##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 001-33097
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND
    
    02-0681276(State or other jurisdiction of incorporation or 
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 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



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




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##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30, 2010
    
    
    December 31, 2009ASSETSReal estate, at cost
    
    $
    391,502,046
    
    
    $
    390,753,892Less: accumulated depreciation
    
    
    41,268,421
    
    
    
    34,111,952Total real estate, net
    
    
    350,233,625
    
    
    
    356,641,940Lease intangibles, net
    
    
    25,348,564
    
    
    
    28,177,461Mortgage note receivable
    
    
    
    
    
    
    10,000,000Cash and cash equivalents
    
    
    3,230,471
    
    
    
    3,096,598Restricted cash
    
    
    2,606,065
    
    
    
    2,633,538Funds held in escrow
    
    
    2,714,936
    
    
    
    2,487,680Deferred rent receivable
    
    
    10,020,329
    
    
    
    8,975,196Deferred financing costs, net
    
    
    2,553,660
    
    
    
    3,136,055Other assets
    
    
    864,726
    
    
    
    1,716,905TOTAL ASSETS
    
    $
    397,572,376
    
    
    $
    416,865,373LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    250,781,740
    
    
    $
    252,761,651Borrowings under line of credit
    
    
    22,700,000
    
    
    
    33,200,000Deferred rent liability
    
    
    2,507,408
    
    
    
    3,213,195Asset retirement obligation liability
    
    
    2,414,048
    
    
    
    2,305,644Accounts payable and accrued expenses
    
    
    1,662,045
    
    
    
    2,086,741Due to Adviser
    
    
    1,720,203
    
    
    
    1,213,640Other liabilities
    
    
    3,726,929
    
    
    
    3,633,960Total Liabilities
    
    
    285,512,373
    
    
    
    298,414,831STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation
preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding at September 30, 2010 and December 31, 2009,
respectively
    
    
    2,150
    
    
    
    2,150Senior common stock, $0.001 par value; 7,500,0000 shares
authorized and
51,737 and 0 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively
    
    
    52
    
    
    
    Common stock, $0.001 par value, 40,200,000 shares authorized and
8,605,264 and 8,563,264 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
    
    
    8,605
    
    
    
    8,563Additional paid in capital
    
    
    172,023,461
    
    
    
    170,622,581Notes receivable  employees
    
    
    (1,516,016
    )
    
    
    (2,304,999
    )Distributions in excess of accumulated earnings
    
    
    (58,458,249
    )
    
    
    (49,877,753
    )Total Stockholders Equity
    
    
    112,060,003
    
    
    
    118,450,542TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    397,572,376
    
    
    $
    416,865,373
  3




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##### Table of Contents



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating revenuesRental income
    
    $
    10,209,211
    
    
    $
    10,383,002
    
    
    $
    31,033,797
    
    
    $
    31,150,423Interest income from mortgage note receivable
    
    
    43,750
    
    
    
    191,667
    
    
    
    420,833
    
    
    
    568,750Tenant recovery revenue
    
    
    81,452
    
    
    
    82,425
    
    
    
    246,147
    
    
    
    247,593Total operating revenues
    
    
    10,334,413
    
    
    
    10,657,094
    
    
    
    31,700,777
    
    
    
    31,966,766Operating expensesDepreciation and amortization
    
    
    3,280,048
    
    
    
    3,284,723
    
    
    
    9,992,411
    
    
    
    9,875,156Property operating expenses
    
    
    262,686
    
    
    
    219,537
    
    
    
    738,327
    
    
    
    687,129Due diligence expense
    
    
    
    
    
    
    
    
    
    
    20,788
    
    
    
    16,433Base management fee
    
    
    298,393
    
    
    
    342,743
    
    
    
    907,098
    
    
    
    1,073,041Incentive fee
    
    
    1,070,145
    
    
    
    835,003
    
    
    
    2,745,601
    
    
    
    2,433,945Administration fee
    
    
    356,856
    
    
    
    293,075
    
    
    
    807,859
    
    
    
    774,636Professional fees
    
    
    1,822,683
    
    
    
    105,368
    
    
    
    2,200,094
    
    
    
    466,529Insurance expense
    
    
    53,219
    
    
    
    50,757
    
    
    
    166,056
    
    
    
    147,561Directors fees
    
    
    54,533
    
    
    
    49,459
    
    
    
    152,976
    
    
    
    149,547General and administrative
    
    
    83,656
    
    
    
    88,617
    
    
    
    317,669
    
    
    
    356,894Total operating expenses before credit
from Adviser
    
    
    7,282,219
    
    
    
    5,269,282
    
    
    
    18,048,879
    
    
    
    15,980,871Credit to incentive fee
    
    
    
    
    
    
    (200,264
    )
    
    
    (56,073
    )
    
    
    (564,968
    )Total operating expenses
    
    
    7,282,219
    
    
    
    5,069,018
    
    
    
    17,992,806
    
    
    
    15,415,903Other income (expense)Interest income from temporary investments
    
    
    114
    
    
    
    524
    
    
    
    492
    
    
    
    17,989Interest income  employee loans
    
    
    36,557
    
    
    
    48,130
    
    
    
    122,231
    
    
    
    145,878Other income
    
    
    3,309,887
    
    
    
    
    
    
    
    3,318,216
    
    
    
    11,320Interest expense
    
    
    (4,370,500
    )
    
    
    (4,521,848
    )
    
    
    (13,027,872
    )
    
    
    (13,443,405
    )Total other expense
    
    
    (1,023,942
    )
    
    
    (4,473,194
    )
    
    
    (9,586,933
    )
    
    
    (13,268,218
    )Income from continuing operations
    
    
    2,028,252
    
    
    
    1,114,882
    
    
    
    4,121,038
    
    
    
    3,282,645Discontinued operationsIncome from discontinued operations
    
    
    
    
    
    
    4,070
    
    
    
    
    
    
    
    42,823Gain on sale of real estate
    
    
    
    
    
    
    160,038
    
    
    
    
    
    
    
    160,038Total discontinued operations
    
    
    
    
    
    
    164,108
    
    
    
    
    
    
    
