##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
  MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    02-0681276
(I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102   (703) 287-5800
 þ o
  Large Accelerated Filer o.
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o.
 o þ




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##### 



PAGEPART I FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2005Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005Notes to Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    44




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31, 2006
    
    
    December 31, 2005ASSETSReal estate, net of accumulated depreciation of
$4,562,992 and $3,408,878, respectively
    
    $
    204,739,533
    
    
    $
    161,634,761Lease intangibles, net of accumulated amortization of
$1,902,039 and $1,221,413, respectively
    
    
    22,593,292
    
    
    
    13,947,484Mortgage notes receivable
    
    
    21,000,455
    
    
    
    21,025,815Cash and cash equivalents
    
    
    1,280,038
    
    
    
    1,740,159Restricted cash
    
    
    1,935,741
    
    
    
    1,974,436Funds held in escrow
    
    
    1,730,346
    
    
    
    1,041,292Interest receivable  mortgage note
    
    
    70,586
    
    
    
    70,749Interest receivable  employees
    
    
    5,548
    
    
    
    Deferred rent receivable
    
    
    2,751,382
    
    
    
    2,590,617Deferred financing costs, net of accumulated amortization of
$381,970 and $260,099, respectively
    
    
    2,762,706
    
    
    
    1,811,017Prepaid expenses
    
    
    471,160
    
    
    
    385,043Deposits on real estate
    
    
    200,000
    
    
    
    600,000Accounts receivable
    
    
    266,312
    
    
    
    225,581TOTAL ASSETS
    
    $
    259,807,099
    
    
    $
    207,046,954LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    108,558,267
    
    
    $
    61,558,961Borrowings under line of credit
    
    
    22,260,000
    
    
    
    43,560,000Deferred rent liability
    
    
    3,698,616
    
    
    
    Asset retirement obligation liability
    
    
    1,428,964
    
    
    
    Accounts payable and accrued expenses
    
    
    743,560
    
    
    
    493,002Due to adviser
    
    
    196,148
    
    
    
    164,155Rent received in advance, security deposits and funds held in escrow
    
    
    2,488,362
    
    
    
    2,322,300Total Liabilities
    
    
    139,373,917
    
    
    
    108,098,418STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;
1,150,000 shares authorized and 1,000,000 shares issued and outstanding at
March 31, 2006
    
    
    1,000
    
    
    
    Common stock, $0.001 par value, 18,850,000 shares authorized and
7,672,000 shares issued and outstanding at both December 31, 2005 and
March 31, 2006
    
    
    7,672
    
    
    
    7,672Additional paid in capital
    
    
    129,245,756
    
    
    
    105,502,544Notes receivable  employees
    
    
    (432,282
    )
    
    
    (432,282
    )Distributions in excess of accumulated earnings
    
    
    (8,388,964
    )
    
    
    (6,129,398
    )Total Stockholders Equity
    
    
    120,433,182
    
    
    
    98,948,536TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    259,807,099
    
    
    $
    207,046,954
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Operating revenuesRental income
    
    $
    5,021,485
    
    
    $
    1,847,007Interest income from mortgage notes receivable
    
    
    552,913
    
    
    
    295,583Tenant recovery revenue
    
    
    5,623
    
    
    
    2,043Total operating revenues
    
    
    5,580,021
    
    
    
    2,144,633Operating expensesDepreciation and amortization
    
    
    1,834,740
    
    
    
    537,755Management advisory fee
    
    
    652,742
    
    
    
    471,861Professional fees
    
    
    202,936
    
    
    
    331,244Taxes and licenses
    
    
    54,259
    
    
    
    128,273Insurance
    
    
    82,999
    
    
    
    70,383General and administrative
    
    
    145,958
    
    
    
    132,828Asset retirement obligation expense
    
    
    55,143
    
    
    
    Stock option compensation expense
    
    
    46,216
    
    
    
    Total operating expenses
    
    
    3,074,993
    
    
    
    1,672,344Other income (expense)Interest income from temporary investments
    
    
    7,373
    
    
    
    94,521Interest income  employee loans
    
    
    5,548
    
    
    
    4,685Interest expense
    
    
    (1,682,948
    )
    
    
    (36,219
    )Income before realized and unrealized losses
    
    
    835,001
    
    
    
    535,276Realized and unrealized loss from foreign currencyNet realized loss from foreign currency transactions
    
    
    (816
    )
    
