UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
  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




---



##### 



GLADSTONE COMMERCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2010
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended
March 31, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the three months ended
March 31, 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
    
    
    38Item 4. Controls and Procedures
    
    
    39PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Removed and Reserved
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    43




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31, 2010
    
    December 31, 2009ASSETSReal estate, at cost
    
    $
    391,095,912
    
    
    $
    390,753,892Less: accumulated depreciation
    
    
    36,502,598
    
    
    
    34,111,952Total real estate, net
    
    
    354,593,314
    
    
    
    356,641,940Lease intangibles, net
    
    
    27,250,453
    
    
    
    28,177,461Mortgage note receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    3,327,368
    
    
    
    3,096,598Restricted cash
    
    
    2,957,263
    
    
    
    2,633,538Funds held in escrow
    
    
    2,565,860
    
    
    
    2,487,680Deferred rent receivable
    
    
    9,358,748
    
    
    
    8,975,196Deferred financing costs, net
    
    
    2,913,702
    
    
    
    3,136,055Prepaid expenses and other assets
    
    
    1,653,392
    
    
    
    1,716,905TOTAL ASSETS
    
    $
    414,620,100
    
    
    $
    416,865,373LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    252,117,127
    
    
    $
    252,761,651Short-term loan and borrowings under line of credit
    
    
    34,900,000
    
    
    
    33,200,000Deferred rent liability
    
    
    2,970,159
    
    
    
    3,213,195Asset retirement obligation liability
    
    
    2,342,891
    
    
    
    2,305,644Accounts payable and accrued expenses
    
    
    1,618,406
    
    
    
    2,086,741Due to adviser (Refer to Note 2)
    
    
    1,394,007
    
    
    
    1,213,640Obligation under capital lease
    
    
    250,764
    
    
    
    247,686Rent received in advance, security deposits and funds held in escrow
    
    
    3,922,738
    
    
    
    3,386,274Total Liabilities
    
    
    299,516,092
    
    
    
    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 March 31, 2010 and December 31,
2009, respectively
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 47,700,000 shares authorized and
8,545,264 and 8,563,264 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively
    
    
    8,545
    
    
    
    8,563Additional paid in capital
    
    
    170,378,699
    
    
    
    170,622,581Notes
receivable - employees
    
    
    (2,261,555
    )
    
    
    (2,304,999
    )Distributions in excess of accumulated earnings
    
    
    (53,023,831
    )
    
    
    (49,877,753
    )Total Stockholders Equity
    
    
    115,104,008
    
    
    
    118,450,542TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    414,620,100
    
    
    $
    416,865,373
  3




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended March 31,2010
    
    2009Operating revenuesRental income
    
    $
    10,415,066
    
    
    $
    10,388,244Interest income from mortgage note receivable
    
    
    187,500
    
    
    
    187,500Tenant recovery revenue
    
    
    82,410
    
    
    
    82,432Total operating revenues
    
    
    10,684,976
    
    
    
    10,658,176Operating expensesDepreciation and amortization
    
    
    3,321,871
    
    
    
    3,307,802Property operating expenses
    
    
    244,354
    
    
    
    236,812Due diligence expense
    
    
    21,876
    
    
    
    9,547Base management fee (Refer to Note 2)
    
    
    312,564
    
    
    
    372,648Incentive fee (Refer to Note 2)
    
    
    846,192
    
    
    
    786,289Administration fee (Refer to Note 2)
    
    
    231,884
    
    
    
    224,354Professional fees
    
    
    175,610
    
    
    
    235,198Insurance expense
    
    
    56,325
    
    
    
    48,678Directors fees
    
    
    49,418
    
    
    
    49,702Stockholder-related expenses
    
    
    45,216
    
    
    
    83,647Asset retirement obligation expense
    
    
    37,247
    
    
    
    34,907General and administrative
    
    
    17,829
    
    
    
    10,549Total operating expenses before credit from Adviser
    
    
    5,360,386
    
    
    
    5,400,133Credit to incentive fee
    
    
    -
    
    
    
    (235,081
    )Total operating expenses
    
    
    5,360,386
    
    
    
    5,165,052Other income (expense)Interest income from temporary investments
    
    
    265
    
    
    
    17,281Interest
income - employee loans
    
    
    43,101
    
    
    
    48,886Other income
    
    
    3,316
    
    
    
