##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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




---



##### 



PAGEPART I FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005Notes to Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    44PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3.
    
    Defaults Upon Senior Securities
    
    
    46Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    46Item 5.
    
    Other Information
    
    
    46Item 6.
    
    Exhibits
    
    
    47SIGNATURES
    
    
    
    
    49




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2006
    
    
    December 31, 2005ASSETSReal estate, net of accumulated depreciation of
$5,722,987 and $3,408,878 respectively
    
    $
    219,373,127
    
    
    $
    161,634,761Lease intangibles, net of accumulated
amortization of
$2,614,455 and $1,221,413, respectively
    
    
    24,535,650
    
    
    
    13,947,484Real estate and related assets held for sale, net
    
    
    5,458,407
    
    
    
    Mortgage notes receivable
    
    
    20,981,073
    
    
    
    21,025,815Cash and cash equivalents
    
    
    931,560
    
    
    
    1,740,159Restricted cash
    
    
    2,386,510
    
    
    
    1,974,436Funds held in escrow
    
    
    1,697,031
    
    
    
    1,041,292Interest receivable  mortgage note
    
    
    67,140
    
    
    
    70,749Interest receivable  employees
    
    
    28,589
    
    
    
    Deferred rent receivable
    
    
    3,111,718
    
    
    
    2,590,617Deferred financing costs, net of accumulated
amortization of
$549,399 and $260,099, respectively
    
    
    3,037,719
    
    
    
    1,811,017Prepaid expenses
    
    
    196,852
    
    
    
    385,043Deposits on real estate
    
    
    
    
    
    
    600,000Accounts receivable
    
    
    105,395
    
    
    
    225,581TOTAL ASSETS
    
    $
    281,910,771
    
    
    $
    207,046,954LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    118,690,395
    
    
    $
    61,558,961Mortgage notes payable related to assets held
for sale
    
    
    4,797,876
    
    
    
    Borrowings under line of credit
    
    
    29,660,000
    
    
    
    43,560,000Deferred rent liability
    
    
    5,111,381
    
    
    
    Asset retirement obligation liability
    
    
    1,419,559
    
    
    
    Accounts payable and accrued expenses
    
    
    437,693
    
    
    
    389,792Accounts payable and other liabilities related
to assets held for sale
    
    
    198,381
    
    
    
    103,210Due to adviser
    
    
    177,459
    
    
    
    164,155Rent received in advance, security deposits and
funds held in escrow
    
    
    2,897,781
    
    
    
    2,322,300Total Liabilities
    
    
    163,390,525
    
    
    
    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 June 30, 2006
    
    
    1,000
    
    
    
    Common stock, $0.001 par value, 18,850,000
shares authorized and 7,816,972 and 7,672,000
shares issued and outstanding, respectively
    
    
    7,817
    
    
    
    7,672Additional paid in capital
    
    
    131,590,977
    
    
    
    105,502,544Notes receivable  employees
    
    
    (2,259,036
    )
    
    
    (432,282
    )Distributions in excess of accumulated earnings
    
    
    (10,820,512
    )
    
    
    (6,129,398
    )Total Stockholders Equity
    
    
    118,520,246
    
    
    
    98,948,536TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    281,910,771
    
    
    $
    207,046,954
  3




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months endedJune 30, 2006
    
    
    June 30, 2005Operating revenuesRental income
    
    $
    6,027,830
    
    
    $
    2,092,231Interest income from mortgage notes receivable
    
    
    558,434
    
    
    
    501,645Tenant recovery revenue
    
    
    43,798
    
    
    
    37,300Total operating revenues
    
    
    6,630,062
    
    
    
    2,631,176Operating expensesDepreciation and amortization
    
    
    2,064,312
    
    
    
    664,467Management advisory fee
    
    
    719,392
    
    
    
    483,794Professional fees
    
    
    232,960
    
    
    
    11,201Taxes and licenses
    
    
    39,069
    
    
    
    24,450Insurance
    
    
    102,845
    
    
    
    67,021General and administrative
    
    
    306,698
    
    
    
    95,411Asset retirement obligation expense
    
    
    24,940
    
    
    
    Stock option compensation expense
    
    
    33,602
    
    
    
    Total operating expenses
    
    
    3,523,818
    
    
    
    1,346,344Other income (expense)Interest income from temporary investments
    
    
    4,057
    
    
    
    13,192Interest income  employee loans
    
    
    28,589
    
    
    
    5,236Other income
    
    
    10,400
    
    
    
    Interest expense
    
    
    (2,155,968
    )
    
    
    (254,803
    )Total other expense
    
    
    (2,112,922
    )
    
    
    (236,375
    )Income from continuing operations
    
    
    993,322
    
    
    
    1,048,457Discontinued operationsIncome from discontinued operations
    
    
    71,215
    
    
    
    103,784Net realized gain (loss) from foreign currency transactions
    
    
    167
    
    
    
    (2,590
    )Net unrealized (loss) gain from foreign currency transactions
    
    
    (211,939
    )
    
    
    (120
    )Total discontinued operations
    
    
    (140,557
    )
    
    
    101,074Net income
    
    
    852,765
    
    
    
    1,149,531Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    Net income available to common stockholders
    
    $
    368,390
    
    
    $
    1,149,531Earnings per weighted average common share  basicIncome from continuing operations (net of dividends attributable
to preferred stock)
    
