##### Table of Contents



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 JUNE 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 001-33097
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND
    
    02-0681276(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 þ o
 o 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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##### 



GLADSTONE COMMERCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2010
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and six months ended
June 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the six months ended
June 30, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Removed and Reserved
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    44EX-12EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2010
    
    
    December 31, 2009ASSETSReal estate, at cost
    
    $
    391,329,596
    
    
    $
    390,753,892Less: accumulated depreciation
    
    
    38,886,713
    
    
    
    34,111,952Total real estate, net
    
    
    352,442,883
    
    
    
    356,641,940Lease intangibles, net
    
    
    26,246,904
    
    
    
    28,177,461Mortgage note receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    3,312,409
    
    
    
    3,096,598Restricted cash
    
    
    2,295,525
    
    
    
    2,633,538Funds held in escrow
    
    
    2,344,342
    
    
    
    2,487,680Deferred rent receivable
    
    
    9,697,709
    
    
    
    8,975,196Deferred financing costs, net
    
    
    2,653,246
    
    
    
    3,136,055Prepaid expenses and other assets
    
    
    2,186,373
    
    
    
    1,716,905TOTAL ASSETS
    
    $
    411,179,391
    
    
    $
    416,865,373LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    251,453,252
    
    
    $
    252,761,651Borrowings under line of credit
    
    
    36,300,000
    
    
    
    33,200,000Deferred rent liability
    
    
    2,738,784
    
    
    
    3,213,195Asset retirement obligation liability
    
    
    2,380,748
    
    
    
    2,305,644Accounts payable and accrued expenses
    
    
    1,530,275
    
    
    
    2,086,741Due to Adviser (Refer to Note 2)
    
    
    1,292,211
    
    
    
    1,213,640Obligation under capital lease
    
    
    253,841
    
    
    
    247,686Rent received in advance, security deposits and funds held in escrow
    
    
    3,321,442
    
    
    
    3,386,274Total Liabilities
    
    
    299,270,553
    
    
    
    298,414,831STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation
preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding at June 30, 2010 and December 31, 2009,
respectively
    
    
    2,150
    
    
    
    2,150Senior common stock, $0.001 par value; 4,000,0000 shares authorized
and
2,073 and 0 shares issued and outstanding at June 30, 2010 and
December 31, 2009, respectively
    
    
    2
    
    
    
    Common stock, $0.001 par value, 43,700,000 shares authorized and
8,545,264 and 8,563,264 shares issued and outstanding at June
30, 2010 and December 31, 2009, respectively
    
    
    8,545
    
    
    
    8,563Additional paid in capital
    
    
    170,404,393
    
    
    
    170,622,581Notes receivable  employees
    
    
    (2,260,586
    )
    
    
    (2,304,999
    )Distributions in excess of accumulated earnings
    
    
    (56,245,666
    )
    
    
    (49,877,753
    )Total Stockholders Equity
    
    
    111,908,838
    
    
    
    118,450,542TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    411,179,391
    
    
    $
    416,865,373
  3




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##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating revenuesRental income
    
    $
    10,409,519
    
    
    $
    10,379,172
    
    
    $
    20,824,586
    
    
    $
    20,767,420Interest income from mortgage note receivable
    
    
    189,583
    
    
    
    189,583
    
    
    
    377,083
    
    
    
    377,083Tenant recovery revenue
    
    
    82,285
    
    
    
    82,734
    
    
    
    164,695
    
    
    
    165,167Total operating revenues
    
    
    10,681,387
    
    
    
    10,651,489
    
    
    
    21,366,364
    
    
    
    21,309,670Operating expensesDepreciation and amortization
    
    
    3,390,492
    
    
    
    3,282,629
    
    
    
    6,712,362
    
    
    
    6,590,438Property operating expenses
    
    
    229,733
    
    
    
    230,785
    
    
    
    474,088
    
    
    
    467,595Due diligence expense
    
    
    
    
    
    
    6,886
    
    
    
    21,876
    
    
    
    16,433Base management fee (Refer to Note 2)
    
    
    296,141
    
    
    
    357,650
    
    
    
    608,705
    
    
    
    730,298Incentive fee (Refer to Note 2)
    
    
    829,264
    
    
    
    812,653
    
    
    
    1,675,456
    
    
    
    1,598,942Administration fee (Refer to Note 2)
    
    
    219,119
    
    
    
    257,207
    
    
    
    451,003
    
    
    
    481,561Professional fees
    
    
    201,801
    
    
    
    125,965
    
    
    
    377,411
    
    
    
    361,161Insurance expense
    
    
    56,513
    
    
    
    48,125
    
    
    
    112,838
    
    
    
    96,804Directors fees
    
    
    49,025
    
    
    
    50,386
    
    
    
    98,443
    
    
    
    100,088Stockholder-related expenses
    
    
    78,596
    
    
    
    88,245
    
    
    
    123,812
    
    
    
    171,892Asset retirement obligation expense
    
    
    37,857
    
    
    
    35,476
    
    
    
    75,104
    
    
    
    70,384General and administrative
    
    
    17,733
    
    
    
    15,453
    
    
    
    35,563
    
    
    
    26,005Total operating expenses before credit from Adviser
    
    
    5,406,274
    
    
    
    5,311,460
    
    
    
    10,766,661
    
    
    
    10,711,601Credit to incentive fee
    
    
    (56,073
    )
    
    
    (129,623
    )
    
    
    (56,073
    )
    
    
    (364,704
    )Total operating expenses
    
    
    5,350,201
    
    
    
    5,181,837
    
    
    
    10,710,588
    
    
    
    10,346,897Other income (expense)Interest income from temporary investments
    
    
    113
    
    
    
    184
    
    
    
    378
    
    
    
    17,465Interest income  employee loans
    
    
    42,574
    
    
    
    48,862
    
    
    
    85,674
    
    
    
    97,748Other income
    
    
    5,013
    
    
    
    11,320
    
    
    
    8,329
    
    
    
