UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



PAGEPART I   FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three and nine months ended
September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007
    
    
    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
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 1. Legal Proceeding
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    38
 2




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##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30, 2008
    
    
    December 31, 2007ASSETSReal estate, net
    
    $
    367,715,344
    
    
    $
    324,761,772Lease intangibles, net
    
    
    32,467,191
    
    
    
    28,989,556Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    3,064,675
    
    
    
    1,356,408Restricted cash
    
    
    2,637,531
    
    
    
    1,914,067Funds held in escrow
    
    
    1,988,558
    
    
    
    1,401,695Deferred rent receivable
    
    
    6,667,829
    
    
    
    5,094,799Deferred financing costs, net
    
    
    4,752,282
    
    
    
    4,405,129Prepaid expenses and other assets
    
    
    989,645
    
    
    
    979,263TOTAL ASSETS
    
    $
    430,283,055
    
    
    $
    378,902,689LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    255,425,225
    
    
    $
    202,120,471Short-term loan and borrowings under line of credit
    
    
    30,200,000
    
    
    
    24,400,000Deferred rent liability
    
    
    3,343,863
    
    
    
    3,933,035Asset retirement obligation liability
    
    
    2,155,341
    
    
    
    1,811,752Accounts payable and accrued expenses
    
    
    514,222
    
    
    
    778,949Due to adviser (Refer to Note 2)
    
    
    1,231,722
    
    
    
    784,301Obligation under capital lease
    
    
    232,301
    
    
    
    Rent received in advance, security deposits and funds held in escrow
    
    
    3,600,768
    
    
    
    2,706,113Total Liabilities
    
    
    296,703,442
    
    
    
    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, 47,700,000 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
    
    
    (2,629,846
    )
    
    
    (2,769,923
    )Distributions in excess of accumulated earnings
    
    
    (34,442,235
    )
    
    
    (25,513,703
    )Total Stockholders Equity
    
    
    133,579,613
    
    
    
    142,368,068TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    430,283,055
    
    
    $
    378,902,689
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenuesRental income
    
    $
    10,157,553
    
    
    $
    8,024,305
    
    
    $
    29,269,036
    
    
    $
    22,834,663Interest income from mortgage notes receivable
    
    
    216,446
    
    
    
    255,555
    
    
    
    673,548
    
    
    
    758,333Tenant recovery revenue
    
    
    83,144
    
    
    
    80,648
    
    
    
    253,495
    
    
    
    230,851Total operating revenues
    
    
    10,457,143
    
    
    
    8,360,508
    
    
    
    30,196,079
    
    
    
    23,823,847Operating expensesDepreciation and amortization
    
    
    3,262,903
    
    
    
    2,668,383
    
    
    
    9,435,690
    
    
    
    7,722,349Property operating expenses
    
    
    225,020
    
    
    
    204,972
    
    
    
    670,442
    
    
    
    597,273Base management fee (Refer to Note 2)
    
    
    404,108
    
    
    
    459,202
    
    
    
    1,255,833
    
    
    
    1,412,337Incentive fee (Refer to Note 2)
    
    
    793,787
    
    
    
    677,104
    
    
    
    2,300,286
    
    
    
    1,896,677Administration fee (Refer to Note 2)
    
    
    238,241
    
    
    
    175,852
    
    
    
    724,978
    
    
    
    592,996Professional fees
    
    
    117,857
    
    
    
    118,371
    
    
    
    362,584
    
    
    
    442,479Insurance
    
    
    43,354
    
    
    
    53,943
    
    
    
    126,947
    
    
    
    171,275Directors fees
    
    
    54,702
    
    
    
    66,250
    
    
    
    161,202
    
    
    
    174,750Stockholder related expenses
    
    
    42,232
    
    
    
    40,991
    
    
    
    271,430
    
    
    
    215,969Asset retirement obligation expense
    
    
    35,157
    
    
    
    29,440
    
    
    
    98,394
    
    
    
    86,542General and administrative
    
    
    105,999
    
    
    
    17,452
    
    
    
    139,151
    
    
    
    79,119Total operating expenses before credit from Adviser
    
    
    5,323,360
    
    
    
    4,511,960
    
    
    
    15,546,937
    
    
    
    13,391,766Credit to incentive fee (Refer to Note 2)
    
    
    (205,876
    )
    
    
    (526,991
    )
    
    
    (941,928
    )
    
    
    (1,746,564
    )Total operating expenses
    
    
    5,117,484
    
    
    
    3,984,969
    
    
    
    14,605,009
    
    
    
    11,645,202Other income (expense)Interest income from temporary investments
    
    
    4,559
    
    
    
    33,105
    
    
    
    20,796
    
    
    
    325,390Interest income  employee loans
    
    
    49,624
    
    
    
    52,728
    
    
    
    152,620
    
    
    
    169,608Other income
    
    
    7,500
    
    
    
    9,896
    
    
    
    56,493
    
    
    
    28,127Interest expense
    
    
    (4,258,461
    )
    
    
    (2,920,270
    )
    
    
    (12,008,316
    )
    
    
    (8,137,343
    )Total other expense
    
    
    (4,196,778
    )
    
    
    (2,824,541
    )
    
    
    (11,778,407
    )
    
    
    (7,614,218
    )Income from continuing operations
    
    
    1,142,881
    
    
    
    1,550,998
    
    
    
    3,812,663
    
    
    
