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, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND
    
    02-0681276(State or other jurisdiction of incorporation ororganization)
    
    (I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 þ o
 o o
  Large Accelerated Filer oAccelerated Filer þ
Non-Accelerated Filer o(Do not check if a smaller reporting company)Smaller Reporting Company o. o þ




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GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2009
 TABLE OF CONTENTS
  
 PAGEPART I FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three and six months ended
June 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the six months ended
June 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    37PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    38Item 1A.
    
    Risk Factors
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3.
    
    Defaults Upon Senior Securities
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    40SIGNATURES
    
    
    
    
    41
  2




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2009
    
    
    December 31, 2008ASSETSReal estate, at cost
    
    $
    389,668,739
    
    
    $
    390,562,138Less: accumulated depreciation
    
    
    29,397,701
    
    
    
    24,757,576Total real estate, net
    
    
    360,271,038
    
    
    
    365,804,562Lease intangibles, net
    
    
    29,890,585
    
    
    
    31,533,843Real estate and related assets held for sale, net
    
    
    956,916
    
    
    
    Mortgage note receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    2,920,611
    
    
    
    4,503,578Restricted cash
    
    
    3,345,712
    
    
    
    2,677,561Funds held in escrow
    
    
    2,296,773
    
    
    
    2,150,919Deferred rent receivable
    
    
    8,156,144
    
    
    
    7,228,811Deferred financing costs, net
    
    
    3,763,181
    
    
    
    4,383,446Due from adviser (Refer to Note 2)
    
    
    
    
    
    
    108,898Prepaid expenses and other assets
    
    
    644,822
    
    
    
    707,167TOTAL ASSETS
    
    $
    422,245,782
    
    
    $
    429,098,785LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    253,950,925
    
    
    $
    255,111,173Short-term loan and borrowings under line of credit
    
    
    31,800,000
    
    
    
    31,500,000Deferred rent liability
    
    
    2,754,690
    
    
    
    3,147,472Asset retirement obligation liability
    
    
    2,232,940
    
    
    
    2,190,192Accounts payable and accrued expenses
    
    
    1,495,284
    
    
    
    2,673,787Other liabilities related to assets held for sale
    
    
    36,348
    
    
    
    Due to adviser (Refer to Note 2)
    
    
    1,299,850
    
    
    
    Obligation under capital lease
    
    
    241,532
    
    
    
    235,378Rent received in advance, security deposits and funds held in escrow
    
    
    4,194,849
    
    
    
    3,745,523Total Liabilities
    
    
    298,006,418
    
    
    
    298,603,525STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264
shares issued and outstanding
    
    
    8,563
    
    
    
    8,563Additional paid in capital
    
    
    170,622,581
    
    
    
    170,622,581Notes receivable  employees
    
    
    (2,588,965
    )
    
    
    (2,595,886
    )Distributions in excess of accumulated earnings
    
    
    (43,804,965
    )
    
    
    (37,542,148
    )Total Stockholders Equity
    
    
    124,239,364
    
    
    
    130,495,260TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    422,245,782
    
    
    $
    429,098,785
  3




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended June 30,
    
    
    For the six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Operating revenuesRental income
    
    $
    10,379,172
    
    
    $
    9,896,143
    
    
    $
    20,767,420
    
    
    $
    19,059,732Interest income from mortgage note receivable
    
    
    189,583
    
    
    
    218,805
    
    
    
    377,083
    
    
    
    457,102Tenant recovery revenue
    
    
    82,734
    
    
    
    84,635
    
    
    
    165,167
    
    
    
    170,354Total operating revenues
    
    
    10,651,489
    
    
    
    10,199,583
    
    
    
    21,309,670
    
    
    
    19,687,188Operating expensesDepreciation and amortization
    
    
    3,282,629
    
    
    
    3,178,718
    
    
    
    6,590,438
    
    
    
    6,160,187Property operating expenses
    
    
    230,785
    
    
    
    203,405
    
    
    
    467,595
    
    
    
    442,459Due diligence expense
    
    
    6,886
    
    
    
    40
    
    
    
    16,433
    
    
    
    2,125Base management fee (Refer to Note 2)
    
    
    357,650
    
    
    
    419,857
    
    
    
    730,298
    
    
    
    851,725Incentive fee (Refer to Note 2)
    
    
    812,653
    
    
    
    801,832
    
    
    
    1,598,942
    
    
    
    1,506,499Administration fee (Refer to Note 2)
    
    
    257,207
    
    
    
    274,541
    
    
    
    481,561
    
    
    
    486,737Professional fees
    
    
    125,965
    
    
    
    147,065
    
    
    
    361,161
    
    
    
    244,727Insurance
    
    
    48,125
    
    
    
    41,797
    
    
    
    96,804
    
    
    
    83,594Directors fees
    
    
    50,386
    
    
    
    52,251
    
    
    
    100,088
    
    
    
    106,500Stockholder related expenses
    
    
    88,245
    
    
    
    102,775
    
    
    
    171,892
    
    
    
    229,198Asset retirement obligation expense
    
    
    35,476
    
    
    
    32,325
    
    
    
