##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND
    
    02-0681276(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    35PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits
    
    
    37SIGNATURES
    
    
    38




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2007
    
    
    December 31, 2006ASSETSReal estate, net of accumulated depreciation of
$11,947,461 and $8,595,419, respectively
    
    $
    280,541,611
    
    
    $
    235,118,123Lease intangibles, net of accumulated amortization of
$5,877,604 and $4,175,685, respectively
    
    
    26,038,291
    
    
    
    23,416,696Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    9,681,885
    
    
    
    36,005,686Restricted cash
    
    
    1,469,750
    
    
    
    1,225,162Funds held in escrow
    
    
    1,789,814
    
    
    
    1,635,819Interest
receivable  mortgage note
    
    
    83,333
    
    
    
    Interest
receivable  employees
    
    
    52,735
    
    
    
    43,716Deferred rent receivable
    
    
    4,277,061
    
    
    
    3,607,279Deferred financing costs, net of accumulated amortization of
$1,800,471 and $1,467,297, respectively
    
    
    4,067,858
    
    
    
    3,713,004Prepaid expenses
    
    
    456,354
    
    
    
    521,290Deposits on real estate
    
    
    300,000
    
    
    
    300,000Accounts receivable
    
    
    387,747
    
    
    
    179,247TOTAL ASSETS
    
    $
    339,146,439
    
    
    $
    315,766,022LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    182,124,367
    
    
    $
    154,494,438Deferred rent liability
    
    
    4,325,817
    
    
    
    4,718,599Asset retirement obligation liability
    
    
    1,752,378
    
    
    
    1,631,294Accounts payable and accrued expenses
    
    
    588,581
    
    
    
    673,410Due to adviser
    
    
    682,481
    
    
    
    183,042Rent received in advance, security deposits and funds held in escrow
    
    
    2,175,708
    
    
    
    1,841,063Total Liabilities
    
    
    191,649,332
    
    
    
    163,541,846STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;
2,300,000 shares authorized and 2,150,000 shares issued and outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 17,700,000 shares authorized and
8,565,264 shares issued and outstanding
    
    
    8,565
    
    
    
    8,565Additional paid in capital
    
    
    170,640,979
    
    
    
    170,640,979Notes receivable  employees
    
    
    (2,801,180
    )
    
    
    (3,201,322
    )Distributions in excess of accumulated earnings
    
    
    (20,353,407
    )
    
    
    (15,226,196
    )Total Stockholders Equity
    
    
    147,497,107
    
    
    
    152,224,176TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    339,146,439
    
    
    $
    315,766,022
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenuesRental income
    
    $
    7,732,322
    
    
    $
    6,027,830
    
    
    $
    14,810,358
    
    
    $
    10,894,906Interest income from mortgage notes receivable
    
    
    252,778
    
    
    
    558,434
    
    
    
    502,778
    
    
    
    1,111,346Tenant recovery revenue
    
    
    94,468
    
    
    
    43,798
    
    
    
    150,203
    
    
    
    49,420Total operating revenues
    
    
    8,079,568
    
    
    
    6,630,062
    
    
    
    15,463,339
    
    
    
    12,055,672Operating expensesDepreciation and amortization
    
    
    2,636,154
    
    
    
    2,064,312
    
    
    
    5,053,966
    
    
    
    3,863,519Base management fee (refer to Note 2)
    
    
    471,091
    
    
    
    719,392
    
    
    
    953,135
    
    
    
    1,372,134Administration fee (refer to Note 2)
    
    
    210,126
    
    
    
    
    
    
    
    417,144
    
    
    
    Incentive fee (refer to Note 2)
    
    
    633,805
    
    
    
    
    
    
    
    1,219,573
    
    
    
    Professional fees
    
    
    174,677
    
    
    
    232,960
    
    
    
    324,108
    
    
    
    431,418Taxes and licenses
    
    
    50,178
    
    
    
    39,069
    
    
    
    65,185
    
    
    
    89,963Insurance
    
    
    114,556
    
    
    
    102,845
    
    
    
    260,808
    
    
    
    185,842General and administrative
    
    
    133,406
    
    
    
    95,602
    
    
    
    245,308
    
    
    
    143,420Directors fees
    
    
    54,250
    
    
    
    27,500
    
    
    
    108,500
    
    
    
    61,000Stockholder related expenses
    
    
    75,361
    
    
    
    183,596
    
    
    
    174,978
    
    
    
    248,065Asset retirement obligation expense
    
    
    28,942
    
    
    
    24,940
    
    
    
    57,102
    
    
    
    71,641Stock option compensation expense
    
    
    
    
    
    
    33,602
    
    
    
    
    
    
    
    79,818Total operating expenses before credit from Adviser
    
    
    4,582,546
    
    
    