    4,564,427Discontinued operations(Loss) income from discontinued operations
    
    
    (1,322
    )
    
    
    5,975
    
    
    
    (34,956
    )
    
    
    471Net realized income from foreign currency transactions
    
    
    
    
    
    
    33,487
    
    
    
    
    
    
    
    33,550Taxes refunded on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,667Total discontinued operations
    
    
    (1,322
    )
    
    
    39,462
    
    
    
    (34,956
    )
    
    
    112,688Net income
    
    
    1,141,559
    
    
    
    1,590,460
    
    
    
    3,777,707
    
    
    
    4,677,115Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,438
    )
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )Net income available to common stockholders
    
    $
    118,122
    
    
    $
    567,022
    
    
    $
    707,395
    
    
    $
    1,606,803Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.18Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.19Weighted average shares outstanding- basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the nine months ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    3,777,707
    
    
    $
    4,677,115Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    9,435,690
    
    
    
    7,722,349Amortization of deferred financing costs
    
    
    806,075
    
    
    
    509,990Amortization of deferred rent asset and liability, net
    
    
    (399,049
    )
    
    
    (399,051
    )Accretion of obligation under capital lease
    
    
    7,234
    
    
    
    Asset retirement obligation expense
    
    
    98,394
    
    
    
    86,542Decrease (increase) in prepaid expenses
    
    
    (110,382
    )
    
    
    28,815Increase in deferred rent receivable
    
    
    (1,763,153
    )
    
    
    (1,247,345
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    182,694
    
    
    
    516,996Increase in rent received in advance
    
    
    171,191
    
    
    
    137,534Net cash provided by operating activities
    
    
    12,206,401
    
    
    
    12,032,945Cash flows from investing activities:Real estate investments
    
    
    (48,935,032
    )
    
    
    (85,742,539
    )Receipts from lenders for reserves held in escrow
    
    
    630,033
    
    
    
    1,007,684Payments to lenders for reserves held in escrow
    
    
    (1,216,896
    )
    
    
    (1,010,385
    )Increase in restricted cash
    
    
    (723,464
    )
    
    
    (275,696
    )Deposits on future acquisitions
    
    
    (1,650,000
    )
    
    
    (1,310,000
    )Deposits applied against real estate investments
    
    
    1,750,000
    
    
    
    1,610,000Net cash used in investing activities
    
    
    (50,145,359
    )
    
    
    (85,720,936
    )Cash flows from financing activities:Borrowings under mortgage notes payable
    
    
    48,015,000
    
    
    
    32,521,691Principal repayments on mortgage notes payable
    
    
    (1,171,849
    )
    
    
    (599,328
    )Principal repayments on employee notes receivable from sale of common stock
    
    
    140,077
    
    
    
    400,598Borrowings from line of credit
    
    
    62,600,000
    
    
    
    24,200,000Repayments on line of credit
    
    
    (56,800,000
    )
    
    
    (4,200,000
    )Receipts from tenants from reserves
    
    
    1,746,804
    
    
    
    1,446,577Payments to tenants from reserves
    
    
    (1,555,146
    )
    
    
    (1,311,406
    )Increase in security deposits
    
    
    531,806
    
    
    
    140,525Payments for deferred financing costs
    
    
    (1,153,228
    )
    
    
    (770,761
    )Dividends paid for common and preferred
    
    
    (12,706,239
    )
    
    
    (12,320,797
    )Net cash provided by financing activities
    
    
    39,647,225
    
    
    
    39,507,099Net increase (decrease) in cash and cash equivalents
    
    
    1,708,267
    
    
    
    (34,180,892
    )Cash and cash equivalents, beginning of period
    
    
    1,356,408
    
    
    
    36,005,686Cash and cash equivalents, end of period
    
    $
    3,064,675
    
    
    $
    1,824,794NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONAdditions to real estate included in accounts payable, accrued expenses, and amount due adviser
    
    $
    
    
    
    $
    409,000Increase in asset retirement obligation
    
    $
    245,195
    
    
    $
    150,523Fixed rate debt assumed in connection with acquisitions
    
    $
    6,461,603
    
    
    $
    4,506,689
  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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##### 



Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  8




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##### 



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
  Foreign currency transactions
  10




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##### 



Asset retirement obligations
  Real estate held for sale and discontinued operations
  Recently Issued Accounting Pronouncements
    11




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##### 



Use of estimates
  Reclassifications
  12




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##### 



2. Management Advisory Fee
  Amended Advisory Agreement
   Administration Agreement
  13




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##### 



3. Earnings per Common Share
  For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income available to common stockholders
    
    $
    118,122
    
    
    $
    567,022
    
    
    $
    707,395
    
    
    $
    1,606,803Denominator for basic & diluted weighted average shares
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.19
 4. Real Estate and Intangible Assets
 Real Estate
  September 30, 2008
    
    
    December 31, 2007Real estate:Land
    
    $
    55,226,042
    (1)
    
    $
    48,867,482Building
    
    
    325,090,570
    
    
    
    283,829,987Tenant improvements
    
    
    9,820,706
    
    
    
    7,802,937Accumulated depreciation
    
    
    (22,421,974
    )
    
    
    (15,738,634
    )Real estate, net
    
    $
    367,715,344
    
    
    $
    324,761,772
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.During the nine months ended September 30, 2008, the Company acquired six properties, which are
summarized below:(1)
    