    
    (347
    )Net unrealized gain from foreign currency transactions
    
    
    12,615
    
    
    
    255Total net realized and unrealized gain (loss) from foreign currency
    
    
    11,799
    
    
    
    (92
    )Net income
    
    
    846,800
    
    
    
    535,184Dividends attributable to preferred stock
    
    
    (344,444
    )
    
    
    Net income available to common stockholders
    
    $
    502,356
    
    
    $
    535,184Earnings per weighted average common shareBasic
    
    $
    0.07
    
    
    $
    0.07Diluted
    
    $
    0.06
    
    
    $
    0.07Weighted average shares outstandingBasic
    
    
    7,672,000
    
    
    
    7,667,000Diluted
    
    
    7,821,658
    
    
    
    7,733,335
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Cash flows from operating activities:Net income
    
    $
    846,800
    
    
    $
    535,184Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,834,740
    
    
    
    537,755Amortization of deferred financing costs
    
    
    121,871
    
    
    
    16,246Amortization of deferred rent asset
    
    
    63,374
    
    
    
    6,136Amortization of deferred rent liability
    
    
    (80,290
    )
    
    
    Asset retirement obligation expense
    
    
    55,143
    
    
    
    Stock compensation
    
    
    46,216
    
    
    
    Unrealized gain from foreign currency transactions
    
    
    (12,615
    )
    
    
    (255
    )Changes in assets and liabilities:Decrease (increase) in mortgage interest receivable
    
    
    163
    
    
    
    (6,314
    )(Increase) decrease in employee interest receivable
    
    
    (5,548
    )
    
    
    107Increase in prepaid expenses
    
    
    (86,117
    )
    
    
    (32,341
    )(Increase) decrease in other assets
    
    
    (40,730
    )
    
    
    48,170Increase in deferred rent receivable
    
    
    (224,386
    )
    
    
    (97,244
    )Increase in accounts payable and accrued expenses
    
    
    250,558
    
    
    
    249,075Increase in due to Adviser
    
    
    31,993
    
    
    
    13,367Increase in rent received in advance and security deposits
    
    
    204,757
    
    
    
    75,098Payments to lenders for operating reserves held in escrow
    
    
    (872,926
    )
    
    
    Increase in operating reserves from tenants
    
    
    451,969
    
    
    
    Net cash provided by operating activities
    
    
    2,584,972
    
    
    
    1,344,984Cash flows from investing activities:Real estate investments
    
    
    (18,302,939
    )
    
    
    (12,485,610
    )Decrease in restricted cash
    
    
    38,695
    
    
    
    Receipts from tenants for capital reserves
    
    
    301,808
    
    
    
    Payments to tenants from capital reserves
    
    
    (230,141
    )
    
    
    Payments to lenders for capital reserves held in escrow
    
    
    (414,360
    )
    
    
    Receipts from lenders for capital reserves held in escrow
    
    
    35,901
    
    
    
    Deposits on future acquisitions
    
    
    (350,000
    )
    
    
    (550,000
    )Deposits applied against real estate investments
    
    
    750,000
    
    
    
    350,000Principal repayments on mortgage loans
    
    
    25,360
    
    
    
    25,786Net cash used in investing activities
    
    
    (18,145,676
    )
    
    
    (12,659,824
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    25,000,000
    
    
    
    Offering costs
    
    
    (1,302,006
    )
    
    
    Borrowings under mortgage note payable
    
    
    17,000,000
    
    
    
    3,150,000Principal repayments on mortgage note payable
    
    
    (117,486
    )
    
    
    Borrowings from line of credit
    
    
    35,200,000
    
    
    
    Repayments on line of credit
    
    
    (56,500,000
    )
    
    
    Principal repayments on employee loans
    
    
    
    
    
    
    208Payments for deferred financing costs
    
    
    (1,073,561
    )
    
    
    (629,380
    )Dividends paid for common and preferred
    
    
    (3,106,364
    )
    
    
    (2,300,100
    )Net cash provided by financing activities
    
    
    15,100,583
    
    
    
    220,728Net decrease in cash and cash equivalents
    
    
    (460,121
    )
    
    
    (11,094,112
    )Cash and cash equivalents, beginning of period
    
    
    1,740,159
    
    
    
    29,153,987Cash and cash equivalents, end of period
    
    $
    1,280,038
    
    
    $
    18,059,875Cash paid during period for interest
    
    $
    1,545,821
    
    
    $
    8,862NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    1,373,820
    
    
    $
    NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    30,129,654
    
    
    $
    
  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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##### 



