##### 



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, 2006
 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
  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   (703) 287-5800
 þ o
 
 o þ o
 o þ




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##### 



PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    46Item 4.
    
    Controls and Procedures
    
    
    47PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    48Item 1A.
    
    Risk Factors
    
    
    48Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3.
    
    Defaults Upon Senior Securities
    
    
    49Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    49Item 5.
    
    Other Information
    
    
    49Item 6.
    
    Exhibits
    
    
    50SIGNATURES
    
    
    51




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
 September 30, 2006
    
    
    December 31, 2005ASSETSReal estate, net of accumulated depreciation of
$7,106,263 and $3,408,878, respectively
    
    $
    236,573,888
    
    
    $
    161,634,761Lease intangibles, net of accumulated amortization of
$3,393,819 and $1,221,413, respectively
    
    
    24,198,562
    
    
    
    13,947,484Mortgage notes receivable
    
    
    10,000,000
    
    
    
    21,025,815Cash and cash equivalents
    
    
    614,784
    
    
    
    1,740,159Restricted cash
    
    
    1,644,889
    
    
    
    1,974,436Funds held in escrow
    
    
    1,514,701
    
    
    
    1,041,292Interest receivable  mortgage note
    
    
    
    
    
    
    70,749Interest receivable  employees
    
    
    41,346
    
    
    
    Deferred rent receivable
    
    
    3,342,398
    
    
    
    2,590,617Deferred financing costs, net of accumulated
amortization of
$725,040 and $260,099, respectively
    
    
    2,911,643
    
    
    
    1,811,017Prepaid expenses
    
    
    435,196
    
    
    
    385,043Deposits on real estate
    
    
    
    
    
    
    600,000Accounts receivable
    
    
    225,073
    
    
    
    225,581TOTAL ASSETS
    
    $
    281,502,480
    
    
    $
    207,046,954LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    118,516,249
    
    
    $
    61,558,961Borrowings under line of credit
    
    
    35,660,000
    
    
    
    43,560,000Deferred rent liability
    
    
    4,914,989
    
    
    
    Asset retirement obligation liability
    
    
    1,604,416
    
    
    
    Accounts payable and accrued expenses
    
    
    695,330
    
    
    
    493,002Due to adviser
    
    
    210,277
    
    
    
    164,155Rent received in advance, security deposits and
funds held in escrow
    
    
    2,045,850
    
    
    
    2,322,300Total Liabilities
    
    
    163,647,111
    
    
    
    108,098,418STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25
liquidation preference;
1,150,000 shares authorized and 1,000,000 shares
issued and outstanding at September 30, 2006
    
    
    1,000
    
    
    
    Common stock, $0.001 par value, 18,850,000 shares
authorized and
7,850,901 and 7,672,000 shares issued and
outstanding, respectively
    
    
    7,851
    
    
    
    7,672Additional paid in capital
    
    
    132,448,681
    
    
    
    105,502,544Notes receivable  employees
    
    
    (2,259,036
    )
    
    
    (432,282
    )Distributions in excess of accumulated earnings
    
    
    (12,343,127
    )
    
    
    (6,129,398
    )Total Stockholders Equity
    
    
    117,855,369
    
    
    
    98,948,536TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    281,502,480
    
    
    $
    207,046,954
  3




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months endedSeptember 30, 2006
    
    
    September 30, 2005Operating revenuesRental income
    
    $
    6,214,295
    
    
    $
    3,307,759Interest income from mortgage notes receivable
    
    
    478,329
    
    
    
    553,968Tenant recovery revenue
    
    
    43,352
    
    
    
    28,208Total operating revenues
    
    
    6,735,976
    
    
    
    3,889,935Operating expensesDepreciation and amortization
    
    
    2,162,640
    
    
    
    1,107,672Management advisory fee
    
    
    656,916
    
    
    
    609,171Professional fees
    
    
    167,353
    
    
    
    87,896Taxes and licenses
    
    
    24,812
    
    
    
    36,952Insurance
    
    
    113,453
    
    
    
    70,244General and administrative
    
    
    115,349
    
    
    
    61,074Shareholder related expenses
    
    
    34,414
    
    
    
    45,868Asset retirement obligation expense
    
    
    30,619
    
    
    
    Stock option compensation expense
    
    
    314,593
    
    
    
    Total operating expenses
    
    
    3,620,149
    
    
    
    2,018,877Other income (expense)Interest income from temporary investments
    
    
    2,006
    
    
    
    10,093Interest
incomeemployee loans
    
    
    41,346
    
    
    
    5,562Interest expense
    
    
    (2,494,221
    )
    
    
    (865,237
    )Total other expense
    
    
    (2,450,869
    )
    
    
    (849,582
    )Income from continuing operations
    
    
    664,958
    
    
    
    1,021,476Discontinued operationsIncome from discontinued operations
    
    
    6,915
    
    
    
    70,504Net realized loss from foreign currency transactions
    
    
    (1,044
    )
    
    
    (340
    )Net unrealized loss from foreign currency transactions
    
    
   
    

    
    (224,229
    )Gain on sale of real estate
    
    
    1,422,026
    
    
    
    Taxes on sale of real estate
    
    
    (315,436
    )
    
    
    Total discontinued operations
    
    
    1,112,461
    
    
    
    (154,065
    )Net income
    
    
    1,777,419
    
    
    
    867,411Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    Net income available to common stockholders
    
    $
    1,293,044
    
    
    $
    867,411Earnings per weighted average common share basicIncome from continuing operations (net of dividends
attributable to preferred stock)
    
    $
    0.02
    
    
    $
    0.13Discontinued operations
    
    
    0.14
    
    
    