    -Interest expense
    
    
    (4,284,939
    )
    
    
    (4,487,560
    )Total other expense
    
    
    (4,238,257
    )
    
    
    (4,421,393
    )Income from continuing operations
    
    
    1,086,333
    
    
    
    1,071,731Discontinued operationsIncome from discontinued operations
    
    
    -
    
    
    
    17,838Total discontinued operations
    
    
    -
    
    
    
    17,838Net income
    
    
    1,086,333
    
    
    
    1,089,569Distributions attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    $
    62,895
    
    
    $
    66,132Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.01
    
    
    $
    0.01Discontinued operations
    
    
    0.00
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.01
    
    
    $
    0.01Weighted average shares outstanding- basic & diluted
    
    
    8,558,664
    
    
    
    8,563,264
  4




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the three months ended March 31,2010
    
    2009Cash flows from operating activities:Net income
    
    $
    1,086,333
    
    
    $
    1,089,569Adjustments
to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    3,321,871
    
    
    
    3,314,100Amortization of deferred financing costs
    
    
    272,353
    
    
    
    375,194Amortization of deferred rent asset and liability, net
    
    
    (179,662
    )
    
    
    (133,017
    )Accretion of obligation under capital lease
    
    
    3,078
    
    
    
    3,077Asset retirement obligation expense, including discontinued operations
    
    
    37,247
    
    
    
    35,367Increase in prepaid expenses and other assets
    
    
    (430,387
    )
    
    
    (17,218
    )Increase in deferred rent receivable
    
    
    (446,926
    )
    
    
    (562,789
    )(Decrease) increase in accounts payable, accrued expenses, and amount due adviser
    
    
    (287,968
    )
    
    
    113,028Increase (decrease) in rent received in advance
    
    
    212,739
    
    
    
    (120,758
    )Net cash provided by operating activities
    
    
    3,588,678
    
    
    
    4,096,553Cash flows from investing activities:Real estate investments
    
    
    (342,020
    )
    
    
    (54,308
    )Leasing commissions paid
    
    
    (4,217
    )
    
    
    -Receipts from lenders for reserves held in escrow
    
    
    404,462
    
    
    
    272,818Payments to lenders for reserves held in escrow
    
    
    (482,642
    )
    
    
    (471,355
    )Increase in restricted cash
    
    
    (323,725
    )
    
    
    (1,102,902
    )Deposits refunded
    
    
    250,000
    
    
    
    200,000Net cash used in investing activities
    
    
    (498,142
    )
    
    
    (1,155,747
    )Cash flows from financing activities:Principal repayments on mortgage notes payable
    
    
    (644,524
    )
    
    
    (590,881
    )Principal repayments on employee notes receivable
    
    
    43,444
    
    
    
    5,671Borrowings from line of credit
    
    
    4,200,000
    
    
    
    28,000,000Repayments on line of credit
    
    
    (2,500,000
    )
    
    
    (9,200,000
    )Repayment of short-term loan
    
    
    -
    
    
    
    (20,000,000
    )Receipts from tenants for reserves
    
    
    525,330
    
    
    
    1,471,309Payments to tenants from reserves
    
    
    (202,354
    )
    
    
    (378,940
    )Increase in security deposits
    
    
    749
    
    
    
    10,533Payments for deferred financing costs
    
    
    (50,000
    )
    
    
    (53,561
    )Distributions paid for common and preferred
    
    
    (4,232,411
    )
    
    
    (4,234,665
    )Net cash used in financing activities
    
    
    (2,859,766
    )
    
    
    (4,970,534
    )Net increase (decrease) in cash and cash equivalents
    
    
    230,770
    
    
    
    (2,029,728
    )Cash and cash equivalents, beginning of period
    
    
    3,096,598
    
    
    
    4,503,578Cash and cash equivalents, end of period
    
    $
    3,327,368
    
    
    $
    2,473,850NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONIncrease in asset retirement obligation
    
    $
    -
    
    
    $
    245,196Fixed rate debt assumed in connection with acquisitions
    
    $
    -
    
    
    $
    6,461,603Forfeiture of common stock in satisfaction of employee note receivable
    
