##### 



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, 2008
 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
    
    02-0681276(State or other jurisdiction of incorporation or 
organization)
    
    (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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PAGEPART I FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    37PART II OTHER INFORMATIONItem 1.
    
    Legal Proceeding
    
    
    38Item 1A.
    
    Risk Factors
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3.
    
    Defaults Upon Senior Securities
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.
    
    Other Information
    
    
    38Item 6.
    
    Exhibits
    
    
    39SIGNATURES
    
    
    40
 2




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31, 2008
    
    
    December 31, 2007ASSETSReal estate, net of accumulated depreciation of
$17,842,267 and $15,738,634, respectively
    
    $
    353,335,334
    
    
    $
    324,761,772Lease intangibles, net of accumulated amortization of
$8,445,057 and $7,560,928, respectively
    
    
    31,079,739
    
    
    
    28,989,556Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    1,335,884
    
    
    
    1,356,408Restricted cash
    
    
    2,409,065
    
    
    
    1,914,067Funds held in escrow
    
    
    1,538,551
    
    
    
    1,401,695Deferred rent receivable
    
    
    5,575,368
    
    
    
    5,094,799Deferred financing costs, net of accumulated amortization of
$2,433,815 and $2,184,492, respectively
    
    
    4,191,740
    
    
    
    4,405,129Prepaid expenses and other assets
    
    
    1,717,397
    
    
    
    979,263TOTAL ASSETS
    
    $
    411,183,078
    
    
    $
    378,902,689LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    201,736,050
    
    
    $
    202,120,471Short-term loan and borrowings under line of credit
    
    
    59,050,000
    
    
    
    24,400,000Deferred rent liability
    
    
    3,736,644
    
    
    
    3,933,035Asset retirement obligation liability
    
    
    2,101,655
    
    
    
    1,811,752Accounts payable and accrued expenses
    
    
    693,112
    
    
    
    778,949Due to adviser
    
    
    788,428
    
    
    
    784,301Obligation under capital lease
    
    
    225,067
    
    
    
    Rent received in advance, security deposits and funds held in escrow
    
    
    3,302,629
    
    
    
    2,706,113Total Liabilities
    
    
    271,633,585
    
    
    
    236,534,621STOCKHOLDERS 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
    
    
    (2,769,791
    )
    
    
    (2,769,923
    )Distributions in excess of accumulated earnings
    
    
    (28,332,410
    )
    
    
    (25,513,703
    )Total Stockholders Equity
    
    
    139,549,493
    
    
    
    142,368,068TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    411,183,078
    
    
    $
    378,902,689
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended March 31,2008
    
    
    2007Operating revenuesRental income
    
    $
    9,189,465
    
    
    $
    7,078,036Interest income from mortgage notes receivable
    
    
    238,297
    
    
    
    250,000Tenant recovery revenue
    
    
    85,719
    
    
    
    55,735Total operating revenues
    
    
    9,513,481
    
    
    
    7,383,771Operating expensesDepreciation and amortization
    
    
    2,987,760
    
    
    
    2,417,812Property operating expenses
    
    
    241,568
    
    
    
    174,176Base management fee
    
    
    431,868
    
    
    
    482,044Incentive fee
    
    
    704,667
    
    
    
    585,768Administration fee
    
    
    212,196
    
    
    
    207,018Professional fees
    
    
    97,662
    
    
    
    149,431Insurance
    
    
    41,797
    
    
    
    58,634Directors fees
    
    
    54,250
    
    
    
    54,250Stockholder related expenses
    
    
    126,423
    
    
    
    99,617Asset retirement obligation expense
    
    
    30,468
    
    
    
    28,160General and administrative
    
    
    14,631
    
    
    
    40,351Total operating expenses before credit from Adviser
    
    
    4,943,290
    
    
    
    4,297,261Credit to incentive fee
    
    
    (562,355
    )
    
    
    (585,768
    )Total operating expenses
    
    
    4,380,935
    
    
    
    3,711,493Other income (expense)Interest income from temporary investments
    
    
    9,548
    
    
    