    202,861Net income
    
    
    2,028,252
    
    
    
    1,278,990
    
    
    
    4,121,038
    
    
    
    3,485,506Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (3,070,313
    )
    
    
    (3,070,312
    )Distributions attributable to senior common stock
    
    
    (4,282
    )
    
    
    
    
    
    
    (4,657
    )
    
    
    Net income available to common stockholders
    
    $
    1,000,533
    
    
    $
    255,553
    
    
    $
    1,046,068
    
    
    $
    415,194Earnings per weighted average share of common
stock  basicIncome from continuing operations (net of
distributions attributable to preferred
stock)
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.03Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.02Net income available to common stockholders
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05Earnings per weighted average share of common
stock  dilutedIncome from continuing operations (net of
dividends attributable to preferred stock)
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.03Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.02Net income available to common stockholders
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05Weighted average shares of common stock
outstanding  basic
    
    
    8,562,777
    
    
    
    8,563,264
    
    
    
    8,555,517
    
    
    
    8,563,264Weighted average shares of common stock
outstanding  diluted
    
    
    8,577,173
    
    
    
    8,563,264
    
    
    
    8,560,734
    
    
    
    8,563,264Earnings per weighted average share of
senior common stock
    
    $
    0.26
    
    
    $
    0.00
    
    
    $
    0.79
    
    
    $
    0.00Weighted average shares of senior common
stock outstanding  basic
    
    
    16,286
    
    
    
    0
    
    
    
    5,903
    
    
    
    0
  4




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GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the nine months ended September 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    4,121,038
    
    
    $
    3,485,506Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    9,992,411
    
    
    
    9,885,571Amortization of deferred financing costs
    
    
    836,884
    
    
    
    1,144,991Amortization of deferred rent asset and liability, net
    
    
    (515,665
    )
    
    
    (399,052
    )Asset retirement obligation expense, including discontinued operations
    
    
    108,404
    
    
    
    106,902Gain on sale of real estate
    
    
    
    
    
    
    (160,038
    )Decrease (increase) in other assets
    
    
    358,279
    
    
    
    (413,620
    )Increase in deferred rent receivable
    
    
    (1,235,255
    )
    
    
    (1,564,298
    )Increase in accounts payable, accrued expenses, and amount due Adviser
    
    
    80,899
    
    
    
    124,761Increase (decrease) in other liabilities
    
    
    120,442
    
    
    
    (81,672
    )Net cash provided by operating activities
    
    
    13,867,437
    
    
    
    12,129,051Cash flows from investing activities:Real estate investments
    
    
    (748,155
    )
    
    
    (85,534
    )Leasing commissions paid
    
    
    (7,044
    )
    
    
    (298,270
    )Proceeds from sale of real estate
    
    
    
    
    
    
    1,089,031Principal repayments on mortgage notes receivable
    
    
    10,000,000
    
    
    
    Receipts from lenders for reserves held in escrow
    
    
    1,081,987
    
    
    
    853,264Payments to lenders for reserves held in escrow
    
    
    (1,309,245
    )
    
    
    (1,399,699
    )Decrease (increase) in restricted cash
    
    
    27,473
    
    
    
    (371,538
    )Deposits refunded
    
    
    250,000
    
    
    
    200,000Net cash provided by (used in) investing activities
    
    
    9,295,016
    
    
    
    (12,746
    )Cash flows from financing activities:Proceeds from issuance of common and senior common stock
    
    
    1,792,923
    
    
    
    Offering costs
    
    
    (149,801
    )
    
    
    Principal repayments on mortgage notes payable
    
    
    (1,979,911
    )
    
    
    (1,738,262
    )Principal repayments on employee notes receivable
    
    
    788,983
    
    
    
    44,285Borrowings from line of credit
    
    
    22,400,000
    
    
    
    49,700,000Repayments on line of credit
    
    
    (32,900,000
    )
    
    
    (29,400,000
    )Repayment of short-term loan
    
    
    
    
    
    
    (20,000,000
    )Receipts from tenants for reserves
    
    
    1,615,313
    
    
    
    2,541,657Payments to tenants from reserves
    
    
    (1,216,487
    )
    
    
    (2,197,535
    )(Decrease) increase in security deposits
    
    
    (426,299
    )
    
    
    27,415Payments for deferred financing costs
    
    
    (254,489
    )
    
    
    (106,054
    )Distributions paid for common and preferred
    
    
    (12,698,812
    )
    
    
    (12,703,991
    )Net cash used in financing activities
    
    
    (23,028,580
    )
    
    
    (13,832,485
    )Net increase (decrease) in cash and cash equivalents
    
    
    133,873
    
    
    
    (1,716,180
    )Cash and cash equivalents, beginning of period
    
    
    3,096,598
    
    
    
    4,503,578Cash and cash equivalents, end of period
    
    $
    3,230,471
    
    
    $
    2,787,398NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONForfeiture of common stock in satisfaction of employee note receivable
    
    $
    243,900
    
    
    $
    Senior common dividend issued in the dividend reinvestment program
    
    $
    1,753
    
    
    $
    
  5




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##### Table of Contents



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




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##### Table of Contents



Investments in Real Estate
       7




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##### Table of Contents



Impairment
 Investments in Real Estate
   Provision for Loan Losses
  8




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##### Table of Contents



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




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##### Table of Contents



Income Taxes
   Segment Information
  10




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##### Table of Contents



Asset Retirement Obligations
  Stock Issuance Costs
  Other Income
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
  11




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##### Table of Contents



Use of Estimates
  2. Related-Party Transactions
  Advisory Agreement
   12




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##### Table of Contents



Administration Agreement
  3. Earnings per Share of Common Stock
  For the three months ended September 30,
    
    
    For the nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Calculation of basic earnings per share of common stock:Net income available to common stockholders
    
    $
    1,000,533
    
    
    $
    255,553
    
    
    $
    1,046,068
    
    
    $
    415,194Denominator for basic weighted average shares of common stock
    
    
    8,562,777
    
    
    
    8,563,264
    
    
    
    8,555,517
    
    
    
    8,563,264Basic earnings per share of common stock
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05Calculation of diluted earnings per share of comon stock:Net income available to common stockholders
    
