##### 



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 SEPTEMBER 30,
2007
 OR
 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(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)
 þ o
 o þ o
 o þ




---



##### 



PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of
Operations for the three and nine months ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash
Flows for the nine months ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and
Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    36PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    37Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3.
    
    Defaults Upon Senior Securities
    
    
    37Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    38SIGNATURES
    
    
    39




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30, 2007
    
    
    December 31, 2006ASSETSReal estate, net of accumulated depreciation of
$13,771,428 and $8,595,419, respectively
    
    $
    309,420,504
    
    
    $
    235,118,123Lease intangibles, net of accumulated amortization of
$6,722,025 and $4,175,685, respectively
    
    
    27,607,486
    
    
    
    23,416,696Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    1,824,794
    
    
    
    36,005,686Restricted cash
    
    
    1,500,858
    
    
    
    1,225,162Funds held in escrow
    
    
    1,638,520
    
    
    
    1,635,819Interest receivable  mortgage note
    
    
    83,333
    
    
    
    Interest receivable  employees
    
    
    52,728
    
    
    
    43,716Deferred rent receivable
    
    
    4,664,502
    
    
    
    3,607,279Deferred financing costs, net of accumulated amortization of
$1,977,287 and $1,467,297, respectively
    
    
    3,973,775
    
    
    
    3,713,004Prepaid expenses
    
    
    547,500
    
    
    
    521,290Deposits on real estate
    
    
    
    
    
    
    300,000Accounts receivable
    
    
    31,877
    
    
    
    179,247TOTAL ASSETS
    
    $
    361,345,877
    
    
    $
    315,766,022LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    186,416,801
    
    
    $
    154,494,438Borrowings under line of credit
    
    
    20,000,000
    
    
    
    Deferred rent liability
    
    
    4,129,426
    
    
    
    4,718,599Asset retirement obligation liability
    
    
    1,781,817
    
    
    
    1,631,294Accounts payable and accrued expenses
    
    
    993,915
    
    
    
    673,410Due to adviser (refer to Note 2)
    
    
    788,533
    
    
    
    183,042Rent received in advance, security deposits and funds held in escrow
    
    
    2,254,293
    
    
    
    1,841,063Total Liabilities
    
    
    216,364,785
    
    
    
    163,541,846STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation
preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 17,700,000 shares authorized and
8,565,264 shares issued and outstanding
    
    
    8,565
    
    
    
    8,565Additional paid in capital
    
    
    170,640,979
    
    
    
    170,640,979Notes receivable  employees
    
    
    (2,800,724
    )
    
    
    (3,201,322
    )Distributions in excess of accumulated earnings
    
    
    (22,869,878
    )
    
    
    (15,226,196
    )Total Stockholders Equity
    
    
    144,981,092
    
    
    
    152,224,176TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    361,345,877
    
    
    $
    315,766,022
  3




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenuesRental income
    
    $
    8,024,305
    
    
    $
    6,214,295
    
    
    $
    22,834,663
    
    
    $
    17,109,203Interest income from mortgage notes receivable
    
    
    255,555
    
    
    
    478,329
    
    
    
    758,333
    
    
    
    1,589,675Tenant recovery revenue
    
    
    80,648
    
    
    
    43,352
    
    
    
    230,851
    
    
    
    92,772Total operating revenues
    
    
    8,360,508
    
    
    
    6,735,976
    
    
    
    23,823,847
    
    
    
    18,791,650Operating expensesDepreciation and amortization
    
    
    2,668,383
    
    
    
    2,162,640
    
    
    
    7,722,349
    
    
    
    6,026,150Property operating expenses
    
    
    204,972
    
    
    
    145,058
    
    
    
    597,273
    
    
    
    435,495Base management fee (refer to Note 2)
    
    
    459,202
    
    
    
    656,916
    
    
    
    1,412,337
    
    
    
    2,029,050Incentive fee (refer to Note 2)
    
    
    677,104
    
    
    
    
    
    
    
    1,896,677
    
    
    
    Administration fee (refer to Note 2)
    
    
    175,852
    
    
    
    
    
    
    
    592,996
    
    
    
    Professional fees
    
    
    118,371
    
    
    
    167,353
    
    
    
    442,479
    
    
    
    598,771Insurance
    
    
    53,943
    
    
    
    54,662
    
    
    
    171,275
    
    
    
    154,868Directors fees
    
    
    66,250
    
    
    
    33,500
    
    
    
    174,750
    
    
    
    94,500Stockholder related expenses
    
    
    40,991
    
    
    
    34,414
    
    
    
    215,969
    
    
    
    282,478Asset retirement obligation expense
    
    
    29,440
    
    
    
    30,619
    
    
    
    86,542
    
    
    
    102,263General and administrative
    
    
    17,452
    
    
    
    20,394
    
    
    
    79,119
    
    
    
    48,991Stock option compensation expense
    
    
    
    
    
    
    314,593
    
    
    
    
    
    
    
    394,411Total operating expenses before credit from Adviser
    
    
    4,511,960
    
    
    
    3,620,149
    
    
    