    $
    243,900
    
    
    $
    -
  5




---



##### 



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




---



##### 



Investments in Real Estate
       7




---



##### 



Impairment
 Investments in Real Estate
   Provision for Loan Losses
  8




---



##### 



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




---



##### 



Income Taxes
   Segment Information
  10




---



##### 



Asset Retirement Obligations
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
   Use of Estimates
  Reclassifications
  11




---



##### 



2. Related-Party Transactions
  Advisory Agreement
   Administration Agreement
  12




---



##### 



3. Earnings per Common Share
  For the three months ended March 31,2010
    
    2009Net income available to common stockholders
    
    $
    62,895
    
    
    $
    66,132Denominator for basic & diluted weighted average
shares
    
    
    8,558,664
    
    
    
    8,563,264Basic & diluted earnings per share of common stock
    
    $
    0.01
    
    
    $
    0.01
 4. Real Estate and Intangible Assets
 Real Estate
  March 31, 2010
    
    December 31, 2009Real estate:Land
    
    $
    55,025,707
    
    (1)
    $
    55,025,707
    (1)Building and
improvements
    
    
    326,249,499
    
    
    
    325,907,479Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated
depreciation
    


    (36,502,598
    )
    

    (34,111,952
    )Real estate, net
    
    $
    354,593,314
    
    
    $
    356,641,940
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.  TenantYear
    
    Lease PaymentsNine months ending December 31, 2010
    
    $
    29,150,9262011
    
    
    38,657,9362012
    
    
    38,751,6452013
    
    
    33,402,9942014
    
    
    29,172,4732015
    
    
    25,078,235Thereafter
    
    
    135,449,243
  13




---



##### 



Intangible Assets
  March 31, 2010
    
    December 31, 2009Accumulated
    
    
    
    
    
    AccumulatedLease Intangibles
    
    Amortization
    
    Lease Intangibles
    
    AmortizationIn-place leases
    
    $
    15,935,445
    
    
    $
    (7,159,647
    )
    
    $
    15,935,445
    
    
    $
    (6,741,817
    )Leasing costs
    
    
    10,057,222
    
    
    
    (4,049,312
    )
    
    
    10,053,004
    
    
    
    (3,832,623
    )Customer relationships
    
    
    17,136,501
    
    
    
    (4,669,756
    )
    
    
    17,136,501
    
    
    
    (4,373,049
    )$
    43,129,168
    
    
    $
    (15,878,715
    )
    
    $
    43,124,950
    
    
    $
    (14,947,489
    )
  EstimatedYear
    
    Amortization ExpenseNine months ending December 31, 2010
    
    
    4,390,7222011
    
    
    5,203,8122012
    
    
    4,398,0052013
    
    
    2,326,0522014
    
    
    2,062,7792015
    
    
    1,699,607Thereafter
    
    $
    7,169,476
  Rental Revenue forYear of Lease
    
    
    
    
    
    
    
    
    
    the Period Ended
    
    
    Annualized Base
    
    
    % of AnnualizedExpiration
    
    Square Feet
    
    
    Number of Leases
    
    
    March 31, 2010
    
    
    Rental Revenue
    
    
    Base Rent2010
    
    
    215,581
    
    
    
    3
    
    
    $
    352,423
    
    
    $
    1,409,692
    
    
    
    3.4
    %2011
    
    
    -
    
    
    
    0
    
    
    
    -
    
    
    
    -
    
    
    
    0.0
    %2012
    
    
    479,982
    
    
    
    3
    
    
    
    1,107,401
    
    
    
    4,429,604
    
    
    
    10.6
    %2013
    
    
    438,422
    
    
    
    6
    
    
    
    1,168,337
    
    
    
    4,673,348
    
    
    
    11.2
    %2014
    
    
    614,132
    
    
    
    5
    
    
    
    770,549
    
    
    
    3,082,196
    
    
    
    7.4
    %2015
    
    
    896,876
    
    
    
    8
    
    
    
    1,717,794
    
    
    
    6,871,176
    
    
    
    16.5
    %2016
    
    
    898,257
    
    
    
    5
    
    
    
    1,048,793
    
    
    
    4,195,172
    
    
    
    10.1
    %2017
    
    
    102,200
    
    
    
    1
    
    
    
    230,731
    
    
    
    922,924
    
    
    
    2.2
    %2018
    
    
    59,894
    
    
    
    1
    
    
    
    67,010
    
    
    
    268,040
    
    
    
    0.6
    %2019+
    
    
    2,598,815
    
    
    