    (0.02
    )Net income available to common stockholders
    
    $
    0.16
    
    
    $
    0.11Earnings per weighted average common share dilutedIncome from continuing operations (net of dividends
attributable to preferred stock)
    
    $
    0.02
    
    
    $
    0.13Discontinued operations
    
    
    0.14
    
    
    
    (0.02
    )Net income available to common stockholders
    
    $
    0.16
    
    
    $
    0.11Weighted average shares outstandingBasic
    
    
    7,820,376
    
    
    
    7,672,000Diluted
    
    
    7,981,071
    
    
    
    7,725,667
  4




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the nine months endedSeptember 30, 2006
    
    
    September 30, 2005Operating revenuesRental income
    
    $
    17,109,203
    
    
    $
    7,103,591Interest income from mortgage notes
receivable
    
    
    1,589,675
    
    
    
    1,351,197Tenant recovery revenue
    
    
    92,772
    
    
    
    69,808Total operating revenues
    
    
    18,791,650
    
    
    
    8,524,596Operating expensesDepreciation and amortization
    
    
    6,026,150
    
    
    
    2,277,432Management advisory fee
    
    
    2,029,050
    
    
    
    1,564,826Professional fees
    
    
    598,771
    
    
    
    428,781Taxes and licenses
    
    
    114,774
    
    
    
    188,347Insurance
    
    
    299,296
    
    
    
    207,648General and administrative
    
    
    319,784
    
    
    
    166,410Shareholder related expenses
    
    
    282,478
    
    
    
    170,285Asset retirement obligation expense
    
    
    102,263
    
    
    
    Stock option compensation expense
    
    
    394,411
    
    
    
    Total operating expenses
    
    
    10,166,977
    
    
    
    5,003,729Other income (expense)Interest income from temporary
investments
    
    
    13,437
    
    
    
    117,806Interest income  employee loans
    
    
    75,483
    
    
    
    15,483Other income
    
    
    10,400
    
    
    
    Interest expense
    
    
    (6,268,757
    )
    
    
    (1,156,259
    )Total other expense
    
    
    (6,169,437
    )
    
    
    (1,022,970
    )Income from continuing operations
    
    
    2,455,236
    
    
    
    2,497,897Discontinued operationsIncome from discontinued operations
    
    
    116,169
    
    
    
    281,602Net realized loss from foreign
currency transactions
    
    
    (201,017
    )
    
    
    (3,277
    )Net unrealized loss from foreign
currency transactions
    
    
    
    
    
    
    (224,094
    )Gain on sale of real estate
    
    
    1,422,026
    
    
    
    Taxes on sale of real estate
    
    
    (315,436
    )
    
    
    Total discontinued operations
    
    
    1,021,742
    
    
    
    54,231Net income
    
    
    3,476,978
    
    
    
    2,552,128Dividends attributable to preferred stock
    
    
    (1,313,194
    )
    
    
    Net income available to common stockholders
    
    $
    2,163,784
    
    
    $
    2,552,128Earnings per weighted average common share
- basicIncome from continuing operations
(net of dividends attributable to preferred
stock)
    
    $
    0.15
    
    
    $
    0.32Discontinued operations
    
    
    0.13
    
    
    
    0.01Net income available to common
stockholders
    
    $
    0.28
    
    
    $
    0.33Earnings per weighted average
common share  dilutedIncome from continuing operations
(net of dividends attributable to preferred
stock)
    
    $
    0.14
    
    
    $
    0.32Discontinued operations
    
    
    0.13
    
    
    
    0.01Net income available to common
stockholders
    
    $
    0.27
    
    
    $
    0.33Weighted average shares outstandingBasic
    
    
    7,752,170
    
    
    
    7,669,619Diluted
    
    
    7,896,860
    
    
    
    7,718,441
  5




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the nine
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005Cash flows from operating activities:Net income
    
    $
    3,476,978
    
    
    $
    2,552,128Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued
operations
    
    
    6,078,450
    
    
    
    2,374,912Amortization of deferred financing costs, including
discontinued operations
    
    
    464,941
    
    
    
    158,457Amortization of deferred rent asset
    
    
    190,123
    
    
    
    114,700Amortization of deferred rent liability
    
    
    (499,870
    )
    
    
    Asset retirement obligation expense, including discontinued
operations
    
    
    112,195
    
    
    
    Stock compensation
    
    
    394,411
    
    
    
    Increase in mortgage notes payable due to change in value of
foreign currency
    
    
    202,065
    
    
    
    226,238Value of building acquired in excess of mortgage note
satisfied, applied to interest income
    
    
    (335,701
    )
    
    
    Gain on sale of real estate
    
    
    (1,422,026
    )
    
    
    Decrease (increase) in mortgage interest receivable
    
    
    70,749
    
    
    
    (2,716
    )(Increase) decrease in employee interest receivable
    
    
    (41,346
    )
    
    
    111Increase in prepaid expenses and other assets
    
    
    (49,645
    )
    
    
    (76,943
    )Increase in deferred rent receivable
    
    
    (941,903
    )
    
    
    (369,624
    )Increase in accounts payable, accrued expenses, and amount
due adviser
    
    
    248,449
    
    
    
    302,532Increase (decrease) in rent received in advance and security
deposits
    
    
    472,167
    
    
    
    (259,509
    )Net payments to lenders for operating reserves held in escrow
    
    
    (2,001,065
    )
    
    
    (81,640
    )Increase in operating reserves from tenants
    
    
    1,189,942
    
    
    
    Net cash provided by operating activities
    
    
    7,608,914
    
    
    
    4,938,646Cash flows from investing activities:Real estate investments
    
    
    (48,311,928
    )
    
    
    (80,763,736
    )Proceeds from sales of real estate
    
    
    2,106,112
    
    
    
    Issuance of mortgage note receivable
    
    
    