    3,523,818
    
    
    
    8,879,807
    
    
    
    6,546,820Credit to incentive fee (Refer to Note 2)
    
    
    (633,805
    )
    
    
    
    
    
    
    (1,219,573
    )
    
    
    Total operating expenses
    
    
    3,948,741
    
    
    
    3,523,818
    
    
    
    7,660,234
    
    
    
    6,546,820Other income (expense)Interest income from temporary investments
    
    
    63,269
    
    
    
    4,057
    
    
    
    292,285
    
    
    
    11,431Interest income  employee loans
    
    
    56,458
    
    
    
    28,589
    
    
    
    116,880
    
    
    
    34,137Other income
    
    
    9,817
    
    
    
    10,400
    
    
    
    18,231
    
    
    
    10,400Interest expense
    
    
    (2,702,612
    )
    
    
    (2,155,968
    )
    
    
    (5,217,073
    )
    
    
    (3,774,536
    )Total other expense
    
    
    (2,573,068
    )
    
    
    (2,112,922
    )
    
    
    (4,789,677
    )
    
    
    (3,718,568
    )Income from continuing operations
    
    
    1,557,759
    
    
    
    993,322
    
    
    
    3,013,428
    
    
    
    1,790,284Discontinued operations(Loss) income from discontinued operations
    
    
    (1,503
    )
    
    
    71,215
    
    
    
    (5,504
    )
    
    
    109,253Net realized income (loss) from foreign currency transactions
    
    
    56
    
    
    
    167
    
    
    
    63
    
    
    
    (649
    )Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    (211,939
    )
    
    
    
    
    
    
    (199,323
    )Taxes paid on sale of real estate
    
    
    
    
    
    
    
    
    
    
    78,667
    
    
    
    Total discontinued operations
    
    
    (1,447
    )
    
    
    (140,557
    )
    
    
    73,226
    
    
    
    (90,719
    )Net income
    
    
    1,556,312
    
    
    
    852,765
    
    
    
    3,086,654
    
    
    
    1,699,565Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (484,375
    )
    
    
    (2,046,874
    )
    
    
    (828,819
    )Net income available to common stockholders
    
    $
    532,875
    
    
    $
    368,390
    
    
    $
    1,039,780
    
    
    $
    870,746Earnings per weighted average common share  basicIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.12Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    0.01
    
    
    
    (0.01
    )Net income available to common stockholders
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.11Earnings per weighted average common share  dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.12Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    0.01
    
    
    
    (0.01
    )Net income available to common stockholders
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.11Weighted average shares outstandingBasic
    
    
    8,565,264
    
    
    
    7,762,503
    
    
    
    8,565,264
    
    
    
    7,717,501Diluted
    
    
    8,565,264
    
    
    
    7,911,871
    
    
    
    8,565,264
    
    
    
    7,858,146
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the six months ended June 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    3,086,654
    
    
    $
    1,699,565Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    5,053,966
    
    
    
    3,915,819Amortization of deferred financing costs, including discontinued operations
    
    
    333,174
    
    
    
    289,300Amortization of deferred rent asset
    
    
    126,748
    
    
    
    126,748Amortization of deferred rent liability
    
    
    (392,782
    )
    
    
    (303,478
    )Asset retirement obligation expense, including discontinued operations
    
    
    57,102
    
    
    
    81,573Increase in deferred rent receivable
    
    
    (796,530
    )
    
    
    (720,712
    )Stock compensation
    
    
    
    
    
    
    79,818Increase in mortgage notes payable due to change in value of foreign currency
    
    
    
    
    
    
    199,323(Increase) decrease in mortgage interest receivable
    
    
    (83,333
    )
    
    
    3,609Increase in employee interest receivable
    
    
    (9,019
    )
    
    
    (28,589
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (143,564
    )
    
    
    297,354Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    414,610
    
    
    
    65,606Increase in rent received in advance
    
    
    90,057
    
    
    
    163,407Net cash provided by operating activities
    
    
    7,737,083
    
    
    
    5,869,343Cash flows from investing activities:Real estate investments
    
    
    (53,035,069
    )
    
    
    (40,506,626
    )Principal repayments on mortgage notes receivable
    
    
    
    
    
    
    44,742Principal repayments on employee loans
    
    
    400,142
    
    
    
    Net payments to lenders for reserves held in escrow
    
    
    (868,679
    )
    
    
    (1,899,416
    )Increase in restricted cash
    
    
    (244,588
    )
    
    
    (412,074
    )Deposits on future acquisitions
    
    
    (810,000
    )
    
    
    (500,000
    )Deposits applied against real estate investments
    
    
    810,000
    
    
    
    1,100,000Net cash used in investing activities
    
    
    (53,748,194
    )
    