    On January 29, 2008, the Company acquired a 42,900 square foot industrial building in
Reading, Pennsylvania for approximately $7.2 million, including transaction costs. At
closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant
has four options to extend the lease for additional periods of five years each. The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.72 million.(2)
    
    On February 26, 2008, the Company acquired a 74,160 square foot office building in Fridley,
Minnesota for approximately $10.6 million, including transaction costs. At closing, the
Company was assigned the previously existing triple net lease with the sole tenant, which had
a remaining term of approximately five years. The tenant has two options to extend the lease
for additional periods of five years each. The lease provides for prescribed rent escalations
over the life of the lease, with
annualized straight line rents of approximately $0.95 million. The Company was also assigned a
ground lease on the parking lot at the time of closing, which has a remaining term of
approximately six years. At the end of the term, the Company is required to purchase the land.
The rent due under the ground lease had been prepaid by the previous owner through the end of
the term.(3)
    
    On March 31, 2008, the Company acquired a 273,300 square foot industrial building in Concord
Township, Ohio for approximately $15.3 million, including transaction costs. At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has three
options to extend the lease for additional periods of five years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight line rents of
approximately $1.72 million. 14




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##### 



(4)
    
    On April 30, 2008, the Company acquired a 74,950 square foot industrial building in
Pineville, North Carolina for approximately $3.9 million, including transaction costs. At
closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant
has three options to extend the lease for additional periods of five years each. The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.43 million.(5)
    
    On August 29, 2008, the Company acquired a 223,458 square foot industrial building in
Marietta, Ohio for approximately $8.1 million, including transaction costs.  At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has two
options to extend the lease for additional periods of ten years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight line rents of
approximately $0.90 million.(6)
    
    On August 29, 2008, the Company acquired a 67,200 square foot office building in Chalfont,
Pennsylvania for approximately $8.4 million, including transaction costs, which was funded by
a combination of cash on hand, and the assumption of approximately $6.5 million of financing
on the property.  At closing, the Company was assigned the previously existing triple net
lease with the sole tenant, which had a remaining term of approximately 7 years. The tenant
has two options to extend the lease for additional periods of five years each.  The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.76 million.  Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    
    
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place Leases
    
    
    Leasing Costs
    
    
    Relationships
    
    
    Obligations
    
    
    PriceReading, Pennsylvania
    
    $
    490,646
    
    
    $
    6,188,168
    
    
    $
    14,208
    
    
    $
    362,479
    
    
    $
    1,786
    
    
    $
    141,232
    
    
    $
    
    
    
    $
    7,198,519Fridley, Minnesota
    
    
    1,354,233
    
    
    
    7,454,098
    
    
    
    619,428
    
    
    
    452,414
    
    
    
    171,005
    
    
    
    807,950
    
    
    
    (225,067
    )
    
    
    10,634,061Concord Township, Ohio
    
    
    1,796,467
    
    
    
    10,254,003
    
    
    
    900,120
    
    
    
    1,702,792
    
    
    
    5,102
    
    
    
    917,661
    
    
    
    (245,198
    )
    
    
    15,330,947Pineville, North Carolina
    
    
    669,025
    
    
    
    2,930,295
    
    
    
    98,025
    
    
    
    151,426
    
    
    
    2,218
    
    
    
    93,080
    
    
    
    
    
    
    
    3,944,069Marietta, Ohio
    
    
    829,014
    
    
    
    6,537,796
    
    
    
    69,469
    
    
    
    479,124
    
    
    
    3,268
    
    
    
    179,014
    
    
    
    
    
    
    
    8,097,685Chalfont, Pennsylvania
    
    
    1,249,415
    
    
    
    6,105,819
    
    
    
    316,519
    
    
    
    172,278
    
    
    
    189,326
    
    
    
    397,841
    
    
    
    
    
    
    
    8,431,198$
    6,388,800
    
    
    $
    39,470,179
    
    
    $
    2,017,769
    
    
    $
    3,320,513
    
    
    $
    372,705
    
    
    $
    2,536,778
    
    
    $
    (470,265
    )
    
    $
    53,636,479
 Intangible Assets
  Intangible assets
    
    YearsIn-place leases
    
    
    16.8Leasing costs
    
    
    18.2Customer relationships
    
    
    22.7All intangible assets
    
    
    16.7
  15




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##### 



TenantLease PaymentsThree months ending December 31, 2008
    
    $
    9,922,367Year ending December 31, 2009
    
    
    38,749,3652010
    
    
    38,743,9252011
    
    
    38,352,9632012
    
    
    38,056,0612013
    
    
    32,691,790Thereafter
    
    
    184,282,955
   September 30, 2008
    
    
    December 31, 2007Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,981,245
    
    
    $
    (4,661,864
    )
    
    $
    12,660,732
    
    
    $
    (3,414,868
    )Leasing costs
    
    
    9,662,731
    
    
    
    (2,769,660
    )
    
    
    9,290,026
    
    
    
    (2,114,233
    )Customer relationships
    
    
    17,136,501
    
    
    
    (2,881,762
    )
    
    
    14,599,726
    
    
    
    (2,031,827
    )$
    42,780,477
    
    
    $
    (10,313,286
    )
    
    $
    36,550,484
    
    
    $
    (7,560,928
    )
  Estimated AggregateAmortization ExpenseThree months ending December 31, 2008
    