    $
    0.07
    
    
    $
    0.14Discontinued operations
    
    
    (0.02
    )
    
    
    0.01Net income available to common stockholders
    
    $
    0.05
    
    
    $
    0.15Earnings per weighted average common share  dilutedIncome from continuing operations (net of dividends
attributable to preferred stock)
    
    $
    0.06
    
    
    $
    0.14Discontinued operations
    
    
    (0.02
    )
    
    
    0.01Net income available to common stockholders
    
    $
    0.04
    
    
    $
    0.15Weighted average shares outstandingBasic
    
    
    7,762,503
    
    
    
    7,669,802Diluted
    
    
    7,911,871
    
    
    
    7,692,639
  4




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the six months endedJune 30, 2006
    
    
    June 30, 2005Operating revenuesRental income
    
    $
    10,894,906
    
    
    $
    3,795,831Interest income from mortgage notes receivable
    
    
    1,111,346
    
    
    
    797,228Tenant recovery revenue
    
    
    49,420
    
    
    
    41,600Total operating revenues
    
    
    12,055,672
    
    
    
    4,634,659Operating expensesDepreciation and amortization
    
    
    3,863,519
    
    
    
    1,169,762Management advisory fee
    
    
    1,372,134
    
    
    
    955,655Professional fees
    
    
    431,418
    
    
    
    340,886Taxes and licenses
    
    
    89,963
    
    
    
    151,396Insurance
    
    
    185,842
    
    
    
    137,404General and administrative
    
    
    452,485
    
    
    
    229,750Asset retirement obligation expense
    
    
    71,641
    
    
    
    Stock option compensation expense
    
    
    79,818
    
    
    
    Total operating expenses
    
    
    6,546,820
    
    
    
    2,984,853Other income (expense)Interest income from temporary investments
    
    
    11,431
    
    
    
    107,713Interest income  employee loans
    
    
    34,137
    
    
    
    9,921Other income
    
    
    10,400
    
    
    
    Interest expense
    
    
    (3,774,536
    )
    
    
    (291,022
    )Total other expense
    
    
    (3,718,568
    )
    
    
    (173,388
    )Income from continuing operations
    
    
    1,790,284
    
    
    
    1,476,418Discontinued operationsIncome from discontinued operations
    
    
    109,253
    
    
    
    211,099Net realized gain (loss) from foreign currency transactions
    
    
    (649
    )
    
    
    (2,937
    )Net unrealized (loss) gain from foreign currency transactions
    
    
    (199,323
    )
    
    
    135Total discontinued operations
    
    
    (90,719
    )
    
    
    208,297Net income
    
    
    1,699,565
    
    
    
    1,684,715Dividends attributable to preferred stock
    
    
    (828,819
    )
    
    
    Net income available to common stockholders
    
    $
    870,746
    
    
    $
    1,684,715Earnings per weighted average common share  basicIncome from continuing operations (net of dividends
attributable to preferred stock)
    
    $
    0.12
    
    
    $
    0.19Discontinued operations
    
    
    (0.01
    )
    
    
    0.03Net income available to common stockholders
    
    $
    0.11
    
    
    $
    0.22Earnings per weighted average common share  dilutedIncome from continuing operations (net of dividends
attributable to preferred stock)
    
    $
    0.12
    
    
    $
    0.19Discontinued operations
    
    
    (0.01
    )
    
    
    0.03Net income available to common stockholders
    
    $
    0.11
    
    
    $
    0.22Weighted average shares outstandingBasic
    
    
    7,717,501
    
    
    
    7,668,409Diluted
    
    
    7,858,146
    
    
    
    7,715,100
  5




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the six
    
    
    For the sixmonths ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005Cash flows from operating activities:Net income
    
    $
    1,699,565
    
    
    $
    1,684,715Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    3,915,819
    
    
    
    1,234,731Amortization of deferred financing costs, including discontinued operations
    
    
    289,300
    
    
    
    74,836Amortization of deferred rent asset
    
    
    126,748
    
    
    
    93,385Amortization of deferred rent liability
    
    
    (303,478
    )
    
    
    Asset retirement obligation expense, including discontinued operations
    
    
    81,573
    
    
    
    Stock compensation
    
    
    79,818
    
    
    
    Unrealized loss (gain) from foreign currency transactions
    
    
    199,323
    
    
    
    (135
    )Changes in assets and liabilities:Decrease (increase) in mortgage interest receivable
    
    
    3,609
    
    
    
    (2,824
    )Increase in employee interest receivable
    
    
    (28,589
    )
    
    
    (444
    )Decrease in prepaid expenses
    
    
    177,168
    
    
    
    69,008Decrease in other assets
    
    
    120,186
    
    
    
    59,515Increase in deferred rent receivable
    
    
    (720,712
    )
    
    
    (206,111
    )Increase in accounts payable and accrued expenses
    
    
    52,302
    
    
    
    112,530Increase (decrease) in due to adviser
    
    
    13,304
    
    
    
    (5,060
    )Increase (decrease) in rent received in advance and security deposits
    
    
    725,907
    
    
    
    (435,228
    )Payments to lenders for operating reserves held in escrow
    
    
    (1,452,201
    )
    
    
    Increase in operating reserves from tenants
    
    
    892,137
    
    
    
    Net cash provided by operating activities
    
    
    5,871,779
    
    
    