    11,320Interest expense
    
    
    (4,372,435
    )
    
    
    (4,433,998
    )
    
    
    (8,657,373
    )
    
    
    (8,921,555
    )Total other expense
    
    
    (4,324,735
    )
    
    
    (4,373,632
    )
    
    
    (8,562,992
    )
    
    
    (8,795,022
    )Income from continuing operations
    
    
    1,006,451
    
    
    
    1,096,020
    
    
    
    2,092,784
    
    
    
    2,167,751Discontinued operationsIncome from discontinued operations
    
    
    
    
    
    
    20,916
    
    
    
    
    
    
    
    38,754Total discontinued operations
    
    
    
    
    
    
    20,916
    
    
    
    
    
    
    
    38,754Net income
    
    
    1,006,451
    
    
    
    1,116,936
    
    
    
    2,092,784
    
    
    
    2,206,505Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,876
    )
    
    
    (2,046,875
    )Distributions attributable to senior common stock
    
    
    (375
    )
    
    
    
    
    
    
    (375
    )
    
    
    Net (loss) income available to common stockholders
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    45,533
    
    
    $
    159,630Earnings per weighted average share of common stock  basicIncome from continuing operations (net of distributions
attributable to preferred stock)
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Earnings per weighted average share of common stock  dilutedIncome from continuing operations (net of dividends attributable
to preferred stock)
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Weighted average shares of common stock outstanding  basic
    
    
    8,545,264
    
    
    
    8,563,264
    
    
    
    8,551,927
    
    
    
    8,563,264Weighted
average shares of common stock outstanding  diluted
    
    
    8,546,529
    
    
    
    8,563,264
    
    
    
    8,552,563
    
    
    
    8,563,264Earnings per weighted average share of senior common stock
    
    $
    0.26
    
    
    $
    0.00
    
    
    $
    0.52
    
    
    $
    0.00Weighted average shares of senior common stock outstanding  basic
    
    
    1,435
    
    
    
    0
    
    
    
    722
    
    
    
    0
  4




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##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the six months ended June 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    2,092,784
    
    
    $
    2,206,505Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    6,712,362
    
    
    
    6,600,853Amortization of deferred financing costs
    
    
    544,080
    
    
    
    723,828Amortization of deferred rent asset and liability, net
    
    
    (347,663
    )
    
    
    (266,035
    )Accretion of obligation under capital lease
    
    
    6,155
    
    
    
    6,154Asset retirement obligation expense, including discontinued operations
    
    
    75,104
    
    
    
    70,845Increase in prepaid expenses and other assets
    
    
    (963,368
    )
    
    
    (137,854
    )Increase in deferred rent receivable
    
    
    (849,261
    )
    
    
    (1,082,278
    )(Decrease) increase in accounts payable, accrued expenses, and amount
due Adviser
    
    
    (478,074
    )
    
    
    230,245Increase (decrease) in rent received in advance
    
    
    273,181
    
    
    
    (210,575
    )Net cash provided by operating activities
    
    
    7,065,300
    
    
    
    8,141,688Cash flows from investing activities:Real estate investments
    
    
    (575,704
    )
    
    
    (54,319
    )Leasing commissions paid
    
    
    (7,044
    )
    
    
    (298,270
    )Receipts from lenders for reserves held in escrow
    
    
    1,016,102
    
    
    
    773,187Payments to lenders for reserves held in escrow
    
    
    (872,764
    )
    
    
    (919,041
    )Decrease (increase) in restricted cash
    
    
    338,013
    
    
    
    (668,151
    )Deposits refunded
    
    
    250,000
    
    
    
    200,000Net cash provided by (used in) investing activities
    
    
    148,603
    
    
    
    (966,594
    )Cash flows from financing activities:Proceeds from issuance of senior common stock
    
    
    30,000
    
    
    
    Offering costs
    
    
    (4,500
    )
    
    
    Principal repayments on mortgage notes payable
    
    
    (1,308,399
    )
    
    
    (1,160,248
    )Principal repayments on employee notes receivable
    
    
    44,413
    
    
    
    6,921Borrowings from line of credit
    
    
    13,400,000
    
    
    
    39,300,000Repayments on line of credit
    
    
    (10,300,000
    )
    
    
    (19,000,000
    )Repayment of short-term loan
    
    
    
    
    
    
    (20,000,000
    )Receipts from tenants for reserves
    
    
    1,036,621
    
    
    
    1,996,723Payments to tenants from reserves
    
    
    (947,606
    )
    
    
    (1,339,968
    )(Decrease) increase in security deposits
    
    
    (427,028
    )
    
    
    11,396Payments for deferred financing costs
    
    
    (61,271
    )
    
    
    (103,563
    )Distributions paid for common and preferred
    
    
    (8,460,322
    )
    
    
    (8,469,322
    )Net cash used in financing activities
    
    
    (6,998,092
    )
    
    
    (8,758,061
    )Net increase (decrease) in cash and cash equivalents
    
    
    215,811
    
    
    
    (1,582,967
    )Cash and cash equivalents, beginning of period
    
    
    3,096,598
    
    
    
    4,503,578Cash and cash equivalents, end of period
    
    $
    3,312,409
    
    
    $
    2,920,611NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONForfeiture of common stock in satisfaction of employee note receivable
    
    $
    243,900
    
    
    $
    Senior common dividend issued in the dividend reinvestment program
    
    $
    375
    
    
    $
    
  5




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




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Investments in Real Estate
       7




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##### Table of Contents



Impairment
 Investments in Real Estate
   Provision for Loan Losses
  8




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Cash and Cash Equivalents
  Restricted Cash
  Funds Held in Escrow
  Deferred Financing Costs
  Prepaid Expenses and Other Assets
  Obligation Under Capital Lease
  Revenue Recognition
  9




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Income Taxes
   Segment Information
  10




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Asset Retirement Obligations
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
  Use of Estimates
  2. Related-Party Transactions
  11




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Advisory Agreement
   Administration Agreement
  12