    13,391,766
    
    
    
    10,166,977Credit to incentive fee (refer to Note 2)
    
    
    (526,991
    )
    
    
    
    
    
    
    (1,746,564
    )
    
    
    Total operating expenses
    
    
    3,984,969
    
    
    
    3,620,149
    
    
    
    11,645,202
    
    
    
    10,166,977Other income (expense)Interest income from temporary investments
    
    
    33,105
    
    
    
    2,006
    
    
    
    325,390
    
    
    
    13,437Interest income  employee loans
    
    
    52,728
    
    
    
    41,346
    
    
    
    169,608
    
    
    
    75,483Other income
    
    
    9,896
    
    
    
    
    
    
    
    28,127
    
    
    
    10,400Interest expense
    
    
    (2,920,270
    )
    
    
    (2,494,221
    )
    
    
    (8,137,343
    )
    
    
    (6,268,757
    )Total other expense
    
    
    (2,824,541
    )
    
    
    (2,450,869
    )
    
    
    (7,614,218
    )
    
    
    (6,169,437
    )Income from continuing operations
    
    
    1,550,998
    
    
    
    664,958
    
    
    
    4,564,427
    
    
    
    2,455,236Discontinued operationsIncome from discontinued operations
    
    
    5,975
    
    
    
    6,915
    
    
    
    471
    
    
    
    116,169Net realized income (loss) from foreign currency transactions
    
    
    33,487
    
    
    
    (1,044
    )
    
    
    33,550
    
    
    
    (201,017
    )Gain on sale of real estate
    
    
    
    
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026Taxes (paid) refunded on sale of real estate
    
    
    
    
    
    
    (315,436
    )
    
    
    78,667
    
    
    
    (315,436
    )Total discontinued operations
    
    
    39,462
    
    
    
    1,112,461
    
    
    
    112,688
    
    
    
    1,021,742Net income
    
    
    1,590,460
    
    
    
    1,777,419
    
    
    
    4,677,115
    
    
    
    3,476,978Dividends attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (484,375
    )
    
    
    (3,070,312
    )
    
    
    (1,313,194
    )Net income available to common stockholders
    
    $
    567,022
    
    
    $
    1,293,044
    
    
    $
    1,606,803
    
    
    $
    2,163,784Earnings per weighted average common share  basicIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    0.15Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    0.01
    
    
    
    0.13Net income available to common stockholders
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.28Earnings per weighted average common share  dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    0.01
    
    
    
    0.13Net income available to common stockholders
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.27Weighted average shares outstandingBasic
    
    
    8,565,264
    
    
    
    7,820,376
    
    
    
    8,565,264
    
    
    
    7,752,170Diluted
    
    
    8,565,264
    
    
    
    7,981,071
    
    
    
    8,565,264
    
    
    
    7,896,860
  4




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the nine months ended September 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    4,677,115
    
    
    $
    3,476,978Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    7,722,349
    
    
    
    6,078,450Amortization of deferred financing costs, including discontinued operations
    
    
    509,990
    
    
    
    464,941Amortization of deferred rent asset
    
    
    190,122
    
    
    
    190,123Amortization of deferred rent liability
    
    
    (589,173
    )
    
    
    (499,870
    )Asset retirement obligation expense, including discontinued operations
    
    
    86,542
    
    
    
    112,195Stock compensation
    
    
    
    
    
    
    394,411Increase in mortgage notes payable due to change in value of foreign currency
    
    
    
    
    
    
    202,065Value of building acquired in excess of mortgage note satisfied, applied to
interest income
    
    
    
    
    
    
    (335,701
    )Gain on sale of real estate
    
    
    
    
    
    
    (1,422,026
    )(Increase) decrease in mortgage interest receivable
    
    
    (83,333
    )
    
    
    70,749Increase in employee interest receivable
    
    
    (9,012
    )
    
    
    (41,346
    )Increase in deferred rent receivable
    
    
    (1,247,345
    )
    
    
    (941,903
    )Decrease (increase) in prepaid expenses and other assets
    
    
    121,160
    
    
    
    (49,645
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    516,996
    
    
    
    248,449Increase in rent received in advance
    
    
    137,534
    
    
    
    53,097Net cash provided by operating activities
    
    
    12,032,945
    
    
    
    8,000,967Cash flows from investing activities:Real estate investments
    
    
    (86,742,539
    )
    
    
    (48,311,928
    )Proceeds from sales of real estate
    
    
    
    
    
    
    2,106,112Principal repayments on mortgage notes receivable
    
    
    
    
    
    
    44,742Net payments to lenders for reserves held in escrow
    
    
    (1,186,448
    )
    
    
    (2,537,541
    )Increase (decrease) in restricted cash
    
    
    (275,696
    )
    
    
    329,547Deposits on future acquisitions
    
    
    (1,310,000
    )
    
    
    (600,000
    )Deposits applied against real estate investments
    
    
    1,610,000
    
    
    
    1,200,000Net cash used in investing activities
    
    
    (86,904,683
    )
    
    
    (47,769,068
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    26,034,648Offering costs
    
    
    
    
    