    $
    1,000,533
    
    
    $
    255,553
    
    
    $
    1,046,068
    
    
    $
    415,194Add: Income impact of assumed conversion of senior common stock
    
    
    4,282
    
    
    
    
    
    
    
    4,657
    
    
    
    Net income available to common stockholders plus assumed conversions
    
    $
    1,004,815
    
    
    $
    255,553
    
    
    $
    1,050,725
    
    
    $
    415,194Denominator for basic weighted average shares of common stock
    
    
    8,562,777
    
    
    
    8,563,264
    
    
    
    8,555,517
    
    
    
    8,563,264Effect of convertible senior common stock
    
    
    14,396
    
    
    
    
    
    
    
    5,217
    
    
    
    Denominator for diluted weighted average shares of common stock
    
    
    8,577,173
    
    
    
    8,563,264
    
    
    
    8,560,734
    
    
    
    8,563,264Diluted earnings per share of common stock
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05
 4. Real Estate and Intangible Assets
 Real Estate
  September 30, 2010
    
    
    December 31, 2009Real estate:Land
    
    $
    55,025,707
    (1)
    
    $
    55,025,707
    (1)Building and
improvements
    
    
    326,655,633
    
    
    
    325,907,479Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated
depreciation
    
    
    (41,268,421
    )
    
    
    (34,111,952
    )Real estate, net
    
    $
    350,233,625
    
    
    $
    356,641,940
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million. 13




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##### Table of Contents



TenantYear
    

    Lease PaymentsThree months ending December 31, 2010
    

    $
    9,696,4242011
    

    
    38,589,6742012
    

    
    38,698,2892013
    

    
    33,356,0722014
    

    
    29,132,2462015
    

    
    25,044,969Thereafter
    

    
    145,637,227
    Intangible Assets
  September 30, 2010
    
    
    December 31, 2009Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,935,445
    
    
    $
    (7,975,361
    )
    
    $
    15,935,445
    
    
    $
    (6,741,817
    )Leasing costs
    
    
    10,060,049
    
    
    
    (4,473,392
    )
    
    
    10,053,004
    
    
    
    (3,832,623
    )Customer relationships
    
    
    17,136,501
    
    
    
    (5,334,678
    )
    
    
    17,136,501
    
    
    
    (4,373,049
    )$
    43,131,995
    
    
    $
    (17,783,431
    )
    
    $
    43,124,950
    
    
    $
    (14,947,489
    )
 14




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##### Table of Contents



EstimatedYear
    

    Amortization ExpenseThree months ending December 31, 2010
    

    $
    1,680,6532011
    

    
    5,672,0162012
    

    
    4,628,0332013
    

    
    2,361,4732014
    

    
    2,088,3202015
    

    
    1,718,027Thereafter
    

    
    7,200,042
 5. Real Estate Held for Sale and Discontinued Operations
   For the three months ended September 30,
    
    
    For the nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating revenue
    
    $
    
    
    
    $
    4,452
    
    
    $
    
    
    
    $
    56,202Operating expense
    
    
    
    
    
    
    (382
    )
    
    
    
    
    
    
    (13,379
    )Income from
discontinued
operations
    
    $
    
    
    
    $
    4,070
    
    
    $
    
    
    
    $
    42,823
 6. Mortgage Note Receivable
  15




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7. Mortgage Notes Payable and Line of Credit
  Principal Balance OutstandingDate of Issuance/
    
    
    Principal Maturity
    
    
    Stated Interest Rate atAssumption
    
    
    Date
    
    

September
30, 2010 (1)
    
    
    September 30, 2010
    
    
    December 31, 2009Fixed-Rate Mortgage Notes
Payable:03/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    $
    2,718,623
    
    
    $
    2,884,90808/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    20,854,306
    
    
    
    21,093,91709/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,255,763
    
    
    
    12,389,64712/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    18,796,119
    
    
    
    18,991,93402/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    9,064,449
    
    
    
    9,188,04402/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    18,837,012
    
    
    
    19,116,27703/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    13,794,558
    
    
    
    14,009,91811/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    14,001,666
    
    
    
    14,136,92112/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,400,768
    
    
    
    21,605,10602/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,00006/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,00009/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,309,798
    
    
    
    4,361,14410/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,521,814
    
    
    
    15,657,33008/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,196,864
    
    
    
    6,296,50509/15/08
    
    
    
    10/01/11
    (2)
    
    
    4.58
    %
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,781,740
    
    
    
    252,761,651Variable-Rate Line of Credit:
    
    
    12/29/06
    
    
    
    12/29/10
    
    
    LIBOR + 2.15%
    
    
    22,700,000
    
    
    
    33,200,000Total Mortgage Notes Payable and Line of Credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    273,481,740
    
    
    $
    285,961,651
 
 (1)
    
    The weighted average interest rate on all debt outstanding at September
30, 2010 was approximately 5.35%.(2)
    
    This note has three annual extension options, which gives the Company the
ability to extend the term of the note until October 1, 2013. The first of these options was
exercised on September 30, 2010, and the new interest rate on the note is 4.58%. Mortgage Notes Payable
   16




---



##### Table of Contents



Scheduled principalYear
    

    paymentsThree months ending December 31, 2010
    

    $
    770,9992011
    

    
    51,069,825
    (1)2012
    

    
    3,378,8302013
    

    
    12,174,9982014
    

    
    20,779,9132015
    

    
    54,527,909Thereafter
    

    
    108,079,266$
    250,781,740
 
 (1)
    
    The $48.0 million mortgage note issued in September 2008 was extended September
30, 2010 for one year. The Company expects to exercise additional options to extend the maturity
date until October 2013. Line of Credit
  17




---



##### Table of Contents



8. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalPreferred
    
    
    Senior Common
    
    
    Common
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December
31, 2009
    
    $
    2,150
    
    
    $
    
    
    
    $
    8,563
    
    
    $
    170,622,581
    
    
    $
    (2,304,999
    )
    
    $
    (49,877,753
    )
    
    $
    118,450,542Issuance of senior
common stock and
common stock
    
    
    
    
    
    
    52
    
    
    
    60
    
    
    
    1,644,762
    
    
    