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3. Earnings per Share of Common Stock
  For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Calculation of basic earnings per share of common stock:Net (loss) income available to common stockholders
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    45,533
    
    
    $
    159,630Denominator for basic weighted average shares of common stock
    
    
    8,545,264
    
    
    
    8,563,264
    
    
    
    8,551,927
    
    
    
    8,563,264Basic earnings per share of common stock
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Calculation of diluted earnings per share of comon stock:Net (loss) income available to common stockholders
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    45,533
    
    
    $
    159,630Add: Income impact of assumed conversion of senior common stock
    
    
    375
    
    
    
    
    
    
    
    375
    
    
    
    Net (loss) income available to common stockholders plus assumed conversions
    
    $
    (16,986
    )
    
    $
    93,499
    
    
    $
    45,908
    
    
    $
    159,630Denominator for basic weighted average shares of common stock
    
    
    8,545,264
    
    
    
    8,563,264
    
    
    
    8,551,927
    
    
    
    8,563,264Effect of convertible senior common stock
    
    
    1,265
    
    
    
    
    
    
    
    636
    
    
    
    Denominator for diluted weighted average shares of common stock
    
    
    8,546,529
    
    
    
    8,563,264
    
    
    
    8,552,563
    
    
    
    8,563,264Diluted earnings per share of common stock
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
 4. Real Estate and Intangible Assets
 Real Estate
  June 30, 2010
    
    
    December 31, 2009Real estate:Land
    
    $
    55,025,707
    (1)
    
    $
    55,025,707
    (1)Building and improvements
    
    
    326,483,183
    
    
    
    325,907,479Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated depreciation
    
    
    (38,886,713
    )
    
    
    (34,111,952
    )Real estate, net
    
    $
    352,442,883
    
    
    $
    356,641,940
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.   13




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TenantYear
    
    Lease PaymentsSix months ending December 31, 2010
    
    $
    19,392,8482011
    
    
    38,589,6742012
    
    
    38,698,2892013
    
    
    33,356,0722014
    
    
    29,132,2462015
    
    
    25,044,969Thereafter
    
    
    145,637,227
  Intangible Assets
  June 30, 2010
    
    
    December 31, 2009Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,935,445
    
    
    $
    (7,577,354
    )
    
    $
    15,935,445
    
    
    $
    (6,741,817
    )Leasing costs
    
    
    10,060,049
    
    
    
    (4,263,737
    )
    
    
    10,053,004
    
    
    
    (3,832,623
    )Customer relationships
    
    
    17,136,501
    
    
    
    (5,044,000
    )
    
    
    17,136,501
    
    
    
    (4,373,049
    )$
    43,131,995
    
    
    $
    (16,885,091
    )
    
    $
    43,124,950
    
    
    $
    (14,947,489
    )
  EstimatedYear
    
    Amortization ExpenseSix months ending December 31, 2010
    
    $
    3,029,9202011
    
    
    5,403,5322012
    
    
    4,502,3862013
    
    
    2,342,8872014
    
    
    2,075,1252015
    
    
    1,708,575Thereafter
    
    
    7,184,479
 5. Real Estate Held for Sale and Discontinued Operations
  14




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For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating revenue
    
    $
    
    
    
    $
    25,875
    
    
    $
    
    
    
    $
    51,751Operating expense
    
    
    
    
    
    
    (4,959
    )
    
    
    
    
    
    
    (12,997
    )Income from discontinued
operations
    
    $
    
    
    
    $
    20,916
    
    
    $
    
    
    
    $
    38,754
 6. Mortgage Note Receivable
  15




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7. Mortgage Notes Payable and Line of Credit
  Date ofIssuance/
    
    
    Principal
    
    
    Stated Interest Rate at
    
    
    Principal Balance OutstandingAssumption
    
    
    Maturity Date
    
    
    June 30, 2010 (1)
    
    
    June 30, 2010
    
    
    December 31, 2009Fixed-Rate Mortgage Notes Payable:03/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    $
    2,792,532
    
    
    $
    2,884,90808/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    20,933,204
    
    
    
    21,093,91709/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,299,802
    
    
    
    12,389,64712/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    18,860,364
    
    
    
    18,991,93402/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    9,105,276
    
    
    
    9,188,04402/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    18,929,519
    
    
    
    19,116,27703/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    13,865,869
    
    
    
    14,009,91811/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    14,045,923
    
    
    
    14,136,92112/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,467,597
    
    
    
    21,605,10602/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,00006/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,00009/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,326,704
    
    
    
    4,361,14410/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,565,851
    
    
    
    15,657,33008/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,230,611
    
    
    
    6,296,50509/15/08
    
    
    
    10/01/10
    (2)
    
    
    6.85
    %
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    251,453,252
    
    
    
    252,761,651Variable-Rate Line of Credit:
    
    
    12/29/06
    
    
    
    12/29/10
    
    
    LIBOR + 2.15%
    
    
    36,300,000
    
    
    
    33,200,000Total Mortgage Notes Payable and Line of Credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    287,753,252
    
    
    $
    285,961,651
 
 (1)
    
    The weighted average interest rate on all debt outstanding at June 30,
2010 was approximately 5.60%.(2)
    
    This note has three annual extension options, which gives us the ability
to extend the term of the note until October 1, 2013. Mortgage Notes Payable
    16




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##### Table of Contents



Scheduled principalYear
    
    paymentsSix months ending December 31, 2010
    
    $
    49,458,334
    (1)2011
    
    
    3,055,8672012
    
    
    3,379,9842013
    
    
    12,176,2732014
    
    
    20,781,3192015
    
    
    54,529,438Thereafter
    
    
    108,072,037$
    251,453,252
 
 (1)
    
    The $48.0 million mortgage note issued in September 2008 matures in October
2010, and we expect to
exercise our options to extend the maturity date until October 2013. Line of Credit
   17




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##### Table of Contents



8. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalPreferred
    
    
    Senior Common
    
    
    Common
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2009
    
    $
    2,150
    
    
    $
    
    
    