    229,016Interest income  employee loans
    
    
    52,144
    
    
    
    60,422Other income
    
    
    9,296
    
    
    
    8,414Interest expense
    
    
    (3,753,604
    )
    
    
    (2,514,461
    )Total other expense
    
    
    (3,682,616
    )
    
    
    (2,216,609
    )Income from continuing operations
    
    
    1,449,930
    
    
    
    1,455,669Discontinued operationsLoss from discontinued operations
    
    
    (33,228
    )
    
    
    (4,001
    )Net realized income from foreign currency transactions
    
    
    
    
    
    
    7Taxes refunded on sale of real estate
    
    
    
    
    
    
    78,667Total discontinued operations
    
    
    (33,228
    )
    
    
    74,673Net income
    
    
    1,416,702
    
    
    
    1,530,342Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    $
    393,265
    
    
    $
    506,905Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of dividends attributable
to preferred stock)
    
    $
    0.05
    
    
    $
    0.05Discontinued operations
    
    
    0.00
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.05
    
    
    $
    0.06Weighted average shares outstanding- basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the three months ended March 31,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    1,416,702
    
    
    $
    1,530,342Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,987,760
    
    
    
    2,417,812Amortization of deferred financing costs
    
    
    249,323
    
    
    
    164,462Amortization of deferred rent asset and liability
    
    
    (133,017
    )
    
    
    (133,017
    )Asset retirement obligation expense
    
    
    30,468
    
    
    
    28,160Increase in prepaid expenses and other assets
    
    
    (76,011
    )
    
    
    (119,112
    )Increase in deferred rent receivable
    
    
    (543,943
    )
    
    
    (370,227
    )(Decrease) increase in accounts payable, accrued expenses,
and amount due adviser
    
    
    (81,710
    )
    
    
    289,942Increase in rent received in advance
    
    
    101,518
    
    
    
    79,357Net cash provided by operating activities
    
    
    3,951,090
    
    
    
    3,887,719Cash flows from investing activities:Real estate investments
    
    
    (33,167,003
    )
    
    
    (41,778,821
    )Increase in funds held in escrow related to acquisition
    
    
    (762,123
    )
    
    
    Net payments to lenders for reserves held in escrow
    
    
    (547,624
    )
    
    
    (214,107
    )Increase in restricted cash
    
    
    (494,998
    )
    
    
    (129,799
    )Deposits on future acquisitions
    
    
    (1,300,000
    )
    
    
    (610,000
    )Deposits applied against real estate investments
    
    
    1,400,000
    
    
    
    460,000Net cash used in investing activities
    
    
    (34,871,748
    )
    
    
    (42,272,727
    )Cash flows from financing activities:Borrowings under mortgage notes payable
    
    
    
    
    
    
    13,775,000Principal repayments on mortgage notes payable
    
    
    (384,421
    )
    
    
    (194,961
    )Principal repayments on employee notes receivable from sale of common stock
    
    
    132
    
    
    
    25,012Borrowings from line of credit
    
    
    36,150,000
    
    
    
    Repayments on line of credit
    
    
    (1,500,000
    )
    
    
    Increase in reserves from tenants
    
    
    548,856
    
    
    
    346,542Increase in security deposits
    
    
    356,910
    
    
    
    Payments for deferred financing costs
    
    
    (35,934
    )
    
    
    (378,745
    )Dividends paid for common and preferred
    
    
    (4,235,409
    )
    
    
    (4,106,932
    )Net cash provided by financing activities
    
    
    30,900,134
    
    
    
    9,465,916Net decrease in cash and cash equivalents
    
    
    (20,524
    )
    
    
    (28,919,092
    )Cash and cash equivalents, beginning of period
    
    
    1,356,408
    
    
    