    
    (42,173,374
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    25,485,010Offering costs
    
    
    
    
    
    
    (1,302,004
    )Borrowings under mortgage notes payable
    
    
    28,015,000
    
    
    
    31,900,000Principal repayments on mortgage notes payable
    
    
    (385,070
    )
    
    
    (302,410
    )Borrowings from line of credit
    
    
    4,200,000
    
    
    
    60,000,400Repayments on line of credit
    
    
    (4,200,000
    )
    
    
    (73,900,400
    )Increase in reserves from tenants
    
    
    818,745
    
    
    
    1,093,252Increase in security deposits
    
    
    140,525
    
    
    
    562,500Payments for deferred financing costs
    
    
    (688,025
    )
    
    
    (1,650,237
    )Dividends paid for common and preferred
    
    
    (8,213,865
    )
    
    
    (6,390,679
    )Net cash provided by financing activities
    
    
    19,687,310
    
    
    
    35,495,432Net decrease in cash and cash equivalents
    
    
    (26,323,801
    )
    
    
    (808,599
    )Cash and cash equivalents, beginning of period
    
    
    36,005,686
    
    
    
    1,740,159Cash and cash equivalents, end of period
    
    $
    9,681,885
    
    
    $
    931,560NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    121,084
    
    
    $
    1,510,330NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    
    
    
    $
    30,129,654Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options
    
    $
    
    
    
    $
    1,826,754
  5




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##### 



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




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##### 



Interim financial information
  Investments in real estate
      7




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##### 



June 30, 2007
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    11,739,091
    
    
    $
    (2,650,525
    )
    
    $
    10,738,319
    
    
    $
    (1,907,668
    )Leasing costs
    
    
    6,689,195
    
    
    
    (1,707,656
    )
    
    
    5,891,099
    
    
    
    (1,267,829
    )Customer relationships
    
    
    13,487,609
    
    
    
    (1,519,423
    )
    
    
    10,962,963
    
    
    
    (1,000,188
    )$
    31,915,895
    
    
    $
    (5,877,604
    )
    
    $
    27,592,381
    
    
    $
    (4,175,685
    )
  Estimated AmortizationYear
    
    Expense2007
    
    $
    1,766,7902008
    
    
    3,533,5802009
    
    
    3,405,9402010
    
    
    3,214,1752011
    
    
    2,732,066
 8




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##### 



Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  Deferred financing costs
  9




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##### 



Revenue recognition
   Income taxes
    10




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##### 



Segment information
  Foreign Currency Transactions
  Asset retirement obligations
  11




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##### 



Real estate held for sale and discontinued operations
  Recently Issued Accounting Pronouncements
   .
 Use of estimates
  Reclassifications
  12




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##### 



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




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##### 



3. Stock Options
   14




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##### 



OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 6/30/07
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    374,155
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    $
    57,796
    
    
    9 years
    
    
    6.00
    %Apr-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    
    
    
    5 years
    
    
    7.77
    %Apr-06
    
    
    12,422
    
    
    $
    16.10
    
    
    $
    199,994
    
    
    $
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    50,000
    
    
    $
    16.85
    
    
    $
    842,500
    
    
    $
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    15,000
    
    
    $
    16.10
    
    
    $
    241,500
    
    
    $
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,500
    
    
    $
    16.01
    
    
    $
    40,000
    
    
    $
    39,275
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.68
    
    
    $
    33,360
    
    
    $
    33,360
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    15.00
    
    
    $
    30,000
    
    
    $
    30,000
    
    
    10 years
    
    
    7.87
    %Oct-06
    
    
    12,000
    
    
    $
    16.10
    
    
    $
    193,200
    
    
    $
    193,200
    
    
    9 years
    
    
    8.17
    %Nov-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    350,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    375,000
    
    
    10 years
    
    
    8.12
    %204,922
    
    
    
    
    
    
    $
    3,219,954
    
    
    $
    2,801,180
  4. Earnings per Common Share
  For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income available to common stockholders
    
    $
    532,875
    
    
    $
    368,390
    
    
    $
    1,039,780
    
    
    $
    870,746Denominator for basic weighted average shares
    
    
    8,565,264
    
    
    
    7,762,503
    
    
    
    8,565,264
    
    
    
    7,717,501Dilutive effect of stock options
    
    
    
    
    
    
    149,368
    
    
    
    
    
    
    
    140,645Denominator for diluted weighted average shares
    
    
    8,565,264
    
    
    
    7,911,871
    
    
    
    8,565,264
    
    
    
    7,858,146Basic earnings per common share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.11Diluted earnings per common share
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.11
 15