    $
    8,563
    
    
    $
    170,622,581
    
    
    $
    (2,304,999
    )
    
    $
    (49,877,753
    )
    
    $
    118,450,542Issuance of senior common stock
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    25,694
    
    
    
    
    
    
    
    
    
    
    
    25,696Repayment of principal on
notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,413
    
    
    
    
    
    
    
    44,413Distributions declared to
common, senior common and
preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,460,697
    )
    
    
    (8,460,697
    )Forfeiture of common stock in
satisfaction of employee note
receivable (1)
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (243,882
    )
    
    
    
    
    
    
    
    
    
    
    (243,900
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,092,784
    
    
    
    2,092,784Balance at June 30, 2010
    
    $
    2,150
    
    
    $
    2
    
    
    $
    8,545
    
    
    $
    170,404,393
    
    
    $
    (2,260,586
    )
    
    $
    (56,245,666
    )
    
    $
    111,908,838
 
 (1)
    
    On February 1, 2010, the maturity date of an employee stock option loan to a former employee of the Adviser was extended until August 2010. In connection with the extension of the
loan, the recourse provision of the loan was removed, and the former employee was granted the option to either repay the principal and interest in full or return the 18,000 shares pledged against the
loan to the Company in full satisfaction of the loan. On March 8, 2010, the date that the market price of the pledged shares equaled the balance of the outstanding loan, the pledged shares were
returned to the Company, and the loan was deemed paid in full. 18




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##### Table of Contents



Outstanding BalanceAmount of
    
    
    Outstanding Balance
    
    
    of Employee LoansNumber of Options
    
    
    Strike Price of
    
    
    Promissory Note
    
    
    of Employee Loans
    
    
    at December 31,
    
    
    Maturity Date of
    
    
    Interest Rate onDate Issued
    
    Exercised
    
    
    Options Exercised
    
    
    Issued to Employees
    
    
    at June 30, 2010
    
    
    2009
    
    
    Note
    
    
    NoteSep 2004
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    314,961
    
    
    $
    358,405
    
    
    Sep 2013
    
    
    5.00
    %Apr 2006
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    199,994
    
    
    
    199,994
    
    
    Apr 2015
    
    
    7.77
    %May 2006
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    
    842,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    
    241,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000
    
    
    May 2016
    
    
    7.87
    %Oct 2006
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    192,231
    
    
    
    193,200
    
    
    Oct 2015
    
    
    8.17
    %Nov 2006
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    
    375,000
    
    
    Nov 2015
    
    
    8.15
    %145,422
    
    
    
    
    
    
    $
    2,321,594
    
    
    $
    2,260,586
    
    
    $
    2,304,999
     19




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##### Table of Contents



9. Segment Information
   As of and for the three months ended June 30, 2010
    
    
    As of and for the six months ended June 30, 2010Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    Total
    
    
    Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,491,804
    
    
    $
    189,583
    
    
    $
    
    
    
    $
    10,681,387
    
    
    $
    20,989,281
    
    
    $
    377,083
    
    
    $
    
    
    
    $
    21,366,364Operating expenses
    
    
    (3,658,082
    )
    
    
    
    
    
    
    (1,692,119
    )      (1)
    
    
    (5,350,201
    )
    
    
    (7,283,430
    )
    
    
    
    
    
    
    (3,427,158
    )      (1)
    
    
    (10,710,588
    )Other expense
    
    
    (4,090,012
    )
    
    
    
    
    
    
    (234,723
    )      (2)
    
    
    (4,324,735
    )
    
    
    (8,135,657
    )
    
    
    
    
    
    
    (427,335
    )      (2)
    
    
    (8,562,992
    )Discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    2,743,710
    
    
    $
    189,583
    
    
    $
    (1,926,842
    )
    
    $
    1,006,451
    
    
    $
    5,570,194
    
    
    $
    377,083
    
    
    $
    (3,854,493
    )
    
    $
    2,092,784Total Assets
    
    $
    393,575,318
    
    
    $
    10,062,500
    
    
    $
    7,541,573
    
    
    $
    411,179,391
    
    
    $
    393,575,318
    
    
    $
    10,062,500
    
    
    $
    7,541,573
    
    
    $
    411,179,391
 As of and for the three months ended June 30, 2009
    
    
    As of and for the six months ended June 30, 2009Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    Total
    
    
    Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,461,906
    
    
    $
    189,583
    
    
    $
    
    
    
    $
    10,651,489
    
    
    $
    20,932,587
    
    
    $
    377,083
    
    
    $
    
    
    
    $
    21,309,670Operating expenses
    
    
    (3,555,776
    )
    
    
    
    
    
    
    (1,626,061
    )      (1)
    
    
    (5,181,837
    )
    
    
    (7,144,850
    )
    
    
    
    
    
    
    (3,202,047
    )      (1)
    
    
    (10,346,897
    )Other expense
    
    
    (4,114,021
    )
    
    
    
    
    
    
    (259,611
    )      (2)
    
    
    (4,373,632
    )
    
    
    (8,196,656
    )
    
    
    
    
    
    
    (598,366
    )      (2)
    
    
    (8,795,022
    )Discontinued
operations
    
    
    20,916
    
    
    
    
    
    
    
    
    
    
    
    20,916
    
    
    
    38,754
    
    
    
    
    
    
    
    
    
    
    
    38,754Net income
    
    $
    2,813,025
    
    
    $
    189,583
    
    
    $
    (1,885,672
    )
    
    $
    1,116,936
    
    
    $
    5,629,835
    
    
    $
    377,083
    
    
    $
    (3,800,413
    )
    
    $
    2,206,505Total Assets
    
    $
    401,711,306
    
    
    $
    10,062,500
    
    
    $
    10,471,976
    
    
    $
    422,245,782
    
    
    $
    401,711,306
    
    
    $
    10,062,500
    
    
    $
    10,471,976
    
    
    $
    422,245,782
 
 (1)
    