    18
    
    
    
    3,952,028
    
    
    
    15,808,112
    
    
    
    38.0
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    10,415,066
    
    
    $
    41,660,264
    
    
    
    100
    %
 14




---



##### 



Rental Revenue forNumber
of
    
    the Period Ended
    
    Annualized Base
    
    % of
AnnualizedState
    
    Square Feet
    
    Leases
    
    March 31, 2010
    
    Rental Revenue
    
    Base RentOhio
    
    
    1,185,411
    
    
    
    11
    
    
    $
    1,867,614
    
    
    $
    7,470,456
    
    
    
    17.9
    %Minnesota
    
    
    547,800
    
    
    
    3
    
    
    
    1,302,876
    
    
    
    5,211,504
    
    
    
    12.5
    %North Carolina
    
    
    695,876
    
    
    
    6
    
    
    
    948,585
    
    
    
    3,794,340
    
    
    
    9.1
    %Pennsylvania
    
    
    623,375
    
    
    
    4
    
    
    
    763,241
    
    
    
    3,052,964
    
    
    
    7.3
    %Texas
    
    
    188,178
    
    
    
    4
    
    
    
    588,963
    
    
    
    2,355,852
    
    
    
    5.7
    %Michigan
    
    
    596,104
    
    
    
    2
    
    
    
    548,959
    
    
    
    2,195,836
    
    
    
    5.3
    %Illinois
    
    
    164,131
    
    
    
    2
    
    
    
    546,504
    
    
    
    2,186,016
    
    
    
    5.2
    %Massachusetts
    
    
    338,508
    
    
    
    3
    
    
    
    543,522
    
    
    
    2,174,088
    
    
    
    5.2
    %All Other States
    
    
    1,964,776
    
    
    
    15
    
    
    
    3,304,802
    
    
    
    13,219,208
    
    
    
    31.8
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    10,415,066
    
    
    $
    41,660,264
    
    
    
    100
    %
 5. Real Estate Held for Sale and Discontinued Operations
   For the three months ended March 31,2010
    
    2009Operating revenue
    
    $
    -
    
    
    $
    25,876Operating expense
    
    
    -
    
    
    
    (8,038
    )Income from discontinued 
operations
    
    $
    -
    
    
    $
    17,838
 15




---



##### 



6. Mortgage Note Receivable
   7. Mortgage Notes Payable and Line of Credit
  Date of
    
    
    
    
    
    
    Principal Balance OutstandingIssuance/
    
    Principal
    
    Stated Interest Rate atAssumption
    
    Maturity Date
    
    March 31, 2010 (1)
    
    
    March 31, 2010
    
    December 31, 2009Fixed-Rate Mortgage Notes
Payable:03/16/05
    
    04/01/30
    
    
    6.33%
    
    
    $
    2,867,675
    
    
    $
    2,884,90808/25/05
    
    09/01/15
    
    
    5.33%
    
    
    
    21,011,020
    
    
    
    21,093,91709/12/05
    
    09/01/15
    
    
    5.21%
    
    
    
    12,343,251
    
    
    
    12,389,64712/21/05
    
    12/08/15
    
    
    5.71%
    
    
    
    18,923,663
    
    
    
    18,991,93402/21/06
    
    12/01/13
    
    
    5.91%
    
    
    
    9,145,484
    
    
    
    9,188,04402/21/06
    
    06/30/14
    
    
    5.20%
    
    
    
    19,020,790
    
    
    
    19,116,27703/29/06
    
    04/01/16
    
    
    5.92%
    
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    05/05/16
    
    
    6.58%
    
    
    
    13,935,975
    
    
    
    14,009,91811/22/06
    
    12/01/16
    
    
    5.76%
    
    
    
    14,089,522
    
    
    
    14,136,92112/22/06
    
    01/01/17
    
    
    5.79%
    
    
    
    21,533,427
    
    
    
    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%
    
    
    
    4,343,357
    
    
    
    4,361,14410/15/07
    
    11/08/17
    
    
    6.63%
    
    
    
    15,609,132
    
    
    
    15,657,33008/29/08
    
    06/01/16
    
    
    6.80%
    
    
    
    6,263,831
    
    
    
    6,296,50509/15/08
    
    10/01/10(2)
    
    
    6.85%
    
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes
Payable:
    
    
    
    
    
    
    