    
    (1,308,496
    )Borrowings under mortgage notes payable
    
    
    32,521,691
    
    
    
    31,900,000Principal repayments on mortgage notes payable
    
    
    (599,328
    )
    
    
    (427,506
    )Principal repayments on employee loans from sale of common stock
    
    
    400,598
    
    
    
    Borrowings from line of credit
    
    
    24,200,000
    
    
    
    70,400,400Repayments on line of credit
    
    
    (4,200,000
    )
    
    
    (78,300,400
    )Increase in reserves from tenants
    
    
    1,318,918
    
    
    
    1,315,516Increase in security deposits
    
    
    140,525
    
    
    
    419,070Payments for deferred financing costs
    
    
    (770,761
    )
    
    
    (1,699,798
    )Dividends paid for common and preferred
    
    
    (12,320,797
    )
    
    
    (9,690,708
    )Net cash provided by financing activities
    
    
    40,690,846
    
    
    
    38,642,726Net decrease in cash and cash equivalents
    
    
    (34,180,892
    )
    
    
    (1,125,375
    )Cash and cash equivalents, beginning of period
    
    
    36,005,686
    
    
    
    1,740,159Cash and cash equivalents, end of period
    
    $
    1,824,794
    
    
    $
    614,784NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    150,523
    
    
    $
    1,604,416Additions to real estate included in accounts payable, accrued expenses and amount due adviser
    
    $
    409,000
    
    
    $
    NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    4,506,689
    
    
    $
    30,129,654Assumption of mortgage notes payable by buyer
    
    $
    
    
    
    $
    4,846,925Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options
    
    $
    
    
    
    $
    1,826,754Acquisition of building in satisfaction of mortgage note receivable
    
    $
    
    
    
    $
    11,316,774
  5




---



##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      6




---



##### 



Interim financial information
  Investments in real estate
      7




---



##### 



September 30, 2007
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    12,178,313
    
    
    $
    (3,030,905
    )
    
    $
    10,738,319
    
    
    $
    (1,907,668
    )Leasing costs
    
    
    8,359,392
    
    
    
    (1,910,586
    )
    
    
    5,891,099
    
    
    
    (1,267,829
    )Customer relationships
    
    
    13,791,806
    
    
    
    (1,780,534
    )
    
    
    10,962,963
    
    
    
    (1,000,188
    )$
    34,329,511
    
    
    $
    (6,722,025
    )
    
    $
    27,592,381
    
    
    $
    (4,175,685
    )
  EstimatedYear
    
    Amortization Expense2007
    
    $
    904,6562008
    
    
    3,618,6232009
    
    
    3,490,9832010
    
    
    3,402,5802011
    
    
    3,211,787
 8




---



##### 



Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  9




---



##### 



Deferred financing costs
  Revenue recognition
   Income taxes
   10




---



##### 



Segment information
  Foreign Currency Transactions
  Asset retirement obligations
  11




---



##### 



Real estate held for sale and discontinued operations
  Recently Issued Accounting Pronouncements
  .
 Use of estimates
  Reclassifications
  12




---



##### 



2. Management Advisory Fee
  Initial Advisory Agreement
   Amended Advisory Agreement
   13




---



##### 



Administration Agreement
  3. Stock Options
   14




---



##### 



OutstandingNumber of
    
    
    
    
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Strike Price of
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest Rate onDate Issued
    
    Exercised
    
    
    Options Exercised
    
    
    Issued to Employees
    
    
    at 9/30/07
    
    
    Term of Note
    
    
    NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    373,832
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    5,000
    
    
    
    15.00
    
    
    
    75,000
    
    
    
    57,796
    
    
    9 years
    
    
    6.00
    %Apr-06
    
    
    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
    %May-06
    
    
    2,500
    
    
    
    16.01
    
    
    
    40,000
    
    
    
    39,142
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    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
    %May-06
    
    
    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
    %Nov-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    350,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %204,922
    
    
    
    
    
    
    $
    3,219,954
    
    
    $
    2,800,724
  4. Earnings per Common Share
  For the three months ended September 30,
    
    
    For the nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income available to common stockholders
    
    $
    567,022
    
    
    $
    1,293,044
    
    
    $
    1,606,803
    
    
    $
    2,163,784Denominator for basic weighted average
shares
    
    
    8,565,264
    
    
    
    7,820,376
    
    
    
    8,565,264
    
    
    
    7,752,170Dilutive effect of stock options
    
    
    
    
    
    
    160,695
    
    
    
    
    
    
    
    144,690Denominator for diluted weighted average
shares
    
    
    8,565,264
    
    
    
    7,981,071
    
    
    
    8,565,264
    
    
    
    7,896,860Basic earnings per common share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.28Diluted earnings per common share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.27
 15




---



##### 



5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,662,636Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,945,970Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,150,060Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,506,526Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,781,951Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,144,714Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,791,928Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,846,269Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    890,296Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,737,823Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,701,969Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,631,093Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,351,767May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,643,167May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,881,097Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,336,844Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,633,830Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,480,049Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,513,683Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,966,428Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,124,190Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,124,191Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,124,191Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    6,840,235Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,533,162Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,173,305Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,846,501Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    2,961,013Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,120,806Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    13,956,406Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    26,606,123May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,842,726Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,310,148Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,576,649Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,127,441Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,543,997Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,543,998Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,543,998Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    6,907,194Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    7,029,876Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    13,812,323Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,137,532May-07
    