    Operating expenses includes base management fees, incentive fees, administration fees, professional fees, insurance expense, directors fees, stockholder-related expenses and general and administrative expenses that are not practicable to allocate to either
operating segment; thus, these expenses are included in the Other column.(2)
    
    Other expense includes interest expense on the Companys line of credit and short-term loan of $282,424 and $521,716 (which is net of interest income on temporary investments, interest income on employee loans and other income) for the three and six months
ended June 30, 2010 and $319,977 and $724,899 for the three and six months ended June 30, 2009, respectively. It is not practicable to allocate the interest expense from the line of credit or the short-term loan to either operating segment; thus, the interest is
included in the Other column. 10. Subsequent Events
   20




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##### Table of Contents



21




---



##### Table of Contents



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, or the Exchange Act. These
statements may relate to, among other things, future events or our future performance or financial
condition. In some cases, you can identify forward-looking statements by terminology such as may,
might, believe, will, provided, anticipate, future, could, growth, plan,
intend, expect, should, would, if, seek, possible, potential, likely or the
negative of such terms or comparable terminology. These forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our business, financial
condition, liquidity, results of operations, funds from operations or prospects to be materially
different from any future business, financial condition, liquidity, results of operations, funds
from operations or prospects expressed or implied by such forward-looking statements. We caution
readers not to place undue reliance on any such forward-looking statements, which are made pursuant
to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, after the date of this
Quarterly Report on Form 10-Q, or Report.
 All references to we, our, us and the Company in this Report mean Gladstone Commercial
Corporation and its consolidated subsidiaries, except where it is made clear that the term means
only Gladstone Commercial Corporation.
 OVERVIEW
 General
  Business Environment
  22




---



##### Table of Contents



Recent Events
 Financing Activities:
  23




---



##### Table of Contents



Equity Activities:
   Leasing Activities:
  Industry Classifications
  June 30, 2010
    
    
    June 30, 2009Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeAutomobile
    
    $
    583,326
    
    
    
    2.8
    %
    
    $
    583,327
    
    
    
    2.8
    %Beverage, Food & Tobacco
    
    
    1,094,383
    
    
    
    5.2
    %
    
    
    1,094,371
    
    
    
    5.3
    %Buildings and Real Estate
    
    
    1,022,674
    
    
    
    4.9
    %
    
    
    1,012,834
    
    
    
    4.9
    %Chemicals, Plastics & Rubber
    
    
    1,565,065
    
    
    
    7.5
    %
    
    
    1,598,724
    
    
    
    7.7
    %Containers, Packaging & Glass
    
    
    1,165,237
    
    
    
    5.6
    %
    
    
    1,165,007
    
    
    
    5.6
    %Diversified/Conglomerate Manufacturing
    
    
    1,832,341
    
    
    
    8.8
    %
    
    
    1,832,344
    
    
    
    8.8
    %Diversified/Conglomerate Services
    
    
    154,052
    
    
    
    0.7
    %
    
    
    154,052
    
    
    
    0.8
    %Electronics
    
    
    3,083,187
    
    
    
    14.8
    %
    
    
    3,082,895
    
    
    
    14.8
    %Healthcare, Education & Childcare
    
    
    3,072,703
    
    
    
    14.8
    %
    
    
    3,072,707
    
    
    
    14.8
    %Home & Office Furnishings
    
    
    264,871
    
    
    
    1.3
    %
    
    
    264,872
    
    
    
    1.3
    %Insurance
    
    
    361,433
    
    
    
    1.7
    %
    
    
    361,433
    
    
    
    1.7
    %Machinery
    
    
    1,194,308
    
    
    
    5.7
    %
    
    
    1,194,301
    
    
    
    5.8
    %Oil & Gas
    
    
    647,121
    
    
    
    3.1
    %
    
    
    572,645
    
    
    
    2.8
    %Personal & Non-Durable Consumer Products
    
    
    677,090
    
    
    
    3.2
    %
    
    
    677,361
    
    
    
    3.3
    %Personal, Food & Miscellaneous Services
    
    
    287,503
    
    
    
    1.4
    %
    
    
    287,503
    
    
    
    1.4
    %Printing & Publishing
    
    
    1,095,611
    
    
    
    5.3
    %
    
    
    1,089,693
    
    
    
    5.3
    %Telecommunications
    
    
    2,723,681
    
    
    
    13.2
    %
    
    
    2,723,351
    
    
    
    12.9
    %$
    20,824,586
    
    
    
    100.0
    %
    
    $
    20,767,420
    
    
    
    100.0
    %
 24




---



##### Table of Contents



Lease Expirations
  Rental Revenuefor the Six MonthYear of Lease
    
    
    
    
    
    Number of
    
    
    Period Ended
    
    
    Annualized Base
    
    
    % of AnnualizedExpiration
    
    Square Feet
    
    
    Leases
    
    
    June 30, 2010
    
    
    Rental Revenue
    
    
    Base Rent2010
    
    
    215,581
    
    
    
    3
    
    
    $
    704,844
    
    
    $
    1,409,688
    
    
    
    3.4
    %2011
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %2012
    
    
    479,982
    
    
    
    3
    
    
    
    2,214,824
    
    
    
    4,429,648
    
    
    
    10.6
    %2013
    
    
    438,422
    
    
    
    6
    
    
    
    2,336,675
    
    
    
    4,673,350
    
    
    
    11.2
    %2014
    
    
    614,132
    
    
    
    5
    
    
    
    1,541,098
    
    
    
    3,082,196
    
    
    
    7.4
    %2015
    
    
    896,876
    
    
    
    8
    
    
    
    3,423,921
    
    
    
    6,847,842
    
    
    
    16.4
    %2016
    
    
    898,257
    
    
    
    5
    
    
    
    2,107,425
    
    
    
    4,214,850
    
    
    
    10.1
    %2017
    
    
    102,200
    
    
    
    1
    
    
    
    461,462
    
    
    
    922,924
    
    
    
    2.2
    %2018
    
    
    59,894
    
    
    
    1
    
    
    
    134,020
    
    
    
    268,040
    
    
    
