UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.

The number of shares of the registrant’s Common Stock,common stock, $0.001 par value, outstanding as of October 31, 2017May 10, 2021 was 27,705,664.36,394,406.

1. Organization, Basis of Presentation and Significant Accounting Policies

Gladstone Commercial Corporation is a real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and commercial mortgage loans; however, we do not have any mortgage loans currently outstanding. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation ("Adviser"(the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company ("Administrator"(the “Administrator”), each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership or the Operating Partnership.(the “Operating Partnership”).

All further references herein to “we,” “our,” “us” and “us”the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.

Interim Financial Information

Our interim financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"(“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016,2020, as filed with the U.S. Securities and Exchange Commission on February 15, 2017.16, 2021. The results of operations for the three and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the impact of extraordinary events such as the novel coronavirus (“COVID-19”) pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materiallymay differ from those estimates.these estimates under different assumptions or conditions.

CriticalSignificant Accounting Policies

InThe preparation of our financial statements in accordance with GAAP we apply certain critical accounting policies which requirerequires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of ourthese accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2017.March 31, 2021.

Recently Issued Accounting Pronouncements

In May 2014,April 2020, the FASB issued guidance regardinga staff question-and-answer document, Topic 842 and Topic 840: Accounting for Lease Concessions related to the recognitionEffects of revenue from contracts with customers. Under this guidance, an entity will recognize revenuethe COVID-19 Pandemic (“COVID-19 Q&A”), to depict the transfer of goods or servicesaddress frequently asked questions pertaining to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flowslease concessions arising from contracts with customers. We expect the new revenue standard will apply to executory costs and other componentseffects of revenue due under leases that are deemed to be non-lease components (examples include common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. Revenue from these non-lease components, which were previously recognized on a straight-line basis under currentCOVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the tenant, which would be recognizedaddressed under the new revenue guidancelease modification accounting framework, or if a lease concession was under the enforceable rights and obligations within the existing lease agreement, which would not fall under the lease modification accounting framework. The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease

modification, as long as the related services are delivered. Asconcession does not result in a result, while the total revenue recognized over the lease term would not differ under the new guidance, the revenue recognition pattern could be different. We aresubstantial increase in the process of evaluating the significancerights of the difference in the revenue recognition pattern that would result from this change, and adjustments in revenue recognition attributable to non-lease components will take effect in tandem with the new leasing standard described below, which is effective January 1, 2019. We will adopt this guidance for our annual and interim periods beginning January 1, 2018 and expect to use the modified retrospective method, under which the cumulative effectlessor or obligations of initially applying the guidance is recognized at the date of initial application.

2. Related-Party Transactions

Gladstone Management and Gladstone Administration

We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. TwoNaN of our executive officers, Mr. Gladstone and Mr. Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip, is anthe executive managing directorvice president of commercial and industrial real estate of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary.secretary, as well as executive vice president of administration of our Adviser. We have entered into an advisory agreement with our Adviser, as amended from time to time or the Advisory Agreement,(the “Advisory Agreement”), and an administration agreement with our Administrator or the Administration Agreement.(the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of September 30, 2017March 31, 2021 and December 31, 2016, $2.32020, $3.2 million and $2.1$3.0 million, respectively, were collectively due to our Adviser and Administrator.

Under the previous version of the Advisory Agreement (that which was in place prior to the most recent amendment on July 2015 amendment,14, 2020), the calculation of the annual base management fee equalsequaled 1.5% of our adjustedTotal Equity, which was our total stockholders’ equity which is ourplus total stockholders’mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges) and, adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include operating partnership units in the Operating Partnership (“OP Units”) held by holders who do not control the Operating Partnership (“Non-controlling OP Unitholders”). The fee iswas calculated and accrued quarterly as 0.375% per quarter of such adjusted total stockholders’ equity figure. As a result of the July 2016 amendment, the definition of adjusted total stockholders' equity in the calculation of the base management fee and the incentive fee (described below) includes total mezzanine equity.Total Equity. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. Prior to