    Tewksbury, Massachusetts
    
    
    102,200
    
    
    Industrial
    
    
    10,197,797Jul-07
    
    Mason, Ohio
    
    
    21,264
    
    
    Retail
    
    
    6,133,589Sep-07
    
    Cicero, New York
    
    
    71,880
    
    
    Industrial
    
    
    5,308,758Sep-07
    
    Grand Rapids, Michigan
    
    
    63,235
    
    
    Office
    
    
    12,124,991Sep-07
    
    Bolingbrook, Illinois
    
    
    55,869
    
    
    Industrial
    
    
    6,271,264Total real estate, net
    
    
    5,490,147
    
    
    
    
    $
    309,420,504
  September 30, 2007
    
    
    December 31, 2006Real estate:Land
    
    $
    45,525,512
    
    
    $
    33,764,113Building
    
    
    270,545,921
    
    
    
    204,115,481Tenant improvements
    
    
    7,120,488
    
    
    
    5,833,948Accumulated depreciation
    
    
    (13,771,417
    )
    
    
    (8,595,419
    )Real estate, net
    
    $
    309,420,504
    
    
    $
    235,118,123
 16




---



##### 



17




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    PriceMason, Ohio
    
    $
    797,274
    
    
    $
    5,959,167
    
    
    $
    296,277
    
    
    $
    
    
    
    $
    144,703
    
    
    $
    683,471
    
    
    $
    7,880,892Raleigh, North Carolina
    
    
    1,605,551
    
    
    
    5,464,586
    
    
    
    48,767
    
    
    
    142,209
    
    
    
    64,110
    
    
    
    478,083
    
    
    
    7,803,306Tulsa, Oklahoma
    
    
    
    
    
    
    13,858,489
    
    
    
    198,738
    
    
    
    437,117
    
    
    
    587,605
    
    
    
    723,168
    
    
    
    15,805,117Hialeah, Florida
    
    
    3,562,455
    
    
    
    6,619,258
    
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    104,508
    
    
    
    10,287,038Tewksbury,
Massachusetts
    
    
    1,394,902
    
    
    
    8,638,642
    
    
    
    256,233
    
    
    
    421,446
    
    
    
    865
    
    
    
    535,416
    
    
    
    11,247,504Mason, Ohio
    
    
    1,201,338
    
    
    
    4,853,919
    
    
    
    106,439
    
    
    
    
    
    
    
    416,142
    
    
    
    189,699
    
    
    
    6,767,537Cicero, New York
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    
    
    
    
    151,734
    
    
    
    226,998
    
    
    
    114,505
    
    
    
    5,810,931Grand Rapids, Michigan
    
    
    1,629,270
    
    
    
    10,194,256
    
    
    
    303,929
    
    
    
    
    
    
    
    246,042
    
    
    
    
    
    
    
    12,373,497Bolingbrook, Illinois
    
    
    1,271,543
    
    
    
    4,924,703
    
    
    
    76,157
    
    
    
    287,488
    
    
    
    146,364
    
    
    
    
    
    
    
    6,706,255$
    11,761,399
    
    
    $
    65,531,648
    
    
    $
    1,286,540
    
    
    $
    1,439,994
    
    
    $
    1,833,646
    
    
    $
    2,828,850
    
    
    $
    84,682,077
   Year
    
    Lease Payments2007
    
    $
    7,905,0632008
    
    
    31,930,6752009
    
    
    31,334,2692010
    
    
    30,978,7052011
    
    
    30,462,466Thereafter
    
    
    154,863,639
  18




---



##### 



6. Discontinued Operations
   For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenue
    
    $
    
    
    
    $
    31,106
    
    
    $
    
    
    
    $
    342,629Operating income
    
    
    5,975
    
    
    
    6,815
    
    
    
    471
    
    
    
    22,708Taxes & licenses
    
    
    
    
    
    
    319,753
    
    
    
    78,667
    
    
    
    323,172Interest expense
    
    
    
    
    
    
    13,059
    
    
    
    
    
    
    
    143,716Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,300Gain on sale of real estate
    
    
    
    
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026Realized and unrealized
gain (loss) on foregin
currency transactions
    
    
    33,487
    
    
    
    (1,044
    )
    
    
    33,550
    
    
    
    (201,017
    )Income from discontinued
operations
    
    $
    39,462
    
    
    $
    1,112,461
    
    
    $
    112,688
    
    
    $
    1,021,742
 7. Mortgage Note Receivable
  8. Mortgage Notes Payable
  19




---



##### 



Principal Balance OutstandingDate of Issuance of
    
    Principal MaturityNote
    
    Date
    
    
    Interest Rate
    
    
    September 30, 2007
    
    
    December 31, 20063/16/2005
    
    
    4/1/2030
    
    
    