March 31, 2006
    
    
    December 31, 2005Weighted Average
    
    
    
    
    
    
    Weighted AverageLease Intangibles
    
    
    Amortization Period
    
    
    Lease Intangibles
    
    
    Amortization PeriodIn-place leases
    
    $
    10,178,997
    
    
    
    11.46
    
    
    $
    5,625,736
    
    
    
    11.82Leasing costs
    
    
    5,302,506
    
    
    
    10.95
    
    
    
    5,047,033
    
    
    
    11.33Customer relationships
    
    
    9,013,828
    
    
    
    14.79
    
    
    
    4,496,128
    
    
    
    15.43Accumulated amortization
    
    
    (1,902,039
    )
    
    
    
    
    
    
    (1,221,413
    )$
    22,593,292
    
    
    
    12.35
    
    
    $
    13,947,484
    
    
    
    12.69
  Estimated AmortizationYear
    
    Expense2006
    
    $
    2,331,1592007
    
    
    2,772,4882008
    
    
    2,772,4882009
    
    
    2,594,8482010
    
    
    2,499,080
 8




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##### 



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




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##### 



Deferred financing costs
  Revenue recognition
   Stock based compensation
  10




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##### 



Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R). .
 Income taxes
   Segment information
 Disclosures about Segments of an Enterprise and Related Information
 Foreign Currency Transactions
 Foreign Currency
Translation
 11




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##### 



Asset retirement obligations
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
  12




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##### 



For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Allocated payroll and benefits
    
    $
    467,719
    
    
    $
    347,314Allocated overhead expenses
    
    $
    185,023
    
    
    $
    124,547Total management advisory fee
    
    $
    652,742
    
    
    $
    471,861
    13




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##### 



3. Stock Options Effective January 1, 2006, the Company adopted the provisions of FASB Statement
No. 123(R), Share-Based Payment, for its stock-based compensation plans. The
Company previously accounted for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and disclosure requirements established
by SFAS 123, Accounting for Stock-Based Compensation. In this regard, these
options have been granted to individuals who are the Companys officers, and
who would qualify as leased employees under FASB Interpretation No. 44 (FIN
44), Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25. Under APB 25, no expense was recorded in the income statement for the Companys
stock options. The pro forma effects on income for stock options were instead
disclosed in a footnote to the financial statements. Under SFAS 123(R), all
share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as an expense in the income statement
over an employees requisite service period. The Company adopted SFAS 123(R) using the modified prospective method. Under
this transition method, compensation cost recognized during the three months
ended March 31, 2006 includes the cost for all stock-based payments granted
prior to, but not yet vested, as of January 1, 2006. This cost was based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123. For the three months ended March 31, 2006 the Company recorded stock
option compensation expense of $46,216, using an estimated weighted
average fair value of $1.26 using the Black-Scholes option-pricing
model, based on options issued from date of inception forward, and
the following weighted-average assumptions: divided yield of 5.07%,
risk-free interest rate of 2.61%, expected volatility factor of
18.15%, and expected lives of 3 years. The following table illustrates the effect on net income and earnings per share
as if the company had applied the fair-value recognition provisions of SFAS 123
to stock options, stock appreciation rights, performance units and restricted
stock units for periods prior to adoption of SFAS 123(R). For the three monthsended March 31, 2005Net income, as reported
    
    $
    535,184Less:
Stock-based compensation expense
determined using the fair value based method
    
    
    (95,792
    )Net income, pro-forma
    
    $
    439,392Basic, as reported
    
    $
    0.07Basic, pro-forma
    
    $
    0.06Diluted, as reported
    
    $
    0.07Diluted, pro-forma
    
    $
    0.06
 The stock-based compensation expense under the fair value method, as reported
in the above table, was computed using an estimated weighted average fair value
of $1.29 using the Black-Scholes option-pricing model, based on options issued
from date of inception forward, and the following weighted-average assumptions:
dividend yield of 4.99%, risk-free interest rate of 2.54%, expected volatility
factor of 18.40%, and expected lives of 3 years. As of March 31, 2006, there was approximately $61,000 of total unrecognized
compensation cost related to non-vested stock-based compensation awards
granted. That cost is expected to be recognized over the next 1.3 years. 14




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##### 



At March 31, 2006, 916,000 options were outstanding with exercise prices
ranging from $15 to $16.85 with terms of ten years. A summary of the status of the Companys 2003 Equity Incentive Plan for the
three months ended March 31, 2006 is as follows: Weighted AverageShares
    
