investment~~ advisory agreement with its Adviser (the ~~“Amended Advisory~~“Advisory Agreement”) and an administration agreement (the “Administration Agreement”) with a wholly-owned subsidiary of the Adviser, Gladstone Administration, LLC (the “Administrator”). The management services and fees ~~in effect~~ under the ~~Amended~~ Advisory and Administration Agreements are described below.

~~Amended~~ Advisory Agreement

The ~~Amended~~ Advisory Agreement provides for an annual base management fee equal to 2% of the Company’s total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on ~~FFO.~~funds from operations (“FFO”). For both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, the Company recorded a base management fee of ~~$404,108 and $1,255,833, respectively, and for the three and nine months ended September 30, 2007, the Company recorded a base management fee of $459,202 and $1,412,337, respectively.~~approximately $0.4 million. For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any ~~dividends~~distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee rewards the Adviser if the Company’s quarterly FFO, before giving effect to any incentive fee (“pre-incentive fee FFO”), exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. The Adviser receives 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of the Company’s pre-incentive fee FFO. The Adviser also receives an incentive fee of 20% of the amount of the Company’s pre-incentive fee FFO that exceeds 2.1875%.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, the Company recorded an incentive fee of ~~$793,787~~approximately $0.8 million and ~~$2,300,286, respectively,~~$0.7 million offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of ~~$205,876~~approximately $0.2 million and ~~$941,928, respectively,~~$0.6 million, for a net incentive fee for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 of ~~$587,911~~approximately $0.6 million and ~~$1,358,358,~~$0.1 million, respectively. For the three and nine months ended September 30, 2007, the Company recorded an incentive fee of $677,104 and $1,896,677, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of $526,991 and $1,746,564, respectively, for a net incentive fee for the three and nine months ended September 30, 2007 of $150,113. The board of directors of the Company accepted the Adviser’s offer to ~~unconditionally, irrevocably and voluntarily~~ waive a portion of the incentive fee for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ in order to ~~maintain~~support the current level of distributions to the Company’s stockholders.

Administration Agreement

Under the Administration Agreement, the Company pays separately for its allocable portion of the Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of the Administrator, and its allocable portion of the salaries and benefits expenses of its chief financial officer, chief compliance officer, ~~controller,~~ treasurer and their respective staffs. The Company’s allocable portion of expenses is derived by multiplying the Administrator’s total allocable expenses by the percentage of the Company’s ~~average total assets (the~~ total assets at the beginning ~~and end~~ of each ~~quarter)~~quarter in comparison to the ~~average~~ total assets of all companies managed by the Adviser under similar agreements. For both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, the Company recorded an administration fee of ~~$238,241 and $724,978, respectively, and for the three and nine months ended September 30, 2007, the Company recorded an administration fee of $175,852 and $592,996, respectively.~~approximately $0.2 million.


~~(4)~~		On April 30, 2008, the Company acquired a 74,950 square foot industrial building in Pineville, North Carolina for approximately $3.9 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has three options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.43 million.

~~(5)~~		On August 29, 2008, the Company acquired a 223,458 square foot industrial building in Marietta, Ohio for approximately $8.1 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has two options to extend the lease for additional periods of ten years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.90 million.

~~(6)~~		On August 29, 2008, the Company acquired a 67,200 square foot office building in Chalfont, Pennsylvania for approximately $8.4 million, including transaction costs, which was funded by a combination of cash on hand, and the assumption of approximately $6.5 million of financing on the property. At closing, the Company was assigned the previously existing triple net lease with the sole tenant, which had a remaining term of approximately 7 years. The tenant has two options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.76 million.

~~In accordance with SFAS No. 141, “Business Combinations,” the Company allocated the purchase price of the properties acquired during the nine months ended September 30, 2008 as follows:~~

Tenant Customer Total Purchase
Land Building Improvements In-place Leases Leasing Costs Relationships Obligations Price
Reading, Pennsylvania $ 490,646 $ 6,188,168 $ 14,208 $ 362,479 $ 1,786 $ 141,232 $ — $ 7,198,519
Fridley, Minnesota 1,354,233 7,454,098 619,428 452,414 171,005 807,950 (225,067 ) 10,634,061
Concord Township, Ohio 1,796,467 10,254,003 900,120 1,702,792 5,102 917,661 (245,198 ) 15,330,947
Pineville, North Carolina 669,025 2,930,295 98,025 151,426 2,218 93,080 — 3,944,069
Marietta, Ohio 829,014 6,537,796 69,469 479,124 3,268 179,014 — 8,097,685
Chalfont, Pennsylvania 1,249,415 6,105,819 316,519 172,278 189,326 397,841 — 8,431,198

$ 6,388,800 $ 39,470,179 $ 2,017,769 $ 3,320,513 $ 372,705 $ 2,536,778 $ (470,265 ) $ 53,636,479

~~Intangible Assets~~

~~The weighted average amortization period for the intangible assets acquired during the nine months ended September 30, 2008, were as follows:~~


~~Intangible assets~~	~~Years~~
~~In-place leases~~		~~16.8~~
~~Leasing costs~~		~~18.2~~
~~Customer relationships~~		~~22.7~~
~~All intangible assets~~		~~16.7~~

~~There were no allocations to above or below market lease intangibles for the six acquisitions during the nine months ended September 30, 2008.~~

The Company classified its two Canadian properties as discontinued operations, in accordance with the provisions of SFAS 144. The table below summarizes the components of income (loss) from discontinued operations:

For the three months ended September 30, For the nine months ended September 30,
2008 2007 2008 2007
Operating (expense) income $ (1,322 ) $ 5,975 $ (34,956 ) $ 471

Net realized income from foreign currency transactions — 33,487 — 33,550

Taxes refunded on sale of real estate — — — 78,667

(Loss) income from discontinued operations $ (1,322 ) $ 39,462 $ (34,956 ) $ 112,688

entities.

6. Mortgage Note Receivable

On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million, collateralized by an office building in McLean, Virginia, where the Company’s Adviser and Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the greater of 7.5% per year or the one month London Interbank Offered Rate (“LIBOR”) rate plus 6.0% per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of the term, with payments of principal commencing after the initial period. The balance of the principal and all interest remaining is due at the end of the 12 year term. At ~~September 30, 2008,~~March 31, 2009, the interest rate was ~~8.5%~~7.5%.

The fair market value of the mortgage note receivable as of March 31, 2009 was approximately $9.7 million, as compared to the carrying value stated above of approximately $10.0 million. The fair market value is calculated based on a discounted cash flow analysis, using an interest rate based on management’s estimate of the interest rate on a mortgage note receivable with comparable terms.

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

The Company’s mortgage notes payable, line of credit and short-term loan as of ~~September 30, 2008~~March 31, 2009 and December 31, ~~2007~~2008 are summarized below:


														Date of Issuance/		Principal Maturity			Stated Interest Rate at			Principal Balance Outstanding
	Date of Issuance/		Principal Maturity			Stated Interest Rate at			Principal Balance Outstanding					Assumption		Date			March 31, 2009⁽¹⁾			March 31, 2009		December 31, 2008
	Assumption		Date			September 30, 2008⁽¹⁾			September 30, 2008		December 31, 2007
Fixed-Rate Mortgage Notes Payable:

															03/16/05		04/01/30			6.33	%	$	2,932,536	$	2,948,753
		3/16/2005		4/1/2030			6.33	%	$	2,958,913	$	3,003,582			08/25/05		09/01/15			5.33	%		21,320,841		21,399,644
		8/25/2005		9/1/2015			5.33	%		21,448,474		21,664,476			09/12/05		09/01/15			5.21	%		12,516,513		12,560,673
		9/12/2005		9/1/2015			5.21	%		12,588,000		12,588,000			12/21/05		12/08/15			5.71	%		19,176,398		19,241,117
		12/21/2005		12/8/2015			5.71	%		19,280,744		19,456,000			02/21/06		12/01/13			5.91	%		9,304,677		9,344,908
		2/21/2006		12/1/2013			5.91	%		9,369,889		9,480,063			02/21/06		06/30/14			5.20	%		19,381,908		19,472,740
		2/21/2006		6/30/2014			5.20	%		19,529,866		19,782,270			03/29/06		04/01/16			5.92	%		17,000,000		17,000,000
		3/29/2006		4/1/2016			5.92	%		17,000,000		17,000,000			04/27/06		05/05/16			6.58	%		14,212,167		14,281,616
		4/27/2006		5/5/2016			6.58	%		14,324,718		14,514,214			11/22/06		12/01/16			5.76	%		14,264,091		14,309,000
		11/22/2006		12/1/2016			5.76	%		14,309,000		14,309,000			12/22/06		01/01/17			5.79	%		21,797,129		21,846,000
		12/22/2006		1/1/2017			5.79	%		21,846,000		21,846,000			02/08/07		03/01/17			6.00	%		13,775,000		13,775,000
		2/8/2007		3/1/2017			6.00	%		13,775,000		13,775,000			06/05/07		06/08/17			6.11	%		14,240,000		14,240,000
		6/5/2007		6/8/2017			6.11	%		14,240,000		14,240,000			09/06/07		12/11/15			5.81	%		4,409,558		4,426,393
		9/6/2007		12/11/2015			5.81	%		4,442,289		4,487,205			10/15/07		11/08/17			6.63	%		15,783,269		15,828,612
		10/15/2007		11/8/2017			6.63	%		15,855,560		15,974,661			08/29/08		06/01/16			6.80	%		6,391,205		6,421,717
		8/29/2008		6/1/2016			6.80	%		6,441,772		—			09/15/08		10/01/10	⁽²⁾		6.85	%		48,015,000		48,015,000
		9/15/2008		10/1/2010			6.85	%		48,015,000		—