    2,678,918Cash flows from investing activities:Real estate investments
    
    
    (40,506,626
    )
    
    
    (41,116,911
    )Issuance of mortgage note receivable
    
    
    
    
    
    
    (10,000,000
    )Principal repayments on mortgage notes receivable
    
    
    44,742
    
    
    
    42,856Increase in restricted cash
    
    
    (412,074
    )
    
    
    Receipts from tenants for capital reserves
    
    
    435,633
    
    
    
    Payments to tenants from capital reserves
    
    
    (234,518
    )
    
    
    Payments to lenders for capital reserves held in escrow
    
    
    (755,350
    )
    
    
    Receipts from lenders for capital reserves held in escrow
    
    
    308,135
    
    
    
    Deposits on future acquisitions
    
    
    (500,000
    )
    
    
    (550,000
    )Deposits applied against real estate investments
    
    
    1,100,000
    
    
    
    Net cash used in investing activities
    
    
    (40,520,058
    )
    
    
    (51,624,055
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    25,485,010
    
    
    
    Offering costs
    
    
    (1,302,004
    )
    
    
    Borrowings under mortgage note payable
    
    
    31,900,000
    
    
    
    3,150,000Principal repayments on mortgage note payable
    
    
    (302,410
    )
    
    
    (12,471
    )Borrowings from line of credit
    
    
    60,000,400
    
    
    
    22,010,000Repayments on line of credit
    
    
    (73,900,400
    )
    
    
    Principal repayments on employee loans
    
    
    
    
    
    
    16,211Payments for deferred financing costs
    
    
    (1,650,237
    )
    
    
    (1,015,176
    )Dividends paid for common and preferred
    
    
    (6,390,679
    )
    
    
    (4,140,980
    )Net cash provided by financing activities
    
    
    33,839,680
    
    
    
    20,007,584Net decrease in cash and cash equivalents
    
    
    (808,599
    )
    
    
    (28,937,553
    )Cash and cash equivalents, beginning of period
    
    
    1,740,159
    
    
    
    29,153,987Cash and cash equivalents, end of period
    
    $
    931,560
    
    
    $
    216,434NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    1,510,330
    
    
    $
    NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    30,129,654
    
    
    $
    Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options
    
    $
    1,826,754
    
    
    $
    75,000
  6




---



##### 



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




---



##### 



Interim financial information
  Investments in real estate
      8




---



##### 



June 30, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    10,663,334
    
    
    $
    (1,196,836
    )
    
    $
    5,625,736
    
    
    $
    (558,997
    )Leasing costs
    
    
    5,833,922
    
    
    
    (861,069
    )
    
    
    5,047,033
    
    
    
    (505,078
    )Customer relationships
    
    
    10,652,849
    
    
    
    (556,550
    )
    
    
    4,496,128
    
    
    
    (157,338
    )$
    27,150,105
    
    
    $
    (2,614,455
    )
    
    $
    15,168,897
    
    
    $
    (1,221,413
    )
 9




---



##### 



Estimated AmortizationYear
    
    Expense2006
    
    $
    1,531,8282007
    
    
    3,063,6562008
    
    
    3,063,6562009
    
    
    2,936,0162010
    
    
    2,857,669
 Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  10




---



##### 



Funds held in escrow
  Deferred financing costs
  Revenue recognition
    Stock based compensation
  11




---



##### 



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
 12




---



##### 



Foreign Currency Transactions
 Foreign Currency Translation
 Asset retirement obligations
  Real estate held for sale and discontinued operations
  13




---



##### 



Use of estimates
  Reclassifications
  2. Management Advisory Fee
    14




---



##### 



For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Allocated payroll and benefits
    
    $
    561,316
    
    
    $
    334,563
    
    
    $
    1,029,035
    
    
    $
    681,877Allocated overhead expenses
    
    
    158,076
    
    
    
    149,231
    
    
    
    343,099
    
    
    
    273,778Total management advisory fee
    
    $
    719,392
    
    
    $
    483,794
    
    
    $
    1,372,134
    
    
    $
    955,655
    3. Stock Options
   15




---



##### 



For the three
    
    
    For the sixmonths ended
    
    
    months endedJune 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    1,149,531
    
    
    $
    1,684,715Less: Stock-based compensation expense
determined using the fair value based method
    
    
    (43,971
    )
    
    
    (93,659
    )Net income, pro-forma
    
    $
    1,105,560
    
    
    $
    1,591,056Basic, as reported
    
    $
    0.15
    
    
    $
    0.22Basic, pro-forma
    
    $
    0.14
    
    
    $
    0.21Diluted, as reported
    
    $
    0.15
    
    
    $
    0.22Diluted, pro-forma
    
    $
    0.14
    
    
    $
    0.21
     16




---



##### 



Weighted AverageShares
    
    
    Exercise PriceOptions outstanding at
December 31, 2005, of which 744,250
shares are exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    (144,972
    )
    
    $
    15.95Forfeited
    
    
    
    
    
    $
    Options outstanding at June 30, 2006,
    
    
    771,028
    
    
    $
    15.30Options exercisable at June 30, 2006
    
    
    740,028
    
    
    $
    15.29
  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
    %Apr-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    5 years
    