    
    252,117,127
    
    
    
    252,761,651Variable-Rate
Line of Credit:
    
    12/29/06
    
    12/29/10
    
    
    LIBOR + 1.9%
    
    
    
    34,900,000
    
    
    
    33,200,000Total Mortgage Notes Payable,
Line of Credit and Short-Term Loan
    
    
    
    
    
    $
    287,017,127
    
    
    $
    285,961,651
 
 (1)
    
    The weighted average interest rate on all debt outstanding at March 31, 2010 was approximately 5.57%.(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




---



##### 



Scheduled principalYear
    

paymentsNine months ending December 31, 2010
    
    $
    49,925,983
    (1)2011
    
    
    2,795,4112012
    
    
    3,083,4292013
    
    
    11,840,0202014
    
    
    20,401,5722015
    
    
    54,102,017Thereafter
    
    
    109,968,695$
    252,117,127
 
 (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




---



##### 



8. Stockholders Equity
  Notes
    
    Distributions inCapital in
    
    Receivable
    
    Excess of
    
    TotalPreferred
    
    Common
    
    Excess of
    
    From Sale of
    
    Accumulated
    
    Stockholders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
    )
    
    $
    118,450,542Repayment of Principal on
Notes Receivable
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    43,444
    
    
    
    -
    
    
    
    43,444Distributions Declared to
Common and Preferred
Stockholders
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (4,232,411
    )
    
    
    (4,232,411
    )Forfeiture of common stock in
satisfaction of employee note
receivable (1)
    
    
    -
    
    
    
    (18
    )
    
    
    (243,882
    )
    
    
    -
    
    
    
    -
    
    
    
    (243,900
    )Net income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,086,333
    
    
    
    1,086,333Balance at March 31, 2010
    
    $
    2,150
    
    
    $
    8,545
    
    
    $
    170,378,699
    
    
    $
    (2,261,555
    )
    
    $
    (53,023,831
    )
    
    $
    115,104,008
 
 (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




---



##### 



OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance of
    
    
    Outstanding BalanceOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    of Employee Loans at
    
    
    Maturity Date
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at March 31, 2010
    
    
    December 31, 2009
    
    
    of Note
    
    
    on 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
    
    
    
    193,200
    
    
    
    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
    
    
    $
    2,261,555
    
    
    $
    2,304,999
     9. Segment Information
  19




---



##### 



As of and for the three months ended March 31, 2010Real Estate
    
    Real EstateLeasing
    
    Lending
    
    Other
    
    TotalOperating revenues
    
    $
    10,497,476
    
    
    $
    187,500
    
    
    $
    -
    
    
    $
    10,684,976Operating expenses
    
    
    (3,625,348
    )
    
    
    -
    
    
    
    (1,735,038
    )
    (1)
    
    (5,360,386
    )Other expense
    
    
    (4,045,644
    )
    
    
    -
    
    
    
    (192,613
    )
    (2)
    
    (4,238,257
    )Discontinued
operations
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Net income
    
    $
    2,826,484
    
    
    $
    187,500
    
    
    $
    (1,927,651
    )
    
    $
    1,086,333Total Assets
    
    $
    396,795,468
    
    
    $
    10,064,583
    
    
    $
    7,760,049
    
    
    $
    414,620,100
 As of and for the three months ended March 31, 2009Real Estate
    
    Real EstateLeasing
    
    Lending
    
    Other
    
    TotalOperating revenues
    
    $
    10,470,676
    
    
    $
    187,500
    
    
    $
    -
    
    
    $
    10,658,176Operating expenses
    
    
    (3,589,068
    )
    
    
    -
    
    
    
    (1,575,984
    )
    (1)
    
    (5,165,052
    )Other expense
    
    
    (4,082,638
    )
    
    
    -
    
    
    
    (338,755
    )
    (2)
    
    (4,421,393
    )Discontinued
operations
    
    
    17,838
    
    
    
    -
    
    
    
    -
    
    
    
    17,838Net income
    
    $
    2,816,808
    
    
    $
    187,500
    
    
    $
    (1,914,739
    )
    
    $
    1,089,569Total Assets
    
    $
    404,272,994
    
    
    $
    10,064,583
    
    
    $
    10,659,229
    
    
    $
    424,996,806
 
 (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 it is included in the other column.(2)
    