    0.6
    %2019+
    
    
    2,598,815
    
    
    
    18
    
    
    
    7,900,317
    
    
    
    15,800,634
    
    
    
    38.1
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    20,824,586
    
    
    $
    41,649,172
    
    
    
    100
    %
  Rental Revenuefor the Six MonthNumber of
    
    
    Period Ended
    
    
    Annualized Base
    
    
    % of AnnualizedState
    
    Square Feet
    
    
    Leases
    
    
    June 30, 2010
    
    
    Rental Revenue
    
    
    Base RentOhio
    
    
    1,185,411
    
    
    
    11
    
    
    $
    3,723,561
    
    
    $
    7,447,122
    
    
    
    17.9
    %Minnesota
    
    
    547,800
    
    
    
    3
    
    
    
    2,605,773
    
    
    
    5,211,546
    
    
    
    12.5
    %North Carolina
    
    
    695,876
    
    
    
    6
    
    
    
    1,897,167
    
    
    
    3,794,334
    
    
    
    9.1
    %Pennsylvania
    
    
    623,375
    
    
    
    4
    
    
    
    1,522,752
    
    
    
    3,045,504
    
    
    
    7.3
    %Texas
    
    
    188,178
    
    
    
    4
    
    
    
    1,177,926
    
    
    
    2,355,852
    
    
    
    5.7
    %Michigan
    
    
    596,104
    
    
    
    2
    
    
    
    1,107,759
    
    
    
    2,215,518
    
    
    
    5.3
    %Illinois
    
    
    164,131
    
    
    
    2
    
    
    
    1,093,010
    
    
    
    2,186,020
    
    
    
    5.2
    %Massachusetts
    
    
    338,508
    
    
    
    3
    
    
    
    1,087,044
    
    
    
    2,174,088
    
    
    
    5.2
    %All Other States
    
    
    1,964,776
    
    
    
    15
    
    
    
    6,609,594
    
    
    
    13,219,188
    
    
    
    31.8
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    20,824,586
    
    
    $
    41,649,172
    
    
    
    100
    %
 Our Adviser and Administrator
   25




---



##### Table of Contents



Advisory and Administration Agreements
    Management Services and Fees under the Advisory Agreement
   
    
    no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized);
    
    100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
 26




---



##### Table of Contents



Quarterly Incentive Fee Based on FFO
 
 
   Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
  27




---



##### Table of Contents




    
    The amount of purchase price allocated to the various tangible and intangible assets on
our balance sheet;
    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus, depending on the amounts allocated between
land and other depreciable assets, changes in the purchase price allocation among our
assets could have a material impact on our FFO, a metric which is used by many REIT
investors to evaluate our operating performance; and
    
    The period of time over which tangible and intangible assets are depreciated varies
greatly, and thus, changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years. Also, we
depreciate our buildings over 39 years, but do not depreciate our land. These differences
in timing could have a material impact on our results of operations.
 Asset Impairment Evaluation
  28




---



##### Table of Contents



Overview Business Environment
 Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  29




---



##### Table of Contents



Results of Operations
  A comparison of our operating results for the three and six months ended June 30, 2010 and 2009 is
below
 For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,409,519
    
    
    $
    10,379,172
    
    
    $
    30,347
    
    
    
    0
    %
    
    $
    20,824,586
    
    
    $
    20,767,420
    
    
    $
    57,166
    
    
    
    0
    %Interest income from mortgage note receivable
    
    
    189,583
    
    
    
    189,583
    
    
    
    
    
    
    
    0
    %
    
    
    377,083
    
    
    
    377,083
    
    
    
    
    
    
    
    0
    %Tenant recovery revenue
    
    
    82,285
    
    
    
    82,734
    
    
    
    (449
    )
    
    
    -1
    %
    
    
    164,695
    
    
    
    165,167
    
    
    
    (472
    )
    
    
    0
    %Total operating revenues
    
    
    10,681,387
    
    
    
    10,651,489
    
    
    
    29,898
    
    
    
    0
    %
    
    
    21,366,364
    
    
    
    21,309,670
    
    
    
    56,694
    
    
    
    0
    %Operating expensesDepreciation and amortization
    
    
    3,390,492
    
    
    
    3,282,629
    
    
    
    107,863
    
    
    
    3
    %
    
    
    6,712,362
    
    
    
    6,590,438
    
    
    
    121,924
    
    
    
    2
    %Property operating expenses
    
    
    229,733
    
    
    
    230,785
    
    
    
    (1,052
    )
    
    
    0
    %
    
    
    474,088
    
    
    
    467,595
    
    
    
    6,493
    
    
    
    1
    %Due diligence expense
    
    
    
    
    
    
    6,886
    
    
    
    (6,886
    )
    
    
    -100
    %
    
    
    21,876
    
    
    
    16,433
    
    
    
    5,443
    
    
    
    33
    %Base management fee
    
    
    296,141
    
    
    
    357,650
    
    
    
    (61,509
    )
    
    
    -17
    %
    
    
    608,705
    
    
    
    730,298
    
    
    
    (121,593
    )
    
    
    -17
    %Incentive fee
    
    
    829,264
    
    
    
    812,653
    
    
    
    16,611
    
    
    
    2
    %
    
    
    1,675,456
    
    
    
    1,598,942
    
    
    
    76,514
    
    
    
    5
    %Administration fee
    
    
    219,119
    
    
    
    257,207
    
    
    
    (38,088
    )
    
    
    -15
    %
    
    
    451,003
    
    
    
    481,561
    
    
    
    (30,558
    )
    
    
    -6
    %Professional fees
    
    
    201,801
    
    
    
    125,965
    
    
    
    75,836
    
    
    
    60
    %
    
    
    377,411
    
    
    
    361,161
    
    
    
    16,250
    
    
    
    4
    %Insurance expense
    
    
    56,513
    
    
    
    48,125
    
    
    
    8,388
    
    
    
    17
    %
    
    
    112,838
    
    
    
    96,804
    
    
    
    16,034
    
    
    