    
    
    
    (10,000,000
    )Principal repayments on mortgage notes receivable
    
    
    44,742
    
    
    
    60,443Increase in restricted cash
    
    
    329,547
    
    
    
    Net receipts from tenants for capital reserves
    
    
    125,574
    
    
    
    Net payments to lenders for capital reserves held in escrow
    
    
    (536,476
    )
    
    
    (1,006,602
    )Deposits on future acquisitions
    
    
    (600,000
    )
    
    
    (1,600,000
    )Deposits applied against real estate investments
    
    
    1,200,000
    
    
    
    1,400,000Net cash used in investing activities
    
    
    (45,642,429
    )
    
    
    (91,909,895
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    26,034,648
    
    
    
    Offering costs
    
    
    (1,308,496
    )
    
    
    Borrowings under mortgage notes payable
    
    
    31,900,000
    
    
    
    41,964,045Principal repayments on mortgage notes payable
    
    
    (427,506
    )
    
    
    (32,036
    )Borrowings from line of credit
    
    
    70,400,400
    
    
    
    69,410,000Repayments on line of credit
    
    
    (78,300,400
    )
    
    
    (45,600,000
    )Principal repayments on employee loans
    
    
    
    
    
    
    17,094Payments for deferred financing costs
    
    
    (1,699,798
    )
    
    
    (1,595,299
    )Dividends paid for common and preferred
    
    
    (9,690,708
    )
    
    
    (5,982,260
    )Net cash provided by financing activities
    
    
    36,908,140
    
    
    
    58,181,544Net decrease in cash and cash equivalents
    
    
    (1,125,375
    )
    
    
    (28,789,705
    )Cash and cash equivalents, beginning of period
    
    
    1,740,159
    
    
    
    29,153,987Cash and cash equivalents, end of period
    
    $
    614,784
    
    
    $
    364,282NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    1,604,416
    
    
    $
    NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    30,129,654
    
    
    $
    Assumption of mortgage notes payable by buyer
    
    $
    4,846,925
    
    
    $
    Notes receivable issued in exchange for common stock associated
with the exercise of employee stock options
    
    $
    1,826,754
    
    
    $
    75,000Acquisition of building in satisfaction of mortgage note
receivable
    
    $
    11,316,774
    
    
    $
    
  6




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##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      7




---



##### 



Interim financial information
  Investments in real estate
      8




---



##### 



September 30, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    10,738,319
    
    
    $
    (1,551,955
    )
    
    $
    5,625,736
    
    
    $
    (558,997
    )Leasing costs
    
    
    5,891,099
    
    
    
    (1,064,706
    )
    
    
    5,047,033
    
    
    
    (505,078
    )Customer relationships
    
    
    10,962,963
    
    
    
    (777,158
    )
    
    
    4,496,128
    
    
    
    (157,338
    )$
    27,592,381
    
    
    $
    (3,393,819
    )
    
    $
    15,168,897
    
    
    $
    (1,221,413
    )
 9




---



##### 



Estimated AmortizationYear
    
    Expense2006
    
    $
    809,3172007
    
    
    3,237,2682008
    
    
    3,237,2682009
    
    
    3,122,3922010
    
    
    3,084,100
 Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  10




---



##### 



Funds held in escrow
  Deferred financing costs
  Revenue recognition
    11




---



##### 



Stock based compensation
  Practical Accommodation to the Application of Grant Date as Defined in FASB Statement
No. 123(R). .
 Income taxes
    12




---



##### 



Segment information
 Disclosures about Segments of an Enterprise and Related Information
 Foreign Currency Transactions
 Foreign Currency Translation
 13




---



##### 



Asset retirement obligations
  Real estate held for sale and discontinued operations
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
  14




---



##### 



For the three
    
    
    For the three
    
    
    For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Allocated payroll and benefits
    
    $
    513,220
    
    
    $
    446,625
    
    
    $
    1,542,254
    
    
    $
    1,128,502Allocated overhead expenses
    
    
    143,696
    
    
    
    162,546
    
    
    
    486,796
    
    
    
    436,324Total management advisory fee
    
    $
    656,916
    
    
    $
    609,171
    
    
    $
    2,029,050
    
    
    $
    1,564,826
    15




---



##### 



3. Stock Options
     16




---



##### 



For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    867,411
    
    
    $
    2,552,128Less: Stock-based compensation expense
determined using the fair value
based method
    
    
    (47,941
    )
    
    
    (140,373
    )Net income, pro-forma
    
    $
    819,470
    
    
    $
    2,411,755Basic, as reported
    
    $
    0.11
    
    
    $
    0.33Basic, pro-forma
    
    $
    0.11
    
    
    $
    0.31Diluted, as reported
    
    $
    0.11
    
    
    $
    0.33Diluted, pro-forma
    
    $
    0.11
    
    
    $
    0.31
     Weighted AverageShares
    
    
    Exercise PriceOptions outstanding at December 31, 2005, of which 744,250
shares were exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    (178,901
    )
    
    $
    15.87Forfeited
    
    
    
    
    
    $
    Options outstanding and exercisable at September 30, 2006
    
    
    737,099
    
    
    $
    15.29
 17




---



##### 



Number of
    
    
    Strike Price of
    
    
    Amount ofOptions
    
    
    Options
    
    
    Promissory
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Note
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    9 years
    
    
    6.00
    %Apr-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    5 years
    
    
    7.77
    %Apr-06
    
    
    12,422
    
    
    $
    16.10
    
    
    $
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    50,000
    
    
    $
    16.85
    
    
    $
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    15,000
    
    
    $
    16.10
    
    
    $
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,500
    
    
    $
    16.01
    
    
    $
    40,000
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.68
    
    
    $
    33,360
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    15.00
    
    
    $
    30,000
    
    
    10 years
    
    
    7.87
    %142,922
    
    
    