On July 14, 2020, the 2015 amendment,Company amended and restated the Advisory Agreement provided for an annualby entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Sixth Amended Advisory Agreement”), which replaced the previous calculation of the base management fee equal to 2.0%with a calculation based on Gross Tangible Real Estate. The revised base management fee will be payable quarterly in arrears and calculated at an annual rate of our common stockholders’ equity, which was our total stockholders’ equity, less0.425% (0.10625% per quarter) of the recordedprior calendar quarter’s “Gross Tangible Real Estate,” defined in the Sixth Amended Advisory Agreement as the current gross value of any preferred stock and adjusted to exclude the effectCompany’s property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any unrealized gains, losses, orsubsequent capital improvements thereon). The calculation of the other items that did not affect realized net income (including impairment charges).fees in the Advisory Agreement remain unchanged. The revised base management fee calculation began with the fee calculations for the quarter ended September 30, 2020.

For the three and nine months ended September 30, 2017,March 31, 2021 and 2020, we recorded a base management fee of $1.3$1.4 million and $3.7 million, respectively. For the three and nine months ended September 30, 2016, we recorded a base management fee of $1.1 million and $2.8$1.4 million, respectively.

Incentive Fee

As a result ofPursuant to the July 2015 amendment,Advisory Agreement, the calculation of the incentive fee was revised to rewardrewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee, and which, as a result of the July 2016 amendment to the Advisory Agreement, now includes total mezzanine equity)fee). We refer to this as the new hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the new hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four4 quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP

net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.

For the three and nine months ended September 30, 2017,March 31, 2021 and 2020, we recorded an incentive fee of $0.6$1.2 million and $1.8 million, respectively. For the three and nine months ended September 30, 2016, we recorded an incentive fee of $0.6 million and $1.8$1.1 million, respectively. The Adviser did not0t waive any portion of the incentive fee for the three and nine months ended September 30, 2017March 31, 2021 or 2016. Waivers are unconditional and cannot be recouped by the Adviser in the future.2020.

Capital Gain Fee

Under the Advisory Agreement, as amended in July 2015, we will pay to the Adviser a capital gains-basedgain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (which is calculated as(equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements). of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. NoNaN capital gain fee was recognized during the three and nine months ended September 30, 2017March 31, 2021 or 2016.2020.

Termination Fee

The Advisory Agreement includes a termination fee clause whereby, in the event of our termination thereofof the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the Advisory Agreement after we have defaulted and applicable cure periods have expired. The Advisory Agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions thereof, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.

Administration Agreement

Under the terms of the Administration Agreement, we pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our interim chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator'sAdministrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. We believe that the methodology of allocating the Administrator’s total expenses by approximate percentage of time services were performed among all companies serviced by our Administrator more closely approximates fees paid to actual services performed. For the three and nine months ended September 30, 2017,March 31, 2021 and 2020, we recorded an administration fee of $0.3 million and $1.0 million, respectively, and for the three and nine months ended September 30, 2016, we recorded an administration fee of $0.3 million and $1.1$0.4 million, respectively.

Gladstone Securities

Gladstone Securities, LLC or (“Gladstone Securities,Securities”), is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

Mortgage Financing Arrangement Agreement

We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage,

generally ranging from 0.15% to a maximum of 1.0%1.00% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third partythird-party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1 million and $0.2 million$14,000 during the three and nine months ended September 30, 2017, respectively, which are included in mortgage notes payable, net, in the consolidated balance sheets, or 0.25% and 0.27%, respectively, of mortgage principal secured. We paid financing fees to Gladstone Securities of $0.1 million and $0.2 million during the three and nine months ended September 30, 2016, respectively,March 31, 2021, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.28% and 0.36%, respectively,0.25% of the mortgage principal secured. We paid financing fees to Gladstone Securities of $89,637 during the three months ended March 31, 2020, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.25% of the mortgage principal secured. Our Board of Directors renewed the agreement for an additional year, through August 31, 2018,2021, at its July 20172020 meeting.

3. Loss perPer Share of Common Stock

The following tables set forth the computation of basic and diluted loss per share of common stock for the three and nine months ended September 30, 2017March 31, 2021 and 2016. 2020. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted loss per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of loss would also be added back to net loss. Net loss figures are presented net of such non-controlling interests in the loss per share calculation.