    
    7.77
    %Apr-06
    
    
    12,422
    
    
    $
    16.10
    
    
    $
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    50,000
    
    
    $
    16.85
    
    
    $
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    15,000
    
    
    $
    16.10
    
    
    $
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,500
    
    
    $
    16.01
    
    
    $
    40,000
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.10
    
    
    $
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    16.68
    
    
    $
    33,360
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    $
    15.00
    
    
    $
    30,000
    
    
    10 years
    
    
    7.87
    %142,922
    
    
    
    
    
    
    $
    2,276,754
  17




---



##### 



4. Earnings per Common Share
  For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Net income available to common stockholders
    
    $
    368,390
    
    
    $
    1,149,531
    
    
    $
    870,746
    
    
    $
    1,684,715Denominator for basic weighted average shares
    
    
    7,762,503
    
    
    
    7,669,802
    
    
    
    7,717,501
    
    
    
    7,668,409Dilutive effect of stock options
    
    
    149,368
    
    
    
    22,837
    
    
    
    140,645
    
    
    
    46,691Denominator for diluted weighted average shares
    
    
    7,911,871
    
    
    
    7,692,639
    
    
    
    7,858,146
    
    
    
    7,715,100Basic earnings per common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.22Diluted earnings per common share
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.22
 5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,916,551Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    3,056,003Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,370,188Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,782,430Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,943,810Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,347,035Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,859,668Sep-04
    
    Austin, Texas
    
    
    51,993
    
    
    Flexible Office
    
    
    7,032,889Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    914,565Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,927,688Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    8,019,616Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,707,976Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,559,876May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,970,638May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    4,000,920Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,424,435Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,762,606Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,586,107Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,161,562Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    3,044,794Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,159,561Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,159,561Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,159,561Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    7,050,070Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,688,772Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,787,924Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    6,033,519Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    3,070,947Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,182,498Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    14,348,274Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    27,594,693May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    12,221,874Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,526,516Real estate, net
    
    
    3,975,482
    
    
    
    
    
    219,373,127Oct-04
    
    Granby, Quebec
    
    
    99,981
    
    
    Commercial and Manufacturing
    
    
    3,007,864Oct-04
    
    Montreal, Quebec
    
    
    42,490
    
    
    Commercial and Manufacturing
    
    
    1,807,220Real estate held for sale, net
    
    
    142,471
    
    
    
    
    
    4,815,084Total real estate, net
    
    
    4,117,953
    
    
    
    
    $
    224,188,211
 18




---



##### 



June 30, 2006
    
    
    December 31, 2005Real estate:Land
    
    $
    29,802,462
    
    
    $
    20,329,568Building
    
    
    189,579,455
    
    
    
    141,660,553Tenant improvements
    
    
    5,714,197
    
    
    
    3,053,518Accumulated depreciation
    
    
    (5,722,987
    )
    
    
    (3,408,878
    )Real estate, net
    
    $
    219,373,127
    
    
    $
    161,634,761
      19




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Below Market
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    Rents
    
    
    PriceSouth Hadley, Massachusetts
    
    $
    470,636
    
    
    $
    2,738,511
    
    
    $
    
    
    
    $
    225,959
    
    
    $
    46,710
    
    
    $
    183,052
    
    
    $
    
    
    
    $
    3,664,868Champaign, Illinois
    
    
    3,645,770
    
    
    
    10,589,003
    
    
    
    225,367
    
    
    
    838,387
    
    
    
    165,893
    
    
    
    869,041
    
    
    
    (1,223,286
    )
    
    
    15,110,175Roseville, Minnesota
    
    
    2,587,757
    
    
    
    24,107,863
    
    
    
    1,182,263
    
    
    
    2,448,286
    
    
    
    491,342
    
    
    
    2,881,122
    
    
    
    (3,473,624
    )
    
    
    30,225,009Burnsville, Minnesota
    
    
    3,510,711
    
    
    
    7,882,749
    
    
    
    863,658
    
    
    
    463,237
    
    
    
    316,043
    
    
    
    1,126,538
    
    
    
    
    
    
    
    14,162,936Menomonee Falls, Wisconsin
    
    
    624,700
    
    
    
    6,861,786
    
    
    
    40,030
    
    
    
    138,320
    
    
    
    1,154
    
    
    
    379,284
    
    
    
    
    
    
    
    8,045,274$
    10,839,574
    
    
    $
    52,179,912
    
    
    $
    2,311,318
    
    
    $
    4,114,189
    
    
    $
    1,021,142
    
    
    $
    5,439,037
    
    
    $
    (4,696,910
    )
    
    $
    71,208,262
   Year
    
    Lease Payments2006
    
    $
    11,409,6152007
    
    
    23,045,7992008
    
    
    23,421,9272009
    
    
    22,713,3772010
    
    
    21,981,459Thereafter
    
    
    88,865,699
  6. Real Estate Held for Sale and Discontinued Operations
  20




---



##### 



For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Operating revenue
    
    $
    157,112
    
    
    $
    143,010
    
    
    $
    311,523
    
    
    $
    286,420Operating expense
    
    
    2,856
    
    
    
    6,715
    
    
    
    19,313
    
    
    
    10,349Interest expense
    
    
    66,281
    
    
    
    
    
    
    
    130,657
    
    
    
    Depreciation expense
    
    
    16,760
    
    
    
    32,510
    
    
    
    52,300
    
    
    
    64,971Realized and
unrealized gains
(losses) on foregin
currency
transactions
    
    
    (211,772
    )
    
    
    (2,711
    )
    
    
    (199,972
    )
    