    6.33
    %
    
    $
    3,017,649
    
    
    $
    3,060,0938/25/2005
    
    
    9/1/2015
    
    
    
    5.33
    %
    
    
    21,732,419
    
    
    
    21,757,0009/12/2005
    
    
    9/1/2015
    
    
    
    5.21
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    12/8/2015
    
    
    
    5.71
    %
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    12/1/2013
    
    
    
    5.91
    %
    
    
    9,514,667
    
    
    
    9,620,0502/21/2006
    
    
    6/30/2014
    
    
    
    5.20
    %
    
    
    19,862,309
    
    
    
    20,104,7163/29/2006
    
    
    4/1/2016
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    5/5/2016
    
    
    
    6.58
    %
    
    
    14,573,540
    
    
    
    14,753,57911/22/2006
    
    
    12/1/2016
    
    
    
    5.76
    %
    
    
    14,309,000
    
    
    
    14,309,00012/22/2006
    
    
    1/1/2017
    
    
    
    5.79
    %
    
    
    21,846,000
    
    
    
    21,846,0002/8/2007
    
    
    3/1/2017
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    6/5/2007
    
    
    6/8/2017
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    9/6/2007
    
    
    12/11/2015
    
    
    
    5.81
    %
    
    
    4,502,217
    
    
    
    $
    186,416,801
    
    
    $
    154,494,438
   Scheduled principalYear
    
    payments2007
    
    $
    292,9392008
    
    
    1,432,6752009
    
    
    2,083,3052010
    
    
    2,206,7642011
    
    
    2,481,162Thereafter
    
    
    177,919,956$
    186,416,801
   20




---



##### 



9. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December
31, 2006
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (3,201,322
    )
    
    $
    (15,226,196
    )
    
    $
    152,224,176Repayment of
Principal on Notes
Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400,598
    
    
    
    
    
    
    
    400,598Distributions
Declared to Common
and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,320,797
    )
    
    
    (12,320,797
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,677,115
    
    
    
    4,677,115Balance at
September 30, 2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,800,724
    )
    
    $
    (22,869,878
    )
    
    $
    144,981,092
    10. Segment Information
  21




---



##### 



As of and for the three months ended September 30, 2007
    
    
    As of and for the nine months ended September 30, 2007Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    8,104,953
    
    
    $
    255,555
    
    
    $
    
    
    
    $
    8,360,508
    
    
    $
    23,065,514
    
    
    $
    758,333
    
    
    $
    
    
    
    $
    23,823,847Operating expenses
    
    
    (5,823,065
    )
    
    
    
    
    
    
    (1,082,174
    )
    
    
    (6,905,239
    )
    
    
    (16,543,507
    )
    
    
    
    
    
    
    (3,239,038
    )
    
    
    (19,782,545
    )Other income
    
    
    
    
    
    
    
    
    
    
    95,729
    
    
    
    95,729
    
    
    
    
    
    
    
    
    
    
    
    523,125
    
    
    
    523,125Discontinued
operations
    
    
    39,462
    
    
    
    
    
    
    
    
    
    
    
    39,462
    
    
    
    112,688
    
    
    
    
    
    
    
    
    
    
    
    112,688Net income (loss)
    
    $
    2,321,350
    
    
    $
    255,555
    
    
    $
    (986,445
    )
    
    $
    1,590,460
    
    
    $
    6,634,695
    
    
    $
    758,333
    
    
    $
    (2,715,913
    )
    
    $
    4,677,115Total Assets
    
    $
    343,702,960
    
    
    $
    10,000,000
    
    
    $
    7,642,917
    
    
    $
    361,345,877
    
    
    $
    343,702,960
    
    
    $
    10,000,000
    
    
    $
    7,642,917
    
    
    $
    361,345,877
 As of and for the three months ended September 30, 2006
    
    
    As of and for the nine months ended September 30, 2006Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    6,257,647
    
    
    $
    478,329
    
    
    $
    
    
    
    $
    6,735,976
    
    
    $
    17,201,975
    
    
    $
    1,589,675
    
    
    $
    
    
    
    $
    18,791,650Operating expenses
    
    
    (4,832,538
    )
    
    
    
    
    
    
    (1,281,832
    )
    
    
    (6,114,370
    )
    
    
    (12,832,665
    )
    
    
    
    
    
    
    (3,603,069
    )
    
    
    (16,435,734
    )Other income
    
    
    
    
    
    
    
    
    
    
    43,352
    
    
    
    43,352
    
    
    
    
    
    
    
    
    
    
    
    99,320
    
    
    
    99,320Discontinued
operations
    
    
    1,112,461
    
    
    
    
    
    
    
    
    
    
    
    1,112,461
    
    
    
    1,021,742
    
    
    
    
    
    
    
    
    
    
    
    1,021,742Net income (loss)
    
    $
    2,537,570
    
    
    $
    478,329
    
    
    $
    (1,238,480
    )
    
    $
    1,777,419
    
    
    $
    5,391,052
    
    
    $
    1,589,675
    
    
    $
    (3,503,749
    )
    