    $
    688,090Year ending December 31, 2009
    
    
    2,687,2992010
    
    
    2,623,7132011
    
    
    2,480,6182012
    
    
    2,190,9062013
    
    
    1,312,252Thereafter
    
    
    6,319,267
 5. Discontinued Operations
  16




---



##### 



For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating (expense) income
    
    $
    (1,322
    )
    
    $
    5,975
    
    
    $
    (34,956
    )
    
    $
    471Net realized income from foreign currency
transactions
    
    
    
    
    
    
    33,487
    
    
    
    
    
    
    
    33,550Taxes refunded on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,667(Loss) income from discontinued operations
    
    $
    (1,322
    )
    
    $
    39,462
    
    
    $
    (34,956
    )
    
    $
    112,688
 6. Mortgage Note Receivable
  7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  Date of Issuance/
    
    
    Principal Maturity
    
    
    Stated Interest Rate at
    
    
    Principal Balance OutstandingAssumption
    
    
    Date
    
    
    September 30, 2008 (1)
    
    
    September 30, 2008
    
    
    December 31, 2007Fixed-Rate Mortgage Notes Payable:3/16/2005
    
    
    
    4/1/2030
    
    
    
    6.33
    %
    
    $
    2,958,913
    
    
    $
    3,003,5828/25/2005
    
    
    
    9/1/2015
    
    
    
    5.33
    %
    
    
    21,448,474
    
    
    
    21,664,4769/12/2005
    
    
    
    9/1/2015
    
    
    
    5.21
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    12/8/2015
    
    
    
    5.71
    %
    
    
    19,280,744
    
    
    
    19,456,0002/21/2006
    
    
    
    12/1/2013
    
    
    
    5.91
    %
    
    
    9,369,889
    
    
    
    9,480,0632/21/2006
    
    
    
    6/30/2014
    
    
    
    5.20
    %
    
    
    19,529,866
    
    
    
    19,782,2703/29/2006
    
    
    
    4/1/2016
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    
    5/5/2016
    
    
    
    6.58
    %
    
    
    14,324,718
    
    
    
    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
    %
    
    
    4,442,289
    
    
    
    4,487,20510/15/2007
    
    
    
    11/8/2017
    
    
    
    6.63
    %
    
    
    15,855,560
    
    
    
    15,974,6618/29/2008
    
    
    
    6/1/2016
    
    
    
    6.80
    %
    
    
    6,441,772
    
    
    
    9/15/2008
    
    
    
    10/1/2010
    
    
    
    6.85
    %
    
    
    48,015,000
    
    
    
    Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,425,225
    
    
    
    202,120,471Variable-Rate Line of Credit:
    
    
    12/29/2006
    
    
    
    12/29/2009
    (2)
    
    LIBOR + 1.9
    %
    
    
    10,200,000
    
    
    
    4,400,000Variable-Rate Short-Term Loan:
    
    
    12/21/2007
    
    
    
    12/21/2008
    (3)
    
    LIBOR + 2.75
    %
    
    
    20,000,000
    
    
    
    20,000,000Total Mortgage Notes Payable, Line of Credit and Short-Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    285,625,225
    
    
    $
    226,520,471
 
 (1)
    
    The weighted average interest rate on all debt outstanding at September 30, 2008 was approximately 5.92%.(2)
    
    The line of credit may be extended for a one-year period at the Companys option, subject to certain conditions.(3)
    
    The short-term loan may be extended for a six-month period at the Companys option, subject to certain conditions. 17




---



##### 



Mortgage Notes Payable
      Scheduled principalpaymentsThree months ending December 31, 2008
    
    $
    467,668Year ending December 31, 2009
    
    
    2,380,0652010
    
    
    50,539,2162011
    
    
    2,820,7502012
    
    
    3,107,1722013
    
    
    11,837,278Thereafter
    
    
    184,273,076$
    255,425,225
 18




---



##### 



Line of Credit
  Short-Term Loan
  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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,077
    
    
    
    
    
    
    
    140,077Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,706,239
    )
    
    
    (12,706,239
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,777,707
    
    
    
    3,777,707Balance at September 30, 2008
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,629,846
    )
    
    $
    (34,442,235
    )
    
    $
    133,579,613
  19




---



##### 



OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 9/30/08
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    366,348
    
    
    9 years
    
    
    5.00
    %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
    
    
    
    38,544
    
    
    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
    
    
    
    245,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %174,922
    
    
    
    
    
    
    $
    2,769,954
    
    
    $
    2,629,846
  9. Segment Information
  As of and for the three months ended September 30, 2008
    
    
    As of and for the nine months ended September 30, 2008Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,240,697
    
    
    $
    216,446
    
    
    $
    
    
    
    $
    10,457,143
    
    
    $
    29,522,531
    
    
    $
    673,548
    
    
    $
    
    
    
    $
    30,196,079Operating expenses
    
    
    (3,523,080
    )
    
    
    
    
    
    
    (1,594,404
    )
    
    
    (5,117,484
    )
    
    
    (10,204,526
    )
    
    
    
    
    
    
    (4,400,483
    )
    
    
    (14,605,009
    )Other expense
    
    
    (3,183,823
    )
    
    
    
    
    
    
    (1,012,955
    )
    
    
    (4,196,778
    )
    
    
    (9,128,081
    )
    
    
    
    
    
    
    (2,650,326
    )
    