Total Fixed-Rate Mortgage Notes Payable:										255,425,225		202,120,471											254,520,292		255,111,173


Variable-Rate Line of Credit:		12/29/2006		12/29/2009	⁽²⁾	LIBOR + 1.9		%		10,200,000		4,400,000			12/29/06		12/29/09	⁽³⁾	LIBOR + 1.9%				30,300,000		11,500,000


Variable-Rate Short-Term Loan:		12/21/2007		12/21/2008	⁽³⁾	LIBOR + 2.75		%		20,000,000		20,000,000			12/21/07		06/20/09	⁽⁴⁾	LIBOR + 2.75%				—		20,000,000



Total Mortgage Notes Payable, Line of Credit and Short-Term Loan									$	285,625,225	$	226,520,471	Total Mortgage Notes Payable, Line of Credit and Short-Term Loan									$	284,820,292	$	286,611,173

Mortgage Notes Payable

As of ~~September 30, 2008~~March 31, 2009, the Company had 16 fixed-rate mortgage notes payable, collateralized by a total of 55 properties. The obligor under each of these notes is a wholly-owned separate borrowing entity, which owns 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 also indemnifies lenders against 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 ~~September 30, 2008~~March 31, 2009 was approximately 6.0%.

The fair market value of all fixed-rate mortgage notes payable outstanding as of ~~September 30, 2008~~March 31, 2009 was approximately ~~$231.4~~$213.6 million, as compared to the carrying value stated above of approximately ~~$255.4~~$254.5 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.

Line of Credit

~~On December 29, 2006, the~~The Company ~~entered into~~has a ~~$75~~$95 million senior revolving credit agreement with a syndicate of banks led by KeyBank National Association (“KeyBank”), which matures on December 29, ~~2009~~2009. As long as the Company is in compliance with ~~an option to extend for an additional year. The Company subsequently increased the availability~~its covenants under the line of credit, the Company has the option to ~~$95 million in November 2007.~~extend the line of credit for an additional year, and currently intends to exercise this option. The Company must notify KeyBank of its intention to exercise the renewal option 45 days prior to the maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of notification. The interest rate charged on the advances under the facility is based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. The Company’s ability to access this funding source is subject to the Company continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires the Company to limit its distributions to stockholders to 95% of its ~~FFO, beginning with the quarter ended December 31, 2007.~~FFO. In addition, the maximum amount the Company may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. AsKeyBank has the option to obtain updated appraisals for the properties pledged to the line of credit as borrowing base collateral if they believe there has been a material adverse change to the value of any of the pledged properties. If the aggregate value of the updated appraisals is lower than the current aggregate value of appraisals, it would lower the amount of the Company’s borrowing base and reduce the amount the Company ~~arranges for~~could borrow under its line of credit with that borrowing base. The Company does not believe that if updated appraisals were obtained on its pledged properties that any change in the value of the properties would be significant enough to trigger a scenario whereby the Company would have to repay amounts currently outstanding under its line of credit.

If and when long-term mortgages are arranged for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the removed property. Conversely, as the Company purchases new properties meeting the eligibility standards, the Company may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit may also be reduced by letters of credit used in the ordinary course of business. The Company anticipates that certain of its letters of credit will be returned during 2009, thus further increasing its availability. The Company may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of ~~September 30, 2008,~~March 31, 2009, there was approximately ~~$10.2~~$30.3 million outstanding under the line of credit at an interest rate of approximately ~~5.7%~~2.5%, and approximately ~~$5.1~~$3.3 million outstanding ~~under~~pursuant to letters of credit at a weighted average interest rate of approximately 2.0%. At ~~September 30, 2008,~~March 31, 2009, the remaining borrowing capacity available under the line of credit was ~~$79.7 million, and the~~approximately $18.6 million. The Company was in compliance with all covenants under the line of ~~credit.~~credit as of March 31, 2009.

Short-Term Loan

On December 21, 2007, the Company entered into a ~~$20~~$20.0 million unsecured ~~term~~short-term loan with KeyBank, which ~~matures~~matured on December 21, ~~2008 with an option to extend for an additional six months.~~2008. The Company ~~can exercise the~~exercised its option to extend the term ~~as long as it is~~for an additional six months, which resulted in ~~compliance with all covenants under the loan at the time it exercises its option.~~a new maturity date of June 20, 2009. The interest rate charged on the loan iswas based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and ~~adjusts~~adjusted periodically. The Company’s ability to maintain this funding source is subject to it continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requiresOn March 31, 2009, the Company ~~to limit distributions to its stockholders to 95% of its FFO beginning with~~repaid in full the ~~quarter ended December 31, 2007. As of September 30, 2008, the interest rate on the~~unsecured short-term loan, ~~was approximately 5.2%, and the Company was in compliance with all covenants~~using proceeds from borrowings under ~~the short-term loan.~~its line of credit.

8. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity for the ~~nine~~three months ended ~~September 30, 2008:~~March 31, 2009:

Notes Distributions in
Capital in Receivable Excess of Total
Common Preferred Excess of From Sale of Accumulated Stockholders’
Stock Stock Par Value Common Stock Earnings Equity
Balance at December 31, 2007 $ 8,565 $ 2,150 $ 170,640,979 $ (2,769,923 ) $ (25,513,703 ) $ 142,368,068

Repayment of Principal on Notes Receivable — — — 140,077 — 140,077

Distributions Declared to Common and Preferred Stockholders — — — — (12,706,239 ) (12,706,239 )

Net income — — — — 3,777,707 3,777,707

Balance at September 30, 2008 $ 8,565 $ 2,150 $ 170,640,979 $ (2,629,846 ) $ (34,442,235 ) $ 133,579,613


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


Repayment of principal on notes receivable — employees		—		—		—		5,671			—			5,671

Distributions declared to common and preferred stockholders		—		—		—		—			(4,234,665	)		(4,234,665	)

Net income		—		—		—		—			1,089,569			1,089,569


Balance at March 31, 2009	$	8,563	$	2,150	$	170,622,581	$	(2,590,215	)	$	(40,687,244	)	$	127,355,835

~~Dividends~~Distributions paid per common share for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 were ~~$0.375 and $1.125 per share, respectively, and for the three and nine months ended September 30, 2007 were $0.36 and $1.08, respectively. Dividends~~$0.375. Distributions paid per share of Series A Preferred Stock for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ were approximately $0.48 ~~and $1.45~~ per ~~share, respectively. Dividends~~share. Distributions paid per share of Series B Preferred Stock for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ were approximately $0.47 ~~and $1.41~~ per ~~share, respectively.~~share.

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


							Outstanding												Outstanding
	Number of		Strike Price of		Amount of		Balance of						Number of		Strike Price of		Amount of		Balance
	Options		Options		Promissory Note		Employee Loans			Interest Rate			Options		Options		Promissory Note		of Employee Loans			Interest Rate
Date Issued	Exercised		Exercised		Issued to Employees		at 9/30/08		Term of Note	on Note			Exercised		Exercised		Issued to Employees		at 3/31/09		Term of Note	on Note
														��
Sep-04		25,000	$	15.00	$	375,000	$	366,348	9 years		5.00	%		25,000	$	15.00	$	375,000	$	360,501	9 years		5.00	%
Apr-06		12,422		16.10		199,994		199,994	9 years		7.77	%		12,422		16.10		199,994		199,994	9 years		7.77	%
May-06		50,000		16.85		842,500		842,500	10 years		7.87	%
May-06		15,000		16.10		241,500		241,500	10 years		7.87	%		50,000		16.85		842,500		842,500	10 years		7.87	%
May-06		2,500		16.01		40,000		38,544	10 years		7.87	%		15,000		16.10		241,500		241,500	10 years		7.87	%
May-06		2,000		16.10		32,200		32,200	10 years		7.87	%		2,500		16.01		40,000		38,120	10 years		7.87	%
May-06		2,000		16.10		32,200		32,200	10 years		7.87	%		2,000		16.10		32,200		32,200	10 years		7.87	%
May-06		2,000		16.68		33,360		33,360	10 years		7.87	%		2,000		16.10		32,200		32,200	10 years		7.87	%
May-06		2,000		15.00		30,000		30,000	10 years		7.87	%		2,000		15.00		30,000		30,000	10 years		7.87	%
Oct-06		12,000		16.10		193,200		193,200	9 years		8.17	%		12,000		16.10		193,200		193,200	9 years		8.17	%
Nov-06		25,000		15.00		375,000		245,000	9 years		8.15	%		25,000		15.00		375,000		375,000	9 years		8.15	%
Dec-06		25,000		15.00		375,000		375,000	10 years		8.12	%		25,000		15.00		375,000		245,000	10 years		8.12	%


		174,922			$	2,769,954	$	2,629,846						172,922			$	2,736,594	$	2,590,215

~~In accordance with the note agreements with each employee, they are required to remit interest payments to the Company on their outstanding loan balance quarterly in arrears.~~

In accordance with Emerging Issues Task Force No. 85-1, “Classifying Notes Received for ~~Sale of~~Capital Stock,” 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 loans to employees and are included in the equity section of the accompanying consolidated balance sheets.