    70,384
    
    
    
    62,361General and administrative
    
    
    15,453
    
    
    
    18,326
    
    
    
    26,005
    
    
    
    30,506Total operating expenses before credit from Adviser
    
    
    5,311,460
    
    
    
    5,272,932
    
    
    
    10,711,601
    
    
    
    10,206,618Credit to incentive fee
    
    
    (129,623
    )
    
    
    (173,697
    )
    
    
    (364,704
    )
    
    
    (736,052
    )Total operating expenses
    
    
    5,181,837
    
    
    
    5,099,235
    
    
    
    10,346,897
    
    
    
    9,470,566Other income (expense)Interest income from temporary investments
    
    
    184
    
    
    
    6,689
    
    
    
    17,465
    
    
    
    16,237Interest income  employee loans
    
    
    48,862
    
    
    
    50,852
    
    
    
    97,748
    
    
    
    102,996Other income
    
    
    11,320
    
    
    
    39,697
    
    
    
    11,320
    
    
    
    48,993Interest expense
    
    
    (4,433,998
    )
    
    
    (3,996,453
    )
    
    
    (8,921,555
    )
    
    
    (7,752,501
    )Total other expense
    
    
    (4,373,632
    )
    
    
    (3,899,215
    )
    
    
    (8,795,022
    )
    
    
    (7,584,275
    )Income from continuing operations
    
    
    1,096,020
    
    
    
    1,201,133
    
    
    
    2,167,751
    
    
    
    2,632,347Discontinued operationsIncome from discontinued operations
    
    
    20,916
    
    
    
    18,312
    
    
    
    38,754
    
    
    
    3,801Total discontinued operations
    
    
    20,916
    
    
    
    18,312
    
    
    
    38,754
    
    
    
    3,801Net income
    
    
    1,116,936
    
    
    
    1,219,445
    
    
    
    2,206,505
    
    
    
    2,636,148Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,875
    )
    
    
    (2,046,875
    )Net income available to common stockholders
    
    $
    93,499
    
    
    $
    196,008
    
    
    $
    159,630
    
    
    $
    589,273Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.07Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.07Weighted average shares outstanding- basic & diluted
    
    
    8,563,264
    
    
    
    8,565,264
    
    
    
    8,563,264
    
    
    
    8,565,264
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the six months ended June 30,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    2,206,505
    
    
    $
    2,636,148Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    6,600,853
    
    
    
    6,172,777Amortization of deferred financing costs
    
    
    723,828
    
    
    
    505,757Amortization of deferred rent asset and liability
    
    
    (266,035
    )
    
    
    (266,034
    )Accretion of obligation under capital lease
    
    
    6,154
    
    
    
    4,156Asset retirement obligation expense, including discontinued operations
    
    
    70,845
    
    
    
    63,232Increase in prepaid expenses and other assets
    
    
    (137,854
    )
    
    
    (286,200
    )Increase in deferred rent receivable
    
    
    (1,082,278
    )
    
    
    (1,153,008
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    230,245
    
    
    
    703,460(Decrease) increase in rent received in advance
    
    
    (210,575
    )
    
    
    122,341Net cash provided by operating activities
    
    
    8,141,688
    
    
    
    8,502,629Cash flows from investing activities:Real estate investments
    
    
    (54,319
    )
    
    
    (38,667,763
    )Leasing commissions paid
    
    
    (298,270
    )
    
    
    Receipts from lenders for reserves held in escrow
    
    
    773,187
    
    
    
    259,538Payments to lenders for reserves held in escrow
    
    
    (919,041
    )
    
    
    (714,551
    )Increase in restricted cash
    
    
    (668,151
    )
    
    
    (690,763
    )Deposits on future acquisitions
    
    
    
    
    
    
    (1,650,000
    )Deposits refunded or applied against real estate investments
    
    
    200,000
    
    
    
    1,700,000Net cash used in investing activities
    
    
    (966,594
    )
    
    
    (39,763,539
    )Cash flows from financing activities:Principal repayments on mortgage notes payable
    
    
    (1,160,248
    )
    
    
    (773,779
    )Principal repayments on employee notes receivable
    
    
    6,921
    
    
    
    140,077Borrowings from line of credit
    
    
    39,300,000
    
    
    
    45,150,000Repayments on line of credit
    
    
    (19,000,000
    )
    
    
    (5,000,000
    )Repayment of short-term loan
    
    
    (20,000,000
    )
    
    
    Receipts from tenants for reserves
    
    
    1,996,723
    
    
    
    1,119,390Payments to tenants from reserves
    
    
    (1,339,968
    )
    
    
    (840,433
    )Increase in security deposits
    
    
    11,396
    
    
    
    411,806Payments for deferred financing costs
    
    
    (103,563
    )
    
    
    (56,462
    )Distributions paid for common and preferred
    
    
    (8,469,322
    )
    
    
    (8,470,823
    )Net cash (used in) provided by financing activities
    
    
    (8,758,061
    )
    
    
    31,679,776Net (decrease) increase in cash and cash equivalents
    
    
    (1,582,967
    )
    
    
    418,866Cash and cash equivalents, beginning of period
    
    
    4,503,578
    
    
    