    
    Exercise PriceOptions
outstanding at December 31, 2005, of which 744,250
shares are exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Options
outstanding at March 31, 2006, of which 744,250
shares are exercisable
    
    
    916,000
    
    
    $
    15.39
 The following table is a summary of all notes issued to employees for the
exercise of stock options: Number of
    
    
    Strike Price of
    
    
    Amount ofOptions
    
    
    Options
    
    
    Promissory
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Note
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    9 years
    
    
    5.0
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    9 years
    
    
    6.0
    %
 These notes were recorded as loans to employees in the equity section of the
accompanying consolidated balance sheets. As of March 31, 2006, approximately
$432,000 of indebtedness was owed by current employees to the Company, and no
current or former directors or executive officers had any loans outstanding. 4. Earnings per Common Share
  For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Net income available to common stockholders
    
    $
    502,356
    
    
    $
    535,184Denominator for basic weighted average shares
    
    
    7,672,000
    
    
    
    7,667,000Dilutive effect of stock options
    
    
    149,658
    
    
    
    66,335Denominator for diluted weighted average shares
    
    
    7,821,658
    
    
    
    7,733,335Basic earnings per common share
    
    $
    0.07
    
    
    $
    0.07Diluted earnings per common share
    
    $
    0.06
    
    
    $
    0.07
 15




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##### 



5. Real Estate
  Square FootageDate Acquired
    
    Location
    
    (unaudited)
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,968,511Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    3,078,010Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,414,213Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,837,611Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,976,182Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,389,350Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,873,216Sep-04
    
    Austin, Texas
    
    
    51,993
    
    
    Flexible Office
    
    
    7,075,067Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    919,418Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,965,661Oct-04
    
    Granby, Quebec
    
    
    99,981
    
    
    Commercial and Manufacturing
    
    
    3,017,470Oct-04
    
    Montreal, Quebec
    
    
    42,490
    
    
    Commercial and Manufacturing
    
    
    1,810,905Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    8,083,146Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,723,352Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,601,497May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    11,036,428May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    4,024,885Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,409,159Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,789,574Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,626,240Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,254,836Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    3,060,466Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,166,732Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,166,732Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,166,732Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    7,092,037Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,719,867Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,862,804Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    6,064,897Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    3,092,996Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,236,717Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    14,205,278Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    27,029,5443,878,161
    
    
    
    
    $
    204,739,533
  March 31, 2006
    
    
    December 31, 2005Real estate:Land
    
    $
    26,411,783
    
    
    $
    20,329,568Building
    
    
    178,132,801
    
    
    
    141,660,553Tenant improvements
    
    
    4,757,941
    
    
    
    3,053,518Accumulated depreciation
    
    
    (4,562,992
    )
    
    
    (3,408,878
    )Real estate, net
    
    $
    204,739,533
    
    
    $
    161,634,761
  16




---



##### 



Tenant
    
    
    Lease
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    Intangibles
    
    
    PriceSouth Hadley, Massachusetts
    
    $
    470,636
    
    
    $
    2,775,163
    
    
    $
    
    
    
    $
    418,699
    
    
    $
    3,664,498Champaign, Illinois
    
    
    3,587,711
    
    
    
    10,428,904
    
    
    
    221,778
    
    
    
    861,237
    
    
    
    15,099,630Roseville, Minnesota
    
    
    2,480,548
    
    
    
    23,498,730
    
    
    
    1,133,284
    
    
    
    3,112,447
    
    
    