    17
    %Directors fees
    
    
    49,025
    
    
    
    50,386
    
    
    
    (1,361
    )
    
    
    -3
    %
    
    
    98,443
    
    
    
    100,088
    
    
    
    (1,645
    )
    
    
    -2
    %Stockholder-related expenses
    
    
    78,596
    
    
    
    88,245
    
    
    
    (9,649
    )
    
    
    -11
    %
    
    
    123,812
    
    
    
    171,892
    
    
    
    (48,080
    )
    
    
    -28
    %Asset retirement obligation expense
    
    
    37,857
    
    
    
    35,476
    
    
    
    2,381
    
    
    
    7
    %
    
    
    75,104
    
    
    
    70,384
    
    
    
    4,720
    
    
    
    7
    %General and administrative
    
    
    17,733
    
    
    
    15,453
    
    
    
    2,280
    
    
    
    15
    %
    
    
    35,563
    
    
    
    26,005
    
    
    
    9,558
    
    
    
    37
    %Total operating expenses before
credit from Adviser
    
    
    5,406,274
    
    
    
    5,311,460
    
    
    
    94,814
    
    
    
    2
    %
    
    
    10,766,661
    
    
    
    10,711,601
    
    
    
    55,060
    
    
    
    1
    %Credit to incentive fee
    
    
    (56,073
    )
    
    
    (129,623
    )
    
    
    73,550
    
    
    
    -57
    %
    
    
    (56,073
    )
    
    
    (364,704
    )
    
    
    308,631
    
    
    
    -85
    %Total operating expenses
    
    
    5,350,201
    
    
    
    5,181,837
    
    
    
    168,364
    
    
    
    3
    %
    
    
    10,710,588
    
    
    
    10,346,897
    
    
    
    363,691
    
    
    
    4
    %Other income (expense)Interest income from temporary investments
    
    
    113
    
    
    
    184
    
    
    
    (71
    )
    
    
    -39
    %
    
    
    378
    
    
    
    17,465
    
    
    
    (17,087
    )
    
    
    -98
    %Interest income  employee loans
    
    
    42,574
    
    
    
    48,862
    
    
    
    (6,288
    )
    
    
    -13
    %
    
    
    85,674
    
    
    
    97,748
    
    
    
    (12,074
    )
    
    
    -12
    %Other income
    
    
    5,013
    
    
    
    11,320
    
    
    
    (6,307
    )
    
    
    -56
    %
    
    
    8,329
    
    
    
    11,320
    
    
    
    (2,991
    )
    
    
    -26
    %Interest expense
    
    
    (4,372,435
    )
    
    
    (4,433,998
    )
    
    
    61,563
    
    
    
    -1
    %
    
    
    (8,657,373
    )
    
    
    (8,921,555
    )
    
    
    264,182
    
    
    
    -3
    %Total other expense
    
    
    (4,324,735
    )
    
    
    (4,373,632
    )
    
    
    48,897
    
    
    
    -1
    %
    
    
    (8,562,992
    )
    
    
    (8,795,022
    )
    
    
    232,030
    
    
    
    -3
    %Income from continuing operations
    
    
    1,006,451
    
    
    
    1,096,020
    
    
    
    (89,569
    )
    
    
    -8
    %
    
    
    2,092,784
    
    
    
    2,167,751
    
    
    
    (74,967
    )
    
    
    -3
    %Discontinued operationsIncome from discontinued operations
    
    
    
    
    
    
    20,916
    
    
    
    (20,916
    )
    
    
    -100
    %
    
    
    
    
    
    
    38,754
    
    
    
    (38,754
    )
    
    
    -100
    %Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %
    
    
    (2,046,876
    )
    
    
    (2,046,875
    )
    
    
    (1
    )
    
    
    0
    %Distributions attributable to senior common stock
    
    
    (375
    )
    
    
    
    
    
    
    (375
    )
    
    
    -100
    %
    
    
    (375
    )
    
    
    
    
    
    
    (375
    )
    
    
    -100
    %Net (loss) income available to common stockholders
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    (110,860
    )
    
    
    -119
    %
    
    $
    45,533
    
    
    $
    159,630
    
    
    $
    (114,097
    )
    
    
    -71
    %
 30




---



##### Table of Contents



Operating Revenues
    Operating Expenses
    Advisory and Administration Agreements.
 Advisory and Administration Agreements.
  31




---



##### Table of Contents



Advisory and Administration Agreements.
       Other Income and Expense
     32




---



##### Table of Contents



Discontinued Operations
  Net Income Available to Common Stockholders
 Advisory and
Administration Agreements.
 Liquidity and Capital Resources
 Future Capital Needs
  Overview Business Environment
   33




---



##### Table of Contents



Operating Activities
  Investing Activities
  34




---



##### Table of Contents



Overview Business Environment
 Financing Activities
  Mortgage Notes Payable
  Line of Credit
    35




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    
    287,753,252
    
    
    $
    87,100,228
    
    
    $
    6,773,238
    
    
    $
    32,882,071
    
    
    $
    160,997,715Interest on Debt Obligations (2)
    
    
    69,564,532
    
    
    
    13,080,805
    
    
    
    23,549,443
    
    
    
    21,059,786
    
    
    
    11,874,498Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    Operating Lease Obligations (4)
    
    
    1,677,614
    
    
    
    152,510
    
    
    
    305,021
    
    
    
    305,021
    
    
    
    915,062Total
    
    $
    359,295,398
    
    
    $
    100,333,543
    
    
    $
    30,627,702
    
    
    $
    54,546,878
    
    
    $
    173,787,275
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, which represents $36.3 million of the debt obligation due in less than 1 year,
and mortgage notes payable that were outstanding as of June 30, 2010. The line of credit matures in December 2010.
The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise each of our options to extend the maturity date until October 2013.(2)
    
    Interest on debt obligations includes estimated interest on our borrowings under our line of credit.
The balance and interest rate on our line of credit is variable; thus, the amount of interest calculated for purposes of this table was based upon rates and
balances as of June 30, 2010.(3)
    