    
    
    
    $
    2,276,754
    4. Earnings per Common Share
  For the three
    
    
    For the three
    
    
    For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Net income available to common stockholders
    
    $
    1,293,044
    
    
    $
    867,411
    
    
    $
    2,163,784
    
    
    $
    2,552,128Denominator for basic weighted average shares
    
    
    7,820,376
    
    
    
    7,672,000
    
    
    
    7,752,170
    
    
    
    7,669,619Dilutive effect of stock options
    
    
    160,695
    
    
    
    53,667
    
    
    
    144,690
    
    
    
    48,822Denominator for diluted weighted average shares
    
    
    7,981,071
    
    
    
    7,725,667
    
    
    
    7,896,860
    
    
    
    7,718,441Basic earnings per common share
    
    $
    0.16
    
    
    $
    0.11
    
    
    $
    0.28
    
    
    $
    0.33Diluted earnings per common share
    
    $
    0.16
    
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.33
 18




---



##### 



5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,864,590Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    3,033,997Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,326,162Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,727,250Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,911,438Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,314,217Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,846,120Sep-04
    
    Austin, Texas
    
    
    51,993
    
    
    Flexible Office
    
    
    7,015,299Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    909,711Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,889,715Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,956,087Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,692,599Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,518,254May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,906,369May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,976,955Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,406,170Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,742,162Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,640,481Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,068,285Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    3,029,121Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,153,041Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,153,041Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,153,042Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    7,008,103Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,657,650Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,467,618Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,996,116Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    3,048,960Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,191,562Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    14,269,900Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    27,396,979May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    12,140,106Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,490,306Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,643,057Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,311,244Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,572,727Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,572,727Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,572,727Total real estate, net
    
    
    4,629,612
    
    
    
    
    $
    236,573,888
  September 30, 2006
    
    
    December 31, 2005Real estate:Land
    
    $
    33,764,113
    
    
    $
    20,329,568Building
    
    
    204,082,090
    
    
    
    141,660,553Tenant improvements
    
    
    5,833,948
    
    
    
    3,053,518Accumulated depreciation
    
    
    (7,106,263
    )
    
    
    (3,408,878
    )Real estate, net
    
    $
    236,573,888
    
    
    $
    161,634,761
  19




---



##### 



20




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Below Market
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    Rents
    
    
    PriceSouth Hadley,
Massachusetts
    
    $
    470,636
    
    
    $
    2,543,800
    
    
    $
    
    
    
    $
    225,959
    
    
    $
    46,710
    
    
    $
    183,052
    
    
    $
    
    
    
    $
    3,470,157Champaign, Illinois
    
    
    3,645,770
    
    
    
    10,589,003
    
    
    
    225,367
    
    
    
    838,387
    
    
    
    165,893
    
    
    
    869,041
    
    
    
    (1,223,286
    )
    
    
    15,110,175Roseville, Minnesota
    
    
    2,587,757
    
    
    
    23,623,407
    
    
    
    1,182,263
    
    
    
    2,448,286
    
    
    
    491,342
    
    
    
    2,881,122
    
    
    
    (3,473,624
    )
    
    
    29,740,553Burnsville, Minnesota
    
    
    3,510,711
    
    
    
    7,827,812
    
    
    
    863,658
    
    
    
    463,237
    
    
    
    316,043
    
    
    
    1,126,538
    
    
    
    
    
    
    
    14,107,999Menomonee Falls, Wisconsin
    
    
    624,700
    
    
    
    6,870,586
    
    
    
    40,030
    
    
    
    138,320
    
    
    
    1,154
    
    
    
    379,284
    
    
    
    
    
    
    
    8,054,074Baytown, Texas
    
    
    221,314
    
    
    
    2,356,986
    
    
    
    80,483
    
    
    
    
    
    
    
    54,277
    
    
    
    100,949
    
    
    
    
    
    
    
    2,814,009Sterling Heights, Michigan
    
    
    2,734,887
    
    
    
    8,581,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,316,774Birmingham, Alabama;Montgomery Alabama;Columbia, Missouri
    
    
    1,005,450
    
    
    
    3,633,074
    
    
    
    39,268
    
    
    
    74,985
    
    
    
    2,900
    
    
    
    209,165
    
    
    
    
    
    
    
    4,964,842$
    14,801,225
    
    
    $
    66,026,555
    
    
    $
    2,431,069
    
    
    $
    4,189,174
    
    
    $
    1,078,319
    
    
    $
    5,749,151
    
    
    $
    (4,696,910
    )
    
    $
    89,578,583
   Year
    
    Lease Payments2006
    
    $
    5,912,6982007
    
    
    23,725,4352008
    
    
    24,122,9262009
    
    
    23,429,5112010
    
    
    22,706,503Thereafter
    
    
    91,805,314
  6. Discontinued Operations
  21




---



##### 



For the three
    
    
    For the three
    
    
    For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Operating revenue
    
    $
    31,106
    
    
    $
    146,017
    
    
    $
    342,629
    
    
    $
    432,436Operating expense
    
    
    6,815
    
    
    
    12,016
    
    
    
    22,708
    
    
    
    20,050Taxes & Licenses
    
    
    319,753
    
    
    
    448
    
    
    
    323,172
    
    
    
    2,765Interest expense
    
    
    13,059
    
    
    
    30,539
    
    
    
    143,716
    
    
    
    30,539Depreciation expense
    
    
    
    
    
    
    32,510
    
    
    
    52,300
    
    
    
    97,480Gain on sale of real estate
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026
    
    
    
    Realized and unrealized
gains (losses) on foregin
currency transactions
    
    
    (1,044
    )
    
    
    (224,569
    )
    
    
    (201,017
    )
    