    36,005,686Cash and cash equivalents, end of period
    
    $
    1,335,884
    
    
    $
    7,086,594NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    259,435
    
    
    $
    92,143
  5




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##### 



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




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##### 



Interim financial information
  Investments in real estate
      7




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##### 



March 31, 2008
    
    
    December 31, 2007Lease
    
    
    Accumulated
    
    
    Lease
    
    
    AccumulatedIntangibles
    
    
    Amortization
    
    
    Intangibles
    
    
    AmortizationIn-place leases
    
    $
    13,475,625
    
    
    $
    (3,816,500
    )
    
    $
    12,660,732
    
    
    $
    (3,414,868
    )Leasing costs
    
    
    9,467,919
    
    
    
    (2,331,187
    )
    
    
    9,290,026
    
    
    
    (2,114,233
    )Customer relationships
    
    
    16,581,252
    
    
    
    (2,297,370
    )
    
    
    14,599,726
    
    
    
    (2,031,827
    )$
    39,524,796
    
    
    $
    (8,445,057
    )
    
    $
    36,550,484
    
    
    $
    (7,560,928
    )
  EstimatedAmortizationYear
    
    Expense2008
    
    $
    2,854,6732009
    
    
    3,678,5912010
    
    
    3,590,1882011
    
    
    3,399,3992012
    
    
    2,998,170
 Impairment
 Investments in Real Estate
  8




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##### 



Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  Deferred financing costs
  Prepaid expenses and other assets
  9




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##### 



Obligation under capital lease
  Revenue recognition
    Income taxes
   10




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##### 



Segment information
  Foreign currency transactions
  Asset retirement obligations
  Real estate held for sale and discontinued operations
  11




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##### 



Recently Issued Accounting Pronouncements
      Use of estimates
  12




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##### 



Reclassifications
  2. Management Advisory Fee
  Amended Advisory Agreement
   Administration Agreement
  13




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##### 



3. Earnings per Common Share
  For the three months ended March 31,2008
    
    
    2007Net income available to common stockholders
    
    $
    393,265
    
    
    $
    506,905Denominator for basic & diluted weighted
average shares
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.05
    
    
    $
    0.06
 14




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##### 



4. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,594,036Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,901,956Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,062,010Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,396,164Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,717,208Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,059,962Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,734,589Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,761,412Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    880,588Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,661,877Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,574,910Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,600,341Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,268,524May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,511,568May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,833,168Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,321,543Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,579,664Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,399,832Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,348,305Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,935,081Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,109,746Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,109,746Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,109,746Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    6,756,301Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,470,918Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,026,147Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,771,695Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    2,917,040Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,095,296Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    13,799,659Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    26,210,695May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,694,035Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,220,063Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,540,439Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,016,943Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,519,076Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,519,076Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,519,076Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    6,806,379Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    6,957,225Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    13,600,785Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,051,345May-07
    
    Tewksbury, Massachusetts
    
    
    102,200
    
    
    Industrial
    
    
    10,072,672Jul-07
    
    Mason, Ohio
    
    
    21,264
    
    
    Retail
    
    
    6,069,295Sep-07
    
    Cicero, New York
    
    
    71,880
    
    
    Industrial
    
    
    5,244,417Sep-07
    
    Grand Rapids, Michigan
    
    
    63,235
    
    
    Office
    
    
    11,978,974Sep-07
    
    Bolingbrook, Illinois
    
    
    55,869
    
    
    Industrial
    
    
    6,205,125Dec-07
    
    Decatur, Georgia
    
    
    26,600
    
    
    Office
    
    
    2,865,395Dec-07
    
    Lawrenceville, Georgia
    
    
    12,412
    
    
    Office
    
    
    2,865,395Dec-07
    
    Snellville, Georgia
    
    
    3,800
    
    
    Office
    
    
    2,865,396Dec-07
    
    Covington, Georgia
    
    
    5,000
    
    
    Office
    
    
    2,865,396Dec-07
    
    Cumming, Georgia
    
    
    13,919
    
    
    Office
    
    
    2,865,396Dec-07
    
    Conyers, Georgia
    
    
    6,400
    
    
    Office
    
    
    2,865,396Jan-08
    
    Reading, Pennsylvania
    
    
    42,900
    
    
    Industrial
    
    
    6,664,956Feb-08
    
    Fridley, Minnesota
    
    
    74,160
    
    
    Office
    
    
    9,394,515Mar-08
    
    Concord Township, Ohio
    
    
    273,300
    
    
    Industrial
    
    
    14,548,837Total real estate, net
    
    
    5,948,638
    
    
    