---



##### 



5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,708,710Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,967,976Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,194,086Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,561,707Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,814,323Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,187,089Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,805,476Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,888,697Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    895,149Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,775,796Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,765,498Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,646,471Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,393,389May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,708,968May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,905,061Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,354,393Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,660,913Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,520,157Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    14,788,459Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,982,100Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,131,413Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,131,413Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,131,413Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    6,882,202Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,564,284Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,246,882Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,883,905Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    2,983,000Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,138,495Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    14,034,779Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    26,803,837May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,917,071Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,355,190Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,594,754Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,182,690Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,552,142Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,552,142Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,552,141Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    6,954,695Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    7,067,940Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    13,918,092Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,180,626May-07
    
    Tewksbury, Massachusetts
    
    
    102,200
    
    
    Industrial
    
    
    10,258,087Total real estate, net
    
    
    5,277,899
    
    
    
    
    $
    280,541,611
  June 30, 2007
    
    
    December 31, 2006Real estate:Land
    
    $
    41,124,295
    
    
    $
    33,764,113Building
    
    
    244,730,814
    
    
    
    204,115,481Tenant improvements
    
    
    6,633,963
    
    
    
    5,833,948Accumulated depreciation
    
    
    (11,947,461
    )
    
    
    (8,595,419
    )Real estate, net
    
    $
    280,541,611
    
    
    $
    235,118,123
  16




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    PriceMason, Ohio
    
    $
    797,274
    
    
    $
    5,959,167
    
    
    $
    296,277
    
    
    $
    
    
    
    $
    144,703
    
    
    $
    683,471
    
    
    $
    7,880,892Raleigh, North Carolina
    
    
    1,605,551
    
    
    
    5,464,586
    
    
    
    48,767
    
    
    
    142,209
    
    
    
    64,110
    
    
    
    478,083
    
    
    
    7,803,306Tulsa, Oklahoma
    
    
    
    
    
    
    13,858,489
    
    
    
    198,738
    
    
    
    437,117
    
    
    
    587,605
    
    
    
    723,168
    
    
    
    15,805,117Hialeah, Florida
    
    
    3,562,455
    
    
    
    6,619,258
    
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    104,508
    
    
    
    10,287,038Tewksbury, Massachusetts
    
    
    1,394,902
    
    
    
    8,637,183
    
    
    
    256,233
    
    
    
    421,446
    
    
    
    865
    
    
    
    535,416
    
    
    
    11,246,045$
    7,360,182
    
    
    $
    40,538,683
    
    
    $
    800,015
    
    
    $
    1,000,772
    
    
    $
    798,100
    
    
    $
    2,524,646
    
    
    $
    53,022,398
   17




---



##### 



Year
    
    Lease Payments2007
    
    $
    14,651,8282008
    
    
    29,726,3232009
    
    
    29,128,8772010
    
    
    28,036,3732011
    
    
    25,943,457Thereafter
    
    
    111,538,328
  6. Discontinued Operations
   For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenue
    
    $
    
    
    
    $
    157,112
    
    
    $
    
    
    
    $
    311,523Operating (income) expense
    
    
    (1,503
    )
    
    
    2,803
    
    
    
    (5,504
    )
    
    
    15,894Taxes & licenses
    
    
    
    
    
    
    53
    
    
    
    78,667
    
    
    
    3,419Interest expense
    
    
    
    
    
    
    66,281
    
    
    
    
    
    
    
    130,657Depreciation expense
    
    
    
    
    
    
    16,760
    
    
    
    
    
    
    
    52,300Realized and unrealized gain (loss) on
foregin currency transactions
    
    
    56
    
    
    
    (211,772
    )
    
    
    63
    
    
    
    (199,972
    )(Loss) income from discontinued operations
    
    $
    (1,447
    )
    
    $
    (140,557
    )
    
    $
    73,226
    
    
    $
    (90,719
    )
 7. Mortgage Note Receivable
  18




---



##### 



8. Mortgage Notes Payable
  Principal Balance OutstandingDate of Issuance
    
    Principalof Note
    
    Maturity Date
    
    
    Interest Rate
    
    
    June 30, 2007
    
    
    December 31, 20063/16/2005
    
    
    4/1/2030
    
    
    
    6.3300
    %
    
    $
    3,031,487
    
    
    $
    3,060,0938/25/2005
    
    
    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
    %
    
    
    9,548,743
    
    
    
    9,620,0502/21/2006
    
    
    6/30/2014
    
    
    
    5.2000
    %
    
    
    19,941,278
    
    
    
    20,104,7163/29/2006
    
    
    4/1/2016
    
    
    
    5.9200
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    5/5/2016
    
    
    
    6.5800
    %
    
    
    14,631,859
    
    
    
    14,753,57911/22/2006
    
    
    12/1/2016
    
    
    
    5.7600
    %
    
    
    14,309,000
    
    
    
    14,309,00012/22/2006
    
    
    1/1/2017
    
    
    
    5.7900
    %
    
    
    21,846,000
    
    
    