    $
    3,476,978Total Assets
    
    $
    265,894,348
    
    
    $
    10,000,000
    
    
    $
    5,608,132
    
    
    $
    281,502,480
    
    
    $
    265,894,348
    
    
    $
    10,000,000
    
    
    $
    5,608,132
    
    
    $
    281,502,480
  11. Line of Credit
  22




---



##### 



12. Pro Forma Financial Information
  For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating Data:Total operating revenue
    
    $
    8,885,873
    
    
    $
    8,686,955
    
    
    $
    26,643,326
    
    
    $
    24,605,105Total operating expenses
    
    
    (4,153,570
    )
    
    
    (4,285,053
    )
    
    
    (12,586,821
    )
    
    
    (12,202,405
    )Other expense
    
    
    (2,824,541
    )
    
    
    (2,450,869
    )
    
    
    (7,614,218
    )
    
    
    (6,169,437
    )Income from continuing operations
    
    
    1,907,762
    
    
    
    1,951,033
    
    
    
    6,442,287
    
    
    
    6,233,263Dividends attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (484,375
    )
    
    
    (3,070,312
    )
    
    
    (1,313,194
    )Net income available to common stockholders
    
    $
    884,324
    
    
    $
    1,466,658
    
    
    $
    3,371,975
    
    
    $
    4,920,069Share and Per Share Data:Basic net income
    
    $
    0.10
    
    
    $
    0.19
    
    
    $
    0.39
    
    
    $
    0.63Diluted net income
    
    $
    0.10
    
    
    $
    0.18
    
    
    $
    0.39
    
    
    $
    0.62Weighted average shares outstanding-basic
    
    
    8,565,264
    
    
    
    7,820,376
    
    
    
    8,565,264
    
    
    
    7,752,170Weighted average shares outstanding-diluted
    
    
    8,565,264
    
    
    
    7,981,071
    
    
    
    8,565,264
    
    
    
    7,896,860
  13. Subsequent Events
   23




---



##### 



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. Such factors include,
among others: (1) general volatility of the capital markets and the market price of our securities;
(2) risks associated with negotiation and consummation of pending and future transactions; (3) the
loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker,
or George Stelljes III; (4) changes in our business strategy; (5) availability, terms and
deployment of capital, including the ability to maintain and borrow under our existing credit
facility, arrange for long-term mortgages on our properties; secure one or more additional
long-term credit facilities, and to raise equity capital; (6) changes in our industry, interest
rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (7)
those factors listed under the caption Risk Factors of the Annual Report on Form 10-K as filed
with the Securities and Exchange Commission, (the SEC), on February 27, 2007, and the Quarterly
Report on Form 10-Q as filed with the SEC on May 1, 2007. We caution readers not to place undue
reliance on any such forward-looking statements, which are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date of this Form 10-Q
 OVERVIEW
 Our Investment Strategy
  24




---



##### 



Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
    Investment Advisory and Administration Agreements
   25




---



##### 



Management services and fees under the Initial Advisory Agreement
   Management services and fees under the Amended Advisory Agreement
   26




---



##### 



Administration Agreement
  Critical Accounting Policies
  Recently Issued Accounting Pronouncements
  .
 27




---



##### 



Results of Operations
  A comparison of our operating results for the three and nine months ended September 30, 2007 and
2006 is below
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    8,024,305
    
    
    $
    6,214,295
    
    
    $
    1,810,010
    
    
    
    29
    %
    
    $
    22,834,663
    
    
    $
    17,109,203
    
    
    $
    5,725,460
    
    
    
    33
    %Interest income from mortgage notes receivable
    
    
    255,555
    
    
    
    478,329
    
    
    
    (222,774
    )
    
    
    -47
    %
    
    
    758,333
    
    
    
    1,589,675
    
    
    
    (831,342
    )
    
    
    -52
    %Tenant recovery revenue
    
    
    80,648
    
    
    
    43,352
    
    
    
    37,296
    
    
    
    86
    %
    
    
    230,851
    
    
    
    92,772
    
    
    
    138,079
    
    
    
    149
    %Total operating revenues
    
    
    8,360,508
    
    
    
    6,735,976
    
    
    
    1,624,532
    
    
    
    24
    %
    
    
    23,823,847
    
    
    
    18,791,650
    
    
    
    5,032,197
    
    
    
    27
    %Operating expensesDepreciation and amortization
    
    
    2,668,383
    
    
    
    2,162,640
    
    
    
    505,743
    
    
    
    23
    %
    
    
    7,722,349
    
    
    
    6,026,150
    
    
    
    1,696,199
    
    
    
    28
    %Property operating expenses
    
    
    204,972
    
    
    
    145,058
    
    
    
    59,914
    
    
    
    41
    %
    
    
    597,273
    
    
    
    435,495
    
    
    
    161,778
    
    
    
    37
    %Base management fee
    
    
    459,202
    
    
    
    656,916
    
    
    
    (197,714
    )
    
    
    -30
    %
    
    
    1,412,337
    
    
    
    2,029,050
    
    
    
    (616,713
    )
    
    
    -30
    %Incentive fee
    
    
    677,104
    
    
    
    
    