    
    $
    353,335,334
 15




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##### 



March 31, 2008
    
    
    December 31, 2007Real estate:Land
    
    $
    52,703,103
    
    
    $
    48,867,482Building
    
    
    309,025,312
    
    
    
    283,829,987Tenant improvements
    
    
    9,449,186
    
    
    
    7,802,937Accumulated depreciation
    
    
    (17,842,267
    )
    
    
    (15,738,634
    )Real estate, net
    
    $
    353,335,334
    
    
    $
    324,761,772
      Capital
    
    TotalTenant
    
    In-place
    
    
    
    
    
    Customer
    
    Lease
    
    PurchaseLand
    
    Building
    
    Improvements
    
    leases
    
    Leasing Costs
    
    relationships
    
    Obligations
    
    PriceReading, Pennsylvania
    
    $
    490,646
    
    
    $
    6,187,954
    
    
    $
    14,208
    
    
    $
    362,479
    
    
    $
    1,786
    
    
    $
    141,232
    
    
    $
    
    
    
    $
    7,198,305Fridley, Minnesota
    
    
    1,354,233
    
    
    
    7,453,621
    
    
    
    619,428
    
    
    
    452,414
    
    
    
    171,005
    
    
    
    807,950
    
    
    
    (225,067
    )
    
    
    10,633,584Concord Township, Ohio
    
    
    2,020,982
    
    
    
    11,256,703
    
    
    
    1,012,613
    
    
    
    
    
    
    
    5,102
    
    
    
    1,032,347
    
    
    
    
    
    
    
    15,327,747$
    3,865,861
    
    
    $
    24,898,278
    
    
    $
    1,646,249
    
    
    $
    814,893
    
    
    $
    177,893
    
    
    $
    1,981,529
    
    
    $
    (225,067
    )
    
    $
    33,159,636
  16




---



##### 



Year
    
    Lease Payments2008
    
    $
    27,403,7052009
    
    
    35,816,3442010
    
    
    35,537,7822011
    
    
    35,099,5882012
    
    
    34,378,696Thereafter
    
    
    188,940,657
  5. Discontinued Operations
   For the three months ended March 31,2008
    
    
    2007Operating expense
    
    $
    (33,228
    )
    
    $
    (4,001
    )Taxes & licenses
    
    
    
    
    
    
    78,667Realized gain on foreign
currency transactions
    
    
    
    
    
    
    7Income from discontinued
operations
    
    $
    (33,228
    )
    
    $
    74,673
 6. Mortgage Note Receivable
  17




---



##### 



7. Mortgage Notes Payable
  Date of Issuance
    
    
    
    
    Principal
    
    
    
    
    
    
    Principal Balance Outstandingof Note
    
    
    
    
    Maturity Date
    
    
    Interest Rate
    
    
    March 31, 2008
    
    
    December 31, 20073/16/2005
    
    
    
    
    
    4/1/2030
    
    
    
    6.33
    %
    
    $
    2,988,756
    
    
    $
    3,003,5828/25/2005
    
    
    
    
    
    9/1/2015
    
    
    
    5.33
    %
    
    
    21,592,384
    
    
    
    21,664,4769/12/2005
    
    
    
    
    
    9/1/2015
    
    
    
    5.21
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    
    
    12/8/2015
    
    
    
    5.71
    %
    
    
    19,397,389
    
    
    
    19,456,0002/21/2006
    
    
    
    
    
    12/1/2013
    
    
    
    5.91
    %
    
    
    9,443,372
    
    
    
    9,480,0632/21/2006
    
    
    
    
    
    6/30/2014
    
    
    
    5.20
    %
    
    
    19,698,296
    
    
    
    19,782,2703/29/2006
    
    
    
    
    
    4/1/2016
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    
    
    
    5/5/2016
    
    
    