    
    (227,371
    )Income (loss) from
discontinued operations
    
    $
    1,112,461
    
    
    $
    (154,065
    )
    
    $
    1,021,742
    
    
    $
    54,231
 7. Mortgage Note Receivable
   22




---



##### 



8. Mortgage Notes Payable
  Balance OutstandingDate of Issuance
    
    Principal Maturityof Note
    
    Date
    
    
    Interest Rate
    
    
    September 30, 2006
    
    
    December 31, 20053/16/2005
    
    
    4/1/2030
    
    
    
    6.3300
    %
    
    $
    3,073,256
    
    
    $
    3,113,1027/19/2005
    
    
    8/1/2015
    
    
    
    5.2200
    %
    
    
    
    
    
    
    4,644,8598/25/2005
    
    
    9/1/2015
    
    
    
    5.3310
    %
    
    
    21,757,000
    
    
    
    21,757,0009/12/2005
    
    
    9/1/2015
    
    
    
    5.2100
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    12/8/2015
    
    
    
    5.7107
    %
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    12/1/2013
    
    
    
    5.9100
    %
    
    
    9,652,561
    
    
    
    2/21/2006
    
    
    6/30/2014
    
    
    
    5.2000
    %
    
    
    20,180,508
    
    
    
    3/29/2006
    
    
    4/1/2016
    
    
    
    5.9200
    %
    
    
    17,000,000
    
    
    
    4/27/2006
    
    
    5/5/2016
    
    
    
    6.5800
    %
    
    
    14,808,924
    
    
    
    $
    118,516,249
    
    
    $
    61,558,961
      23




---



##### 



9. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    7,672
    
    
    $
    
    
    
    $
    105,502,544
    
    
    $
    (432,282
    )
    
    $
    (6,129,398
    )
    
    $
    98,948,536Issuance of Common StockUnder Stock Option Plan
    
    
    179
    
    
    
    
    
    
    
    2,861,222
    
    
    
    (1,826,754
    )
    
    
    
    
    
    
    1,034,648Issuance of Preferred Stock
    
    
    
    
    
    
    1,000
    
    
    
    24,999,000
    
    
    
    
    
    
    
    
    
    
    
    25,000,000Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (1,308,496
    )
    
    
    
    
    
    
    
    
    
    
    (1,308,496
    )Stock Options
    
    
    
    
    
    
    
    
    
    
    394,411
    
    
    
    
    
    
    
    
    
    
    
    394,411Distributions Declared to Common and
Preferred Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,690,707
    )
    
    
    (9,690,708
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,476,978
    
    
    
    3,476,978Balance at September 30, 2006
    
    $
    7,851
    
    
    $
    1,000
    
    
    $
    132,448,681
    
    
    $
    (2,259,036
    )
    
    $
    (12,343,127
    )
    
    $
    117,855,369
   10. Segment Information
  24




---



##### 



As of and for the three months ended September 30, 2006
    
    
    As of and for the nine months ended September 30, 2006Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    6,257,647
    
    
    $
    478,329
    
    
    $
    
    
    
    $
    6,735,976
    
    
    $
    17,201,975
    
    
    $
    1,589,675
    
    
    $
    
    
    
    $
    18,791,650Operating expenses
    
    
    (2,218,071
    )
    
    
    
    
    
    
    (1,402,078
    )
    
    
    (3,620,149
    )
    
    
    (6,243,187
    )
    
    
    
    
    
    
    (3,923,790
    )
    
    
    (10,166,977
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (2,450,869
    )
    
    
    (2,450,869
    )
    
    
    
    
    
    
    
    
    
    
    (6,169,437
    )
    
    
    (6,169,437
    )Discontinued operations
    
    
    1,112,461
    
    
    
    
    
    
    
    
    
    
    
    1,112,461
    
    
    
    1,021,742
    
    
    
    
    
    
    
    
    
    
    
    1,021,742Net income (loss)
    
    $
    5,152,037
    
    
    $
    478,329
    
    
    $
    (3,852,947
    )
    
    $
    1,777,419
    
    
    $
    11,980,530
    
    
    $
    1,589,675
    
    
    $
    (10,093,227
    )
    
    $
    3,476,978Total Assets
    
    $
    265,894,348
    
    
    $
    10,000,000
    
    
    $
    5,608,132
    
    
    $
    281,502,480
    
    
    $
    265,894,348
    
    
    $
    10,000,000
    
    
    $
    5,608,132
    
    
    $
    281,502,480
 As of and for the three months ended September 30, 2005
    
    
    As of and for the nine months ended September 30, 2005Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    3,335,967
    
    
    $
    553,968
    
    
    $
    
    
    
    $
    3,889,935
    
    
    $
    7,173,399
    
    
    $
    1,351,197
    
    
    $
    
    
    
    $
    8,524,596Operating expenses
    
    
    (1,144,624
    )
    
    
    
    
    
    
    (874,253
    )
    
    
    (2,018,877
    )
    
    
    (2,465,779
    )
    
    
    
    
    
    
    (2,537,950
    )
    
    
    (5,003,729
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (849,582
    )
    
    
    (849,582
    )
    
    
    
    
    
    
    
    
    
    
    (1,022,970
    )
    
    
    (1,022,970
    )Discontinued operations
    
    
    (154,065
    )
    
    
    
    
    
    
    
    
    
    
    (154,065
    )
    
    
    54,231
    
    
    
    
    
    
    
    
    
    
    
    54,231Net income (loss)
    
    $
    2,037,278
    
    
    $
    553,968
    
    
    $
    (1,723,835
    )
    
    $
    867,411
    
    
    $
    4,761,851
    
    
    $
    1,351,197
    
    
    $
    (3,560,920
    )
    