    
    
    
    
    
    
    
    
    1,644,874Repayment of
principal on notes
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    788,983
    
    
    
    
    
    
    
    788,983Distributions
declared to common,
senior common and
preferred
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,701,534
    )
    
    
    (12,701,534
    )Forfeiture of
common stock in
satisfaction of
employee note
receivable
(1)
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (243,882
    )
    
    
    
    
    
    
    
    
    
    
    (243,900
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,121,038
    
    
    
    4,121,038Balance at
September 30, 2010
    
    $
    2,150
    
    
    $
    52
    
    
    $
    8,605
    
    
    $
    172,023,461
    
    
    $
    (1,516,016
    )
    
    $
    (58,458,249
    )
    
    $
    112,060,003
 
 (1)
    
    On February 1, 2010, the maturity date of an employee stock option loan to a former
employee of the Adviser was extended until August 2010. In connection with the extension of the
loan, the recourse provision of the loan was removed, and the former employee was granted the
option to either repay the principal and interest in full or return the 18,000 shares pledged
against the loan to the Company in full satisfaction of the loan. On March 8, 2010, the date that
the market price of the pledged shares equaled the balance of the outstanding loan, the pledged
shares were returned to the Company, and the loan was deemed paid in full. 18




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##### Table of Contents



Outstanding Balance
    
    
    Outstanding BalanceAmount of
    
    
    of Employee Loans
    
    
    of Employee LoansNumber of Options
    
    
    Strike Price of
    
    
    Promissory Note
    
    
    at September 30,
    
    
    at December 31,
    
    
    Maturity Date of
    
    
    Interest Rate onDate Issued
    
    Exercised
    
    
    Options Exercised
    
    
    Issued to Employees
    
    
    2010
    
    
    2009
    
    
    Note
    
    
    NoteSep 2004
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    20,253
    
    
    $
    358,405
    
    
    Sep 2013
    
    
    5.00
    %Apr 2006
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    4,563
    
    
    
    199,994
    
    
    Apr 2015
    
    
    7.77
    %May 2006
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    
    842,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    
    241,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    
    
    
    
    30,000
    
    
    May 2016
    
    
    7.87
    %Oct 2006
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    
    
    
    
    193,200
    
    
    Oct 2015
    
    
    8.17
    %Nov 2006
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    
    375,000
    
    
    Nov 2015
    
    
    8.15
    %145,422
    
    
    
    
    
    
    $
    2,321,594
    
    
    $
    1,516,016
    
    
    $
    2,304,999
     19




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##### Table of Contents



9. Segment Information
   As of and for the three months ended September 30, 2010
    
    
    As of and for the nine months ended September 30, 2010Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    Total
    
    
    Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,290,663
    
    
    $
    43,750
    
    
    $
    
    
    
    $
    10,334,413
    
    
    $
    31,279,944
    
    
    $
    420,833
    
    
    $
    
    
    
    $
    31,700,777Operating expenses
    
    
    (3,576,499
    )
    
    
    
    
    
    
    (3,705,720
    )      (1)
    
    
    (7,282,219
    )
    
    
    (10,859,930
    )
    
    
    
    
    
    
    (7,132,876
    )      (1)
    
    
    (17,992,806
    )Other expense
    
    
    (4,141,538
    )
    
    
    
    
    
    
    3,117,596
    (2)
    
    
    (1,023,942
    )
    
    
    (12,277,195
    )
    
    
    
    
    
    
    2,690,262
    (2)
    
    
    (9,586,933
    )Net income
    
    $
    2,572,626
    
    
    $
    43,750
    
    
    $
    (588,124
    )
    
    $
    2,028,252
    
    
    $
    8,142,819
    
    
    $
    420,833
    
    
    $
    (4,442,614
    )
    
    $
    4,121,038Total Assets
    
    $
    391,142,468
    
    
    $
    
    
    
    $
    6,429,908
    
    
    $
    397,572,376
    
    
    $
    391,142,468
    
    
    $
    
    
    
    $
    6,429,908
    
    
    $
    397,572,376
 As of and for the three months ended September 30, 2009
    
    
    As of and for the nine months ended September 30, 2009Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    Total
    
    
    Real Estate Leasing
    
    
    Real Estate Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,465,427
    
    
    $
    191,667
    
    
    $
    
    
    
    $
    10,657,094
    
    
    $
    31,398,016
    
    
    $
    568,750
    
    
    $
    
    
    
    $
    31,966,766Operating expenses
    
    
    (3,540,320
    )
    
    
    
    
    
    
    (1,528,698
    )      (1)
    
    
    (5,069,018
    )
    
    
    (10,685,159
    )
    
    
    
    
    
    
    (4,730,744
    )      (1)
    
    
    (15,415,903
    )Other expense
    
    
    (4,146,341
    )
    
    
    
    
    
    
    (326,853
    )      (2)
    
    
    (4,473,194
    )
    
    
    (12,343,000
    )
    
    
    
    
    
    
    (925,218
    )      (2)
    
    
    (13,268,218
    )Discontinued
operations
    
    
    164,108
    
    
    
    
    
    
    
    
    
    
    
    164,108
    
    
    
    202,861
    
    
    
    
    
    
    
    
    
    
    
    202,861Net income
    
    $
    2,942,874
    
    
    $
    191,667
    
    
    $
    (1,855,551
    )
    
    $
    1,278,990
    
    
    $
    8,572,718
    
    
    $
    568,750
    
    
    $
    (5,655,962
    )
    
    $
    3,485,506Total Assets
    
    $
    398,456,908
    
    
    $
    10,062,500
    
    
    $
    9,762,275
    
    
    $
    418,281,683
    
    
    $
    398,456,908
    
    
    $
    10,062,500
    
    
    $
    9,762,275
    
    
    $
    418,281,683
 
 (1)
    
    Operating expenses includes base management fees, incentive fees, administration fees,
professional fees, insurance expense, directors fees, stockholder-related expenses and general and
administrative expenses that are not practicable to allocate to either operating segment; thus,
these expenses are included in the Other column.(2)
    