    6.58
    %
    
    
    14,451,221
    
    
    
    14,514,21411/22/2006
    
    
    
    
    
    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
    
    
    
    13,775,0006/5/2007
    
    
    
    
    
    6/8/2017
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,0009/6/2007
    
    
    
    
    
    12/11/2015
    
    
    
    5.81
    %
    
    
    4,471,980
    
    
    
    4,487,20510/15/2007
    
    
    
    
    
    11/8/2017
    
    
    
    6.63
    %
    
    
    15,934,652
    
    
    
    15,974,661$
    201,736,050
    
    
    $
    202,120,471
  18




---



##### 



ScheduledprincipalYear
    
    payments2008
    
    $
    1,209,9712009
    
    
    2,254,4702010
    
    
    2,389,8062011
    
    
    2,676,9072012
    
    
    2,953,229Thereafter
    
    
    190,251,667$
    201,736,050
 8. 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,
2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,769,923
    )
    
    $
    (25,513,703
    )
    
    $
    142,368,068Repayment of Principal
on Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    132Distributions Declared
to Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,235,409
    )
    
    
    (4,235,409
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,416,702
    
    
    
    1,416,702Balance at March 31, 2008
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,769,791
    )
    
    $
    (28,332,410
    )
    
    $
    139,549,493
  19




---



##### 



Number of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Outstanding Balance
    
    
    
    
    
    
    InterestOptions
    
    
    Options
    
    
    Promissory Note
    
    
    of Employee Loans
    
    
    
    
    
    
    Rate onDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 3/31/08
    
    
    Term of Note
    
    
    NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    368,161
    
    
    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
    
    
    
    38,880
    
    
    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
    
    
    
    325,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %179,922
    
    
    
    
    
    
    $
    2,844,954
    
    
    $
    2,769,791
   20




---



##### 



9. Segment Information
  As of and for the three months ended March 31, 2008Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    9,275,184
    
    
    $
    238,297
    
    
    $
    
    
    
    $
    9,513,481Operating expenses
    
    
    (3,259,796
    )
    
    
    
    
    
    
    (1,121,139
    )
    
    
    (4,380,935
    )Other expense
    
    
    
    
    
    
    
    
    
    
    (3,682,616
    )
    
    
    (3,682,616
    )Discontinued
operations
    
    
    (33,228
    )
    
    
    
    
    
    
    
    
    
    
    (33,228
    )Net income
    
    $
    5,982,160
    
    
    $
    238,297
    
    
    $
    (4,803,755
    )
    
    $
    1,416,702Total Assets
    
    $
    391,919,723
    
    
    $
    10,000,000
    
    
    $
    9,263,355
    
    
    $
    411,183,078
 As of and for the three months ended March 31, 2007Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    7,133,771
    
    
    $
    250,000
    
    
    $
    
    
    
    $
    7,383,771Operating expenses
    
    
    (2,620,148
    )
    
    
    
    
    
    
    (1,091,345
    )
    
    
    (3,711,493
    )Other expense
    
    
    
    
    
    
    
    
    
    
    (2,216,609
    )
    
    
    (2,216,609
    )Discontinued
operations
    
    
    74,673
    
    
    
    
    
    
    
    
    
    
    
    74,673Net income
    
    $
    4,588,296
    
    
    $
    250,000
    
    
    $
    (3,307,954
    )
    
    $
    1,530,342Total Assets
    
    $
    304,124,119
    
    
    $
    10,000,000
    
    
    $
    13,065,216
    
    
    $
    327,189,335
  10. Line of Credit and Short-Term Loan
  21




---



##### 



11. Pro Forma Financial Information
  For the three months ended March 31,2008
    
    
    2007Operating Data:Total operating revenue
    
    $
    10,131,799
    
    
    $
    8,002,089Total operating expenses
    
    
    (4,472,179
    )
    
    
    (3,802,737
    )Other expense
    
    
    (4,040,342
    )
    
    
    (2,574,335
    )Income from continuing operations
    
    
    1,619,278
    
    
    