    
    (11,778,407
    )Discontinued operations
    
    
    (1,322
    )
    
    
    
    
    
    
    
    
    
    
    (1,322
    )
    
    
    (34,956
    )
    
    
    
    
    
    
    
    
    
    
    (34,956
    )Net income
    
    $
    3,532,472
    
    
    $
    216,446
    
    
    $
    (2,607,359
    )
    
    $
    1,141,559
    
    
    $
    10,154,968
    
    
    $
    673,548
    
    
    $
    (7,050,809
    )
    
    $
    3,777,707Total Assets
    
    $
    409,461,178
    
    
    $
    10,070,714
    
    
    $
    10,751,163
    
    
    $
    430,283,055
    
    
    $
    409,461,178
    
    
    $
    10,070,714
    
    
    $
    10,751,163
    
    
    $
    430,283,055
 As of and for the three months ended September 30, 2007
    
    
    As of and for the nine months ended September 30, 2007Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    8,104,953
    
    
    $
    255,555
    
    
    $
    
    
    
    $
    8,360,508
    
    
    $
    23,065,514
    
    
    $
    758,333
    
    
    $
    
    
    
    $
    23,823,847Operating expenses
    
    
    (2,902,795
    )
    
    
    
    
    
    
    (1,082,174
    )
    
    
    (3,984,969
    )
    
    
    (8,406,164
    )
    
    
    
    
    
    
    (3,239,038
    )
    
    
    (11,645,202
    )Other expense
    
    
    (2,693,509
    )
    
    
    
    
    
    
    (131,032
    )
    
    
    (2,824,541
    )
    
    
    (7,502,386
    )
    
    
    
    
    
    
    (111,832
    )
    
    
    (7,614,218
    )Discontinued operations
    
    
    39,462
    
    
    
    
    
    
    
    
    
    
    
    39,462
    
    
    
    112,688
    
    
    
    
    
    
    
    
    
    
    
    112,688Net income
    
    $
    2,548,111
    
    
    $
    255,555
    
    
    $
    (1,213,206
    )
    
    $
    1,590,460
    
    
    $
    7,269,652
    
    
    $
    758,333
    
    
    $
    (3,350,870
    )
    
    $
    4,677,115Total Assets
    
    $
    343,702,960
    
    
    $
    10,083,333
    
    
    $
    7,559,584
    
    
    $
    361,345,877
    
    
    $
    343,702,960
    
    
    $
    10,083,333
    
    
    $
    7,559,584
    
    
    $
    361,345,877
 20




---



##### 



10. Pro Forma Financial Information
  For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating Data:Total operating revenue
    
    $
    10,719,521
    
    
    $
    9,730,400
    
    
    $
    32,138,406
    
    
    $
    27,933,522Total operating expenses
    
    
    (5,313,745
    )
    
    
    (4,720,207
    )
    
    
    (15,810,891
    )
    
    
    (13,998,829
    )Other expense
    
    
    (4,320,745
    )
    
    
    (3,427,951
    )
    
    
    (11,984,983
    )
    
    
    (8,217,628
    )Income from continuing operations
    
    
    1,085,031
    
    
    
    1,582,242
    
    
    
    4,342,532
    
    
    
    5,717,065Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,438
    )
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )Net income from continuing operations available to common stockholders
    
    $
    61,594
    
    
    $
    558,804
    
    
    $
    1,272,220
    
    
    $
    2,646,753Share and Per Share Data:Basic & diluted net income from continuing operations
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.31Weighted average shares outstanding-basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
  11. Commitments and Contingencies
  Lease PaymentsThree months ending December 31, 2008
    
    $
    33,600Year ending December 31, 2009
    
    
    134,4002010
    
    
    134,4002011
    
    
    134,4002012
    
    
    134,4002013
    
    
    134,400Thereafter
    
    
    1,008,000
 12. Subsequent Events
  21




---



##### 



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
 General
  Business Environment
  22




---



##### 



As of:
    
    Total properties ownedDecember 31, 2006
    
    
    42March 31, 2007
    
    
    46June 30, 2007
    
    
    47September 30, 2007
    
    
    51December 31, 2007
    
    
    59March 31, 2008
    
    
    62June 30, 2008
    
    
    63September 30, 2008
    
    
    65
 Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
 
 
  23




---



##### 



Investment Advisory and Administration Agreements
    Management Services and Fees under the Amended Advisory Agreement
   24




---



##### 



Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
   25




---



##### 




    
    The amount of acquisition costs allocated to the various tangible and intangible assets
on our balance sheet;
    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts
allocated to all other tangible and intangible assets are amortized to depreciation or
amortization expense. Thus changes in the purchase price allocation among our assets could
have a material impact on our FFO, which is used by investors of REITs to evaluate our
operating performance; and
    
    The period of time that tangible and intangible assets are depreciated over varies
greatly, and thus changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years, we depreciate our
buildings over 39 years, and land is not depreciated. These differences in timing could
have a material impact on our result of operations.
 Asset Impairment Evaluation
  Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  Results of Operations
  Date Acquired
    
    Property Location
    
    Weighted-Average Yield1/29/08
    
    Reading, Pennsylvania
    
    9.95%2/26/08
    
    Fridley, Minnesota
    
    8.93%3/31/08
    
    Concord Township, Ohio
    
    11.27%4/30/08
    
    Pineville, North Carolina
    
    11.06%8/29/08
    
    Marietta, Ohio
    
    11.07%8/29/08
    
    Chalfont, Pennsylvania
    
    9.01%
  26




---



##### 



A comparison of our operating results for the three and nine months ended September 30, 2008 and
2007 is below
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,157,553
    