    21,846,0002/8/2007
    
    
    3/1/2017
    
    
    
    6.0000
    %
    
    
    13,775,000
    
    
    
    6/5/2007
    
    
    6/8/2017
    
    
    
    6.1100
    %
    
    
    14,240,000
    
    
    
    $
    182,124,367
    
    
    $
    154,494,438
   Scheduled principalYear
    
    payments2007
    
    $
    483,1422008
    
    
    1,371,5582009
    
    
    2,017,7302010
    
    
    2,137,2202011
    
    
    2,407,408Thereafter
    
    
    173,707,309$
    182,124,367
  19




---



##### 



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, 2006
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (3,201,322
    )
    
    $
    (15,226,196
    )
    
    $
    152,224,176Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400,142
    
    
    
    
    
    
    
    400,142Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,213,865
    )
    
    
    (8,213,865
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,086,654
    
    
    
    3,086,654Balance at June 30, 2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,801,180
    )
    
    $
    (20,353,407
    )
    
    $
    147,497,107
    20




---



##### 



10. Segment Information
  As of and for the three months ended June 30, 2007
    
    
    As of and for the six months ended June 30, 2007Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    7,826,790
    
    
    $
    252,778
    
    
    $
    
    
    
    $
    8,079,568
    
    
    $
    14,960,561
    
    
    $
    502,778
    
    
    $
    
    
    
    $
    15,463,339Operating expenses
    
    
    (5,473,745
    )
    
    
    
    
    
    
    (1,177,608
    )
    
    
    (6,651,353
    )
    
    
    (10,536,802
    )
    
    
    
    
    
    
    (2,340,505
    )
    
    
    (12,877,307
    )Other income
    
    
    
    
    
    
    
    
    
    
    129,544
    
    
    
    129,544
    
    
    
    
    
    
    
    
    
    
    
    427,396
    
    
    
    427,396Discontinued operations
    
    
    (1,447
    )
    
    
    
    
    
    
    
    
    
    
    (1,447
    )
    
    
    73,226
    
    
    
    
    
    
    
    
    
    
    
    73,226Net income (loss)
    
    $
    2,351,598
    
    
    $
    252,778
    
    
    $
    (1,048,064
    )
    
    $
    1,556,312
    
    
    $
    4,496,985
    
    
    $
    502,778
    
    
    $
    (1,913,109
    )
    
    $
    3,086,654Total Assets
    
    $
    313,272,218
    
    
    $
    10,000,000
    
    
    $
    15,874,221
    
    
    $
    339,146,439
    
    
    $
    313,272,218
    
    
    $
    10,000,000
    
    
    $
    15,874,221
    
    
    $
    339,146,439
 As of and for the three months ended June 30, 2006
    
    
    As of and for the six months ended June 30, 2006Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    6,071,628
    
    
    $
    558,434
    
    
    $
    
    
    
    $
    6,630,062
    
    
    $
    10,944,326
    
    
    $
    1,111,346
    
    
    $
    
    
    
    $
    12,055,672Operating expenses
    
    
    (4,336,472
    )
    
    
    
    
    
    
    (1,343,314
    )
    
    
    (5,679,786
    )
    
    
    (7,885,296
    )
    
    
    
    
    
    
    (2,436,060
    )
    
    
    (10,321,356
    )Other income
    
    
    
    
    
    
    
    
    
    
    43,046
    
    
    
    43,046
    
    
    
    
    
    
    
    
    
    
    
    55,968
    
    
    
    55,968Discontinued operations
    
    
    (140,557
    )
    
    
    
    
    
    
    
    
    
    
    (140,557
    )
    
    
    (90,719
    )
    
    
    
    
    
    
    
    
    
    
    (90,719
    )Net income (loss)
    
    $
    1,594,599
    
    
    $
    558,434
    
    
    $
    (1,300,268
    )
    
    $
    852,765
    
    
    $
    2,968,311
    
    
    $
    1,111,346
    
    
    $
    (2,380,092
    )
    
    $
    1,699,565Total Assets
    
    $
    254,177,059
    
    
    $
    21,048,213
    
    
    $
    6,685,499
    
    
    $
    281,910,771
    
    
    $
    254,177,059
    
    
    $
    21,048,213
    
    
    $
    6,685,499
    
    
    $
    281,910,771
  11. Line of Credit
  21




---



##### 



12. Pro Forma Financial Information
  For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating Data:Total operating revenue
    
    $
    8,193,693
    
    
    $
    7,876,944
    
    
    $
    16,347,028
    
    
    $
    14,507,720Total operating expenses
    
    
    (3,990,249
    )
    
    
    (3,982,370
    )
    
    
    (7,960,304
    )
    