    1,625,017Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )Net income from continuing operations available to
common stockholders
    
    $
    595,841
    
    
    $
    601,580Share and Per Share Data:Basic & diluted net income from continuing operations
    
    $
    0.07
    
    
    $
    0.07Weighted average shares outstanding-basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
  22




---



##### 



12. 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. 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
  Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
  24




---



##### 



Investment Advisory and Administration Agreements
    Management Services and Fees under the Amended Advisory Agreement
  25




---



##### 



Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
   26




---



##### 




    
    The amount of acquisition costs allocated to the various tangible and intangible assets
on our balance sheet; and
    
    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.
 Asset Impairment Evaluation
  Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  
 27




---



##### 



28




---



##### 



Results of Operations
  A comparison of our operating results for the three months ended March 31, 2008 and 2007 is below
 For the three months ended March 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    9,189,465
    
    
    $
    7,078,036
    
    
    $
    2,111,429
    
    
    
    30
    %Interest income from mortgage notes receivable
    
    
    238,297
    
    
    
    250,000
    
    
    
    (11,703
    )
    
    
    -5
    %Tenant recovery revenue
    
    
    85,719
    
    
    
    55,735
    
    
    
    29,984
    
    
    
    54
    %Total operating revenues
    
    
    9,513,481
    
    
    
    7,383,771
    
    
    
    2,129,710
    
    
    
    29
    %Operating expensesDepreciation and amortization
    
    
    2,987,760
    
    
    
    2,417,812
    
    
    
    569,948
    
    
    
    24
    %Property operating expenses
    
    
    241,568
    
    
    
    174,176
    
    
    
    67,392
    
    
    
    39
    %Base management fee
    
    
    431,868
    
    
    
    482,044
    
    
    
    (50,176
    )
    
    
    -10
    %Incentive fee
    
    
    704,667
    
    
    
    585,768
    
    
    
    118,899
    
    
    
    20
    %Administration fee
    
    
    212,196
    
    
    
    207,018
    
    
    
    5,178
    
    
    
    3
    %Professional fees
    
    
    97,662
    
    
    
    149,431
    
    
    
    (51,769
    )
    
    
    -35
    %Insurance
    
    
    41,797
    
    
    
    58,634
    
    
    
    (16,837
    )
    
    
    -29
    %Directors fees
    
    
    54,250
    
    
    
    54,250
    
    
    
    
    
    
    
    0
    %Stockholder related expense
    
    
    126,423
    
    
    
    99,617
    
    
    
    26,806
    
    
    
    27
    %Asset retirement obligation expense
    
    
    30,468
    
    
    
    28,160
    
    
    
    2,308
    
    
    
    8
    %General and administrative
    
    
    14,631
    
    
    
    40,351
    
    
    
    (25,720
    )
    
    
    -64
    %Total operating expenses before credit from Adviser
    
    
    4,943,290
    
    
    
    4,297,261
    
    
    
    646,029
    
    
    
    15
    %Credit to incentive fee
    
    
    (562,355
    )
    
    
    (585,768
    )
    
    
    23,413
    
    
    
    -4
    %Total operating expenses
    
    
    4,380,935
    
    
    
    3,711,493
    
    
    
    669,442
    
    
    
    18
    %Other income (expense)Interest income from temporary investments
    
    
    9,548
    
    
    
    229,016
    
    
    
    (219,468
    )
    
    
    -96
    %Interest income  employee loans
    
    
    52,144
    
    
    
    60,422
    
    
    
    (8,278
    )
    
    
    -14
    %Other income
    
    
    9,296
    
    
    
    8,414
    
    
    
    882
    
    
    
    10
    %Interest expense
    
    
    (3,753,604
    )
    
    
    (2,514,461
    )
    
    
    (1,239,143
    )
    
    
    49
    %Total other expense
    
    
    (3,682,616
    )
    
    
    (2,216,609
    )
    
    
    (1,466,007
    )
    
    
    66
    %Income from continuing operations
    
    
    1,449,930
    
    
    