    
    $
    8,024,305
    
    
    $
    2,133,248
    
    
    
    27
    %
    
    $
    29,269,036
    
    
    $
    22,834,663
    
    
    $
    6,434,373
    
    
    
    28
    %Interest income from mortgage notes receivable
    
    
    216,446
    
    
    
    255,555
    
    
    
    (39,109
    )
    
    
    -15
    %
    
    
    673,548
    
    
    
    758,333
    
    
    
    (84,785
    )
    
    
    -11
    %Tenant recovery revenue
    
    
    83,144
    
    
    
    80,648
    
    
    
    2,496
    
    
    
    3
    %
    
    
    253,495
    
    
    
    230,851
    
    
    
    22,644
    
    
    
    10
    %Total operating revenues
    
    
    10,457,143
    
    
    
    8,360,508
    
    
    
    2,096,635
    
    
    
    25
    %
    
    
    30,196,079
    
    
    
    23,823,847
    
    
    
    6,372,232
    
    
    
    27
    %Operating expensesDepreciation and amortization
    
    
    3,262,903
    
    
    
    2,668,383
    
    
    
    594,520
    
    
    
    22
    %
    
    
    9,435,690
    
    
    
    7,722,349
    
    
    
    1,713,341
    
    
    
    22
    %Property operating expenses
    
    
    225,020
    
    
    
    204,972
    
    
    
    20,048
    
    
    
    10
    %
    
    
    670,442
    
    
    
    597,273
    
    
    
    73,169
    
    
    
    12
    %Base management fee
    
    
    404,108
    
    
    
    459,202
    
    
    
    (55,094
    )
    
    
    -12
    %
    
    
    1,255,833
    
    
    
    1,412,337
    
    
    
    (156,504
    )
    
    
    -11
    %Incentive fee
    
    
    793,787
    
    
    
    677,104
    
    
    
    116,683
    
    
    
    17
    %
    
    
    2,300,286
    
    
    
    1,896,677
    
    
    
    403,609
    
    
    
    21
    %Administration fee
    
    
    238,241
    
    
    
    175,852
    
    
    
    62,389
    
    
    
    35
    %
    
    
    724,978
    
    
    
    592,996
    
    
    
    131,982
    
    
    
    22
    %Professional fees
    
    
    117,857
    
    
    
    118,371
    
    
    
    (514
    )
    
    
    0
    %
    
    
    362,584
    
    
    
    442,479
    
    
    
    (79,895
    )
    
    
    -18
    %Insurance
    
    
    43,354
    
    
    
    53,943
    
    
    
    (10,589
    )
    
    
    -20
    %
    
    
    126,947
    
    
    
    171,275
    
    
    
    (44,328
    )
    
    
    -26
    %Directors fees
    
    
    54,702
    
    
    
    66,250
    
    
    
    (11,548
    )
    
    
    -17
    %
    
    
    161,202
    
    
    
    174,750
    
    
    
    (13,548
    )
    
    
    -8
    %Stockholder related expense
    
    
    42,232
    
    
    
    40,991
    
    
    
    1,241
    
    
    
    3
    %
    
    
    271,430
    
    
    
    215,969
    
    
    
    55,461
    
    
    
    26
    %Asset retirement obligation expense
    
    
    35,157
    
    
    
    29,440
    
    
    
    5,717
    
    
    
    19
    %
    
    
    98,394
    
    
    
    86,542
    
    
    
    11,852
    
    
    
    14
    %General and administrative
    
    
    105,999
    
    
    
    17,452
    
    
    
    88,547
    
    
    
    507
    %
    
    
    139,151
    
    
    
    79,119
    
    
    
    60,032
    
    
    
    76
    %Total operating expenses before credit from Adviser
    
    
    5,323,360
    
    
    
    4,511,960
    
    
    
    811,400
    
    
    
    18
    %
    
    
    15,546,937
    
    
    
    13,391,766
    
    
    
    2,155,171
    
    
    
    16
    %Credit to incentive fee
    
    
    (205,876
    )
    
    
    (526,991
    )
    
    
    321,115
    
    
    
    -61
    %
    
    
    (941,928
    )
    
    
    (1,746,564
    )
    
    
    804,636
    
    
    
    -46
    %Total operating expenses
    
    
    5,117,484
    
    
    
    3,984,969
    
    
    
    1,132,515
    
    
    
    28
    %
    
    
    14,605,009
    
    
    
    11,645,202
    
    
    
    2,959,807
    
    
    
    25
    %Other income (expense)Interest income from temporary investments
    
    
    4,559
    
    
    
    33,105
    
    
    
    (28,546
    )
    
    
    -86
    %
    
    
    20,796
    
    
    
    325,390
    
    
    
    (304,594
    )
    
    
    -94
    %Interest income  employee loans
    
    
    49,624
    
    
    
    52,728
    
    
    
    (3,104
    )
    
    
    -6
    %
    
    
    152,620
    
    
    
    169,608
    
    
    
    (16,988
    )
    
    
    -10
    %Other income
    
    
    7,500
    
    
    
    9,896
    
    
    