    
    (7,414,399
    )Other expense
    
    
    (2,573,068
    )
    
    
    (2,112,922
    )
    
    
    (4,789,677
    )
    
    
    (3,718,568
    )Income from continuing operations
    
    $
    1,630,376
    
    
    $
    1,781,652
    
    
    $
    3,597,047
    
    
    $
    3,374,753Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (484,375
    )
    
    
    (2,046,874
    )
    
    
    (828,819
    )Net income available to common stockholders
    
    $
    606,939
    
    
    $
    1,297,277
    
    
    $
    1,550,173
    
    
    $
    2,545,934Share and Per Share Data:Basic net income
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.33Diluted net income
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.32Weighted average shares outstanding-basic
    
    
    8,565,264
    
    
    
    7,762,503
    
    
    
    8,565,264
    
    
    
    7,717,501Weighted average shares outstanding-diluted
    
    
    8,565,264
    
    
    
    7,911,871
    
    
    
    8,565,264
    
    
    
    7,858,146
  13. Subsequent Events
   22




---



##### 



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. Such factors include,
among others: (1) general volatility of the capital markets and the market price of our securities;
(2) risks associated with negotiation and consummation of pending and future transactions; (3) the
loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker,
or George Stelljes III; (4) changes in our business strategy; (5) 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; (6) changes in our industry, interest
rates, exchange rates or the general economy; (7) the degree and nature of our competition; and (7)
those factors listed under the caption Risk Factors of the Annual Report on Form 10-K as filed
with the Securities and Exchange Commission, (the SEC), on February 27, 2007, and the Quarterly
Report on Form 10-Q as filed with the SEC on May 1, 2007. We caution readers not to place undue
reliance on any such forward-looking statements, which are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date of this Form 10-Q
 OVERVIEW
 Our Investment Strategy
  23




---



##### 



Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
    Investment Advisory and Administration Agreements
   24




---



##### 



Management services and fees under the Initial Advisory Agreement
   Management services and fees under the Amended Advisory Agreement
   25




---



##### 



Administration Agreement
  Critical Accounting Policies
  Recently Issued Accounting Pronouncements
   .
 26




---



##### 



Results of Operations
  A comparison of our operating results for the three and six months ended June 30, 2007 and 2006 is
below
 For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    7,732,322
    
    
    $
    6,027,830
    
    
    $
    1,704,492
    
    
    
    28
    %
    
    $
    14,810,358
    
    
    $
    10,894,906
    
    
    $
    3,915,452
    
    
    
    36
    %Interest income from mortgage notes receivable
    
    
    252,778
    
    
    
    558,434
    
    
    
    (305,656
    )
    
    
    -55
    %
    
    
    502,778
    
    
    
    1,111,346
    
    
    
    (608,568
    )
    
    
    -55
    %Tenant recovery revenue
    
    
    94,468
    
    
    
    43,798
    
    
    
    50,670
    
    
    
    116
    %
    
    
    150,203
    
    
    
    49,420
    
    
    
    100,783
    
    
    
    204
    %Total operating revenues
    
    
    8,079,568
    
    
    
    6,630,062
    
    
    
    1,449,506
    
    
    
    22
    %
    
    
    15,463,339
    
    
    
    12,055,672
    
    
    
    3,407,667
    
    
    
    28
    %Operating expensesDepreciation and amortization
    
    
    2,636,154
    
    
    
    2,064,312
    
    
    
    571,842
    
    
    
    28
    %
    
    
    5,053,966
    
    
    
    3,863,519
    
    
    
    1,190,447
    
    
    
    31
    %Base management fee
    
    
    471,091
    
    
    
    719,392
    
    
    
    (248,301
    )
    
    
    -35
    %
    
    
    953,135
    
    
    
    1,372,134
    
    
    
    (418,999
    )
    
    
    -31
    %Administration fee
    
    
    210,126
    
    
    
    
    
    
    
    210,126
    
    
    
    100
    %
    
    
    417,144
    
    
    
    
    
    
    
    417,144
    
    
    
    100
    %Incentive fee
    
    
    633,805
    
    
    
    
    
    
    
    633,805
    
    
    
    100
    %
    
    
    1,219,573
    
    
    
    
    
    
    
    1,219,573
    
    
    
    100
    %Professional fees
    
    
    174,677
    
    
    
    232,960
    
    
    
    (58,283
    )
    
    
    -25
    %
    
    
    324,108
    
    
    
    431,418
    
    
    
    (107,310
    )
    
    
    -25
    %Taxes and licenses
    
    
    50,178
    
    
    
    39,069
    
    
    
    11,109
    
    
    
    28
    %
    
    
    65,185
    
    
    
    89,963
    
    
    
    (24,778
    )
    
    
    -28
    %Insurance
    
    
    114,556
    
    
    