We computed basic loss per share for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 using the weighted average number of shares outstanding during the respective periods. Diluted loss per share for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020 reflects additional shares of common stock related to our convertible Seniorsenior common stock (the “Senior Common Stock (ifStock”), if the effect would be dilutive),dilutive, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net income availableloss attributable to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of September 30, 2017March 31, 2021 and December 31, 20162020, excluding real estate held for sale as of December 31, 20162020 (dollars in thousands):

 

Real estate depreciation expense on building and tenant improvements was $6.9$10.7 million and $19.8$9.0 million for the three and nine months ended September 30, 2017, respectively,March 31, 2021 and $6.1 million and $17.9 million for the three and nine months ended September 30, 2016,2020, respectively.

We acquired five1 property during the three months ended March 31, 2021, and 5 properties during the ninethree months ended September 30, 2017, and two properties during the nine months ended September 30, 2016, whichMarch 31, 2020. The acquisitions are summarized below (dollars in thousands):

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the ninethree months ended September 30, 2017March 31, 2021 and 20162020, respectively, as follows (dollars in thousands):

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the nine months ended September 30, 2016ending December 31, 2021 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

The following table reflects pro-forma consolidated statementsbelow sets forth the allocation of operations as if the business combinations completed in 2016, were completed as of January 1, 2015. The pro-forma earningslease revenue between fixed contractual payments and variable lease payments for the three and nine months ended September 30, 2016 were adjusted to assume that the acquisition-related costs were incurred as of the beginning of the comparative period (dollars in thousands, except per share amounts):

Intangible Assets

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of September 30, 2017March 31, 2021 and December 31, 2016,2020, excluding real estate held for sale as of December 31, 20162020 (dollars in thousands):

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $3.9$6.0 million and $10.9$5.1 million for the three and nine months ended September 30, 2017, respectively,March 31, 2021 and $3.4 million and $9.9 million for the three and nine months ended September 30, 2016,2020, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and other comprehensive income (loss).income.

Total amortization related to above-market lease values was $0.2 million and $0.4$0.2 million for the three and nine months ended September 30, 2017, respectively,March 31, 2021 and $0.1 million and $0.4 million for the three and nine months ended September 30, 2016,2020, respectively, and is included in rentallease revenue in the condensed consolidated statements of operations and other comprehensive income (loss).income. Total amortization related to below-market lease values was $0.4 million and $1.1 million for the three and nine months ended September 30, 2017, respectively, and $0.3$1.6 million and $0.7 million for the three and nine months ended September 30, 2016,March 31, 2021 and 2020, respectively, and is included in rentallease revenue in the condensed consolidated statements of operations and other comprehensive income (loss).income.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the ninethree months ended September 30, 2017March 31, 2021 and 20162020, respectively, were as follows:

5. Real Estate Dispositions, Held for Sale and Impairment Charges

Real Estate Dispositions

During the ninethree months ended September 30, 2017,March 31, 2021, we continued to execute our capital recycling program, whereby we sold properties outside of our core markets and redeployed proceeds to either fund property acquisitions in our target secondary growth markets, as well asor repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core

properties as reasonable disposition opportunities become available. During the ninethree months ended September 30, 2017,March 31, 2021, we sold four2 non-core properties, located in Franklin, New Jersey, Hazelwood, Missouri, Concord Township, Ohio,Rancho Cordova, California and Newburyport, Massachusetts,Champaign, Illinois, which are summarized in the table below (dollars in thousands):

Our dispositions during the ninethree months ended September 30, 2017March 31, 2021 were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will theysuch dispositions have a major effect on our operations and financial results. Accordingly, the operating results of these properties are included within continuing operations for all periods reported.

The table below summarizes the components of operating income from the real estate and related assets disposed of during the three and nine months ended September 30, 2017,March 31, 2021, and 20162020 (dollars in thousands):

Real Estate Held for Sale

At September 30, 2017,As of March 31, 2021, we did not have any properties classified as held for sale. At December 31, 2016,2020, we had two3 properties classified as held for sale, located in Hazelwood, MissouriBoston Heights, Ohio, Rancho Cordova, California, and Franklin, New Jersey. BothChampaign, Illinois. NaN of thesethe properties were sold during the ninethree months ended September 30, 2017.March 31, 2021. Our Boston Heights, Ohio property is classified as held and used as of March 31, 2021, as this property no longer meets the held for sale criteria.