    Other expense includes interest expense on the Companys
line of credit and short-term loan of $239,292 and $404,922 (which is net of interest income on temporary investments, interest income
on employee loans and other income) for the three months ended March 31, 2010 and 2009, respectively.  It is not practicable
to allocate the interest from the line of credit or the short-term loan to either operating segment, thus it is included in
the other column. 10. Subsequent Events
   20




---



##### 



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 Quarterly Report on Form 10-Q.
 All references to we, our, us and the Company in this Quarterly Report on Form 10-Q
(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




---



##### 



Recent Events
 Financing Activities:
  Equity Activities:
  23




---



##### 



Industry Classifications
  March 31, 2010
    
    March 31, 2009Percentage of
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    Rental Income
    
    Rental Income
    
    Rental IncomeAutomobile
    
    $
    291,663
    
    
    
    2.8
    %
    
    $
    291,663
    
    
    
    2.8
    %Beverage, Food & Tobacco
    
    
    547,192
    
    
    
    5.2
    %
    
    
    547,180
    
    
    
    5.3
    %Buildings and Real Estate
    
    
    506,417
    
    
    
    4.9
    %
    
    
    506,417
    
    
    
    4.9
    %Chemicals, Plastics & Rubber
    
    
    782,534
    
    
    
    7.5
    %
    
    
    802,204
    
    
    
    7.7
    %Containers, Packaging & Glass
    
    
    582,619
    
    
    
    5.6
    %
    
    
    582,503
    
    
    
    5.6
    %Diversified/Conglomerate Manufacturing
    
    
    916,172
    
    
    
    8.8
    %
    
    
    916,172
    
    
    
    8.8
    %Diversified/Conglomerate Services
    
    
    77,026
    
    
    
    0.7
    %
    
    
    77,026
    
    
    
    0.8
    %Electronics
    
    
    1,541,448
    
    
    
    14.8
    %
    
    
    1,541,447
    
    
    
    14.9
    %Healthcare, Education & Childcare
    
    
    1,536,353
    
    
    
    14.8
    %
    
    
    1,536,353
    
    
    
    14.8
    %Home & Office Furnishings
    
    
    132,436
    
    
    
    1.3
    %
    
    
    132,436
    
    
    
    1.3
    %Insurance
    
    
    180,717
    
    
    
    1.7
    %
    
    
    180,717
    
    
    
    1.7
    %Machinery
    
    
    597,155
    
    
    
    5.7
    %
    
    
    597,151
    
    
    
    5.7
    %Oil & Gas
    
    
    329,391
    
    
    
    3.2
    %
    
    
    288,111
    
    
    
    2.8
    %Personal & Non-Durable Consumer
Products
    
    
    338,681
    
    
    
    3.2
    %
    
    
    338,680
    
    
    
    3.3
    %Personal, Food & Miscellaneous Services
    
    
    143,752
    
    
    
    1.4
    %
    
    
    143,752
    
    
    
    1.4
    %Printing & Publishing
    
    
    549,669
    
    
    
    5.3
    %
    
    
    544,845
    
    
    
    5.3
    %Telecommunications
    
    
    1,361,841
    
    
    
    13.1
    %
    
    
    1,361,587
    
    
    
    12.9
    %$
    10,415,066
    
    
    
    100.0
    %
    
    $
    10,388,244
    
    
    
    100.0
    %
 Our Adviser and Administrator
   24




---



##### 



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).
 25




---



##### 



Quarterly Incentive Fee Based on FFO
 
 
   Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
  26




---



##### 




    
    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, 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
  27




---



##### 



Overview Business Environment
 Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  28




---



##### 



Results of Operations
  A comparison of our operating results for the three months ended March 31, 2010 and 2009 is below
 For the three months ended March 31,2010
    
    2009
    
    $ Change
    
    % ChangeOperating revenuesRental income
    
    $
    10,415,066
    
    
    $
    10,388,244
    
    
    $
    26,822
    
    
    
    0
    %Interest income
from mortgage notes
receivable
    
    
    187,500
    
    
    
    187,500
    
    
    
    -
    
    
    
    0
    %Tenant recovery
revenue
    
    
    82,410
    
    
    
    82,432
    
    
    
    (22
    )
    
    
    0
    %Total
operating
revenues
    
    
    10,684,976
    
    
    
    10,658,176
    
    
    
    26,800
    
    
    