    Capital lease obligations represent the obligation to purchase the land held under the ground lease on our property located in Fridley, Minnesota.(4)
    
    Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021. Off-Balance Sheet Arrangements
  36




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##### Table of Contents



Funds from Operations
     37




---



##### Table of Contents



For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    1,006,451
    
    
    $
    1,116,936
    
    
    $
    2,092,784
    
    
    $
    2,206,505Less: Distributions attributable to preferred and senior common stock
    
    
    (1,023,812
    )
    
    
    (1,023,437
    )
    
    
    (2,047,251
    )
    
    
    (2,046,875
    )Net (loss) income available to common stockholders
    
    
    (17,361
    )
    
    
    93,499
    
    
    
    45,533
    
    
    
    159,630Add: Real estate depreciation and amortization, including discontinued operations
    
    
    3,390,492
    
    
    
    3,286,743
    
    
    
    6,712,362
    
    
    
    6,600,853FFO available to common stockholders
    
    $
    3,373,131
    
    
    $
    3,380,242
    
    
    $
    6,757,895
    
    
    $
    6,760,483Weighted average shares outstanding  basic
    
    
    8,545,264
    
    
    
    8,563,264
    
    
    
    8,551,927
    
    
    
    8,563,264Weighted average shares outstanding  diluted
    
    
    8,546,529
    
    
    
    8,563,264
    
    
    
    8,552,563
    
    
    
    8,563,264Basic net income per weighted average share of common stock
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Diluted net income per weighted average share of common stock
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02Basic FFO per weighted average share of common stock
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    0.79
    
    
    $
    0.79Diluted FFO per weighted average share of common stock
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    0.79
    
    
    $
    0.79Distributions declared per share of common stock
    
    $
    0.375
    
    
    $
    0.375
    
    
    $
    0.750
    
    
    $
    0.750Percentage of FFO paid per share of common stock
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
 38




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    For the three months ended June 30,
    
    
    For the six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    20091% increase in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    5
    
    
    $
    
    
    
    $
    5Interest expense
    
    
    91,758
    
    
    
    80,383
    
    
    
    182,508
    
    
    
    159,883Net decrease
    
    $
    (91,758
    )
    
    $
    (80,378
    )
    
    $
    (182,508
    )
    
    $
    (159,878
    )Net (loss) income available to common stockholders (as reported)
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    45,533
    
    
    $
    159,630Net decrease as percentage of
Net (loss) income available to common stockholders (as reported)
    
    
    528.5
    %
    
    
    -86.0
    %
    
    
    -400.8
    %
    
    
    -100.2
    %1% decrease in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest expense
    
    $
    (91,758
    )
    
    $
    (80,383
    )
    
    $
    (182,508
    )
    
    $
    (159,883
    )Net increase
    
    $
    91,758
    
    
    $
    80,383
    
    
    $
    182,508
    
    
    $
    159,883Net (loss) income available to common stockholders (as reported)
    
    $
    (17,361
    )
    
    $
    93,499
    
    
    $
    45,533
    
    
    $
    159,630Net increase as percentage of
Net (loss) income available to common stockholders (as reported)
    
    
    -528.5
    %
    
    
    86.0
    %
    
    
    400.8
    %
    
    
    100.2
    %
   39




---



##### Table of Contents



Item 4. Controls and Procedures
     40




---



##### Table of Contents



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. Removed and Reserved
 
 Item 5. Other Information
  41




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##### Table of Contents



Item 6. Exhibits
 Exhibit Index
 Exhibit Number
    
    Exhibit Description3.1
    
    Articles of Amendment and Restatement to Articles of
Incorporation, incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-11 (File No.
333-106024), filed June 11, 20033.1.1
    
    Articles of Amendment to Articles of Amendment and
Restatement of Articles of Incorporation, incorporated by
reference to Exhibit 3.1.1 to the Quarterly Report on Form
10-Q, filed July 30, 20093.1.2
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed March
19, 20103.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024),
filed June 11, 20033.2.1
    
    First Amendment to Bylaws, incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed July
10, 20074.1
    
    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, 20064.2
    
    Articles of Amendment to Articles Supplementary
Establishing and Fixing the Rights and Preferences of the
7.75% Series A Cumulative Redeemable Preferred Stock,
incorporated by reference to Exhibit 99.1 of Form 8-K,
filed on April 13, 20064.3
    
    Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.5% Series B Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.4
of Form 8-A (File No. 000-50363), filed October 19, 20064.4
    
    Amended and Restated Articles Supplementary Establishing
and Fixing the Rights and Preferences of Senior Common
Stock, incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K, filed June 10, 20104.5
    
    Form of Certificate for Common Stock of Gladstone
Commercial Corporation, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-106024), filed August 8, 20034.6
    
    Form of Certificate for 7.75% Series A Cumulative
Redeemable Preferred Stock of Gladstone Commercial
Corporation, incorporated by reference to Exhibit 4.1 of
Form 8-A (File No. 000-50363), filed January 19, 20064.7
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A (File
No. 001-33097), filed October 19, 200610.1
    
    Amendment to First Amended and Restated Agreement of
Limited Partnership of Gladstone Commercial Limited
Partnership, incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K, filed April 29, 2010
 42




---



##### Table of Contents



Exhibit Number
    
    Exhibit Description10.2
    
    Gladstone Commercial Limited Partnership Schedule 4.2(a)(3)
to First Amended and Restated Agreement of Limited
Partnership; Designation of Senior Common Units,
incorporated by reference to Exhibit 10.2 of the Form 8-K,
filed April 29, 201011
    
    Computation of Per Share Earnings from Operations (included
in the notes to the unaudited financial statements
contained in this Report.12
    
    Statements re: computation of ratios (filed herewith).31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).31.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).32.1
    
    Certification of Chief Executive Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).32.2
    
    Certification of Chief Financial Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).
 43




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##### Table of Contents



Gladstone Commercial CorporationDate: August 3, 2010
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 44