    102,845
    
    
    
    11,711
    
    
    
    11
    %
    
    
    260,808
    
    
    
    185,842
    
    
    
    74,966
    
    
    
    40
    %General and administrative
    
    
    133,406
    
    
    
    95,602
    
    
    
    37,804
    
    
    
    40
    %
    
    
    245,308
    
    
    
    143,420
    
    
    
    101,888
    
    
    
    71
    %Directors fees
    
    
    54,250
    
    
    
    27,500
    
    
    
    26,750
    
    
    
    97
    %
    
    
    108,500
    
    
    
    61,000
    
    
    
    47,500
    
    
    
    78
    %Stockholder related expense
    
    
    75,361
    
    
    
    183,596
    
    
    
    (108,235
    )
    
    
    -59
    %
    
    
    174,978
    
    
    
    248,065
    
    
    
    (73,087
    )
    
    
    -29
    %Asset retirement obligation expense
    
    
    28,942
    
    
    
    24,940
    
    
    
    4,002
    
    
    
    16
    %
    
    
    57,102
    
    
    
    71,641
    
    
    
    (14,539
    )
    
    
    -20
    %Stock option compensation expense
    
    
    
    
    
    
    33,602
    
    
    
    (33,602
    )
    
    
    -100
    %
    
    
    
    
    
    
    79,818
    
    
    
    (79,818
    )
    
    
    -100
    %Total operating expenses before credit from Adviser
    
    
    4,582,546
    
    
    
    3,523,818
    
    
    
    1,058,728
    
    
    
    30
    %
    
    
    8,879,807
    
    
    
    6,546,820
    
    
    
    2,332,987
    
    
    
    36
    %Credit to incentive fee
    
    
    (633,805
    )
    
    
    
    
    
    
    (633,805
    )
    
    
    100
    %
    
    
    (1,219,573
    )
    
    
    
    
    
    
    (1,219,573
    )
    
    
    100
    %Total operating expenses
    
    
    3,948,741
    
    
    
    3,523,818
    
    
    
    424,923
    
    
    
    12
    %
    
    
    7,660,234
    
    
    
    6,546,820
    
    
    
    1,113,414
    
    
    
    17
    %Other income (expense)Interest income from temporary investments
    
    
    63,269
    
    
    
    4,057
    
    
    
    59,212
    
    
    
    1460
    %
    
    
    292,285
    
    
    
    11,431
    
    
    
    280,854
    
    
    
    2457
    %Interest income  employee loans
    
    
    56,458
    
    
    
    28,589
    
    
    
    27,869
    
    
    
    97
    %
    
    
    116,880
    
    
    
    34,137
    
    
    
    82,743
    
    
    
    242
    %Other income
    
    
    9,817
    
    
    
    10,400
    
    
    
    (583
    )
    
    
    -6
    %
    
    
    18,231
    
    
    
    10,400
    
    
    
    7,831
    
    
    
    75
    %Interest expense
    
    
    (2,702,612
    )
    
    
    (2,155,968
    )
    
    
    (546,644
    )
    
    
    25
    %
    
    
    (5,217,073
    )
    
    
    (3,774,536
    )
    
    
    (1,442,537
    )
    
    
    38
    %Total other expense
    
    
    (2,573,068
    )
    
    
    (2,112,922
    )
    
    
    (460,146
    )
    
    
    22
    %
    
    
    (4,789,677
    )
    
    
    (3,718,568
    )
    
    
    (1,071,109
    )
    
    
    29
    %Income from continuing operations
    
    
    1,557,759
    
    
    
    993,322
    
    
    
    564,437
    
    
    
    57
    %
    
    
    3,013,428
    
    
    
    1,790,284
    
    
    
    1,223,144
    
    
    
    68
    %Discontinued operationsIncome from discontinued operations
    
    
    (1,503
    )
    
    
    71,215
    
    
    
    (72,718
    )
    
    
    -102
    %
    
    
    (5,504
    )
    
    
    109,253
    
    
    
    (114,757
    )
    
    
    -105
    %Net realized loss from foreign currency transactions
    
    
    56
    
    
    
    167
    
    
    
    (111
    )
    
    
    -66
    %
    
    
    63
    
    
    
    (649
    )
    
    
    712
    
    
    
    110
    %Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    (211,939
    )
    
    
    211,939
    
    
    
    -100
    %
    
    
    
    
    
    
    (199,323
    )
    
    
    199,323
    
    
    
    100
    %Taxes on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    78,667
    
    
    
    
    
    
    
    78,667
    
    
    
    100
    %Total discontinued operations
    
    
    (1,447
    )
    
    
    (140,557
    )
    
    
    139,110
    
    
    
    -99
    %
    
    
    73,226
    
    
    