    
    
    677,104
    
    
    
    100
    %
    
    
    1,896,677
    
    
    
    
    
    
    
    1,896,677
    
    
    
    100
    %Administration fee
    
    
    175,852
    
    
    
    
    
    
    
    175,852
    
    
    
    100
    %
    
    
    592,996
    
    
    
    
    
    
    
    592,996
    
    
    
    100
    %Professional fees
    
    
    118,371
    
    
    
    167,353
    
    
    
    (48,982
    )
    
    
    -29
    %
    
    
    442,479
    
    
    
    598,771
    
    
    
    (156,292
    )
    
    
    -26
    %Insurance
    
    
    53,943
    
    
    
    54,662
    
    
    
    (719
    )
    
    
    -1
    %
    
    
    171,275
    
    
    
    154,868
    
    
    
    16,407
    
    
    
    11
    %Directors fees
    
    
    66,250
    
    
    
    33,500
    
    
    
    32,750
    
    
    
    98
    %
    
    
    174,750
    
    
    
    94,500
    
    
    
    80,250
    
    
    
    85
    %Stockholder related expense
    
    
    40,991
    
    
    
    34,414
    
    
    
    6,577
    
    
    
    19
    %
    
    
    215,969
    
    
    
    282,478
    
    
    
    (66,509
    )
    
    
    -24
    %Asset retirement obligation expense
    
    
    29,440
    
    
    
    30,619
    
    
    
    (1,179
    )
    
    
    -4
    %
    
    
    86,542
    
    
    
    102,263
    
    
    
    (15,721
    )
    
    
    -15
    %General and administrative
    
    
    17,452
    
    
    
    20,394
    
    
    
    (2,942
    )
    
    
    -14
    %
    
    
    79,119
    
    
    
    48,991
    
    
    
    30,128
    
    
    
    61
    %Stock option compensation expense
    
    
    
    
    
    
    314,593
    
    
    
    (314,593
    )
    
    
    -100
    %
    
    
    
    
    
    
    394,411
    
    
    
    (394,411
    )
    
    
    -100
    %Total operating expenses before credit from
Adviser
    
    
    4,511,960
    
    
    
    3,620,149
    
    
    
    891,811
    
    
    
    25
    %
    
    
    13,391,766
    
    
    
    10,166,977
    
    
    
    3,224,789
    
    
    
    32
    %Credit to incentive fee
    
    
    (526,991
    )
    
    
    
    
    
    
    (526,991
    )
    
    
    100
    %
    
    
    (1,746,564
    )
    
    
    
    
    
    
    (1,746,564
    )
    
    
    100
    %Total operating expenses
    
    
    3,984,969
    
    
    
    3,620,149
    
    
    
    364,820
    
    
    
    10
    %
    
    
    11,645,202
    
    
    
    10,166,977
    
    
    
    1,478,225
    
    
    
    15
    %Other income (expense)Interest income from temporary investments
    
    
    33,105
    
    
    
    2,006
    
    
    
    31,099
    
    
    
    1550
    %
    
    
    325,390
    
    
    
    13,437
    
    
    
    311,953
    
    
    
    2322
    %Interest income  employee loans
    
    
    52,728
    
    
    
    41,346
    
    
    
    11,382
    
    
    
    28
    %
    
    
    169,608
    
    
    
    75,483
    
    
    
    94,125
    
    
    
    125
    %Other income
    
    
    9,896
    
    
    
    
    
    
    
    9,896
    
    
    
    100
    %
    
    
    28,127
    
    
    
    10,400
    
    
    
    17,727
    
    
    
    170
    %Interest expense
    
    
    (2,920,270
    )
    
    
    (2,494,221
    )
    
    
    426,049
    
    
    
    17
    %
    
    
    (8,137,343
    )
    
    
    (6,268,757
    )
    
    
    1,868,586
    
    
    
    30
    %Total other expense
    
    
    (2,824,541
    )
    
    
    (2,450,869
    )
    
    
    478,426
    
    
    
    -20
    %
    
    
    (7,614,218
    )
    
    
    (6,169,437
    )
    
    
    2,292,391
    
    
    
    -37
    %Income from continuing operations
    
    
    1,550,998
    
    
    
    664,958
    
    
    
    1,738,138
    
    
    
    261
    %
    
    
    4,564,427
    
    
    
    2,455,236
    
    
    
    5,846,363
    
    
    
    238
    %Discontinued operations
Income from discontinued operations
    
    
    5,975
    
    
    
    6,915
    
    
    
    (940
    )
    
    
    -14
    %
    
    
    471
    
    
    
    116,169
    
    
    
    (115,698
    )
    
    
    -100
    %Net realized loss from foreign currency transactions
    
    
    33,487
    
    
    
    (1,044
    )
    
    
    34,531
    
    
    
    -3308
    %
    
    
    33,550
    
    
    
    (201,017
    )
    
    
    234,567
    
    
    
    117
    %Gain on sale of real estate
    
    
    
    
    
    
    1,422,026
    
    
    
    (1,422,026
    )
    
    
    100
    %
    
    
    
    
    