    (2,396
    )
    
    
    -24
    %
    
    
    56,493
    
    
    
    28,127
    
    
    
    28,366
    
    
    
    101
    %Interest expense
    
    
    (4,258,461
    )
    
    
    (2,920,270
    )
    
    
    (1,338,191
    )
    
    
    46
    %
    
    
    (12,008,316
    )
    
    
    (8,137,343
    )
    
    
    (3,870,973
    )
    
    
    48
    %Total other expense
    
    
    (4,196,778
    )
    
    
    (2,824,541
    )
    
    
    (1,372,237
    )
    
    
    49
    %
    
    
    (11,778,407
    )
    
    
    (7,614,218
    )
    
    
    (4,164,189
    )
    
    
    55
    %Income from continuing operations
    
    
    1,142,881
    
    
    
    1,550,998
    
    
    
    (408,117
    )
    
    
    -26
    %
    
    
    3,812,663
    
    
    
    4,564,427
    
    
    
    (751,764
    )
    
    
    -16
    %Discontinued operationsLoss from discontinued operations
    
    
    (1,322
    )
    
    
    5,975
    
    
    
    (7,297
    )
    
    
    -122
    %
    
    
    (34,956
    )
    
    
    471
    
    
    
    (35,427
    )
    
    
    -7522
    %Net realized income from foreign currency transactions
    
    
    
    
    
    
    33,487
    
    
    
    (33,487
    )
    
    
    -100
    %
    
    
    
    
    
    
    33,550
    
    
    
    (33,550
    )
    
    
    -100
    %Taxes refunded on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    78,667
    
    
    
    (78,667
    )
    
    
    -100
    %Total discontinued operations
    
    
    (1,322
    )
    
    
    39,462
    
    
    
    (40,784
    )
    
    
    -103
    %
    
    
    (34,956
    )
    
    
    112,688
    
    
    
    (147,644
    )
    
    
    -131
    %Net income
    
    
    1,141,559
    
    
    
    1,590,460
    
    
    
    (448,901
    )
    
    
    -28
    %
    
    
    3,777,707
    
    
    
    4,677,115
    
    
    
    (899,408
    )
    
    
    -19
    %Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,438
    )
    
    
    1
    
    
    
    0
    %
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    118,122
    
    
    $
    567,022
    
    
    $
    (448,900
    )
    
    
    -79
    %
    
    $
    707,395
    
    
    $
    1,606,803
    
    
    $
    (899,408
    )
    
    
    -56
    %
 Operating Revenues
    Operating Expenses
  27




---



##### 



Investment Advisory and Administration
Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration
Agreements.
       28




---



##### 



Other Income and Expense
     Discontinued Operations
  Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  29




---



##### 



Operating Activities
  Investing Activities
 Recent Events
  September 30, 2008
    
    
    December 31, 2007Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Net Real Estate
    
    
    Net Real Estate
    
    
    Net Real Estate
    
    
    Net Real EstateAutomobile
    
    $
    10,906,445
    
    
    
    3.0
    %
    
    $
    11,072,192
    
    
    
    3.4
    %Beverage, Food & Tobacco
    
    
    18,792,486
    
    
    
    5.1
    %
    
    
    10,655,401
    
    
    
    3.3
    %Buildings and Real Estate
    
    
    20,116,878
    
    
    
    5.5
    %
    
    
    20,504,268
    
    
    
    6.3
    %Chemicals, Plastics & Rubber
    
    
    26,175,476
    
    
    
    7.1
    %
    
    
    15,371,141
    
    
    
    4.7
    %Containers, Packaging & Glass
    
    
    16,002,508
    
    
    
    4.4
    %
    
    
    16,320,658
    
    
    
    5.0
    %Diversified/Conglomerate Manufacturing
    
    
    32,437,883
    
    
    
    8.8
    %
    
    
    25,328,441
    
    
    
    7.8
    %Diversified/Conglomerate Services
    
    
    2,569,588
    
    
    
    0.7
    %
    
    
    2,615,717
    
    
    
    0.8
    %Electronics
    
    
    54,585,128
    
    
    
    14.8
    %
    
    
    55,721,882
    
    
    
    17.2
    %Healthcare, Education & Childcare
    
    
    55,307,539
    
    
    
    15.0
    %
    
    
    43,322,758
    
    
    
    13.3
    %Home & Office Furnishings
    
    
    5,180,076
    
    
    
    1.4
    %
    
    
    5,276,588
    
    
    
    1.6
    %Insurance
    
    
    5,696,887
    
    
    
    1.5
    %
    
    
    5,809,099
    
    
    
    1.8
    %Machinery
    
    
    21,686,150
    
    
    
    5.9
    %
    
    
    12,682,144
    
    
    
    3.9
    %Oil & Gas
    
    
    10,878,990
    
    
    
    3.0
    %
    
    
    11,099,726
    
    
    
    3.4
    %Personal & Non-Durable Consumer Products
    
    
    13,024,942
    
    
    
    3.5
    %
    
    
    13,207,489
    
    
    
    4.1
    %Personal, Food & Miscellaneous Services
    
    
    4,408,674
    
    
    
    1.2
    %
    
    
    4,502,040
    
    
    
    1.4
    %Printing & Publishing
    
    
    22,167,679
    
    
    
    6.0
    %
    
    
    22,594,423
    
    
    
    7.0
    %Telecommunications
    
    
    47,778,015
    
    
    