    Other expense includes interest expense on the Companys line of credit and short-term loan of
$228,962 and $750,677 (which is net of interest income on temporary investments, interest income on
employee loans and other income) for the three and nine months ended September 30, 2010 and
$375,507 and $1,100,405 for the three and nine months ended September 30, 2009, respectively. It
is not practicable to allocate the interest expense from the line of credit or the short-term loan
to either operating segment; thus, the interest is included in the Other column. 10. Subsequent Events
   20




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##### Table of Contents



21




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These
statements may relate to, among other things, future events or our future performance or financial
condition. In some cases, you can identify forward-looking statements by terminology such as may,
might, believe, will, provided, anticipate, future, could, growth, plan,
intend, expect, should, would, if, seek, possible, potential, likely or the
negative of such terms or comparable terminology. These forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our business, financial
condition, liquidity, results of operations, funds from operations or prospects to be materially
different from any future business, financial condition, liquidity, results of operations, funds
from operations or prospects expressed or implied by such forward-looking statements. We caution
readers not to place undue reliance on any such forward-looking statements, which are made pursuant
to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, after the date of this
Quarterly Report on Form 10-Q, or Report.
 All references to we, our, us and the Company in this Report mean Gladstone Commercial
Corporation and its consolidated subsidiaries, except where it is made clear that the term means
only Gladstone Commercial Corporation.
 OVERVIEW
 General
  Business Environment
  22




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##### Table of Contents



Recent Events
 Financing Activities:
   Debt Activities:
  Equity Activities:
  23




---



##### Table of Contents



Leasing Activities:
      24




---



##### Table of Contents



Diversity of Our Portfolio
  September 30, 2010
    
    
    September 30, 2009Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeElectronics
    
    $
    4,624,341
    
    
    
    14.9
    %
    
    $
    4,624,341
    
    
    
    14.8
    %Healthcare, Education & Childcare
    
    
    4,609,061
    
    
    
    14.9
    %
    
    
    4,609,061
    
    
    
    14.8
    %Telecommunications
    
    
    4,085,525
    
    
    
    13.3
    %
    
    
    4,085,192
    
    
    
    12.9
    %Diversified/Conglomerate Manufacturing
    
    
    2,748,512
    
    
    
    8.9
    %
    
    
    2,748,515
    
    
    
    8.8
    %Chemicals, Plastics & Rubber
    
    
    2,347,601
    
    
    
    7.6
    %
    
    
    2,395,845
    
    
    
    7.7
    %Machinery
    
    
    1,791,467
    
    
    
    5.8
    %
    
    
    1,791,453
    
    
    
    5.8
    %Containers, Packaging & Glass
    
    
    1,747,976
    
    
    
    5.6
    %
    
    
    1,747,626
    
    
    
    5.6
    %Beverage, Food & Tobacco
    
    
    1,641,588
    
    
    
    5.2
    %
    
    
    1,641,563
    
    
    
    5.3
    %Printing & Publishing
    
    
    1,641,559
    
    
    
    5.3
    %
    
    
    1,639,363
    
    
    
    5.3
    %Buildings and Real Estate
    
    
    1,548,889
    
    
    
    5.0
    %
    
    
    1,519,251
    
    
    
    4.9
    %Oil & Gas
    
    
    964,852
    
    
    
    3.1
    %
    
    
    855,391
    
    
    
    2.7
    %Personal & Non-Durable Consumer Products
    
    
    926,123
    
    
    
    2.9
    %
    
    
    1,016,041
    
    
    
    3.3
    %Automobile
    
    
    874,990
    
    
    
    2.8
    %
    
    
    874,990
    
    
    
    2.8
    %Personal, Food & Miscellaneous Services
    
    
    431,255
    
    
    
    1.4
    %
    
    
    431,255
    
    
    
    1.4
    %Insurance
    
    
    421,672
    
    
    
    1.4
    %
    
    
    542,150
    
    
    
    1.7
    %Home & Office Furnishings
    
    
    397,307
    
    
    
    1.3
    %
    
    
    397,307
    
    
    
    1.3
    %Diversified/Conglomerate Services
    
    
    231,079
    
    
    
    0.6
    %
    
    
    231,079
    
    
    
    0.9
    %$
    31,033,797
    
    
    
    100.0
    %
    
    $
    31,150,423
    
    
    
    100.0
    %
 Lease Expirations
  Rental Revenue forthe Nine MonthYear of Lease
    
    
    
    
    
    Number of
    
    
    Period Ended
    
    
    Annualized Base
    
    
    % of AnnualizedExpiration
    
    Square Feet
    
    
    Leases (1)
    
    
    September 30, 2010
    
    
    Rental Revenue
    
    
    Base Rent2010
    
    
    192,213
    
    
    
    2
    
    
    $
    601,509
    
    
    $
    802,012
    
    
    
    1.9
    %2011
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %2012
    
    
    479,982
    
    
    
    3
    
    
    
    3,322,203
    
    
    
    4,429,604
    
    
    
    10.7
    %2013
    
    
    438,422
    
    
    
    6
    
    
    
    3,505,028
    
    
    
    4,673,371
    
    
    
    11.3
    %2014
    
    
    614,132
    
    
    
    5
    
    
    
    2,311,650
    
    
    
    3,082,200
    
    
    
    7.5
    %2015
    
    
    896,876
    
    
    
    8
    
    
    
    5,130,057
    
    
    
    6,840,076
    
    
    
    16.5
    %2016
    
    
    898,257
    
    
    
    5
    
    
    
    3,170,982
    
    
    
    4,227,976
    
    
    
    10.2
    %2017
    
    
    102,200
    
    
    
    1
    
    
    
    692,194
    
    
    
    922,925
    
    
    
    2.2
    %2018
    
    
    59,894
    
    
    
    1
    
    
    
    201,031
    
    
    
    268,041
    
    
    
    0.7
    %2019+
    
    
    2,622,183
    
    
    
    19
    
    
    
    12,099,143
    
    
    
    16,132,192
    
    
    
    39.0
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    31,033,797
    
    
    $
    41,378,397
    
    
    
    100
    %
 
 (1)
    
    Two leases expired during the third quarter of 2010, neither of these properties have yet to be re-leased.  25