    30,225,009$
    6,538,895
    
    
    $
    36,702,797
    
    
    $
    1,355,062
    
    
    $
    4,392,383
    
    
    $
    48,989,137
  Year
    
    Rental Payments2006
    
    $
    16,114,5362007
    
    
    21,776,5702008
    
    
    22,140,5352009
    
    
    21,413,9552010
    
    
    20,547,390Thereafter
    
    
    85,001,572
   17




---



##### 



Location
    
    Real Estate TaxesRaleigh, North Carolina
    
    $
    45,743Canton, Ohio
    
    
    6,374Akron, Ohio
    
    
    133,630Charlotte, North Carolina
    
    
    65,724Canton, North Carolina
    
    
    47,877Snyder Township, Pennsylvania
    
    
    99,222Lexington, North Carolina
    
    
    21,102Austin, Texas
    
    
    167,499Norfolk, Virginia
    
    
    11,570Mt. Pocono, Pennsylvania
    
    
    115,232Granby, Quebec
    
    
    37,885Montreal, Quebec
    
    
    81,502San Antonio, Texas
    
    
    159,444Columbus, Ohio
    
    
    37,610Big Flats, New York
    
    
    24,594Wichita, Kansas
    
    
    5,222Arlington, Texas
    
    
    66,312Dayton, Ohio
    
    
    56,108Eatontown, New Jersey
    
    
    53,240Franklin Township, New Jersey
    
    
    140,280Duncan, South Carolina
    
    
    319,757Hazelwood, Missouri
    
    
    75,876Angola, Indiana
    
    
    12,934Angola, Indiana
    
    
    12,934Rock Falls, Illinois
    
    
    17,723Newburyport, Massachusetts
    
    
    27,663Clintonville, Wisconsin
    
    
    130,757Maple Heights, Ohio
    
    
    336,163Richmond, Virginia
    
    
    39,024Toledo, Ohio
    
    
    48,824South Hadley, Massachusetts
    
    
    30,911Champaign, Illinois
    
    
    242,264Roseville, Minnesota
    
    
    721,384$
    3,392,384
 6. Mortgage Notes Receivable
   18




---



##### 



7. Mortgage Notes Payable
  Balance OutstandingDate of Issuance
    
    
    Principal Maturityof Note
    
    
    Date
    
    
    
    Interest Rate
    
    March 31, 2006
    
    
    December 31, 20053/16/2005
    
    
    
    4/1/2030
    
    
    
    6.3300
    %
    
    $
    3,099,488
    
    
    $
    3,113,1027/19/2005
    
    
    
    8/1/2015
    
    
    
    5.2200
    %
    
    
    4,608,079
    
    
    
    4,644,8598/25/2005
    
    
    
    9/1/2015
    
    
    
    5.3310
    %
    
    
    21,757,000
    
    
    
    21,757,0009/12/2005
    
    
    
    9/1/2015
    
    
    
    5.2100
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    12/8/2015
    
    
    
    5.7107
    %
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    
    12/1/2013
    
    
    
    5.9100
    %
    
    
    9,717,698
    
    
    
    2/21/2006
    
    
    
    6/1/2014
    
    
    
    5.2000
    %
    
    
    20,332,002
    
    
    
    3/29/2006
    
    
    
    4/1/2016
    
    
    
    5.9200
    %
    
    
    17,000,000
    
    
    
    $
    108,558,267
    
    
    $
    61,558,961
     19




---



##### 



8. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    Stockholders'Stock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    7,672
    
    
    $
    
    
    
    $
    105,502,544
    
    
    $
    (432,282
    )
    
    $
    (6,129,398
    )
    
    $
    98,948,536Issuance of Common Stock
Under Stock Option Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Preferred Stock
    
    
    
    
    
    
    1,000
    
    
    
    24,999,000
    
    
    
    
    
    
    
    
    
    
    
    25,000,000Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (1,302,006
    )
    
    
    
    
    
    
    
    
    
    
    (1,302,006
    )Stock Options
    
    
    
    
    
    
    
    
    
    
    46,216
    
    
    
    
    
    
    
    
    
    
    
    46,216Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,106,364
    )
    
    
    (3,106,364
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846,800
    
    
    
    846,800Balance at March 31, 2006
    
    $
    7,672
    
    
    $
    1,000
    
    
    $
    129,245,754
    
    
    $
    (432,282
    )
    
    $
    (8,388,962
    )
    
    $
    120,433,182
   9. Segment Information
  20




---



##### 



As of and for the three months ended March 31, 2006Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    5,027,108
    
    
    $
    552,913
    
    
    $
    
    
    
    $
    5,580,021Operating expenses
    
    
    (1,944,142
    )
    
    
    
    
    
    
    (1,084,635
    )
    
    
    (3,028,777
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (1,716,243
    )
    
    
    (1,716,243
    )Net realized and unrealized loss from foreign currency
    
    
    11,799
    
    
    
    
    
    
    
    
    
    
    
    11,799Net income (loss)
    
    $
    3,094,765
    
    
    $
    552,913
    
    
    $
    (2,800,878
    )
    
    $
    846,800Total Assets
    
    $
    232,323,606
    
    
    $
    21,071,041
    
    
    $
    6,412,452
    
    
    $
    259,807,099
 As of and for the three months ended March 31, 2005Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    1,849,050
    