9. Segment Information

As of ~~September 30, 2008,~~March 31, 2009, the Company’s operations were 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 extends mortgage loans and collects principal and interest payments. The amounts included under the 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.

The following table summarizes the Company’s consolidated operating results and total assets by segment as of and for the three ~~and nine~~ months ended ~~September 30, 2008~~March 31, 2009 and ~~2007:~~2008:


	As of and for the three months ended September 30, 2008											As of and for the nine months ended September 30, 2008											As of and for the three months ended March 31, 2009
	Real Estate			Real Estate								Real Estate			Real Estate								Real Estate			Real Estate
	Leasing			Lending		Other			Total			Leasing			Lending		Other			Total			Leasing			Lending		Other			Total
Operating revenues	$	10,240,697		$	216,446	$	—		$	10,457,143		$	29,522,531		$	673,548	$	—		$	30,196,079		$	10,496,554		$	187,500	$	—		$	10,684,054
Operating expenses		(3,523,080	)		—		(1,594,404	)		(5,117,484	)		(10,204,526	)		—		(4,400,483	)		(14,605,009	)		(3,596,170	)		—		(1,576,922	)		(5,173,092	)
Other expense		(3,183,823	)		—		(1,012,955	)		(4,196,778	)		(9,128,081	)		—		(2,650,326	)		(11,778,407	)		(4,082,638	)		—		(338,755	)⁽¹⁾		(4,421,393	)
Discontinued operations		(1,322	)		—		—			(1,322	)		(34,956	)		—		—			(34,956	)

Net income	$	3,532,472		$	216,446	$	(2,607,359	)	$	1,141,559		$	10,154,968		$	673,548	$	(7,050,809	)	$	3,777,707		$	2,817,746		$	187,500	$	(1,915,677	)	$	1,089,569



Total Assets	$	409,461,178		$	10,070,714	$	10,751,163		$	430,283,055		$	409,461,178		$	10,070,714	$	10,751,163		$	430,283,055		$	404,272,994		$	10,064,583	$	10,659,229		$	424,996,806

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

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

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial and commercial real property and selectively making long-term industrial and commercial mortgage loans. Most of the portfolio of real estate we currently own is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which are corporations that do not have publicly rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having triple net leases with terms of approximately 10 to 15 years and built in rental increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We are actively communicating with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. At March 31, 2009, we owned 65 properties totaling approximately 6.3 million square feet, and had one mortgage loan outstanding. The total gross investment in these acquisitions, including the $10.0 million mortgage loan investment, was approximately $443.4 million at March 31, 2009.

Business Environment

~~Conditions~~The United States entered into a recession in December 2007, and, as a result, conditions within the ~~U.S.~~global credit markets ~~in general~~ and the U.S. real estate credit markets in particular continue to experience ~~historical~~historic levels of dislocation and ~~stress that began~~stress. The economic downturn and the disruptions in the ~~summer~~capital markets have increased the cost of, ~~2007. These~~and decreased our ability to obtain, new debt and equity capital. The longer these conditions ~~continue to impact us in a variety of ways, including making~~persist, the greater the probability that these factors could have an adverse effect on our operations and financial results. The current economic conditions also make it difficult ~~for us~~ to price and finance new investment opportunities on attractive terms. We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will affect us. ~~If market instability persists or intensifies, we may experience challenges in raising additional capital.~~ Continued weak economic conditions could adversely impact the financial condition of one or more of our tenants and therefore, could make a tenant bankruptcy and payment default on the related lease or loan more likely. Currently, all of our properties are fully leased and all ~~but one~~ of our tenants and our borrower are current and paying in accordance with their leases and loan, respectively. In addition, no balloon payments are due under our mortgage notes payable until 2010, and the only mortgage note that matures in 2010 has three annual extension options through 2013.

Our ability to make new investments is highly dependent upon external financing. Our principal external financing sources generally include the issuance of equity securities, the issuance of long-term mortgages secured by properties and borrowings under our line of credit. Recent market conditions have affected the

2220

At September 30, 2008, we owned 65 properties totaling approximately 6.3 million square feet, and had one mortgage loan outstanding. The total gross investment in these acquisitions, including the mortgage loan investment, was approximately $442.9 million at September 30, 2008. Prior to September 30, 2008, we reported the aggregate number of properties we own based on the appraisals obtained in connection with the acquisitiontrading price of our ~~properties,~~common stock. On April 30, 2009, the closing market price of our common stock was $11.72, which ~~occasionally grouped two~~represents a 21% discount to our average stock price of $14.82 during 2008. In addition, the market for long-term mortgages has frozen as the collateralized mortgage-backed securities, or ~~more buildings together. At September 30, 2008 we are reporting, and in future periods we will report, our aggregate number of properties based on~~CMBS, market has disappeared. With the ~~number of individual buildings. Below is a summary~~recent closure of the ~~properties~~CMBS market, many banks are not lending on commercial real estate as they are no longer able to sell these loans to the CMBS market and many banks are not willing or able to keep these loans on their balance sheets. We are now seeing banks only willing to issue medium-term mortgages, between two to five years, at substantially less favorable terms. As a result, we ~~owned as of~~intend to focus on medium-term mortgages until the ~~respective periods, using~~market for long-term mortgages returns. Our ability to increase the ~~new methodology:~~


~~As of:~~	~~Total properties owned~~
~~December 31, 2006~~		42
~~March 31, 2007~~		46
~~June 30, 2007~~		47
~~September 30, 2007~~		51
~~December 31, 2007~~		59
~~March 31, 2008~~		62
~~June 30, 2008~~		63
~~September 30, 2008~~		65

~~Recent Events~~

~~Investment Activities:~~During the nine months ended September 30, 2008, we acquired six properties totaling approximately 756,000 square feet for approximately $53.6 million, and made capital improvements to our properties located in Newburyport, Massachusetts and Arlington, Texas for approximately $1.8 million, resulting in a total investment of approximately $55.4 million. Of the total investment, $48.9 million was fundedavailability under our line of credit is dependent upon us pledging additional properties as collateral. Traditionally, we have pledged new properties to the line of credit as we arrange for long-term mortgages for these pledged properties. Currently, only 10 of our properties do not have long-term mortgages, and 9 of those are pledged as collateral under our line of credit. Our line of credit matures in December 2009, however, we intend to exercise our option to extend the ~~remaining $6.5 million was funded~~term for an additional year, through December 2010.

We expect that under acurrent market conditions, debt and equity capital will be costly and difficult for us to access for some time. As long as this is the case, our near-term strategy has become somewhat dependent upon retaining capital and building the value of our existing portfolio of properties by reviewing and renegotiating existing leases and making capital improvements to our properties. Capital improvements will be limited to the extent we have available capital. We will continue to review potential acquisitions and we intend to continue our strategy of making conservative investments in properties that have existing financing, and funding the remainder using the existing availability under our line of credit, that we believe will weather the current recession and that are likely to produce attractive long-term ~~note payable with GE Commercial Mortgage Financial Corporation or GE, assumed in connection with an acquisition.~~returns for our stockholders.

Recent Events

Financing Activities:During the ~~nine~~three months ended ~~September 30, 2008,~~March 31, 2009, we had net borrowings under our line of credit of approximately ~~$5.8~~$18.8 million, with ~~approximately $10.2~~$30.3 million outstanding at ~~September 30, 2008.~~March 31, 2009. The proceeds from borrowings under the line of credit were used to ~~fund~~pay off the ~~six acquisitions during~~$20.0 million unsecured short-term loan with KeyBank.

Industry Classifications

Our Adviser seeks to diversify our portfolio to avoid dependence on any one particular tenant, geographic location or tenant industry. By diversifying our portfolio, our Adviser intends to reduce the ~~nine-month period~~adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic region. Our largest tenant at March 31, 2009 comprised approximately 7.3% of our total rental income, and ~~to fund capital improvements to~~ our largest concentration of properties was located in ~~Newburyport, Massachusetts and Arlington, Texas. In September 2008, we borrowed~~Ohio, which accounted for approximately ~~$48.0 million pursuant to a long-term note payable with GE, collateralized by security interests in 15~~17.7% of our ~~properties.~~total rental income. The ~~proceeds from~~table below reflects the ~~long-term note payable were used to pay down the line~~breakdown of ~~credit.~~our total rental income by tenant industry classification as of March 31, 2009 and 2008:


	March 31, 2009					March 31, 2008
			Percentage of					Percentage of
Industry Classification	Rental Income		Rental Income			Rental Income		Rental Income
Automobile	$	291,663		2.8	%	$	291,663		3.2	%
Beverage, Food & Tobacco		547,180		5.3	%		444,350		4.8	%
Buildings and Real Estate		506,417		4.9	%		500,341		5.4	%
Chemicals, Plastics & Rubber		802,204		7.7	%		463,305		5.0	%
Containers, Packaging & Glass		582,503		5.6	%		558,278		6.1	%
Diversified/Conglomerate Manufacturing		916,172		8.8	%		726,779		7.9	%
Diversified/Conglomerate Services		77,026		0.7	%		77,026		0.8	%
Electronics		1,541,447		14.8	%		1,541,447		16.8	%
Healthcare, Education & Childcare		1,536,353		14.8	%		1,109,955		12.1	%
Home & Office Furnishings		132,436		1.3	%		132,436		1.4	%
Insurance		180,717		1.7	%		180,717		2.0	%
Machinery		597,151		5.7	%		450,299		4.9	%
Oil & Gas		288,111		2.8	%		288,111		3.1	%
Personal & Non-Durable Consumer Products		338,680		3.3	%		339,019		3.7	%
Personal, Food & Miscellaneous Services		143,752		1.4	%		143,752		1.6	%
Printing & Publishing		570,720		5.5	%		580,395		6.3	%
Telecommunications		1,361,588		12.9	%		1,361,592		14.9	%

	$	10,414,120		100.0	%	$	9,189,465		100.0	%

Our ~~Investment~~ Adviser and Administrator

Gladstone Management Corporation, or our Adviser, is led by a management team which has extensive experience in our lines of business. 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 and 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. Our Adviser also has a wholly-owned subsidiary, Gladstone Administration, LLC, or ~~the~~our Administrator, which employs our chief financial officer, chief compliance officer, ~~controller,~~ treasurer and their respective staffs. ~~All of our executive officers are officers or directors, or both, of our Adviser and our Administrator.~~

Our Adviser and Administrator also provide investment advisory and administrative services to our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly traded business development companies, as well as Gladstone Land Corporation, a private agricultural real estate company. ~~All~~With the exception of our ~~directors and~~chief financial officer, all of our executive officers serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In the future, our Adviser may provide investment advisory and administrative services to other funds, both public and private, of which it is the sponsor.

Our Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Our Adviser is headquartered in McLean, Virginia, a suburb of Washington D.C., and also has offices in New York, New Jersey, Pennsylvania, Illinois, Texas, Georgia and Washington.

~~Investment~~ Advisory and Administration Agreements

We have been externally managed pursuant to a contractual investment advisory arrangement with our Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll, benefits, and general expenses directly. ~~Our initial investment~~On January 1, 2007, we entered into an advisory agreement with our Adviser, which we refer to as the Initial Advisory Agreement, was in place from August 12, 2003 through December 31, 2006. On January 1, 2007, we entered into an amended and restated investment advisory agreement with our Adviser, which we refer to as the Amended Advisory Agreement, and an administration agreement, which we refer to as the Administration Agreement, with our Administrator.

Under the terms of the ~~Initial Advisory Agreement and the Amended~~ Advisory Agreement, we ~~were and remain~~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. During the three and nine months ended September 30, 2008, the total amount of these expenses that we incurred was approximately $4.8 million and $13.8 million, respectively. During the three and nine months ended September 30, 2007, the total amount of these expenses that we incurred was approximately $3.4 million and $9.8 million, respectively. All of these charges are incurred directly by us rather than by our Adviser for our benefit. Accordingly, we did not make any reimbursements to our Adviser for these amounts.

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 nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ none of these expenses were

incurred by us directly. The actual amount of such fees that we incur in the future will depend largely upon the aggregate costs of the properties we acquire, the aggregate amount of mortgage loans we make and the extent to which we are able to shift the burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the future is not determinable at this time.

Management Services and Fees under the ~~Amended~~ Advisory Agreement

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

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any ~~dividends~~distributions paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee ~~will~~would reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, (“or pre-incentive fee ~~FFO”),~~FFO, exceeds 1.75%, or ~~7% annualized, (the “hurdle rate”)~~the hurdle rate, of total stockholders’ equity, less the recorded value of any preferred stock. ~~Our~~We pay our Adviser ~~will receive 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of our pre-incentive fee FFO. Our Adviser will also receive~~ an incentive fee ~~of 20% of the amount of~~with respect to our pre-incentive fee FFO ~~that exceeds 2.1875%.~~ in each calendar quarter as follows:

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

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

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

Quarterly Incentive Fee Based on FFO

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

Percentage of pre-incentive fee FFO allocated to incentive fee

The incentive fee may be reduced because of our line of credit covenant which limits distributions to our stockholders to 95% of FFO.

For the three and nine months ended September 30, 2008, the base management fee was $404,108 and $1,255,833, respectively. For the three and nine months ended September 30, 2007, the base management fee was $459,202 and $1,412,337, respectively. For the three and nine months ended September 30, 2008, we recorded an incentive fee In order to comply with this covenant, our board of $793,787 and $2,300,286, respectively, offset by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of $205,876 and $941,928, respectively, for a net incentive fee for the three and nine months ended September 30, 2008 of $587,911 and $1,358,358, respectively. For the three and nine months ended September 30, 2007, we recorded an incentive fee of $677,104 and $1,896,677, respectively, offset by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of $526,991 and $1,746,564, respectively, for a net incentive fee for both the three and nine months ended September 30, 2007 of $150,113. Our Board of Directorsdirectors accepted our Adviser’s offer to unconditionally, irrevocably and voluntarily waive a portion of the incentive fee for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007, in order~~which allowed us to maintain the current level of distributions to our stockholders. Our Adviser has indicated that it intends to continue to waive all or a portion of the incentive fee in order to support the current level of distributions to our stockholders, however, our Adviser is not required to issue any waiver, in whole or in part.

Administrator, and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, ~~controller,~~ treasurer and their respective staffs. ~~For~~Our allocable portion of expenses is derived by multiplying our Administrator’s total expenses by the ~~three and nine months ended September 30, 2008, we incurred $238,241 and $724,978, respectively, for~~percentage of our total assets at the ~~administration fee. For~~beginning of each quarter in comparison to the ~~three and nine months ended September 30, 2007, we incurred $175,852 and $592,996, respectively, for the administration fee.~~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 ~~judgments~~judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements included elsewhere in this report. Below is a summary of accounting polices involving estimates and assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.

Allocation of Purchase Price

When we acquire real estate, we allocate the purchase price to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

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

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

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

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

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

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

Asset Impairment Evaluation

We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. In determining if impairment exists, management considers such factors as our tenants’ payment history, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industry in which our tenants operate and whether the carrying value of our real estate has decreased. If ~~circumstances~~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 investment in such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate the hold periods of the properties and cap rates using information we obtain from market comparability studies and other comparable sources. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows. 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 ifof whether impairment is deemed to have occurred and the amount of impairment loss we would recognize.

Using the methodology discussed above and in light of the current economic conditions discussed above in “–Business Environment,” we performed an impairment analysis of our entire portfolio at March 31, 2009. We concluded that none of our properties are currently impaired, and we will continue to monitor our portfolio for any indicators that may change our conclusion.

Provision for Loan Losses

Our accounting policies require that we reflect in our financial statements an allowance for estimated credit losses with respect to mortgage loans we have made based upon our evaluation of known and inherent risks associated with our private lending assets. Management reflects provisions for loan losses based upon our assessment of general market conditions, our internal risk management policies and credit risk rating system, industry loss experience, our assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying our investments. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations. We did not make a loss allowance for our existing mortgage loan receivable as of March 31, 2009, as we believe the carrying value of the loan is fully collectible.

Recently Issued Accounting Pronouncements

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

Results of Operations

Our weighted-average yield on the portfolio as of ~~September 30, 2008~~March 31, 2009 was approximately ~~9.53%~~9.68%. ~~Our weighted-average yields on the six properties acquired during the nine months ended September 30, 2008 were as follows:~~


~~Date Acquired~~	~~Property Location~~	~~Weighted-Average Yield~~
~~1/29/08~~	~~Reading, Pennsylvania~~	~~9.95%~~
~~2/26/08~~	~~Fridley, Minnesota~~	~~8.93%~~
~~3/31/08~~	~~Concord Township, Ohio~~	~~11.27%~~
~~4/30/08~~	~~Pineville, North Carolina~~	~~11.06%~~
~~8/29/08~~	~~Marietta, Ohio~~	~~11.07%~~
~~8/29/08~~	~~Chalfont, Pennsylvania~~	~~9.01%~~

The weighted-average yield on our portfolio is calculated by taking the annualized straight-line ~~rent,~~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 take into account the interest expense incurred on the financings placed on our properties.