    
    (2,803
    )Income (loss) from
discontinued
operations
    
    $
    (140,557
    )
    
    $
    101,074
    
    
    $
    (90,719
    )
    
    $
    208,297
  June 30, 2006Real estate, net
    
    $
    4,815,086Lease intangibles, net
    
    
    422,460Prepaid expenses
    
    
    11,024Deferred rent receivable
    
    
    75,606Deferred financing costs, net
    
    
    134,231Real estate and related assets held for sale, net
    
    $
    5,458,407Mortgage notes payable related to assets held for sale
    
    $
    4,797,876Accounts payable and accrued expenses
    
    
    107,610Asset retirement obligation liability
    
    
    90,771Accounts payable and other liabilities related to assets held for sale
    
    $
    198,381
 7. Mortgage Notes Receivable
   21




---



##### 



8. Mortgage Notes Payable
  Date of Issuance of
    
    Principal Maturity
    
    
    
    
    
    
    Balance Outstandingof Note
    
    Date
    
    
    Interest Rate
    
    
    June 30, 2006
    
    
    December 31, 20053/16/2005
    
    
    4/1/2030
    
    
    
    6.3300
    %
    
    $
    3,086,205
    
    
    $
    3,113,1027/19/2005
    
    
    8/1/2015
    
    
    
    5.2200
    %
    
    
    4,797,876
    
    
    
    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
    %
    
    
    9,684,575
    
    
    
    2/21/2006
    
    
    6/1/2014
    
    
    
    5.2000
    %
    
    
    20,255,285
    
    
    
    3/29/2006
    
    
    4/1/2016
    
    
    
    5.9200
    %
    
    
    17,000,000
    
    
    
    4/27/2006
    
    
    5/5/2016
    
    
    
    6.5800
    %
    
    
    14,863,330
    
    
    
    $
    123,488,271
    
    
    $
    61,558,961
      22




---



##### 



9. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    7,672
    
    
    $
    
    
    
    $
    105,502,544
    
    
    $
    (432,282
    )
    
    $
    (6,129,398
    )
    
    $
    98,948,536Issuance of Common Stock
Under Stock Option Plan
    
    
    145
    
    
    
    
    
    
    
    2,311,621
    
    
    
    (1,826,754
    )
    
    
    
    
    
    
    485,012Issuance of Preferred Stock
    
    
    
    
    
    
    1,000
    
    
    
    24,999,000
    
    
    
    
    
    
    
    
    
    
    
    25,000,000Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (1,302,006
    )
    
    
    
    
    
    
    
    
    
    
    (1,302,006
    )Stock Options
    
    
    
    
    
    
    
    
    
    
    79,818
    
    
    
    
    
    
    
    
    
    
    
    79,818Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,390,679
    )
    
    
    (6,390,679
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,699,565
    
    
    
    1,699,565Balance at June 30, 2006
    
    $
    7,817
    
    
    $
    1,000
    
    
    $
    131,590,977
    
    
    $
    (2,259,036
    )
    
    $
    (10,820,512
    )
    
    $
    118,520,246
   10. Segment Information
  23




---



##### 



As of and for the three months ended June 30, 2006
    
    
    As of and for the six months ended June 30, 2006Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    6,071,628
    
    
    $
    558,434
    
    
    $
    
    
    
    $
    6,630,062
    
    
    $
    10,944,326
    
    
    $
    1,111,346
    
    
    $
    
    
    
    $
    12,055,672Operating expenses
    
    
    (2,128,321
    )
    
    
    
    
    
    
    (1,395,497
    )
    
    
    (3,523,818
    )
    
    
    (4,025,123
    )
    
    
    
    
    
    
    (2,521,697
    )
    
    
    (6,546,820
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (2,112,922
    )
    
    
    (2,112,922
    )
    
    
    
    
    
    
    
    
    
    
    (3,718,568
    )
    
    
    (3,718,568
    )Discontinued operations
    
    
    (140,557
    )
    
    
    
    
    
    
    
    
    
    
    (140,557
    )
    
    
    (90,719
    )
    
    
    
    
    
    
    
    
    
    
    (90,719
    )Net income (loss)
    
    $
    3,802,750
    
    
    $
    558,434
    
    
    $
    (3,508,419
    )
    
    $
    852,765
    
    
    $
    6,828,484
    
    
    $
    1,111,346
    
    
    $
    (6,240,265
    )
    
    $
    1,699,565Total Assets
    
    $
    254,177,059
    
    
    $
    21,048,213
    
    
    $
    6,685,499
    
    
    $
    281,910,771
    
    
    $
    254,177,059
    
    
    $
    21,048,213
    
    
    $
    6,685,499
    
    
    $
    281,910,771
 As of and for the three months ended June 30, 2005
    
    
    As of and for the six months ended June 30, 2005Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    2,129,531
    
    
    $
    501,645
    
    
    $
    
    
    
    $
    2,631,176
    
    
    $
    3,837,431
    
    
    $
    797,228
    
    
    $
    
    
    
    $
    4,634,659Operating expenses
    
    
    (688,917
    )
    
    
    
    
    
    
    (657,427
    )
    
    
    (1,346,344
    )
    
    
    (1,321,158
    )
    
    
    
    
    
    
    (1,663,695
    )
    
    
    (2,984,853
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (236,375
    )
    
    
    (236,375
    )
    
    
    