    
    $
    295,583
    
    
    $
    
    
    
    $
    2,144,633Operating expenses
    
    
    (666,028
    )
    
    
    
    
    
    
    (1,006,316
    )
    
    
    (1,672,344
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    62,987
    
    
    
    62,987Net realized and unrealized loss from foreign currency
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    (92
    )Net income (loss)
    
    $
    1,182,930
    
    
    $
    295,583
    
    
    $
    (943,329
    )
    
    $
    535,184Total Assets
    
    $
    76,146,541
    
    
    $
    11,153,040
    
    
    $
    19,691,498
    
    
    $
    106,991,079
 10. Line of Credit
  21




---



##### 



11. Pro Forma Financial Information
  For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Operating Data:Total operating revenue
    
    $
    6,238,795
    
    
    $
    3,294,351Total operating expenses
    
    
    (3,578,845
    )
    
    
    (2,549,430
    )Other income (expense)
    
    
    (1,670,027
    )
    
    
    62,987Income before realized and unrealized losses
    
    
    989,923
    
    
    
    807,908Realized and unrealized loss from foreign currency
    
    
    11,799
    
    
    
    (92
    )Net income (loss)
    
    
    1,001,722
    
    
    
    807,816Share and Per Share Data:Basic net income (loss)
    
    $
    0.13
    
    
    $
    0.11Diluted net income (loss)
    
    $
    0.13
    
    
    $
    0.10Weighted average shares outstanding-basic
    
    
    7,672,000
    
    
    
    7,667,000Weighted average shares outstanding-diluted
    
    
    7,821,658
    
    
    
    7,733,335
  12. Subsequent Events
      22




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-Q.
 Forward-Looking Statements
 Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements made with respect to possible or
assumed future results of our business, financial condition, liquidity, results of operations,
plans and objectives. Such forward-looking statements can generally be identified by the use of the
words may, will, intend, believe, expect, anticipate, estimate or similar
expressions. You should not place undue reliance on these forward-looking statements. Statements
regarding the following subjects are forward-looking by their nature:
 
    
    our business strategy;
    
    pending transactions;
    
    our projected operating results;
    
    our ability to obtain future financing arrangements;
    
    estimates relating to our future distributions;
    
    our understanding of our competition;
    
    market trends;
    
    estimates of our future operating expenses, including payments to our Adviser under the
terms of our advisory agreement;
    
    projected capital expenditures; and
    
    use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity
securities and other future capital resources, if any.
 These statements involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or achievements to be materially
different from any future results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements.
 The forward-looking statements are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to us. Although we believe
that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common and preferred stock, along with the following factors that could cause actual results to
vary from our forward-looking statements:
 
    
    the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer;
    
    general volatility of the capital markets and the market price of our securities;
    
    risks associated with negotiation and consummation of pending and future transactions;
    
    changes in our business strategy;
    
    availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital;
    
    availability of qualified personnel;
    
    changes in our industry, interest rates, exchange rates or the general economy; and
    
    the degree and nature of our competition.
 We are under no duty to update any of the forward-looking statements after the date of this report
to conform such statements to actual results.
 23




---



##### 



Overview
    Recent Events
 Investments
   24




---



##### 



Mortgage Loans
     Preferred Stock Financing
  25




---



##### 



Expenses
       26




---



##### 



Critical Accounting Policies
  Revenue Recognition
  27




---



##### 



Purchase Price Allocation
 
     28




---



##### 



Risk Rating
  First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)>10
    
    Baa2
    
    BBB
    
    Probability of default during the next ten years is 4% and the expected loss is 1% or less10
    
    Baa3
    
    BBB-
    
    Probability of default during the next ten years is 5% and the expected loss is 1% to 2%9
    
    Ba1
    
    BB+
    
    Probability of default during the next ten years is 10% and the expected loss is 2% to 3%8
    
    Ba2
    
    BB
    
    Probability of default during the next ten years is 16% and the expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the next ten years is 17.8% and the expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the next ten years is 22% and the expected loss is 5% to 6.5%
 29




---



##### 



First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)5
    
    B2
    
    B
    
    Probability of default during the next ten years is 25% and the expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the next ten years is 27% and the expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the next ten years is 30% and the expected loss is 10% to
13.3%2
    
    Caa2
    
    CCC
    
    Probability of default during the next ten years is 35% and the expected loss is 13.3% to
16.7%1
    