    
    1,422,026
    
    
    
    (1,422,026
    )
    
    
    100
    %Taxes (paid) refunded on sale of real estate
    
    
    
    
    
    
    (315,436
    )
    
    
    315,436
    
    
    
    -100
    %
    
    
    78,667
    
    
    
    (315,436
    )
    
    
    394,103
    
    
    
    125
    %Total discontinued operations
    
    
    39,462
    
    
    
    1,112,461
    
    
    
    (1,072,999
    )
    
    
    -96
    %
    
    
    112,688
    
    
    
    1,021,742
    
    
    
    (909,054
    )
    
    
    -89
    %Net income
    
    
    1,590,460
    
    
    
    1,777,419
    
    
    
    665,139
    
    
    
    37
    %
    
    
    4,677,115
    
    
    
    3,476,978
    
    
    
    4,937,309
    
    
    
    142
    %Dividends attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (484,375
    )
    
    
    (539,063
    )
    
    
    111
    %
    
    
    (3,070,312
    )
    
    
    (1,313,194
    )
    
    
    (1,757,118
    )
    
    
    134
    %Net income available to common stockholders
    
    $
    567,022
    
    
    $
    1,293,044
    
    
    $
    (726,022
    )
    
    
    -56
    %
    
    $
    1,606,803
    
    
    $
    2,163,784
    
    
    $
    (556,981
    )
    
    
    -26
    %
 28




---



##### 



Operating Revenues
    Operating Expenses
   Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
  29




---



##### 



Other Income and Expense
    30




---



##### 



Discontinued Operations
  Net income available to common stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
 Results of Operations
 Investing Activities
 Recent Events
 31




---



##### 



Financing Activities
  Future Capital Needs
  Line of Credit
  Mortgage Notes Payable
  32




---



##### 



Contractual Obligations
  Payments Due by PeriodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-Term Debt Obligations (1)
    
    $
    206,416,801
    
    
    $
    21,327,568
    
    
    $
    4,140,656
    
    
    $
    5,070,454
    
    
    $
    175,878,123Interest on Long-Term Debt Obligations (2)
    
    
    88,269,756
    
    
    
    10,890,541
    
    
    
    21,372,542
    
    
    
    20,873,509
    
    
    
    35,133,164Lease Obligations (3)
    
    
    1,848,000
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,176,000Total
    
    $
    296,534,557
    
    
    $
    32,352,509
    
    
    $
    25,781,998
    
    
    $
    26,212,763
    
    
    $
    212,187,287
 
 (1)
    
    Long-term debt obligations represent both borrowings under our line of credit and mortgage notes payable that were outstanding
as of September 30, 2007. The line of credit matures in December 2009.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our line of credit.
The balance and interest rate on our line of credit is variable and, thus, the amount of interest can not be calculated for purposes of this table.(3)
    
    Lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021. Funds from Operations
    33




---



##### 



For the three months ended September 30,
    
    
    For the nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    1,590,460
    
    
    $
    1,777,419
    
    
    $
    4,677,115
    
    
    $
    3,476,978Less: Dividends attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (484,375
    )
    
    
    (3,070,312
    )
    
    
    (1,313,194
    )Net income available to common stockholders
    
    $
    567,022
    
    
    $
    1,293,044
    
    
    $
    1,606,803
    
    
    $
    2,163,784Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    2,668,383
    
    
    
    2,162,640
    
    
    
    7,722,349
    
    
    
    6,078,450Less: Gain on sale of real estate, net of taxes paid
    
    
    
    
    
    
    (1,106,590
    )
    
    
    (78,667
    )
    
    
    (1,106,590
    )FFO available to common stockholders
    
    $
    3,235,405
    
    
    $
    2,349,094
    
    
    $
    9,250,485
    
    
    $
    7,135,644Weighted average shares outstanding  basic
    
    
    8,565,264
    
    
    
    7,820,376
    
    
    
    8,565,264
    
    
    
    7,752,170Weighted average shares outstanding  diluted
    
    
    8,565,264
    
    
    
    7,981,071
    
    
    
    8,565,264
    
    
    
    7,896,860Basic net income per weighted average common share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.28Diluted net income per weighted average common share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.27Basic FFO per weighted average common share
    
    $
    0.38
    
    
    $
    0.30
    
    
    $
    1.08
    
    
    $
    0.92Diluted FFO per weighted average common share
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    1.08
    
    
    $
    0.90
 34




---



##### 



Item 3. Quantitative and Qualitative Disclosure about Market Risk
       35




---



##### 



Item 4. Controls and Procedures
     36




---



##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  37




---



##### 



Item 6. Exhibits
 Exhibit Index
 Exhibit
    
    Description of Document3.1
    
    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
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003.3.2.1
    
    First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363), filed
July 10, 2007.3.3
    
    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, 2006.3.4
    
    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, 2006.4.1
    
    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, 2006.4.2
    
    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, 2006.11
    
    Computation of Per Share Earnings from Operations (included in the
notes to the unaudited 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.
 38




---



##### 



Gladstone Commercial CorporationDate: October 30, 2007
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 39