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##### Table of Contents



Rental Revenue forthe Nine MonthNumber of Leases
    
    
    Period Ended
    
    
    Annualized Base
    
    
    % of AnnualizedState
    
    Square Feet
    
    
    (1)
    
    
    September 30, 2010
    
    
    Rental Revenue
    
    
    Base RentOhio
    
    
    1,185,411
    
    
    
    11
    
    
    $
    5,579,522
    
    
    $
    7,439,363
    
    
    
    18.0
    %Minnesota
    
    
    547,800
    
    
    
    3
    
    
    
    3,908,626
    
    
    
    5,211,501
    
    
    
    12.6
    %North Carolina
    
    
    695,876
    
    
    
    6
    
    
    
    2,850,788
    
    
    
    3,801,051
    
    
    
    9.2
    %Pennsylvania
    
    
    623,375
    
    
    
    4
    
    
    
    2,282,267
    
    
    
    3,043,023
    
    
    
    7.4
    %Texas
    
    
    188,178
    
    
    
    4
    
    
    
    1,766,905
    
    
    
    2,355,873
    
    
    
    5.7
    %Michigan
    
    
    596,104
    
    
    
    2
    
    
    
    1,671,482
    
    
    
    2,228,643
    
    
    
    5.4
    %Illinois
    
    
    164,131
    
    
    
    2
    
    
    
    1,639,514
    
    
    
    2,186,019
    
    
    
    5.3
    %Massachusetts
    
    
    338,508
    
    
    
    3
    
    
    
    1,540,650
    
    
    
    2,054,200
    
    
    
    5.0
    %All Other States
    
    
    1,964,776
    
    
    
    15
    
    
    
    9,794,043
    
    
    
    13,058,724
    
    
    
    31.4
    %Total
    
    
    6,304,159
    
    
    
    50
    
    
    $
    31,033,797
    
    
    $
    41,378,397
    
    
    
    100
    %
 
 (1)
    
    Two leases expired during the third quarter of 2010, neither of these properties have yet to be re-leased. Our Adviser and Administrator
   Advisory and Administration Agreements
    26




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##### Table of Contents



Management Services and Fees under the Advisory Agreement
   
    
    no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized);
    
    100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
 Quarterly Incentive Fee Based on FFO
 
 
   27




---



##### Table of Contents



Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
    
    
    The amount of purchase price allocated to the various tangible and intangible assets on
our balance sheet;
 28




---



##### Table of Contents




    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus, depending on the amounts allocated between
land and other depreciable assets, changes in the purchase price allocation among our
assets could have a material impact on our FFO, a metric which is used by many REIT
investors to evaluate our operating performance; and
    
    The period of time over which tangible and intangible assets are depreciated varies
greatly, and thus, changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years. Also, we
depreciate our buildings over 39 years, but do not depreciate our land. These differences
in timing could have a material impact on our results of operations.
 Asset Impairment Evaluation
  Overview Business Environment
 Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  29




---



##### Table of Contents



Results of Operations
  A comparison of our operating results for the three and nine months ended September 30, 2010 and
2009 is below
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,209,211
    
    
    $
    10,383,002
    
    
    $
    (173,791
    )
    
    
    -2
    %
    
    $
    31,033,797
    
    
    $
    31,150,423
    
    
    $
    (116,626
    )
    
    
    0
    %Interest income from mortgage note receivable
    
    
    43,750
    
    
    
    191,667
    
    
    
    (147,917
    )
    
    
    -77
    %
    
    
    420,833
    
    
    
    568,750
    
    
    
    (147,917
    )
    
    
    -26
    %Tenant recovery revenue
    
    
    81,452
    
    
    
    82,425
    
    
    
    (973
    )
    
    
    -1
    %
    
    
    246,147
    
    
    
    247,593
    
    
    
    (1,446
    )
    
    
    -1
    %Total operating revenues
    
    
    10,334,413
    
    
    
    10,657,094
    
    
    
    (322,681
    )
    
    
    -3
    %
    
    
    31,700,777
    
    
    
    31,966,766
    
    
    
    (265,989
    )
    
    
    -1
    %Operating expensesDepreciation and amortization
    
    
    3,280,048
    
    
    
    3,284,723
    
    
    
    (4,675
    )
    
    
    0
    %
    
    
    9,992,411
    
    
    
    9,875,156
    
    
    
    117,255
    
    
    
    1
    %Property operating expenses
    
    
    262,686
    
    
    
    219,537
    
    
    
    43,149
    
    
    
    20
    %
    
    
    738,327
    
    
    
    687,129
    
    
    
    51,198
    
    
    
    7
    %Due diligence expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    20,788
    
    
    
    16,433
    
    
    
    4,355
    
    
    
    27
    %Base management fee
    
    
    298,393
    
    
    
    342,743
    
    
    
    (44,350
    )
    
    
    -13
    %
    
    
    907,098
    
    
    
    1,073,041
    
    
    
    (165,943
    )
    
    
    -15
    %Incentive fee
    
    
    1,070,145
    
    
    
    835,003
    
    
    
    235,142
    
    
    
    28
    %
    
    
    2,745,601
    
    
    
    2,433,945
    
    
    
    311,656
    
    
    
    13
    %Administration fee
    
    
    356,856
    
    
    
    293,075
    
    
    
    63,781
    
    
    
    22
    %
    
    
    807,859
    
    
    
    774,636
    
    
    
    33,223
    
    
    
    4
    %Professional fees
    
    
    1,822,683
    
    
    
    105,368
    
    
    
    1,717,315
    
    
    
    1630
    %
    
    
    2,200,094
    
    
    
    466,529
    
    
    
    1,733,565
    
    
    
    372
    %Insurance expense
    
    
    53,219
    
    
    
    50,757
    
    
    
    2,462
    
    
    
    5
    %
    
    
    166,056
    
    
    
    147,561
    
    
    
    18,495
    
    
    
    13
    %Directors fees
    
    
    54,533
    
    
    
    49,459
    
    
    
    5,074
    
    
    
    10
    %
    
    
    152,976
    
    
    
    149,547
    
    
    
    3,429
    
    
    
    2
    %General and administrative
    
    
    83,656
    
    
    
    88,617
    
    
    
    (4,961
    )
    