    0
    %Operating expensesDepreciation and
amortization
    
    
    3,321,871
    
    
    
    3,307,802
    
    
    
    14,069
    
    
    
    0
    %Property operating
expenses
    
    
    244,354
    
    
    
    236,812
    
    
    
    7,542
    
    
    
    3
    %Due diligence expense
    
    
    21,876
    
    
    
    9,547
    
    
    
    12,329
    
    
    
    129
    %Base management fee
    
    
    312,564
    
    
    
    372,648
    
    
    
    (60,084
    )
    
    
    -16
    %Incentive fee
    
    
    846,192
    
    
    
    786,289
    
    
    
    59,903
    
    
    
    8
    %Administration fee
    
    
    231,884
    
    
    
    224,354
    
    
    
    7,530
    
    
    
    3
    %Professional fees
    
    
    175,610
    
    
    
    235,198
    
    
    
    (59,588
    )
    
    
    -25
    %Insurance expense
    
    
    56,325
    
    
    
    48,678
    
    
    
    7,647
    
    
    
    16
    %Directors fees
    
    
    49,418
    
    
    
    49,702
    
    
    
    (284
    )
    
    
    -1
    %Stockholder-related
expense
    
    
    45,216
    
    
    
    83,647
    
    
    
    (38,431
    )
    
    
    -46
    %Asset retirement
obligation expense
    
    
    37,247
    
    
    
    34,907
    
    
    
    2,340
    
    
    
    7
    %General and
administrative
expenses
    
    
    17,829
    
    
    
    10,549
    
    
    
    7,280
    
    
    
    69
    %Total
operating
expenses
before credit
from Adviser
    
    
    5,360,386
    
    
    
    5,400,133
    
    
    
    (39,747
    )
    
    
    -1
    %Credit to
incentive
fee
    
    
    -
    
    
    
    (235,081
    )
    
    
    235,081
    
    
    
    -100
    %Total
operating
expenses
    
    
    5,360,386
    
    
    
    5,165,052
    
    
    
    195,334
    
    
    
    4
    %Other income (expense)Interest income
from temporary
investments
    
    
    265
    
    
    
    17,281
    
    
    
    (17,016
    )
    
    
    -98
    %Interest income -
employee loans
    
    
    43,101
    
    
    
    48,886
    
    
    
    (5,785
    )
    
    
    -12
    %Other income
    
    
    3,316
    
    
    
    -
    
    
    
    3,316
    
    
    
    100
    %Interest expense
    
    
    (4,284,939
    )
    
    
    (4,487,560
    )
    
    
    202,621
    
    
    
    -5
    %Total other
expense
    
    
    (4,238,257
    )
    
    
    (4,421,393
    )
    
    
    183,136
    
    
    
    -4
    %Income from continuing
operations
    
    
    1,086,333
    
    
    
    1,071,731
    
    
    
    14,602
    
    
    
    1
    %Discontinued operationsIncome from
discontinued
operations
    
    
    -
    
    
    
    17,838
    
    
    
    (17,838
    )
    
    
    -100
    %Total
discontinued
operations
    
    
    -
    
    
    
    17,838
    
    
    
    (17,838
    )
    
    
    -100
    %Net income
    
    
    1,086,333
    
    
    
    1,089,569
    
    
    
    (3,236
    )
    
    
    0
    %Distributions attributable
to preferred stock
    
    
    (1,023,438
    )
    
    
    (1,023,437
    )
    
    
    (1
    )
    
    
    0
    %Net income available to
common stockholders
    
    $
    62,895
    
    
    $
    66,132
    
    
    $
    (3,237
    )
    
    
    -5
    %
 29




---



##### 



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




---



##### 



Other Income and Expense
     Discontinued Operations
  31




---



##### 



Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Future Capital Needs
  Overview Business Environment
    32




---



##### 



Operating Activities
  Investing Activities
 Overview Business
Environment
 Financing Activities
  33




---



##### 



Mortgage Notes Payable
  Line of Credit
     34




---



##### 



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    More than 5 YearsDebt Obligations
(1)
    
    
    287,017,127
    
    
    $
    85,373,365
    
    
    $
    6,037,099
    
    
    $
    32,207,473
    
    
    $
    163,399,190Interest on Debt
Obligations
(2)
    
    
    74,733,711
    
    
    
    11,730,500
    
    
    