    (90,719
    )
    
    
    163,945
    
    
    
    -181
    %Net income
    
    
    1,556,312
    
    
    
    852,765
    
    
    
    703,547
    
    
    
    83
    %
    
    
    3,086,654
    
    
    
    1,699,565
    
    
    
    1,387,089
    
    
    
    82
    %Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (484,375
    )
    
    
    (539,062
    )
    
    
    111
    %
    
    
    (2,046,874
    )
    
    
    (828,819
    )
    
    
    (1,218,055
    )
    
    
    147
    %Net income available to common stockholders
    
    $
    532,875
    
    
    $
    368,390
    
    
    $
    164,485
    
    
    
    45
    %
    
    $
    1,039,780
    
    
    $
    870,746
    
    
    $
    169,034
    
    
    
    19
    %
 27




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##### 



Operating Revenues
    Operating Expenses
  Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
   28




---



##### 



Other Income and Expense
     29




---



##### 



Discontinued Operations
  Net income available to common stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
 Results of Operations
 Investing Activities
 Recent Events
 Financing Activities
  30




---



##### 



Future Capital Needs
   Line of Credit
  Mortgage Notes Payable
   31




---



##### 



Contractual Obligations
  Payments Due by PeriodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-Term Debt Obligations (1)
    
    $
    182,124,367
    
    
    $
    1,146,779
    
    
    $
    3,810,207
    
    
    $
    4,768,406
    
    
    $
    172,398,975Interest on Long-Term Debt Obligations (2)
    
    
    88,876,848
    
    
    
    10,622,129
    
    
    
    20,913,480
    
    
    
    20,444,308
    
    
    
    36,896,931Purchase Obligations (3)
    
    
    12,600,000
    
    
    
    12,600,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    283,601,215
    
    
    $
    24,368,908
    
    
    $
    24,723,687
    
    
    $
    25,212,714
    
    
    $
    209,295,906
 
 (1)
    
    Long-term debt obligations represent both borrowings under our line of credit and mortgage
notes payble that were outstanding as of June 30, 2007. The line of credit matures in December
2009.(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)
    
    The purchase obligations reflected in the above table represents commitments outstanding at
June 30, 2007 to purchase real estate, of which $6.8 million closed in July 2007. Funds from Operations
     32




---



##### 



For the three months ended June 30,
    
    
    For the six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    1,556,312
    
    
    $
    852,765
    
    
    $
    3,086,654
    
    
    $
    1,699,565Less: Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (484,375
    )
    
    
    (2,046,874
    )
    
    
    (828,819
    )Net income available to common stockholders
    
    $
    532,875
    
    
    $
    368,390
    
    
    $
    1,039,780
    
    
    $
    870,746Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    2,636,154
    
    
    
    2,081,072
    
    
    
    5,053,966
    
    
    
    3,915,819FFO available to common stockholders
    
    $
    3,169,029
    
    
    $
    2,449,462
    
    
    $
    6,093,746
    
    
    $
    4,786,565Weighted average shares outstanding  basic
    
    
    8,565,264
    
    
    
    7,762,503
    
    
    
    8,565,264
    
    
    
    7,717,501Weighted average shares outstanding  diluted
    
    
    8,565,264
    
    
    
    7,911,871
    
    
    
    8,565,264
    
    
    
    7,858,146Basic net income per weighted average common share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.11Diluted net income per weighted average common
share
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.11Basic FFO per weighted average common share
    
    $
    0.37
    
    
    $
    0.32
    
    
    $
    0.71
    
    
    $
    0.62Diluted FFO per weighted average common share
    
    $
    0.37
    
    
    $
    0.31
    
    
    $
    0.71
    
    
    $
    0.61
 33




---



##### 



Item 3. Quantitative and Qualitative Disclosure about Market Risk
       34




---



##### 



Item 4. Controls and Procedures
     35




---



##### 



PART
II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Nominee
    
    Shares Voted For
    
    Authority WithheldDavid Gladstone
    
    
    8,096,266
    
    
    
    38,007Paul W. Adelgren
    
    
    8,096,309
    
    
    
    37,964John H. Outland
    
    
    8,097,779
    
    
    
    36,494
  
  
 Item 5. Other Information
  36




---



##### 



Item 6. Exhibits
 Exhibit Index
 Exhibit
    
    Description of Document3.1
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S
-11 (File No. 333-106024), filed September 11, 2003.3.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003.3.2.1
    
    First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363), filed
July 10, 2007.3.3
    
    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 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 October 19, 2006.11
    
    Computation of Per Share Earnings from Operations (included in the
notes to the unaudited financial statements contained in this
report).31.1
    
    Certification of Chief Executive Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002.
 37




---



##### 



Gladstone Commercial CorporationDate: July 31, 2007
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 38