    $
    2,552,128Total Assets
    
    $
    143,839,316
    
    
    $
    21,114,785
    
    
    $
    3,892,030
    
    
    $
    168,846,131
    
    
    $
    143,839,316
    
    
    $
    21,114,785
    
    
    $
    3,892,030
    
    
    $
    168,846,131
 11. Line of Credit
  12. Pro Forma Financial Information
  25




---



##### 



For the three
    
    
    For the three
    
    
    For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Operating Data:Total operating revenue
    
    $
    6,861,173
    
    
    $
    5,823,778
    
    
    $
    20,600,619
    
    
    $
    14,095,386Total operating expenses
    
    
    (3,669,060
    )
    
    
    (3,280,062
    )
    
    
    (11,031,591
    )
    
    
    (8,564,678
    )Other expense
    
    
    (2,450,869
    )
    
    
    (849,582
    )
    
    
    (6,169,437
    )
    
    
    (1,022,970
    )Income from continuing operations
    
    
    741,244
    
    
    
    1,694,134
    
    
    
    3,399,591
    
    
    
    4,507,738Discontinued Operations
    
    
    1,112,461
    
    
    
    (154,065
    )
    
    
    1,021,740
    
    
    
    54,231Net income
    
    $
    1,853,705
    
    
    $
    1,540,069
    
    
    $
    4,421,331
    
    
    $
    4,561,969Share and Per Share Data:Basic net income
    
    $
    0.24
    
    
    $
    0.20
    
    
    $
    0.57
    
    
    $
    0.59Diluted net income
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.56
    
    
    $
    0.59Weighted average shares
outstanding-basic
    
    
    7,820,376
    
    
    
    7,672,000
    
    
    
    7,752,170
    
    
    
    7,669,619Weighted average shares
outstanding-diluted
    
    
    7,981,071
    
    
    
    7,725,667
    
    
    
    7,896,860
    
    
    
    7,718,441
  13. Subsequent Events
      26




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-Q.
 Forward-Looking Statements
 Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements made with respect to possible or
assumed future results of our business, financial condition, liquidity, results of operations,
plans and objectives. Such forward-looking statements can generally be identified by the use of the
words may, will, intend, believe, expect, anticipate, estimate or similar
expressions. You should not place undue reliance on these forward-looking statements. Statements
regarding the following subjects are forward-looking by their nature:
 
    
    our business strategy;
    
    pending transactions;
    
    our projected operating results;
    
    our ability to obtain future financing arrangements;
    
    estimates relating to our future distributions;
    
    our understanding of our competition;
    
    market trends;
    
    estimates of our future operating expenses, including payments to our adviser under the
terms of our advisory agreement;
    
    projected capital expenditures; and
    
    use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity
securities and other future capital resources, if any.
 These statements involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or achievements to be materially
different from any future results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements.
 The forward-looking statements are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to us. Although we believe
that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common and preferred stock, along with the following factors that could cause actual results to
vary from our forward-looking statements:
 
    
    the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer;
    
    general volatility of the capital markets and the market price of our securities;
    
    risks associated with negotiation and consummation of pending and future transactions;
    
    changes in our business strategy;
    
    availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital;
    
    availability of qualified personnel;
    
    changes in our industry, interest rates, exchange rates or the general economy; and
    
    the degree and nature of our competition.
 We are under no duty to update any of the forward-looking statements after the date of this report
to conform such statements to actual results.
 27




---



##### 



Overview
    Recent Events
 Investments
   28




---



##### 



Mortgage Loans
   29




---



##### 



Preferred Stock Financings
   Properties Sold
  30




---



##### 



Acquisition of Building in Satisfaction of Mortgage Loan
   Expenses
    31




---



##### 



32




---



##### 



Critical Accounting Policies
  Revenue Recognition
   33




---



##### 



Purchase Price Allocation
 
      34




---



##### 



Risk Rating
  First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)>10
    
    Baa2
    
    BBB
    
    Probability of default during the
next ten years is 4% and the
expected loss is 1% or less10
    
    Baa3
    
    BBB-
    
    Probability of default during the
next ten years is 5% and the
expected loss is 1% to 2%9
    
    Ba1
    
    BB+
    
    Probability of default during the
next ten years is 10% and the
expected loss is 2% to 3%8
    
    Ba2
    
    BB
    
    Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5%5
    
    B2
    
    B
    
    Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3%
 35




---



##### 



First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)2
    
    Caa2
    
    CCC
    
    Probability of default during the
next ten years is 35% and the
expected loss is 13.3% to 16.7%1
    
    Caa3
    
    CC
    
    Probability of default during the
next ten years is 65% and the
expected loss is 16.7% to 20%0
    
    N/a
    
    D
    
    Probability of default during the
next ten years is 85%, or there is a
payment default, and the expected
loss is greater than 20%
 
 (a)
    
    The default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term.   Rating
    
    9/30/2006
    
    12/31/2005Average
    
    
    8.5
    
    
    
    8.6Weighted Average
    
    
    8.5
    
    
    
    8.7Highest
    
    
    10.0
    
    
    
    10.0Lowest
    
    
    6.0
    
    
    
    6.0
 Investments in Real Estate
     36




---



##### 



Provision for Loan Losses
  Income Taxes
  Stock Based Compensation
 , .
 ). .
 Results of Operations
  37




---



##### 



For the three months ended
    
    
    For the nine months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    $ Change
    
    
    % Change
    
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    6,214,295
    
    
    $
    3,307,759
    
    
    $
    2,906,536
    
    
    
    88
    %
    
    $
    17,109,203
    
    
    $
    7,103,591
    
    
    $
    10,005,612
    
    
    
    141
    %Interest income from mortgage notes receivable
    
    
    478,329
    
    
    
    553,968
    
    
    
    (75,639
    )
    