    
    
    
    
    
    
    
    (173,388
    )
    
    
    (173,388
    )Discontinued operations
    
    
    101,074
    
    
    
    
    
    
    
    
    
    
    
    101,074
    
    
    
    208,297
    
    
    
    
    
    
    
    
    
    
    
    208,297Net income (loss)
    
    $
    1,541,688
    
    
    $
    501,645
    
    
    $
    (893,802
    )
    
    $
    1,149,531
    
    
    $
    2,724,570
    
    
    $
    797,228
    
    
    $
    (1,837,083
    )
    
    $
    1,684,715Total Assets
    
    $
    104,452,364
    
    
    $
    21,132,480
    
    
    $
    2,603,341
    
    
    $
    128,188,185
    
    
    $
    104,452,364
    
    
    $
    21,132,480
    
    
    $
    2,603,341
    
    
    $
    128,188,185
 11. Line of Credit
  12. Pro Forma Financial Information
  24




---



##### 



For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Operating Data:Total operating revenue
    
    $
    6,939,739
    
    
    $
    4,295,559
    
    
    $
    13,289,438
    
    
    $
    7,700,860Total operating expenses
    
    
    (3,626,864
    )
    
    
    (2,472,309
    )
    
    
    (7,179,564
    )
    
    
    (5,058,368
    )Other expense
    
    
    (2,112,922
    )
    
    
    (236,375
    )
    
    
    (3,718,568
    )
    
    
    (173,388
    )Income from continuing operations
    
    
    1,199,953
    
    
    
    1,586,875
    
    
    
    2,391,306
    
    
    
    2,469,104Discontinued Operations
    
    
    (140,577
    )
    
    
    101,074
    
    
    
    (90,719
    )
    
    
    208,297Net income
    
    $
    1,059,376
    
    
    $
    1,687,949
    
    
    $
    2,300,587
    
    
    $
    2,677,401Share and Per Share Data:Basic net income
    
    $
    0.14
    
    
    $
    0.22
    
    
    $
    0.30
    
    
    $
    0.35Diluted net income
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.29
    
    
    $
    0.35Weighted average shares outstanding-basic
    
    
    7,762,503
    
    
    
    7,669,802
    
    
    
    7,717,501
    
    
    
    7,668,409Weighted average shares outstanding-diluted
    
    
    7,911,871
    
    
    
    7,692,639
    
    
    
    7,858,146
    
    
    
    7,715,100
  13. Subsequent Events
       25




---



##### 



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.
 26




---



##### 



Overview
    Recent Events
 Investments
   27




---



##### 



Mortgage Loans
    28




---



##### 



Preferred Stock Financing
  Properties Sold
  Late Payment
  Expenses
   29




---



##### 



30




---



##### 



Critical Accounting Policies
  Revenue Recognition
  31




---



##### 



Purchase Price Allocation
 
     32




---



##### 



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%
 33




---



##### 



First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)8
    
    Ba2
    
    BB
    
    Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5%5
    
    B2
    
    B
    
    Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3%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
    
    6/30/2006
    
    12/31/2005Average
    
    
    8.5
    
    
    
    8.6Weighted Average
    
    
    8.5
    
    
    
    8.7Highest
    
    
    10.0
    
    
    
    10.0Lowest
    
    
    6.0
    
    
    
    6.0
 Investments in Real Estate
  34




---



##### 



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.
 35




---



##### 



Accounting for Stock-Based
Compensation
 Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123(R). .
 Results of Operations
   For the three months ended
    
    
    For the six months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    $ Change
    
    
    % Change
    
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    6,027,830
    
    
    $
    2,092,231
    
    
    $
    3,935,599
    
    
    
    188
    %
    
    $
    10,894,906
    
    
    $
    3,795,831
    
    
    $
    7,099,075
    
    
    
    187
    %Interest income from mortgage notes receivable
    
    
    558,434
    
    
    
    501,645
    
    
    
    56,789
    
    
    
    11
    %
    
    
    1,111,346
    
    
    
    797,228
    
    
    
    314,118
    
    
    
    39
    %Tenant recovery revenue
    
    
    43,798
    
    
    
    37,300
    
    
    
    6,498
    
    
    
    17
    %
    
    
    49,420
    
    
    
    41,600
    
    
    
    7,820
    
    
    
    19
    %Total operating revenues
    
    
    6,630,062
    
    
    
    2,631,176
    
    
    
    3,998,886
    
    
    
    152
    %
    
    
    12,055,672
    
    
    
    4,634,659
    
    
    
    7,421,013
    
    
    
    160
    %Operating expensesDepreciation and amortization
    
    
    2,064,312
    
    
    
    664,467
    
    
    
    1,399,845
    
    
    
    211
    %
    
    
    3,863,519
    
    
    
    1,169,762
    
    
    
    2,693,757
    
    
    
    230
    %Management advisory fee
    
    
    719,392
    
    
    
    483,794
    
    
    
    235,598
    
    
    
    49
    %
    
    
    1,372,134
    
    
    
    955,655
    
    
    
    416,479
    
    
    
    44
    %Professional fees
    
    
    232,960
    
    
    
    11,201
    
    
    
    221,759
    
    
    
    1980
    %
    
    
    431,418
    
    
    
    340,886
    
    
    
    90,532
    
    
    
    27
    %Taxes and licenses
    
    
    39,069
    
    
    