    13.0
    %
    
    
    48,677,805
    
    
    
    15.0
    %$
    367,715,344
    
    
    
    100.0
    %
    
    $
    324,761,772
    
    
    
    100.0
    %
  Financing Activities
  30




---



##### 



Future Capital Needs
  Mortgage Notes Payable
  Line of Credit
  31




---



##### 



Short-Term Loan
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    $
    285,625,225
    
    
    $
    22,257,476
    
    
    $
    63,294,033
    
    
    $
    6,196,582
    
    
    $
    193,877,134Interest on Debt Obligations (2)
    
    
    96,063,397
    
    
    
    12,242,982
    
    
    
    30,176,906
    
    
    
    23,017,473
    
    
    
    30,626,036Capital Lease Obligations (3)
    
    
    232,301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232,301Operating Lease Obligations (4)
    
    
    1,713,600
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,041,600Total
    
    $
    383,634,523
    
    
    $
    34,634,858
    
    
    $
    93,739,739
    
    
    $
    29,482,855
    
    
    $
    225,777,071
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, term loan and mortgage notes
payable that were outstanding as of September 30, 2008. The line of credit matures in December
2009, with an option to extend for an additional year, and the term loan matures in December 2008
with an option to extend for an additional six months.(2)
    
    Interest on 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 has not been 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. Funds from Operations
    32




---



##### 



For the three months ended September 30,
    
    
    For the nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    1,141,559
    
    
    $
    1,590,460
    
    
    $
    3,777,707
    
    
    $
    4,677,115Less: Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,438
    )
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )Net income available to common stockholders
    
    
    118,122
    
    
    
    567,022
    
    
    
    707,395
    
    
    
    1,606,803Add: Real estate depreciation and amortization
    
    
    3,262,903
    
    
    
    2,668,383
    
    
    
    9,435,690
    
    
    
    7,722,349Less: Gain on sale of real estate, net of taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,667
    )FFO available to common stockholders
    
    $
    3,381,025
    
    
    $
    3,235,405
    
    
    $
    10,143,085
    
    
    $
    9,250,485Weighted average shares outstanding  basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted net income per weighted average
common share
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.19Basic & diluted FFO per weighted average common share
    
    $
    0.395
    
    
    $
    0.378
    
    
    $
    1.184
    
    
    $
    1.080Dividends declared per common share
    
    $
    0.375
    
    
    $
    0.360
    
    
    $
    1.125
    
    
    $
    1.080Percentage of FFO paid per common share
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
    
    
    100
    %
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    33




---



##### 



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    20071% increase in the one month LIBORChange in Rental & Interest Income
    
    $
    27,308
    
    
    $
    9,125
    
    
    $
    82,106
    
    
    $
    27,375Change in Interest Expense
    
    
    77,178
    
    
    
    51,111
    
    
    
    229,856
    
    
    
    151,667Net decrease
    
    $
    (49,869
    )
    
    $
    (41,986
    )
    
    $
    (147,750
    )
    
    $
    (124,292
    )Net Income available to common stockholders
    
    $
    118,112
    
    
    $
    567,022
    
    
    $
    707,395
    
    
    $
    1,606,803Net decrease as percentage of
Net Income available to common stockholders
    
    
    -42.2
    %
    
    
    -7.4
    %
    
    
    -20.9
    %
    
    
    -7.7
    %1% decrease in the one month LIBORChange in Rental & Interest Income
    
    $
    (24,779
    )
    
    $
    (9,125
    )
    
    $
    (75,939
    )
    
    $
    (27,375
    )Change in Interest Expense
    
    $
    (77,178
    )
    
    $
    (51,111
    )
    
    $
    (229,856
    )
    
    $
    (152,222
    )Net increase
    
    $
    52,399
    
    
    $
    41,986
    
    
    $
    153,916
    
    
    $
    124,847Net Income available to common stockholders
    
    $
    118,112
    
    
    $
    567,022
    
    
    $
    707,395
    
    
    $
    1,606,803Net increase as percentage of
Net Income available to common stockholders
    
    
    44.4
    %
    
    
    7.4
    %
    
    
    21.8
    %
    
    
    7.8
    %
    
 Item 4. Controls and Procedures
   34




---



##### 



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  The current state of the economy and the capital markets increases the possibility of adverse
effects on our financial position and results of operations.
  Our ownership of properties through ground leases exposes us to risks which are different than
those resulting from our ownership of fee title to other properties.
  35




---



##### 



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
  
 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, 2006.10.1
    
    Amended and Restated Investment Advisory between the Gladstone
Commercial Corporation and Gladstone Management Corporation,
dated January 1, 2007, incorporated by reference to Exhibit 99.1
of the Current Report on Form 8-K (File No. 
000-50363), filed
January 3, 2007 (renewed on July 9, 2008).
 36




---



##### 



Exhibit
    
    Description of Document10.2
    
    Administration Agreement between Gladstone Commercial Corporation
and Gladstone Administration, LLC, dated January 1, 2007
incorporated by reference to Exhibit 99.2 of the Current Report
on Form 8-K (File No. 000-50363), filed January 3, 2007 (renewed
on July 9, 2008).11
    
    Computation of Per Share Earnings from Operations (included in
the notes to the unaudited 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. 37




---



##### 



Gladstone Commercial CorporationDate: November 5, 2008
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 38