    
    -14
    %
    
    
    1,589,675
    
    
    
    1,351,197
    
    
    
    238,478
    
    
    
    18
    %Tenant recovery revenue
    
    
    43,352
    
    
    
    28,208
    
    
    
    15,144
    
    
    
    54
    %
    
    
    92,772
    
    
    
    69,808
    
    
    
    22,964
    
    
    
    33
    %Total operating revenues
    
    
    6,735,976
    
    
    
    3,889,935
    
    
    
    2,846,041
    
    
    
    73
    %
    
    
    18,791,650
    
    
    
    8,524,596
    
    
    
    10,267,054
    
    
    
    120
    %Operating expensesDepreciation and amortization
    
    
    2,162,640
    
    
    
    1,107,672
    
    
    
    1,054,968
    
    
    
    95
    %
    
    
    6,026,150
    
    
    
    2,277,432
    
    
    
    3,748,718
    
    
    
    165
    %Management advisory fee
    
    
    656,916
    
    
    
    609,171
    
    
    
    47,745
    
    
    
    8
    %
    
    
    2,029,050
    
    
    
    1,564,826
    
    
    
    464,224
    
    
    
    30
    %Professional fees
    
    
    167,353
    
    
    
    87,896
    
    
    
    79,457
    
    
    
    90
    %
    
    
    598,771
    
    
    
    428,781
    
    
    
    169,990
    
    
    
    40
    %Taxes and licenses
    
    
    24,812
    
    
    
    36,952
    
    
    
    (12,140
    )
    
    
    -33
    %
    
    
    114,774
    
    
    
    188,347
    
    
    
    (73,573
    )
    
    
    -39
    %Insurance
    
    
    113,453
    
    
    
    70,244
    
    
    
    43,209
    
    
    
    62
    %
    
    
    299,296
    
    
    
    207,648
    
    
    
    91,648
    
    
    
    44
    %General and administrative
    
    
    115,349
    
    
    
    61,074
    
    
    
    54,275
    
    
    
    89
    %
    
    
    319,784
    
    
    
    166,410
    
    
    
    153,374
    
    
    
    92
    %Shareholder related expense
    
    
    34,414
    
    
    
    45,868
    
    
    
    (11,454
    )
    
    
    -25
    %
    
    
    282,478
    
    
    
    170,285
    
    
    
    112,193
    
    
    
    66
    %Asset retirement obligation expense
    
    
    30,619
    
    
    
    
    
    
    
    30,619
    
    
    
    100
    %
    
    
    102,263
    
    
    
    
    
    
    
    102,263
    
    
    
    100
    %Stock option compensation expense
    
    
    314,593
    
    
    
    
    
    
    
    314,593
    
    
    
    100
    %
    
    
    394,411
    
    
    
    
    
    
    
    394,411
    
    
    
    100
    %Total operating expenses
    
    
    3,620,149
    
    
    
    2,018,877
    
    
    
    1,601,272
    
    
    
    79
    %
    
    
    10,166,977
    
    
    
    5,003,729
    
    
    
    5,163,248
    
    
    
    103
    %Other income (expense)Interest income from temporary investments
    
    
    2,006
    
    
    
    10,093
    
    
    
    (8,087
    )
    
    
    -80
    %
    
    
    13,437
    
    
    
    117,806
    
    
    
    (104,369
    )
    
    
    -89
    %Interest income  employee loans
    
    
    41,346
    
    
    
    5,562
    
    
    
    35,784
    
    
    
    643
    %
    
    
    75,483
    
    
    
    15,483
    
    
    
    60,000
    
    
    
    388
    %Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    10,400
    
    
    
    
    
    
    
    10,400
    
    
    
    100
    %Interest expense
    
    
    (2,494,221
    )
    
    
    (865,237
    )
    
    
    (1,628,984
    )
    
    
    188
    %
    
    
    (6,268,757
    )
    
    
    (1,156,259
    )
    
    
    (5,112,498
    )
    
    
    442
    %Total other expense
    
    
    (2,450,869
    )
    
    
    (849,582
    )
    
    
    (1,601,287
    )
    
    
    188
    %
    
    
    (6,169,437
    )
    
    
    (1,022,970
    )
    
    
    (5,146,467
    )
    
    
    503
    %Income from continuing operations
    
    
    664,958
    
    
    
    1,021,476
    
    
    
    (356,518
    )
    
    
    -35
    %
    
    
    2,455,236
    
    
    
    2,497,897
    
    
    
    (42,661
    )
    
    
    -2
    %Discontinued operationsIncome from discontinued operations
    
    
    6,915
    
    
    
    70,504
    
    
    
    (63,589
    )
    
    
    -90
    %
    
    
    116,169
    
    
    
    281,602
    
    
    
    (165,433
    )
    
    
    -59
    %Net realized gain (loss) from foreign currency transactions
    
    
    (1,044
    )
    
    
    (340
    )
    
    
    (704
    )
    
    
    -207
    %
    
    
    (201,017
    )
    
    
    (3,277
    )
    
    
    (197,740
    )
    
    
    -6034
    %Net unrealized (loss) gain from foreign currency
transactions
    
    
    
    
    
    
    (224,229
    )
    
    
    224,229
    
    
    
    100
    %
    
    
    
    
    
    
    (224,094
    )
    
    
    224,094
    
    
    
    100
    %Gain on sale of real estate
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026
    
    
    
    100
    %
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026
    
    
    
    100
    %Taxes on sale of real estate
    
    
    (315,436
    )
    
    
    
    
    
    
    (315,436
    )
    
    
    100
    %
    
    
    (315,436
    )
    
    
    
    
    
    
    (315,436
    )
    
    
    100
    %Total discontinued operations
    
    
    1,112,461
    
    
    