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A comparison of our operating results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008 ~~and 2007~~ is below:


	For the three months ended September 30,												For the nine months ended September 30,												For the three months ended March 31,
	2008			2007			$ Change			% Change			2008			2007			$ Change			% Change			2009			2008			$ Change			% Change
Operating revenues
Rental income	$	10,157,553		$	8,024,305		$	2,133,248			27	%	$	29,269,036		$	22,834,663		$	6,434,373			28	%	$	10,414,120		$	9,189,465		$	1,224,655			13	%
Interest income from mortgage notes receivable		216,446			255,555			(39,109	)		-15	%		673,548			758,333			(84,785	)		-11	%		187,500			238,297			(50,797	)		-21	%
Tenant recovery revenue		83,144			80,648			2,496			3	%		253,495			230,851			22,644			10	%		82,434			85,719			(3,285	)		-4	%

Total operating revenues		10,457,143			8,360,508			2,096,635			25	%		30,196,079			23,823,847			6,372,232			27	%		10,684,054			9,513,481			1,170,573			12	%


Operating expenses
Depreciation and amortization		3,262,903			2,668,383			594,520			22	%		9,435,690			7,722,349			1,713,341			22	%		3,314,100			2,987,760			326,340			11	%
Property operating expenses		225,020			204,972			20,048			10	%		670,442			597,273			73,169			12	%		237,156			239,483			(2,327	)		-1	%
Due diligence expense																										9,547			2,085			7,462			358	%
Base management fee		404,108			459,202			(55,094	)		-12	%		1,255,833			1,412,337			(156,504	)		-11	%		372,648			431,868			(59,220	)		-14	%
Incentive fee		793,787			677,104			116,683			17	%		2,300,286			1,896,677			403,609			21	%		786,289			704,667			81,622			12	%
Administration fee		238,241			175,852			62,389			35	%		724,978			592,996			131,982			22	%		224,354			212,196			12,158			6	%
Professional fees		117,857			118,371			(514	)		0	%		362,584			442,479			(79,895	)		-18	%		235,198			97,662			137,536			141	%
Insurance		43,354			53,943			(10,589	)		-20	%		126,947			171,275			(44,328	)		-26	%		48,678			41,797			6,881			16	%
Directors fees		54,702			66,250			(11,548	)		-17	%		161,202			174,750			(13,548	)		-8	%		49,702			54,250			(4,548	)		-8	%
Stockholder related expense		42,232			40,991			1,241			3	%		271,430			215,969			55,461			26	%		83,647			126,423			(42,776	)		-34	%
Asset retirement obligation expense		35,157			29,440			5,717			19	%		98,394			86,542			11,852			14	%		35,367			30,468			4,899			16	%
General and administrative		105,999			17,452			88,547			507	%		139,151			79,119			60,032			76	%		11,487			14,631			(3,144	)		-21	%

Total operating expenses before credit from Adviser		5,323,360			4,511,960			811,400			18	%		15,546,937			13,391,766			2,155,171			16	%		5,408,173			4,943,290			464,883			9	%


Credit to incentive fee		(205,876	)		(526,991	)		321,115			-61	%		(941,928	)		(1,746,564	)		804,636			-46	%		(235,081	)		(562,355	)		327,274			-58	%

Total operating expenses		5,117,484			3,984,969			1,132,515			28	%		14,605,009			11,645,202			2,959,807			25	%		5,173,092			4,380,935			792,157			18	%


Other income (expense)
Interest income from temporary investments		4,559			33,105			(28,546	)		-86	%		20,796			325,390			(304,594	)		-94	%		17,281			9,548			7,733			81	%
Interest income — employee loans		49,624			52,728			(3,104	)		-6	%		152,620			169,608			(16,988	)		-10	%		48,886			52,144			(3,258	)		-6	%
Other income		7,500			9,896			(2,396	)		-24	%		56,493			28,127			28,366			101	%		—			9,296			(9,296	)		-100	%
Interest expense		(4,258,461	)		(2,920,270	)		(1,338,191	)		46	%		(12,008,316	)		(8,137,343	)		(3,870,973	)		48	%		(4,487,560	)		(3,753,604	)		(733,956	)		20	%

Total other expense		(4,196,778	)		(2,824,541	)		(1,372,237	)		49	%		(11,778,407	)		(7,614,218	)		(4,164,189	)		55	%		(4,421,393	)		(3,682,616	)		(738,777	)		20	%


Income from continuing operations		1,142,881			1,550,998			(408,117	)		-26	%		3,812,663			4,564,427			(751,764	)		-16	%		1,089,569			1,449,930			(360,361	)		-25	%


Discontinued operations
Loss from discontinued operations		(1,322	)		5,975			(7,297	)		-122	%		(34,956	)		471			(35,427	)		-7522	%		—			(33,228	)		33,228			-100	%
Net realized income from foreign currency transactions		—			33,487			(33,487	)		-100	%		—			33,550			(33,550	)		-100	%
Taxes refunded on sale of real estate		—			—			—			0	%		—			78,667			(78,667	)		-100	%

Total discontinued operations		(1,322	)		39,462			(40,784	)		-103	%		(34,956	)		112,688			(147,644	)		-131	%		—			(33,228	)		33,228			-100	%


Net income		1,141,559			1,590,460			(448,901	)		-28	%		3,777,707			4,677,115			(899,408	)		-19	%		1,089,569			1,416,702			(327,133	)		-23	%


Dividends attributable to preferred stock		(1,023,437	)		(1,023,438	)		1			0	%		(3,070,312	)		(3,070,312	)		—			0	%
Distributions attributable to preferred stock																										(1,023,437	)		(1,023,437	)		—			0	%


Net income available to common stockholders	$	118,122		$	567,022		$	(448,900	)		-79	%	$	707,395		$	1,606,803		$	(899,408	)		-56	%	$	66,132		$	393,265		$	(327,133	)		-83	%

Operating Revenues

Rental income increased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily as a result of the 14three properties acquired between ~~September 30, 2007~~March 31, 2008 and ~~September 30, 2008,~~March 31, 2009, coupled with properties acquired during the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 that were held for the full ~~nine-month period~~quarter in ~~2008.~~2009.

Interest income from mortgage notes receivable decreased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily because interest income on our mortgage loan is based on the London Interbank Offered Rate, or LIBOR, which has significantly decreased over the past year.

Tenant recovery revenue ~~remained relatively flat~~decreased for the three months ended ~~September 30, 2008~~March 31, 2009 as compared to the three months ended ~~September 30, 2007. Tenant recovery revenue increased for the nine months ended September 30,~~March 31, 2008, ~~as compared to the nine months ended September 30, 2007,~~ primarily as a result of a decrease in the ~~reimbursement~~insurance premiums on some of our properties in which the ~~ground lease payments on our Tulsa, Oklahoma property acquired in March 2007, which was held~~tenants reimburse us for ~~the entire nine-month period in 2008.~~insurance expense.

Operating Expenses

Depreciation and amortization expenses increased during the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, as a result of the 14three properties acquired between ~~September 30, 2007~~March 31, 2008 and ~~September 30, 2008,~~March 31, 2009, and properties acquired during the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 that were held for the full ~~nine-month period~~quarter in ~~2008.~~2009.

Property operating expenses consist of franchise taxes, management fees, insurance, ground lease payments ~~on our Tulsa, Oklahoma property acquired in March 2007~~ and overhead expenses paid on behalf of certain of our properties. Property operating expenses ~~increased~~remained relatively flat during the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008.

Due diligence expense primarily ~~as a result~~consists of ~~repairs on several of~~legal fees and fees incurred for third-party reports prepared during our ~~properties. In addition, property operating~~due diligence work. Due diligence expenses increased for the ~~entire nine~~three months ended ~~September 30,~~March 31, 2009 as compared to the three months ended March 31, 2008, ~~included ground lease payments~~primarily due to the adoption of SFAS 141(R) on ~~our Tulsa, Oklahoma property acquired~~January 1, 2009, discussed in ~~March 2007.~~detail in Note 1 of the accompanying consolidated financial statements, which required us to no longer capitalize due diligence costs into the price of the acquisition.

The base management fee decreased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, as a result of a decrease in total common stockholders’ equity, the main component of the calculation. The calculation of the base management fee is described in detail above under“~~Investment~~ –Advisory and Administration Agreements.”

The incentive fee increased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, due to the increase in pre-incentive fee FFO coupled with the decrease in total common stockholders’ ~~equity, coupled with the increase in FFO.~~equity. The calculation of the incentive fee is described in detail above under“~~Investment~~ –Advisory and Administration Agreements.”

The administration fee increased for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009, as compared to the three months ended March 31, 2008, ~~and 2007,~~ primarily as a result of ~~the increased number of employees of our Administrator, coupled with~~ an increase in ~~overhead expenses allocated~~our total assets in comparison to the total assets of all companies managed by our ~~Administrator.~~Adviser under similar agreements. The calculation of the administrative fee is described in detail above under ““–~~Investment~~ Advisory and Administration Agreements.”

Professional fees, consisting primarily of legal and accounting fees, ~~remained relatively flat~~increased during the three months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three months ended ~~September 30, 2007. Professional fees decreased during the nine months ended September 30,~~March 31, 2008, ~~as compared to the nine months ended September 30, 2007,~~ primarily as a result of ~~a reduction~~an increase in legal fees ~~paid during~~relating to ongoing lease renegotiations and reviews of our legal work with our existing tenants coupled with the ~~nine months ended September 30, 2008 combined with fees incurred during the three and nine months ended September 30, 2007 for state tax research and~~timing of our costs related to the ~~implementation of FIN 48,~~annual tax return filings, which were not ~~incurred during~~extended as in the ~~nine months ended September 30, 2008.~~prior year.

Insurance expense consists of the premiums paid for ~~directors~~directors’ and ~~officers~~officers’ insurance, which is renewed annually each September. Insurance expense ~~decreased~~increased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, because of ~~a decrease~~an increase in the premiums for the period from September ~~2007~~2008 through September ~~2008.~~2009.

Directors’ fees decreased during the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily as a result of ~~fewer meetings occurring~~one of the independent directors becoming an interested director in ~~the three~~January 2008, and ~~nine months ended September 30, 2008.~~thus this director did not receive an annual stipend during 2009.