    Caa3
    
    CC
    
    Probability of default during the next ten years is 65% and the expected loss is 16.7% to
20%0
    
    N/a
    
    D
    
    Probability of default during the next ten years is 85%, or there is a payment default,
and the expected loss is greater than 20%
 
 (a)
    
    The default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term.   Rating
    
    3/31/2006
    
    12/31/2005Average
    
    
    8.6
    
    
    
    8.6Weighted Average
    
    
    8.6
    
    
    
    8.7Highest
    
    
    10.0
    
    
    
    10.0Lowest
    
    
    6.0
    
    
    
    6.0
 Investments in Real Estate
    30




---



##### 



Provision for Loan Losses
  Income Taxes
 
 Stock Based Compensation
 Share-Base Payment, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. Accounting for Stock-Based
Compensation
 Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123(R). .
 31




---



##### 



Results of Operations
   March 31, 2006
    
    
    March 31, 2005
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    5,021,485
    
    
    $
    1,847,007
    
    
    $
    3,174,478
    
    
    
    172
    %Interest income from mortgage note receivable
    
    
    552,913
    
    
    
    295,583
    
    
    
    257,330
    
    
    
    87
    %Tenant recovery revenue
    
    
    5,623
    
    
    
    2,043
    
    
    
    3,580
    
    
    
    175
    %Total operating revenues
    
    
    5,580,021
    
    
    
    2,144,633
    
    
    
    3,435,388
    
    
    
    160
    %Operating expensesDepreciation and amortization
    
    
    1,834,740
    
    
    
    537,755
    
    
    
    1,296,985
    
    
    
    241
    %Management advisory fee
    
    
    652,742
    
    
    
    471,861
    
    
    
    180,881
    
    
    
    38
    %Professional fees
    
    
    202,936
    
    
    
    331,244
    
    
    
    (128,308
    )
    
    
    -39
    %Taxes and licenses
    
    
    54,259
    
    
    
    128,273
    
    
    
    (74,014
    )
    
    
    -58
    %Insurance
    
    
    82,999
    
    
    
    70,383
    
    
    
    12,616
    
    
    
    18
    %General and administrative
    
    
    145,958
    
    
    
    132,828
    
    
    
    13,130
    
    
    
    10
    %Asset retirement obligation expense
    
    
    55,143
    
    
    
    
    
    
    
    55,143
    
    
    
    100
    %Stock option compensation expense
    
    
    46,216
    
    
    
    
    
    
    
    46,216
    
    
    
    100
    %Total operating expenses
    
    
    3,074,993
    
    
    
    1,672,344
    
    
    
    1,402,649
    
    
    
    84
    %Other income (expense)Interest income from temporary investments
    
    
    7,373
    
    
    
    94,521
    
    
    
    (87,148
    )
    
    
    -92
    %Interest income  employee loans
    
    
    5,548
    
    
    
    4,685
    
    
    
    863
    
    
    
    18
    %Interest expense
    
    
    (1,682,948
    )
    
    
    (36,219
    )
    
    
    (1,646,729
    )
    
    
    4547
    %Income before realized and unrealized losses
    
    
    835,001
    
    
    
    535,276
    
    
    
    299,725
    
    
    
    56
    %Realized and unrealized loss from foreign currency
    
    
    11,799
    
    
    
    (92
    )
    
    
    11,891
    
    
    
    100
    %Net income
    
    
    846,800
    
    
    
    535,184
    
    
    
    311,616
    
    
    
    58
    %Dividends attributable to preferred stock
    
    
    (344,444
    )
    
    
    
    
    
    
    (344,444
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    502,356
    
    
    $
    535,184
    
    
    $
    (32,828
    )
    
    
    -6
    %
 Comparison of the three months ended March 31, 2006 to the three months ended March 31, 2005
 Revenues
   32




---



##### 



Expenses
       33




---



##### 



Share-based Payment Accounting
for Stock-Based Compensation Accounting for Stock Issued to Employees .
  Interest Income
   Foreign Currency Gains and Losses
  34




---



##### 



Net Income available to common stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
  Financing Activities
  35




---



##### 



Future Capital Needs
   Registration Statement
  Line of Credit
  36




---



##### 



Mortgage Notes Payable
     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)
    
    $
    130,818,267
    
    
    $
    594,904
    
    
    $
    24,356,093
    
    
    $
    2,955,656
    
    
    $
    102,911,614Interest on Long-Term Debt Obligations (2)
    
    
    54,617,590
    
    
    