    
    -6
    %
    
    
    317,669
    
    
    
    356,894
    
    
    
    (39,225
    )
    
    
    -11
    %Total operating expenses before credit from Adviser
    
    
    7,282,219
    
    
    
    5,269,282
    
    
    
    2,012,937
    
    
    
    38
    %
    
    
    18,048,879
    
    
    
    15,980,871
    
    
    
    2,068,008
    
    
    
    13
    %Credit to incentive fee
    
    
    
    
    
    
    (200,264
    )
    
    
    200,264
    
    
    
    -100
    %
    
    
    (56,073
    )
    
    
    (564,968
    )
    
    
    508,895
    
    
    
    -90
    %Total operating expenses
    
    
    7,282,219
    
    
    
    5,069,018
    
    
    
    2,213,201
    
    
    
    44
    %
    
    
    17,992,806
    
    
    
    15,415,903
    
    
    
    2,576,903
    
    
    
    17
    %Other income (expense)Interest income from temporary investments
    
    
    114
    
    
    
    524
    
    
    
    (410
    )
    
    
    -78
    %
    
    
    492
    
    
    
    17,989
    
    
    
    (17,497
    )
    
    
    -97
    %Interest income  employee loans
    
    
    36,557
    
    
    
    48,130
    
    
    
    (11,573
    )
    
    
    -24
    %
    
    
    122,231
    
    
    
    145,878
    
    
    
    (23,647
    )
    
    
    -16
    %Other income
    
    
    3,309,887
    
    
    
    
    
    
    
    3,309,887
    
    
    
    100
    %
    
    
    3,318,216
    
    
    
    11,320
    
    
    
    3,306,896
    
    
    
    29213
    %Interest expense
    
    
    (4,370,500
    )
    
    
    (4,521,848
    )
    
    
    151,348
    
    
    
    -3
    %
    
    
    (13,027,872
    )
    
    
    (13,443,405
    )
    
    
    415,533
    
    
    
    -3
    %Total other expense
    
    
    (1,023,942
    )
    
    
    (4,473,194
    )
    
    
    3,449,252
    
    
    
    -77
    %
    
    
    (9,586,933
    )
    
    
    (13,268,218
    )
    
    
    3,681,285
    
    
    
    -28
    %Income from continuing operations
    
    
    2,028,252
    
    
    
    1,114,882
    
    
    
    913,370
    
    
    
    82
    %
    
    
    4,121,038
    
    
    
    3,282,645
    
    
    
    838,393
    
    
    
    26
    %Discontinued operationsIncome from discontinued operations
    
    
    
    
    
    
    4,070
    
    
    
    (4,070
    )
    
    
    -100
    %
    
    
    
    
    
    
    42,823
    
    
    
    (42,823
    )
    
    
    -100
    %Gain on sale of real estate
    
    
    
    
    
    
    160,038
    
    
    
    (160,038
    )
    
    
    -100
    %
    
    
    
    
    
    
    160,038
    
    
    
    (160,038
    )
    
    
    -100
    %Total discontinued operations
    
    
    
    
    
    
    164,108
    
    
    
    (164,108
    )
    
    
    -100
    %
    
    
    
    
    
    
    202,861
    
    
    
    (202,861
    )
    
    
    -100
    %Net income
    
    
    2,028,252
    
    
    
    1,278,990
    
    
    
    749,262
    
    
    
    59
    %
    
    
    4,121,038
    
    
    
    3,485,506
    
    
    
    635,532
    
    
    
    18
    %2,028,252
    
    
    
    
    
    
    
    2,028,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %
    
    
    (3,070,313
    )
    
    
    (3,070,312
    )
    
    
    (1
    )
    
    
    0
    %Distributions attributable to senior common stock
    
    
    (4,282
    )
    
    
    
    
    
    
    (4,282
    )
    
    
    100
    %
    
    
    (4,657
    )
    
    
    
    
    
    
    (4,657
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    1,000,533
    
    
    $
    255,553
    
    
    $
    744,980
    
    
    
    292
    %
    
    $
    1,046,068
    
    
    $
    415,194
    
    
    $
    630,874
    
    
    
    152
    %
 30




---



##### Table of Contents



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




---



##### Table of Contents



Advisory and Administration Agreements.
 Overview  Recent Events-Equity Activities
    Other Income and Expense
     Discontinued Operations
  32




---



##### Table of Contents



Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Future Capital Needs
  Overview Business Environment
 Overview-Recent Events
  Liquidity and Capital Resources  Line of Credit
 33




---



##### Table of Contents



Operating Activities
  Investing Activities
 Overview Business Environment
 Financing Activities
  Mortgage Notes Payable
  34




---



##### Table of Contents



Overview-Recent Events
 Line of Credit
     35




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    
    273,481,740
    
    
    $
    25,576,756
    
    
    $
    54,934,712
    
    
    $
    61,176,862
    
    
    $
    131,793,410Interest on Debt Obligations (2)
    
    
    67,401,962
    
    
    
    14,149,668
    
    
    
    23,988,675
    
    
    
    20,790,742
    
    
    
    8,472,877Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    Operating Lease Obligations (4)
    
    
    1,639,484
    
    
    
    152,510
    
    
    
    305,020
    
    
    
    305,020
    
    
    
    876,934Total
    
    $
    342,823,186
    
    
    $
    39,878,934
    
    
    $
    79,528,407
    
    
    $
    82,272,624
    
    
    $
    141,143,221
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, which represents $22.7
million of the debt obligation due in less than 1 year, and mortgage notes payable that were
outstanding as of September 30, 2010. The line of credit matures in December 2010.The $48.0 million mortgage note issued in September 2008 matures in October 2011, and we expect
to exercise each of our options to extend the maturity date until October 2013.(2)
    
    Interest on debt obligations includes estimated interest on our borrowings under our line of
credit.The balance and interest rate on our line of credit is variable; thus, the amount of interest
calculated for purposes of this table was based upon rates and
balances as of September 30, 2010.(3)
    
    Capital lease obligations represent the obligation to purchase the land held under the ground
lease on our property located in Fridley, Minnesota.(4)
    
    Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma
property. The lease expires in June 2021. Off-Balance Sheet Arrangements
  36