Stockholder related expense ~~increased~~decreased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily as a result of the ~~increase~~timing in our costs associated with printing and filing the annual ~~report, coupled with costs associated with the solicitation of the stockholder vote for the 2008 annual meeting.~~report.

Asset retirement obligation expense increased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily as a result of a property acquired ~~between September 30, 2007 and September 30,~~during the three months ended March 31, 2008, which was required to recognize an asset retirement ~~liability, coupled with a property acquired where a liability was recorded during the nine months ended September 30, 2007 that was held for the full period in 2008.~~liability.

General and administrative expenses ~~increased~~decreased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, primarily as a result of ~~capitalized fees~~a decrease in the amount of travel for ~~financings that did not materialize, and as such, were written off.~~site visits to our properties, coupled with a decrease in our bank service charges.

Other Income and Expense

Interest income from temporary investments ~~decreased~~increased during the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007.~~March 31, 2008. The ~~decrease~~increase was primarily a result of ~~the decrease~~interest received in 2009 from funds held on deposit for a prospective real estate acquisition, coupled with interest earned on amounts held in reserve accounts with our ~~average cash balances during the nine months ended September 30, 2008.~~lenders.

~~During the three and nine months ended September 30, 2008, interest~~Interest income on employee loans decreased during the three months ended March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007.~~March 31, 2008. This decrease was a result of employees who paid off their loans during 2008, coupled with other partial principal repayments over the periods.

Other income ~~was relatively flat~~decreased during the three months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three months ended ~~September 30, 2007. Other income increased for the nine months ended September 30,~~March 31, 2008, ~~as compared to the nine months ended September 30, 2007,~~ primarily because ~~of a real estate tax reimbursement~~ we ~~received~~no longer receive management fees from our ~~property located~~tenant in ~~Sterling Heights, Michigan.~~our Burnsville, Minnesota property.

Interest expense increased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007.~~March 31, 2008. This was primarily a result of ~~the long term financings we closed on 14 of our properties subsequent to September 30, 2007, coupled with~~ an increased amount outstanding on our line of credit during the three ~~and nine~~ months ended ~~September 30, 2008. In September~~March 31, 2009, coupled with long-term financings, which closed during 2008 ~~we paid down~~that were held for the ~~outstanding balance on the line of credit using proceeds from the $48.0 million long-term note payable from GE.~~full period during 2009.

Discontinued Operations

The loss from discontinued operations is the expense related to our two Canadian properties, which were sold in July 2006. The expense relates to legal fees associated with the dissolution of the entities, which sold the properties. The 2006 tax returns were filed in March 2007, and we were due a refund of approximately $79,000, which is reflected on the statements of operations under taxes refunded on sale of real estate for the nine months ended September 30, 2007.

Net Income Available to Common Stockholders

Net income available to common stockholders decreased for the three ~~and nine~~ months ended ~~September 30, 2008,~~March 31, 2009, as compared to the three ~~and nine~~ months ended ~~September 30, 2007.~~March 31, 2008. This decrease was primarily a result of increased interest expense from the increased number of properties which have long-term financing, partially offset by the increase in the size of our portfolio of investments in the past year and the corresponding increase in our revenues and the other events described above.

Liquidity and Capital Resources

~~Cash and Cash Equivalents~~Future Capital Needs

At ~~September 30, 2008,~~March 31, 2009, we had approximately ~~$3.1~~$2.5 million in cash and cash equivalents. We have access to our existing line of credit with an available borrowing capacity of ~~$79.7~~$18.6 million, and have obtained mortgages on 55 of our properties. We had investments in 65 real properties for a net value, including intangible assets, of approximately $394.1 million and have a $20.0 million short-term loan. We expect that the funds from our line of credit, additional mortgages and securities offerings will provide us with sufficient capital to make additional investments and to fund our continuing operationsone mortgage loan receivable for ~~the foreseeable future.~~ $10.0 million.

As ~~previously~~ discussed in ~~Management’s Discussion and Analysis –~~ “–Business ~~Environment,~~Environment”above, continued weak economic conditions ~~could~~have adversely ~~affect~~affected our ability to obtain additional mortgages, ~~collateralized by some or all of our real property in the future,~~ as well as our ability to borrow funds and issue equity securities, our principal sources of external financing. Until economic conditions improve, we intend to fund our existing contractual obligations with our cash flows from operations and borrowing against our existing line of credit. When economic conditions improve, we intend to fund our contractual obligations and acquire additional properties by borrowing all or a portion of the purchase price and collateralizing the mortgages with some or all of our real property, by borrowing against our existing line of credit or by issuing additional equity securities under an effective shelf registration statement. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities consisting of common or preferred stock, all of which was available as of March 31, 2009. We may also use these funds for general corporate needs. If we are unable to make any required debt payments on any borrowings, our lenders could foreclose on the properties collateralizing their loans, which could cause us to lose part or all of our investments in such properties. We do not have any balloon principal payments due under any of our long-term mortgages until 2010, and the $48.0 million mortgage that matures in 2010 has three annual extension options through 2013.

In addition, we 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 ~~obtain additional capital~~meet these obligations, although our Adviser is under no obligation to provide such credits, in ~~the future.~~whole or in part. We ~~cannot~~routinely review our liquidity requirements, and we believe that our current cash flows from operations, coupled with our current availability on our line of credit, are sufficient to continue operations and pay distributions to our stockholders, however we are unable to determine the terms of future borrowings or equity issuances or whether we will be able to borrow funds or issue equity on terms favorable to us, or if at all.

Operating Activities

Net cash provided by operating activities during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 was approximately ~~$12.2~~$4.1 million, compared to net cash provided by operating activities of approximately ~~$12.0~~$4.0 million for the ~~nine~~three months ended ~~September 30, 2007.~~March 31, 2008. The increase in cash provided by operating activities is primarily a result of the properties acquired during 2008 that were held for the full quarter in 2009. A majority of cash from operating activities is generated from the rental payments we receive from our tenants and the interest payments 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, ~~and short-term loan, dividend payments,~~distributions to our stockholders, management fees to our Adviser, and other entity level expenses.

Investing Activities

Net cash used in investing activities during the ~~nine~~three months ended ~~September 30, 2008~~March 31, 2009 was approximately ~~$50.1~~$1.2 million, which primarily consisted of ~~the purchase of six properties, as described~~an increase in the “~~Recent Events~~~~” section above,~~amount of restricted cash and net payments to lenders for reserves, as compared to net cash used in investing activities during the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 of approximately ~~$85.7~~$34.5 million, which primarily consisted of the purchase of eight properties and one leasehold interest. During the nine months ended September 30, 2008, we purchased five of the six properties using borrowings under our line of credit and assumed the mortgage on the sixth property located in Chalfont, Pennsylvania. During the nine months ended September 30, 2007, we purchased all of the properties using borrowings under our line of credit.three properties.

September 30, 2008 December 31, 2007
Percentage of Percentage of
Industry Classification Net Real Estate Net Real Estate Net Real Estate Net Real Estate
Automobile $ 10,906,445 3.0 % $ 11,072,192 3.4 %
Beverage, Food & Tobacco 18,792,486 5.1 % 10,655,401 3.3 %
Buildings and Real Estate 20,116,878 5.5 % 20,504,268 6.3 %
Chemicals, Plastics & Rubber 26,175,476 7.1 % 15,371,141 4.7 %
Containers, Packaging & Glass 16,002,508 4.4 % 16,320,658 5.0 %
Diversified/Conglomerate Manufacturing 32,437,883 8.8 % 25,328,441 7.8 %
Diversified/Conglomerate Services 2,569,588 0.7 % 2,615,717 0.8 %
Electronics 54,585,128 14.8 % 55,721,882 17.2 %
Healthcare, Education & Childcare 55,307,539 15.0 % 43,322,758 13.3 %
Home & Office Furnishings 5,180,076 1.4 % 5,276,588 1.6 %
Insurance 5,696,887 1.5 % 5,809,099 1.8 %
Machinery 21,686,150 5.9 % 12,682,144 3.9 %
Oil & Gas 10,878,990 3.0 % 11,099,726 3.4 %
Personal & Non-Durable Consumer Products 13,024,942 3.5 % 13,207,489 4.1 %
Personal, Food & Miscellaneous Services 4,408,674 1.2 % 4,502,040 1.4 %
Printing & Publishing 22,167,679 6.0 % 22,594,423 7.0 %
Telecommunications 47,778,015 13.0 % 48,677,805 15.0 %

$ 367,715,344 100.0 % $ 324,761,772 100.0 %

~~Future Capital Needs~~

As of September 30, 2008, we had investments in 65 real properties for a net value, including intangible assets, of approximately $400.2 million and one mortgage loan receivable for $10.0 million. During the remainder of 2008 and beyond, we intend to complete additional acquisitions of real estate and to originate additional mortgage notes, although there is no guarantee we will be able to do sorepayments on ~~favorable terms, if at all. We intend to fund~~ our contractual obligations and acquire additional properties by borrowing all or a portion of the purchase price and collateralizing the mortgages with some or all of our real property, by borrowing against our existing line of credit with an available borrowing capacity of $79.7 million, or by issuing additional equity securities under an effective registration statement on Form S-3 (File No. 333-147856) we have on file with the Securities and Exchange Commission (the “Registration Statement”). The Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities consisting of common or preferred stock, of which all $300 million was available as of September 30, 2008. We may also use these funds for general corporate needs. If we are unable to make any required debt payments on any borrowings, our lenders could foreclose on the properties collateralizing their loans, which could cause us to lose part or all of our investments in such properties. In addition, we need sufficient capital to fund our dividends, and we may require creditsdistributions paid to our ~~management fees, issued from our Adviser, in order to meet these obligations, although our Adviser is under no obligation to provide such credits, in whole or in part.~~stockholders.