    (154,065
    )
    
    
    1,266,526
    
    
    
    822
    %
    
    
    1,021,742
    
    
    
    54,231
    
    
    
    967,511
    
    
    
    1784
    %Net income
    
    
    1,777,419
    
    
    
    867,411
    
    
    
    910,008
    
    
    
    105
    %
    
    
    3,476,978
    
    
    
    2,552,128
    
    
    
    924,850
    
    
    
    36
    %Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    
    
    
    
    (484,375
    )
    
    
    100
    %
    
    
    (1,313,194
    )
    
    
    
    
    
    
    (1,313,194
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    1,293,044
    
    
    $
    867,411
    
    
    $
    425,633
    
    
    
    49
    %
    
    $
    2,163,784
    
    
    $
    2,552,128
    
    
    $
    (388,344
    )
    
    
    -15
    %
 Revenues
    Expenses
  38




---



##### 



39




---



##### 



. Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees .
  Other income
   Gain on sale of real estate
  Foreign currency gains and losses
  Net income available to common stockholders
  40




---



##### 



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
  Financing Activities
  41




---



##### 



Future Capital Needs
  Registration Statements
   Line of Credit
  42




---



##### 



Mortgage Notes Payable
     43




---



##### 



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsLong-Term Debt Obligations(1)
    
    $
    154,176,249
    
    
    $
    771,666
    
    
    $
    38,483,015
    
    
    $
    3,499,207
    
    
    $
    111,422,361Interest on Long-Term Debt Obligations(2)
    
    
    58,135,532
    
    
    
    6,795,235
    
    
    
    13,411,886
    
    
    
    13,029,094
    
    
    
    24,899,317Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    212,311,781
    
    
    $
    7,566,901
    
    
    $
    51,894,901
    
    
    $
    16,528,301
    
    
    $
    136,321,678
 
 (1)
    
    Long-term debt obligations represent both borrowings under our BB&T line of credit
and mortgage notes payble that were outstanding as of September 30, 2006. The line of credit
matures in February of 2008.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings
under our line of credit. The balance and interest rate on our line of credit is variable and, thus, the amount of
interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is allocated
to us by our Adviser in connection with our advisory agreement. Funds from Operations
     44




---



##### 



For the three
    
    
    For the three
    
    
    For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Net income
    
    $
    1,777,419
    
    
    $
    867,411
    
    
    $
    3,476,978
    
    
    $
    2,552,128Less: Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    
    
    
    
    (1,313,194
    )
    
    
    Net income available to common stockholders
    
    $
    1,293,044
    
    
    $
    867,411
    
    
    $
    2,163,784
    
    
    $
    2,552,128Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    2,162,640
    
    
    
    1,140,181
    
    
    
    6,078,450
    
    
    
    2,374,912Less: Gain on sale of real estate, net of taxes paid
    
    
    (1,106,590
    )
    
    
    
    
    
    
    (1,106,590
    )
    
    
    FFO available to common stockholders
    
    
    2,349,094
    
    
    
    2,007,592
    
    
    
    7,135,644
    
    
    
    4,927,040Weighted average shares outstanding  basic
    
    
    7,820,376
    
    
    
    7,672,000
    
    
    
    7,752,170
    
    
    
    7,669,619Weighted average shares outstanding  diluted
    
    
    7,981,071
    
    
    
    7,725,667
    
    
    
    7,896,860
    
    
    
    7,718,441Basic net income per weighted average common share
    
    $
    0.16
    
    
    $
    0.11
    
    
    $
    0.28
    
    
    $
    0.33Diluted net income per weighted average common share
    
    $
    0.16
    
    
    $
    0.11
    
    
    $
    0.27
    
    
    $
    0.33Basic FFO per weighted average common share
    
    $
    0.30
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.64Diluted FFO per weighted average common share
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    0.90
    
    
    $
    0.64
 45




---



##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
       46




---



##### 



Item 4. Controls and Procedures
     47




---



##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  At the beginning of the 2007 fiscal year, our amended and restated advisory agreement with
Gladstone Management Corporation and our administration agreement with Gladstone Administration LLC
will become effective and this could adversely impact our results of operations.
   48




---



##### 



We are currently not in compliance with a covenant of our credit facility and, if we dont
receive a waiver or refinance the credit facility before December 31, 2006, we may be in default on
our credit facility, which would likely have a material adverse impact on our liquidity and
financial condition.
  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
  49




---



##### 



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, 2003.3.3
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.3 of
Form 8-A (File No. 000-50363), filed January 19, 2006.3.4
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.5% Series B Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.4 of Form 8-A
(File No. 000-50363), filed October 19, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.1 of Form 8-A (File No.
000-50363), filed on January 19, 2006.4.2
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A (File No.
000-50363), filed on October 19, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of September 29, 2006,
incorporated by reference to Exhibit 10.31 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 30, 2006.10.32*
    
    Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006.11
    
    Computation of Per Share Earnings from Operations (included in
the notes to the unaudited financial statements contained in
this report)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference.*
    
    Denotes management contract, compensation plan, contract or other arrangement. 50




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Gladstone Commercial CorporationDate: October 31, 2006
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 51




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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, 2003.3.3
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.3 of
Form 8-A (File No. 000-50363), filed January 19, 2006.3.4
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.5% Series B Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.4 of Form 8-A
(File No. 000-50363), filed October 19, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.1 of Form 8-A (File No.
000-50363), filed on January 19, 2006.4.2
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A (File No.
000-50363), filed on October 19, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of September 29, 2006,
incorporated by reference to Exhibit 10.31 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 30, 2006.10.32*
    
    Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006.11
    
    Computation of Per Share Earnings (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.*
    
    Denotes management contract, compensation plan, contract or other arrangement. 52