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##### Table of Contents



Funds from Operations
     37




---



##### Table of Contents



For the three months ended September 30,
    
    

For the nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    2,028,252
    
    
    $
    1,278,990
    
    
    $
    4,121,038
    
    
    $
    3,485,506Less: Distributions attributable to preferred and
senior common stock
    
    
    (1,027,719
    )
    
    
    (1,023,437
    )
    
    
    (3,074,970
    )
    
    
    (3,070,312
    )Net income available to common stockholders
    
    
    1,000,533
    
    
    
    255,553
    
    
    
    1,046,068
    
    
    
    415,194Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    3,280,048
    
    
    
    3,284,723
    
    
    
    9,992,411
    
    
    
    9,885,571Less: Gain on sale of real estate
    
    
    
    
    
    
    (160,038
    )
    
    
    
    
    
    
    (160,038
    )FFO available to common stockholders
    
    $
    4,280,581
    
    
    $
    3,380,238
    
    
    $
    11,038,479
    
    
    $
    10,140,727Weighted average shares outstanding  basic
    
    
    8,562,777
    
    
    
    8,563,264
    
    
    
    8,555,517
    
    
    
    8,563,264Weighted average shares outstanding  diluted
    
    
    8,577,173
    
    
    
    8,563,264
    
    
    
    8,560,734
    
    
    
    8,563,264Basic net income per weighted average share of common
stock
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05Diluted net income per weighted average share of
common stock
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.05Basic FFO per weighted average share of common stock
    
    $
    0.50
    
    
    $
    0.39
    
    
    $
    1.29
    
    
    $
    1.18Diluted FFO per weighted average share of common stock
    
    $
    0.50
    
    
    $
    0.39
    
    
    $
    1.29
    
    
    $
    1.18Distributions declared per share of common stock
    
    $
    0.375
    
    
    $
    0.375
    
    
    $
    1.125
    
    
    $
    1.125Percentage of FFO paid per share of common stock
    
    
    75
    %
    
    
    95
    %
    
    
    87
    %
    
    
    95
    %
 38




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    Increase to Rental
    
    
    Increase to
    
    
    Net Decrease toInterest Rate Change
    
    & Interest Income
    
    
    Interest Expense
    
    
    Net Income1% Increase to LIBOR
    
    $
    
    
    
    $
    175,925
    
    
    $
    (175,925
    )2% Increase to LIBOR
    
    
    
    
    
    
    351,850
    
    
    
    (351,850
    )3% Increase to LIBOR
    
    
    896
    
    
    
    527,775
    
    
    
    (526,879
    )
    
 Item 4. Controls and Procedures
   39




---



##### Table of Contents



40




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Failure to replace our existing line of credit would materially and adversely impact our business,
financial condition, liquidity and results of operations.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Removed and Reserved
 
 Item 5. Other Information
  41




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##### Table of Contents



Item 6. Exhibits
  Exhibit Index
 ExhibitNumber
    
    Exhibit Description3.1
    
    Articles of Amendment and Restatement to Articles of
Incorporation, incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-11 (File No.
333-106024), filed June 11, 20033.1.1
    
    Articles 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, 20063.1.2
    
    Articles of Amendment to Articles Supplementary
Establishing and Fixing the Rights and Preferences of the
7.75% Series A Cumulative Redeemable Preferred Stock,
incorporated by reference to Exhibit 99.1 of Form 8-K,
filed on April 13, 20063.1.3
    
    Articles Supplementary Establishing and Fixing the Rights
and Preferences of the 7.5% Series B Cumulative Redeemable
Preferred Stock, incorporated by reference to Exhibit 3.4
of Form 8-A (File No. 000-50363), filed October 19, 20063.1.4
    
    Articles of Amendment to Articles of Amendment and
Restatement of Articles of Incorporation, incorporated by
reference to Exhibit 3.1.1 to the Quarterly Report on Form
10-Q, filed July 30, 20093.1.5
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed March
19, 20103.1.6
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K, filed
September 9, 20103.1.7
    
    Articles Supplementary, incorporated by reference to
Exhibit 3.2 of the Current Report on Form 8-K, filed
September 9, 20103.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024),
filed June 11, 20033.2.1
    
    First Amendment to Bylaws, incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed July
10, 20074.1
    
    Form of Certificate for Common Stock of Gladstone
Commercial Corporation, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-106024), filed August 8, 20034.2
    
    Form of Certificate for 7.75% Series A Cumulative
Redeemable Preferred Stock of Gladstone Commercial
Corporation, incorporated by reference to Exhibit 4.1 of
Form 8-A (File No. 000-50363), filed January 19, 20064.3
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation,
incorporated by reference to Exhibit 4.2 of Form 8-A (File
No. 001-33097), filed October 19, 2006
 42




---



##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.1
    
    First Amended and Restated Agreement of Limited Partnership
of Gladstone Commercial Limited Partnership, incorporated
by reference to Exhibit 10.1 of the Current Report on Form
8-K, filed February 1, 200610.2
    
    Gladstone Commercial Limited Partnership Schedule 4.2(a)(2)
to First Amended and Restated Agreement of Limited
Partnership; Designation of 7.50% Series B Cumulative
Redeemable Preferred Units, incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K, filed
October 25, 200610.3
    
    Amendment to First Amended and Restated Agreement of
Limited Partnership of Gladstone Commercial Limited
Partnership, incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K, filed April 29, 201010.4
    
    Gladstone Commercial Limited Partnership Schedule 4.2(a)(3)
to First Amended and Restated Agreement of Limited
Partnership; Designation of Senior Common Units,
incorporated by reference to Exhibit 10.2 of the Current
Report on Form 8-K, filed April 29, 201011
    
    Computation of Per Share Earnings from Operations (included
in the notes to the unaudited financial statements
contained in this Report.12
    
    Statements re: computation of ratios (filed herewith).31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).31.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002 (filed
herewith).32.1
    
    Certification of Chief Executive Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).32.2
    
    Certification of Chief Financial Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 (furnished
herewith).
 43




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##### Table of Contents



Gladstone Commercial CorporationDate: November 1, 2010
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 44