    24,450
    
    
    
    14,619
    
    
    
    60
    %
    
    
    89,963
    
    
    
    151,396
    
    
    
    (61,433
    )
    
    
    -41
    %Insurance
    
    
    102,845
    
    
    
    67,021
    
    
    
    35,824
    
    
    
    53
    %
    
    
    185,842
    
    
    
    137,404
    
    
    
    48,438
    
    
    
    35
    %General and administrative
    
    
    306,698
    
    
    
    95,411
    
    
    
    211,287
    
    
    
    221
    %
    
    
    452,485
    
    
    
    229,750
    
    
    
    222,735
    
    
    
    97
    %Asset retirement obligation expense
    
    
    24,940
    
    
    
    
    
    
    
    24,940
    
    
    
    100
    %
    
    
    71,641
    
    
    
    
    
    
    
    71,641
    
    
    
    100
    %Stock option compensation expense
    
    
    33,602
    
    
    
    
    
    
    
    33,602
    
    
    
    100
    %
    
    
    79,818
    
    
    
    
    
    
    
    79,818
    
    
    
    100
    %Total operating expenses
    
    
    3,523,818
    
    
    
    1,346,344
    
    
    
    2,177,474
    
    
    
    162
    %
    
    
    6,546,820
    
    
    
    2,984,853
    
    
    
    3,561,967
    
    
    
    119
    %Other income (expense)Interest income from temporary investments
    
    
    4,057
    
    
    
    13,192
    
    
    
    (9,135
    )
    
    
    -69
    %
    
    
    11,431
    
    
    
    107,713
    
    
    
    (96,282
    )
    
    
    -89
    %Interest income  employee loans
    
    
    28,589
    
    
    
    5,236
    
    
    
    23,353
    
    
    
    446
    %
    
    
    34,137
    
    
    
    9,921
    
    
    
    24,216
    
    
    
    244
    %Other income
    
    
    10,400
    
    
    
    
    
    
    
    10,400
    
    
    
    100
    %
    
    
    10,400
    
    
    
    
    
    
    
    10,400
    
    
    
    100
    %Interest expense
    
    
    (2,155,968
    )
    
    
    (254,803
    )
    
    
    (1,901,165
    )
    
    
    746
    %
    
    
    (3,774,536
    )
    
    
    (291,022
    )
    
    
    (3,483,514
    )
    
    
    1197
    %Total other expense
    
    
    (2,112,922
    )
    
    
    (236,375
    )
    
    
    (1,876,547
    )
    
    
    794
    %
    
    
    (3,718,568
    )
    
    
    (173,388
    )
    
    
    (3,545,180
    )
    
    
    2045
    %Income from continuing operations
    
    
    993,322
    
    
    
    1,048,457
    
    
    
    (55,135
    )
    
    
    -5
    %
    
    
    1,790,284
    
    
    
    1,476,418
    
    
    
    313,866
    
    
    
    21
    %Discontinued operationsIncome from discontinued operations
    
    
    71,215
    
    
    
    103,784
    
    
    
    (32,569
    )
    
    
    -31
    %
    
    
    109,253
    
    
    
    211,099
    
    
    
    (101,846
    )
    
    
    -48
    %Net realized gain (loss) from foreign currency transactions
    
    
    167
    
    
    
    (2,590
    )
    
    
    2,757
    
    
    
    -106
    %
    
    
    (649
    )
    
    
    (2,937
    )
    
    
    2,288
    
    
    
    -78
    %Net unrealized (loss) gain from foreign currency transactions
    
    
    (211,939
    )
    
    
    (120
    )
    
    
    (211,819
    )
    
    
    176516
    %
    
    
    (199,323
    )
    
    
    135
    
    
    
    (199,458
    )
    
    
    -147747
    %Total discontinued operations
    
    
    (140,557
    )
    
    
    101,074
    
    
    
    (241,631
    )
    
    
    -239
    %
    
    
    (90,719
    )
    
    
    208,297
    
    
    
    (299,016
    )
    
    
    -144
    %Net income
    
    
    852,765
    
    
    
    1,149,531
    
    
    
    (296,766
    )
    
    
    -26
    %
    
    
    1,699,565
    
    
    
    1,684,715
    
    
    
    14,850
    
    
    
    1
    %Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    
    
    
    
    (484,375
    )
    
    
    100
    %
    
    
    (828,819
    )
    
    
    
    
    
    
    (828,819
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    368,390
    
    
    $
    1,149,531
    
    
    $
    (781,141
    )
    
    
    -68
    %
    
    $
    870,746
    
    
    $
    1,684,715
    
    
    $
    (813,969
    )
    
    
    -48
    %
 Revenues
  36




---



##### 



Expenses
       37




---



##### 



. Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees .
  Interest Income
   Foreign Currency Gains and Losses
  Net Income available to common stockholders
  38




---



##### 



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
  Financing Activities
  Future Capital Needs
   39




---



##### 



Registration Statement
  Line of Credit
  Mortgage Notes Payable
    40




---



##### 



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)
    
    $
    148,350,395
    
    
    $
    736,027
    
    
    $
    32,305,665
    
    
    $
    3,403,485
    
    
    $
    111,905,218Interest on Long-Term Debt Obligations (2)
    
    
    59,855,160
    
    
    
    6,806,293
    
    
    
    13,451,297
    
    
    