Mortgage Notes Payable

On September 15, 2008, through wholly-owned subsidiaries, we borrowed approximately $48.0 million pursuant to a long-term note payable from GE, which is collateralized by security interests in 15 properties. The note accrues interest at a rate of 6.85% per year and we may not repay this note prior to maturity, or we would be subject to a substantial prepayment penalty. The note has a maturity date of October 1, 2010, with three annual extension options through October 1, 2013. We used the proceeds from the note to pay down the outstanding balance on the line of credit. As of ~~September 30, 2008,~~March 31, 2009 we had 16 fixed-rate mortgage notes payable in the aggregate principal amount of approximately ~~$255.4~~$254.5 million, collateralized by a total of 55 properties with terms ranging from 2 years to 25 years. The weighted-average interest rate on the mortgage notes payable as of ~~September 30, 2008~~March 31, 2009 was approximately 6.0%.

Line of Credit

~~On December 29, 2006, we entered into~~We have a ~~$75~~$95.0 million senior revolving credit agreement with a syndicate of banks led by KeyBank National Association, or KeyBank, which matures on December 29, ~~2009~~2009. As long as we are in compliance with ~~an option to extend for an additional year. We subsequently increased the availability~~covenants under our line of credit, we have the option to ~~$95 million in November 2007.~~extend the line of credit for an additional year, and we currently intend to exercise this option. We must notify KeyBank of our intention to exercise the renewal option 45 days prior to the maturity date and pay an extension fee of 0.20% of the total commitment outstanding at the date of notification. The interest rate charged on the advances under the facility is based on LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. Our ability to access this funding source is subject to us continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 95% of our funds from operations, or ~~FFO, beginning with the quarter ended December 31, 2007.~~FFO. In addition, the maximum amount we may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. ~~As we arrange for~~If and when long-term mortgages are arranged for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the removed property. Conversely, as we purchase new properties meeting the eligibility standards, we may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit will also be reduced by letters of credit used in the ordinary course of business. We may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of ~~September 30, 2008,~~March 31, 2009, there was ~~approximately $10.2~~$30.3 million outstanding under the line of credit at an interest rate of approximately ~~5.7%~~2.5%, and approximately ~~$5.1~~$3.3 million outstanding under letters of credit at a weighted average interest rate of approximately 2.0%. At ~~September 30, 2008,~~March 31, 2009, the remaining borrowing capacity available under the line of credit was ~~$79.7 million, and we~~approximately $18.6 million. We were in compliance with all covenants under the line of ~~credit.~~credit as of March 31, 2009.

Short-Term Loan

On December 21, 2007, we entered into a ~~$20~~$20.0 million unsecured ~~term~~short-term loan with KeyBank, ~~National Association,~~ which ~~matures~~matured on December ~~21, 2008, with an option to extend for an additional nine months.~~20, 2008. We ~~can exercise the~~exercised our option to extend the term ~~as long as we are~~for an additional six months, which resulted in ~~compliance with all covenants under the loan at the time we exercise the option.~~a new maturity date of June 20, 2009. The interest rate charged on the loan iswas based on LIBOR, the prime rate or the federal funds rate, depending on market conditions, and ~~adjusts~~adjusted periodically. Our ability to maintain this funding source is subject to us continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 95% of our FFO beginning withOn March 31, 2009, we repaid in full the ~~quarter ended December 31, 2007. As of September 30, 2008, the interest rate on the~~unsecured short-term loan, ~~was approximately 5.2%, and we were in compliance with all covenants~~using proceeds from borrowings under ~~the short-term loan.~~

~~Off-Balance Sheet Arrangements~~

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

30 ~~2008.~~

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

The following table provides a reconciliation of our FFO for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2009 and 2008, ~~and 2007,~~ to the most directly comparable GAAP measure, net income, and a computation of basic and diluted FFO per weighted average common share and basic and diluted net income per weighted average common ~~share and the percentage of FFO paid per common~~ share:


													For the three			For the three
													months ended			months ended
	For the three months ended September 30,						For the nine months ended September 30,						March 31, 2009			March 31, 2008
	2008			2007			2008			2007
Net income	$	1,141,559		$	1,590,460		$	3,777,707		$	4,677,115		$	1,089,569		$	1,416,702
Less: Dividends attributable to preferred stock		(1,023,437	)		(1,023,438	)		(3,070,312	)		(3,070,312	)
Less: Distributions attributable to preferred stock														(1,023,437	)		(1,023,437	)

Net income available to common stockholders		118,122			567,022			707,395			1,606,803			66,132			393,265

Add: Real estate depreciation and amortization		3,262,903			2,668,383			9,435,690			7,722,349			3,314,100			2,987,760
Less: Gain on sale of real estate, net of taxes paid		—			—			—			(78,667	)

FFO available to common stockholders	$	3,381,025		$	3,235,405		$	10,143,085		$	9,250,485		$	3,380,232		$	3,381,025

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

Basic & diluted net income per weighted average common share	$	0.01		$	0.07		$	0.08		$	0.19		$	0.01		$	0.05


Basic & diluted FFO per weighted average common share	$	0.395		$	0.378		$	1.184		$	1.080		$	0.39		$	0.39


Dividends declared per common share	$	0.375		$	0.360		$	1.125		$	1.080
Distributions declared per common share													$	0.375		$	0.375


Percentage of FFO paid per common share		95	%		95	%		95	%		100	%		95	%		95	%

Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
1% increase in the one month LIBOR

Change in Rental & Interest Income $ 27,308 $ 9,125 $ 82,106 $ 27,375

Change in Interest Expense 77,178 51,111 229,856 151,667

Net decrease $ (49,869 ) $ (41,986 ) $ (147,750 ) $ (124,292 )

Net Income available to common stockholders $ 118,112 $ 567,022 $ 707,395 $ 1,606,803

Net decrease as percentage of Net Income available to common stockholders -42.2 % -7.4 % -20.9 % -7.7 %

1% decrease in the one month LIBOR

Change in Rental & Interest Income $ (24,779 ) $ (9,125 ) $ (75,939 ) $ (27,375 )

Change in Interest Expense $ (77,178 ) $ (51,111 ) $ (229,856 ) $ (152,222 )

Net increase $ 52,399 $ 41,986 $ 153,916 $ 124,847

Net Income available to common stockholders $ 118,112 $ 567,022 $ 707,395 $ 1,606,803

Net increase as percentage of Net Income available to common stockholders 44.4 % 7.4 % 21.8 % 7.8 %


	For the three months ended March 31,
	2009			2008
1% increase in the one month LIBOR

Rental & interest income	$	—		$	23,606

Interest expense		78,250			149,266


Net decrease	$	(78,250	)	$	(125,660	)


Net income available to common stockholders (as reported)	$	66,132		$	393,265

Net decrease as percentage of Net income available to common stockholders (as reported)		-118.3	%		-32.0	%

1% decrease in the one month LIBOR

Rental & interest income	$	—		$	(28,498	)

Interest expense	$	(78,250	)	$	(149,266	)


Net increase	$	78,250		$	120,768


Net income available to common stockholders	$	66,132		$	393,265

Net increase as percentage of Net income available to common stockholders		118.3	%		30.7	%

As of ~~September 30, 2008,~~March 31, 2009, the fair value of our fixed rate debt outstanding was approximately ~~$231.4~~$213.6 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 ~~September 30, 2008,~~March 31, 2009, 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 ~~$11.0~~$9.2 million and ~~$11.7~~$9.7 million, respectively.

In the future, we may be exposed to additional effects of interest rate changes primarily as a result of our line of credit ~~term loan~~ or long-term mortgage debt used 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.

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, all of which may affect our ability to refinance debt if necessary.

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

As of ~~September 30, 2008,~~March 31, 2009, our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and ~~procedures.~~procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of ~~September 30, 2008~~March 31, 2009 in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of necessarily achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The United States has entered into an economic downturn. Continued weak economic conditions could adversely impact the financial condition of one or more of our tenants and, therefore, could make a tenant bankruptcy and payment default on the related lease more likely. Impaired financial positions and operating results could, in turn, harm our results of operations and affect our ability to access capital under our line of credit. The maximum amount we may draw under our line of credit is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. As we arrange for long-term mortgages for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the removed property. The economic decline generally, and the disruptions in the capital markets in particular, have decreased liquidity and increased our cost of debt and equity capital which could also impact our ability to raise capital and reduce our volume of new investments. The longer these conditions persist, the greater the probability that these factors could have an adverse effect on our operations and financial results.