    6,065,279
    
    
    
    12,031,184
    
    
    
    11,697,862
    
    
    
    24,823,265Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations (4)
    
    
    14,000,000
    
    
    
    14,000,000
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    199,435,857
    
    
    $
    20,660,183
    
    
    $
    36,387,277
    
    
    $
    14,653,518
    
    
    $
    127,734,879
 
 (1)
    
    Long-term debt obligations represent both borrowings under our BB&T line of credit
and mortgage notes payble that were outstanding as of March 31, 2006. The line of credit
matures in February 2008.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings
under our line of credit. The balance and interest rate is variable and, thus, the
amount of interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is
allocated to us by our Adviser in connection with our advisory agreement.(4)
    
    The purchase obligations reflected in the above table represents commitments
outstanding at March 31, 2006 to purchase real estate. 37




---



##### 



Funds from Operations
     38




---



##### 



For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2006
    
    
    March 31, 2005Net income
    
    $
    846,800
    
    
    $
    535,184Add: Real estate depreciation and amortization
    
    
    1,834,740
    
    
    
    537,755FFO
    
    
    2,681,540
    
    
    
    1,072,939Less: Dividends attributable to preferred stock
    
    
    (344,444
    )
    
    
    FFO available to common stockholders
    
    
    2,337,096
    
    
    
    1,072,939Weighted average shares outstanding  basic
    
    
    7,672,000
    
    
    
    7,667,000Weighted average shares outstanding  diluted
    
    
    7,821,658
    
    
    
    7,733,335Basic net income per weighted average common share
    
    $
    0.07
    
    
    $
    0.07Diluted net income per weighted average common share
    
    $
    0.06
    
    
    $
    0.07Basic FFO per weighted average common share
    
    $
    0.30
    
    
    $
    0.14Diluted FFO per weighted average common share
    
    $
    0.30
    
    
    $
    0.14
 39




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##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
       40




---



##### 



Item 4. Controls and Procedures
     41




---



##### 



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
  Item 5. Other Information
  Item 6. Exhibits
 Exhibit Index
 Exhibit
    
    Description of Document3 .1
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S
-11 (File No. 333-106024), filed June 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
June 11, 2003.3.3
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed on January 19, 2006.10.19
    
    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 (File
No. 000-50363), filed on February 1, 2006.10.20
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo
Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.20 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.
 42




---



##### 



Exhibit
    
    Description of Document10.21
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06
Champaign IL LLC, Gladstone Commercial Corporation and LaSalle
Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.22
    
    Promissory note between Stonewater Dox Funding LLC and Wells
Fargo Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.23
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006., incorporated by reference to Exhibit 10.23 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.24
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.24 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.25
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and
UC06 Roseville MN LLC, Gladstone Commercial Corporation and
LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.26
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.26 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.27
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006, incorporated by reference to Exhibit 10.27 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.28
    
    Third Amendment to Credit Agreement and Loan Documents by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of March 17, 2006.10.29
    
    Loan agreement between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006.10.30
    
    Promissory note between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006.11
    
    Computation of Per Share Earnings from Operations (included in
the notes to the audited financial statements contained in this
report)
 43




---



##### 



Exhibit
    
    Description of Document31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.31 .2
    
    Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.32 .1
    
    Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.32 .2
    
    Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference.   Gladstone Commercial CorporationDate: May 2, 2006
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 44




---



##### 



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 June 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
June 11, 2003.3.3
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed on January 19, 2006.10.19
    
    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 (File
No. 000-50363), filed on February 1, 2006.10.20
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo
Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.20 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.21
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06
Champaign IL LLC, Gladstone Commercial Corporation and LaSalle
Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.22
    
    Promissory note between Stonewater Dox Funding LLC and Wells
Fargo Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.23
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006., incorporated by reference to Exhibit 10.23 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.24
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.24 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.25
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and
UC06 Roseville MN LLC, Gladstone Commercial Corporation and
LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.26
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.26 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.
 45




---



##### 



Exhibit
    
    Description of Document10.27
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006, incorporated by reference to Exhibit 10.27 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.28
    
    Third Amendment to Credit Agreement and Loan Documents by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of March 17, 2006.10.29
    
    Loan agreement between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006.10.30
    
    Promissory note between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006.11
    
    Computation of Per Share Earnings (included in the notes to the
audited financial statements contained in this report)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.31 .2
    
    Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.32 .1
    
    Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.32 .2
    
    Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference. 46