    1,455,669
    
    
    
    (5,739
    )
    
    
    0
    %Discontinued operationsLoss from discontinued operations
    
    
    (33,228
    )
    
    
    (4,001
    )
    
    
    (29,227
    )
    
    
    730
    %Net realized income from foreign currency transactions
    
    
    
    
    
    
    7
    
    
    
    (7
    )
    
    
    -100
    %Taxes refunded on sale of real estate
    
    
    
    
    
    
    78,667
    
    
    
    (78,667
    )
    
    
    -100
    %Total discontinued operations
    
    
    (33,228
    )
    
    
    74,673
    
    
    
    (107,901
    )
    
    
    -144
    %Net income
    
    
    1,416,702
    
    
    
    1,530,342
    
    
    
    (113,640
    )
    
    
    -7
    %Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    393,265
    
    
    $
    506,905
    
    
    $
    (113,640
    )
    
    
    -22
    %
 29




---



##### 



Operating Revenues
    Operating Expenses
   Investment
Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and
Administration Agreements.
    30




---



##### 



Other Income and Expense
     Discontinued Operations
  Net income available to common stockholders
  31




---



##### 



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
 Recent Events
 Financing Activities
  Future Capital Needs
  32




---



##### 



Line of Credit
  Short-Term Loan
  Off-Balance Sheet Arrangements
  33




---



##### 



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsLong-Term Debt Obligations (1)
    
    $
    260,786,050
    
    
    $
    21,787,286
    
    
    $
    43,760,842
    
    
    $
    5,804,836
    
    
    $
    189,433,086Interest on Long-Term Debt Obligations (2)
    
    
    92,408,604
    
    
    
    11,865,448
    
    
    
    23,350,834
    
    
    
    22,775,154
    
    
    
    34,417,168Capital Lease Obligations (3)
    
    
    225,067
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,067Operating Lease Obligations (4)
    
    
    1,780,800
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,108,800Purchase Obligations (5)
    
    
    17,400,000
    
    
    
    17,400,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    372,600,521
    
    
    $
    51,187,134
    
    
    $
    67,380,476
    
    
    $
    28,848,790
    
    
    $
    225,184,121
 
 (1)
    
    Long-term debt obligations represent borrowings under our line of credit, term loan and mortgage notes payble that were outstanding
as of March 31, 2008. The line of credit matures in December 2009 and the term loan matures in December 2008 with an option to extend for an additional six months.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our line of credit or term loan.
The balance and interest rate on our line of credit and term loan are variable and, thus, the amount of interest can not be calculated for purposes of this table.(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.(5)
    
    The purchase obligations reflected in the above table represents commitments outstanding at March 31, 2008 to purchase real estate, of which one property
was purchased in April 2008 for approximately $3.9 million. Funds from Operations
     34




---



##### 



For the three months
    
    
    For the three monthsended March 31, 2008
    
    
    ended March 31, 2007Net income
    
    $
    1,416,702
    
    
    $
    1,530,342Less: Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    
    393,265
    
    
    
    506,905Add: Real estate depreciation and amortization
    
    
    2,987,760
    
    
    
    2,417,812FFO available to common stockholders
    
    $
    3,381,025
    
    
    $
    2,924,717Weighted average shares outstanding  basic &
diluted
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted net income per weighted
average common share
    
    $
    0.05
    
    
    $
    0.06Basic & diluted FFO per weighted average
common share
    
    $
    0.39
    
    
    $
    0.34
 35




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##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
       36




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##### 



Item 4. Controls and Procedures
     37




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##### 



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
  38




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##### 



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, 2007.4.1
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.2
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.5% Series B Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.4 of Form 8-A (File
No. 000-50363), filed October 19, 2006.4.3
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed January 19, 2006.4.4
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.2 of Form 8-A (File No. 000-50363),
filed October 19, 2006.11
    
    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.
 
 
    
    Previously filed and incorporated by reference. 39




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##### 



Gladstone Commercial CorporationDate: May 6, 2008
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 40