Exhibit		Description of Document

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

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

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

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

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

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

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

~~10.1†~~		Amended and Restated Investment Advisory between the Gladstone Commercial Corporation and Gladstone Management Corporation, dated January 1, 2007, incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K (File No. ~~000-50363), filed January 3, 2007 (renewed on July 9, 2008).~~


	September 30, 2008			December 31, 2007			March 31, 2009			December 31, 2008
Real estate:
Land	$	55,226,042	(1)	$	48,867,482		$	55,226,042	(1)	$	55,226,042	(1)
Building		325,090,570			283,829,987			325,569,702			325,515,390
Tenant improvements		9,820,706			7,802,937			9,820,706			9,820,706
Accumulated depreciation		(22,421,974	)		(15,738,634	)		(27,127,861	)		(24,757,576	)

Real estate, net	$	367,715,344		$	324,761,772		$	363,488,589		$	365,804,562


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

~~During the nine months ended September 30, 2008, the Company acquired six properties, which are summarized below:~~

~~(1)~~		On January 29, 2008, the Company acquired a 42,900 square foot industrial building in Reading, Pennsylvania for approximately $7.2 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has four options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.72 million.

~~(2)~~		On February 26, 2008, the Company acquired a 74,160 square foot office building in Fridley, Minnesota for approximately $10.6 million, including transaction costs. At closing, the Company was assigned the previously existing triple net lease with the sole tenant, which had a remaining term of approximately five years. The tenant has two options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.95 million. The Company was also assigned a ground lease on the parking lot at the time of closing, which has a remaining term of approximately six years. At the end of the term, the Company is required to purchase the land. The rent due under the ground lease had been prepaid by the previous owner through the end of the term.

~~(3)~~		On March 31, 2008, the Company acquired a 273,300 square foot industrial building in Concord Township, Ohio for approximately $15.3 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has three options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.72 million.


	Tenant		Tenant
	Lease Payments		Lease Payments
Three months ending December 31, 2008	$	9,922,367
Year ending December 31, 2009		38,749,365
Nine months ended December 31, 2009			$	29,277,771
2010		38,743,925		38,980,217
2011		38,352,963		38,516,159
2012		38,056,061		38,222,196
2013		32,691,790		32,860,916
2014				28,616,336
Thereafter		184,282,955	$	155,896,518


											March 31, 2009					December 31, 2008
	September 30, 2008					December 31, 2007							Accumulated					Accumulated
			Accumulated					Accumulated			Lease Intangibles		Amortization			Lease Intangibles		Amortization
	Lease Intangibles		Amortization			Lease Intangibles		Amortization
In-place leases	$	15,981,245	$	(4,661,864	)	$	12,660,732	$	(3,414,868	)	$	15,981,245	$	(5,500,484	)	$	15,981,245	$	(5,079,343	)
Leasing costs		9,662,731		(2,769,660	)		9,290,026		(2,114,233	)		9,662,731		(3,207,038	)		9,662,731		(2,987,360	)
Customer relationships		17,136,501		(2,881,762	)		14,599,726		(2,031,827	)		17,136,501		(3,482,931	)		17,136,501		(3,179,931	)

											$	42,780,477	$	(12,190,453	)	$	42,780,477	$	(11,246,634	)
	$	42,780,477	$	(10,313,286	)	$	36,550,484	$	(7,560,928	)


	Estimated Aggregate		Estimated
	Amortization Expense
Three months ending December 31, 2008	$	688,090
Year ending December 31, 2009		2,687,299
Year			Amortization Expense
Nine months ended December 31, 2009			$	3,785,229
2010		2,623,713		4,953,098
2011		2,480,618		4,611,579
2012		2,190,906		4,114,016
2013		1,312,252		2,275,624
2014				2,024,705
Thereafter		6,319,267	$	8,825,773


					Tenant						Customer					Total Purchase
	Land		Building		Improvements		In-place Leases		Leasing Costs		Relationships		Obligations			Price
Reading, Pennsylvania	$	490,646	$	6,188,168	$	14,208	$	362,479	$	1,786	$	141,232	$	—		$	7,198,519
Fridley, Minnesota		1,354,233		7,454,098		619,428		452,414		171,005		807,950		(225,067	)		10,634,061
Concord Township, Ohio		1,796,467		10,254,003		900,120		1,702,792		5,102		917,661		(245,198	)		15,330,947
Pineville, North Carolina		669,025		2,930,295		98,025		151,426		2,218		93,080		—			3,944,069
Marietta, Ohio		829,014		6,537,796		69,469		479,124		3,268		179,014		—			8,097,685
Chalfont, Pennsylvania		1,249,415		6,105,819		316,519		172,278		189,326		397,841		—			8,431,198

	$	6,388,800	$	39,470,179	$	2,017,769	$	3,320,513	$	372,705	$	2,536,778	$	(470,265	)	$	53,636,479


⁽¹⁾		The weighted average interest rate on all debt outstanding at ~~September 30, 2008~~March 31, 2009 was approximately ~~5.92%~~5.66%.

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

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

⁽³⁾⁽⁴⁾		The short-term loan ~~may be extended for a six-month period at the Company’s option, subject to certain conditions.~~was repaid in full on March 31, 2009.


	Scheduled principal		Scheduled principal
	payments		payments
Three months ending December 31, 2008	$	467,668
Year ending December 31, 2009		2,380,065
Nine months ended December 31, 2009			$	1,863,094
2010		50,539,216		50,533,486
2011		2,820,750		2,799,601
2012		3,107,172		3,087,824
2013		11,837,278		11,828,375
2014				20,367,143
Thereafter		184,273,076		164,040,769

	$	255,425,225	$	254,520,292


(1)		Other expense includes interest expense on the Company’s line of credit of $404,922 and $673,197 for the three months ended March 31, 2009 and 2008, respectively. It is not practicable to allocate the interest from the line of credit to either operating segment, thus it is included in the other column.


	Lease Payments
Three months ending December 31, 2008	$	33,600
Year ending December 31, 2009		134,400
2010		134,400
2011		134,400
2012		134,400
2013		134,400
Thereafter		1,008,000


	Payments Due by Period										Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Debt Obligations⁽¹⁾	$	285,625,225	$	22,257,476	$	63,294,033	$	6,196,582	$	193,877,134	$	284,820,292	$	32,809,282	$	53,436,098	$	15,017,195	$	183,557,717
Interest on Debt Obligations⁽²⁾		96,063,397		12,242,982		30,176,906		23,017,473		30,626,036		90,266,237		16,471,682		25,894,344		23,011,778		24,888,433
Capital Lease Obligations⁽³⁾		232,301		—		—		—		232,301		300,000		—		—		—		300,000
Operating Lease Obligations⁽⁴⁾		1,713,600		134,400		268,800		268,800		1,041,600		1,646,400		134,400		268,800		268,800		974,400

Total	$	383,634,523	$	34,634,858	$	93,739,739	$	29,482,855	$	225,777,071	$	377,032,929	$	49,415,364	$	79,599,242	$	38,297,773	$	209,720,550


(1)		Debt obligations represent borrowings under our line of credit ~~term loan~~ and mortgage notes payable that were outstanding as of ~~September 30, 2008.~~ March 31, 2009. The line of credit matures in December 2009, ~~with an~~and we expect to exercise our option to extend for an additional ~~year, and the term loan~~year. The $48.0 million mortgage note issued in September 2008 matures in ~~December 2008 with an option~~October 2010, and we expect to exercise our options to extend ~~for an additional six months.~~through October 2013.

(2)		Interest on debt obligations ~~does not include~~includes estimated interest on our borrowings under our line of ~~credit or term loan.~~ credit. The balance and interest rate on our line of credit ~~and term loan are~~is variable, ~~and,~~ thus the amount of interest ~~has not been~~ calculated for purposes of this ~~table.~~table was based upon rates and balances as of March 31, 2009.

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

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


	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
1% increase in the one month LIBOR

Change in Rental & Interest Income	$	27,308		$	9,125		$	82,106		$	27,375

Change in Interest Expense		77,178			51,111			229,856			151,667


Net decrease	$	(49,869	)	$	(41,986	)	$	(147,750	)	$	(124,292	)


Net Income available to common stockholders	$	118,112		$	567,022		$	707,395		$	1,606,803

Net decrease as percentage of Net Income available to common stockholders		-42.2	%		-7.4	%		-20.9	%		-7.7	%

1% decrease in the one month LIBOR

Change in Rental & Interest Income	$	(24,779	)	$	(9,125	)	$	(75,939	)	$	(27,375	)

Change in Interest Expense	$	(77,178	)	$	(51,111	)	$	(229,856	)	$	(152,222	)


Net increase	$	52,399		$	41,986		$	153,916		$	124,847


Net Income available to common stockholders	$	118,112		$	567,022		$	707,395		$	1,606,803

Net increase as percentage of Net Income available to common stockholders		44.4	%		7.4	%		21.8	%		7.8	%


~~Exhibit~~		~~Description of Document~~
~~10.2†~~		Administration Agreement between Gladstone Commercial Corporation and Gladstone Administration, LLC, dated January 1, 2007 incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K (File No. 000-50363), filed January 3, 2007 (renewed on July 9, 2008).

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

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

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

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

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


	Gladstone Commercial Corporation
Date: ~~November 5, 2008~~May 4, 2009	By:	/s/ ~~Harry Brill~~Danielle Jones
		~~Harry Brill~~Danielle Jones
		Chief Financial Officer