    13,078,854
    
    
    
    26,518,716Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations (4)
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the Registrants
Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    211,005,555
    
    
    $
    10,342,320
    
    
    $
    45,756,962
    
    
    $
    16,482,339
    
    
    $
    138,423,934
 
 (1)
    
    Long-term debt obligations represent both borrowings under our BB&T line of credit and
mortgage notes payble that were outstanding as of June 30, 2006. Long-term debt obligations does
not include commitments on mortgage notes in the amount of approximately $4.7 million on our held for sale properties. The line of credit matures in February of 2008.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under
our line of credit, or interest in the amount of approximately $1.2 million on mortgage notes on our held for sale
properties. The balance and interest rate on our line of credit is variable and, thus, the
amount of interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is
allocated to us by our Adviser in connection with our advisory agreement.(4)
    
    The purchase obligations reflected in the above table represents commitments
outstanding at June 30, 2006 to purchase real estate, of which $2.8 million closed in July of 2006. Funds from Operations
   41




---



##### 



For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Net income
    
    $
    852,765
    
    
    $
    1,149,531
    
    
    $
    1,699,565
    
    
    $
    1,684,715Add: Real estate depreciation and amortization, including discontinued operations
    
    
    2,081,072
    
    
    
    696,977
    
    
    
    3,915,819
    
    
    
    1,234,733FFO
    
    
    2,933,837
    
    
    
    1,846,508
    
    
    
    5,615,384
    
    
    
    2,919,448Less: Dividends attributable to preferred stock
    
    
    (484,375
    )
    
    
    
    
    
    
    (828,819
    )
    
    
    FFO available to common stockholders
    
    
    2,449,462
    
    
    
    1,846,508
    
    
    
    4,786,565
    
    
    
    2,919,448Weighted average shares outstanding  basic
    
    
    7,762,503
    
    
    
    7,669,802
    
    
    
    7,717,501
    
    
    
    7,668,409Weighted average shares outstanding  diluted
    
    
    7,911,871
    
    
    
    7,692,639
    
    
    
    7,858,146
    
    
    
    7,715,100Basic net income per weighted average common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.22Diluted net income per weighted average common share
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.22Basic FFO per weighted average common share
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.62
    
    
    $
    0.38Diluted FFO per weighted average common share
    
    $
    0.31
    
    
    $
    0.24
    
    
    $
    0.61
    
    
    $
    0.38
 42




---



##### 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
       43




---



##### 



Item 4. Controls and Procedures
     44




---



##### 



PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  The recent acceleration of vesting of all outstanding options, coupled with the new expiration
dates of our outstanding options, could result in significant selling pressure from option holders,
which could reduce our stock price.
  Our incentive fee may induce our adviser to make certain investments, including speculative
investments.
  We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
  45




---



##### 



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
  
    
    The election of three directors to hold office until the 2009 Annual Meeting of
Stockholders.
 Nominee
    
    Shares Voted For
    
    Authority WithheldDavid A.R. Dullum
    
    
    7,242,091
    
    
    
    97,541Maurice W. Coulon
    
    
    7,204,016
    
    
    
    135,616Terry Lee Brubaker
    
    
    7,234,474
    
    
    
    105,158
 
    
    The election of one director to hold office until the 2008 Annual Meeting of
Stockholders.
 Nominee
    
    Shares Voted For
    
    Authority WithheldGerard Mead
    
    
    7,200,716
    
    
    
    138,916
 
    
    The approval of an amended and restated investment advisory agreement between the
Company and the Adviser and an administration agreement between the Company and Gladstone
Administration.
 Shares voted for
    
    
    3,261,578Shares voted against
    
    
    1,757,138Shares abstained
    
    
    100,518
 
    
    The ratification of PricewaterhouseCoopers LLP as independent auditors for the year
ending December 31, 2006.
 Shares voted for
    
    
    7,226,052Shares voted against
    
    
    36,144Shares abstained
    
    
    77,436
 Item 5. Other Information
  46




---



##### 



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, 2006.10.29
    
    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, incorporated by
reference to Exhibit 10.29 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed on May 2, 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, incorporated by
reference to Exhibit 10.30 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed on May 2, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of June 29, 2006, incorporated by
reference to Exhibit 10.31 of the Current Report on Form 8-K
(File No. 000-50363), filed on June 30, 2006.10.32
    
    Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006.10.33
    
    Custodial Agreement between Branch Banking and Trust Company of
Virginia, as Custodian, and Gladstone Commercial Company, dated
as of May 1, 2006.11
    
    Computation of Per Share Earnings from Operations (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.
 47




---



##### 



Exhibit
    
    Description of Document32 .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. 48




---



##### 



Gladstone Commercial CorporationDate: August 8, 2006
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 49




---



##### 



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, 2006.10.29
    
    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, incorporated by
reference to Exhibit 10.29 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed on May 2, 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, incorporated by
reference to Exhibit 10.30 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed on May 2, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of June 29, 2006, incorporated by
reference to Exhibit 10.31 of the Current Report on Form 8-K
(File No. 000-50363), filed on June 30, 2006.10.32
    
    Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006.10.33
    
    Custodial Agreement between Branch Banking and Trust Company of
Virginia, as Custodian, and Gladstone Commercial Company, dated
as of May 1, 2006.11
    
    Computation of Per Share Earnings from Operations (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. 50