    23,698,172
    
    
    
    21,930,064
    
    
    
    17,374,975Capital Lease
Obligations
(3)
    
    
    300,000
    
    
    
    -
    
    
    
    -
    
    
    
    300,000
    
    
    
    -Operating Lease
Obligations
(4)
    
    
    1,715,742
    
    
    
    152,510
    
    
    
    305,021
    
    
    
    305,021
    
    
    
    953,190Total
    
    $
    363,766,580
    
    
    $
    97,256,375
    
    
    $
    30,040,292
    
    
    $
    54,742,558
    
    
    $
    181,727,355
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, which represents $34.9
million of the debt obligation due in less than 1 year,
and mortgage notes payable that were outstanding as of March 31, 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 our options to extend the term through 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 March 31, 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
  35




---



##### 



Funds from Operations
     36




---



##### 



For the three months ended March 31,2010
    
    2009Net income
    
    $
    1,086,333
    
    
    $
    1,089,569Less: Distributions attributable to preferred stock
    
    
    (1,023,438
    )
    
    
    (1,023,437
    )Net income available to common stockholders
    
    
    62,895
    
    
    
    66,132Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    3,321,871
    
    
    
    3,314,100FFO available to common stockholders
    
    $
    3,384,766
    
    
    $
    3,380,232Weighted average shares outstanding - basic &
diluted
    
    
    8,558,664
    
    
    
    8,563,264Basic & diluted net income per weighted average
share of common stock
    
    $
    0.01
    
    
    $
    0.01Basic & diluted FFO per weighted average share of
common stock
    
    $
    0.40
    
    
    $
    0.39Distributions declared per share of common stock
    
    $
    0.375
    
    
    $
    0.375Percentage of FFO paid per share of common stock
    
    
    95
    %
    
    
    95
    %
 37




---



##### 



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    For the three months ended March 31,2010
    
    20091%
increase in the one month LIBORRental & interest income
    
    $
    -
    
    
    $
    -Interest expense
    
    
    87,250
    
    
    
    83,000Net decrease
    
    $
    (87,250
    )
    
    $
    (83,000
    )Net income available to common
stockholders (as reported)
    
    $
    62,895
    
    
    $
    66,132Net decrease as percentage of
Net income available to common
stockholders (as reported)
    
    
    -138.7
    %
    
    
    -125.5
    %1%
decrease in the one month LIBORRental & interest income
    
    $
    -
    
    
    $
    -Interest expense
    
    $
    (87,250
    )
    
    $
    (83,000
    )Net increase
    
    $
    87,250
    
    
    $
    83,000Net income available to common stockholders
    
    $
    62,895
    
    
    $
    66,132Net increase as percentage of
Net income available to common stockholders
    
    
    138.7
    %
    
    
    125.5
    %
  38




---



##### 



Item 4.
    
    Controls and Procedures
     39




---



##### 



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  Recent healthcare reform legislation may affect our revenue and financial condition.
  
 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
  40




---



##### 



Item 6.
    
    Exhibits
 Exhibit Index
 Exhibit
    
    Description of Document3.1
    
    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, 2003.3.1.1
    
    Articles of Amendment to Articles of Articles of Amendment and
Restatement to Articles of Incorporation, incorporated by
reference to Exhibit 3.1.1 to the Form 10-Q (File No. 001-33097),
filed July 30, 2009.3.1.2
    
    Articles Supplementary, incorporated by reference to Exhibit 3.1
to the Form 8-K (File No. 001-33097), filed March 19, 2010.3.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
June 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 12G
(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 12B
(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 12G (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 12B (File No. 000-50363),
filed October 19, 2006.4.5
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of Senior Common Stock, incorporated by reference to
Exhibit 3.1 to the Form 8-K (File No. 001-33097), filed April 29,
2010.10.1
    
    Amendment to First Amended and Restated Agreement of Limited
Partnership of Gladstone Commercial Limited Partnership,
incorporated by reference to Exhibit 10.1 to the Form 8-K (File
No. 001-33097), filed April 29, 2010.10.2
    
    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 to the Form 8-K (File No. 001-33097), filed April 29,
2010.11
    
    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).
 41




---



##### 



Exhibit
    
    Description of Document31.1
    
    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).
 42




---



##### 



Gladstone Commercial CorporationDate: May 3, 2010
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 43