    1,356,408Cash and cash equivalents, end of period
    
    $
    2,920,611
    
    
    $
    1,775,274NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    
    
    
    $
    245,199
  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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##### 



Impairment
 Investments in Real Estate
   Provision for Loan Losses
  8




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##### 



Cash and Cash Equivalents
  Restricted Cash
  Funds Held in Escrow
  Deferred Financing Costs
  Prepaid Expenses and Other Assets
  Obligation Under Capital Lease
  9




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##### 



Revenue Recognition
   Income Taxes
   Segment Information
  10




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Asset Retirement Obligations
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
    11




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
 
 12




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
 Use of Estimates
  Reclassifications
  2. Related Party Transactions
  Advisory Agreement
   13




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##### 



Administration Agreement
  3. Earnings per Common Share
  For the three months ended June 30,
    
    
    For the six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income available to common stockholders
    
    $
    93,499
    
    
    $
    196,008
    
    
    $
    159,630
    
    
    $
    589,273Denominator for basic & diluted weighted
average shares
    
    
    8,563,264
    
    
    
    8,565,264
    
    
    
    8,563,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.07
 4. Real Estate and Intangible Assets
 Real Estate
  June 30, 2009 (2)
    
    
    December 31, 2008Real estate:Land
    
    $
    55,036,042
    (1)
    
    $
    55,226,042
    (1)Building
    
    
    324,811,991
    
    
    
    325,515,390Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated
depreciation
    
    
    (29,397,701
    )
    
    
    (24,757,576
    )Real estate, net
    
    $
    360,271,038
    
    
    $
    365,804,562
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.(2)
    
    Does not include real estate held for sale as of June 30, 2009. 14




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##### 



TenantYear
    
    Lease PaymentsSix months ending December 31, 2009
    
    $
    19,428,6582010
    
    
    38,819,4462011
    
    
    38,525,8052012
    
    
    38,614,8452013
    
    
    33,261,3842014
    
    
    29,025,909Thereafter
    
    $
    160,507,642
  Intangible Assets
  June 30, 2009
    
    
    December 31, 2008Lease
    
    
    Accumulated
    
    
    
    
    
    
    AccumulatedIntangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,935,445
    (1)
    
    $
    (5,906,158
    )
    
    $
    15,981,245
    
    
    $
    (5,079,343
    )Leasing costs
    
    
    9,909,528
    
    
    
    (3,405,095
    )
    
    
    9,662,731
    
    
    
    (2,987,360
    )Customer relationships
    
    
    17,136,501
    
    
    
    (3,779,636
    )
    
    
    17,136,501
    
    
    
    (3,179,931
    )$
    42,981,474
    
    
    $
    (13,090,889
    )
    
    $
    42,780,477
    
    
    $
    (11,246,634
    )
 
 (1)
    
    Does not include intangible assets held for sale as of June 30, 2009. 15




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##### 



EstimatedAmortizationYear
    
    ExpenseSix months ending December 31,
2009
    
    $
    2,646,2952010
    
    
    5,190,9662011
    
    
    4,774,3962012
    
    
    4,164,9992013
    
    
    2,280,6992014
    
    
    2,027,307Thereafter
    
    $
    8,805,923
 5. Real Estate Held for Sale and Discontinued Operations
  For the three months ended June 30,
    
    
    For the six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Operating revenue
    
    $
    25,875
    
    
    $
    25,875
    
    
    $
    51,751
    
    
    $
    51,751Operating expense
    
    
    (4,959
    )
    
    
    (7,563
    )
    
    
    (12,997
    )
    
    
    (47,950
    )Income from
discontinued
operations
    
    $
    20,916
    
    
    $
    18,312
    
    
    $
    38,754
    
    
    $
    3,801
  June 30, 2009Real estate, net
    
    $
    858,024Lease intangibles, net
    
    
    70,495Prepaid expenses
    
    
    199Deferred rent receivable
    
    
    28,198Real estate and related assets held
for sale, net
    
    $
    956,916Rent received in advance
    
    
    8,250Asset retirement obligation liability
    
    
    28,098Other liabilities related to assets
held for sale
    
    $
    36,348
 16




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##### 



6. Mortgage Note Receivable
   7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  StatedInterestDate of
    
    
    Principal
    
    
    Rate at
    
    
    Principal Balance OutstandingIssuance/
    
    
    Maturity
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,Assumption
    
    
    Date
    
    
    2009(1)
    
    
    2009
    
    
    2008Fixed-Rate Mortgage Notes Payable:03/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    $
    2,917,085
    
    
    $
    2,948,75308/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    21,247,266
    
    
    
    21,399,64409/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,475,382
    
    
    
    12,560,67312/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    19,116,806
    
    
    
    19,241,11702/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    9,266,886
    
    
    
    9,344,90802/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    19,295,456
    
    
    
    19,472,74003/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    14,146,730
    
    
    
    14,281,61611/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    14,223,075
    
    
    
    14,309,00012/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,735,219
    
    
    
    21,846,00002/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,00006/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,00009/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,393,893
    
    
    
    4,426,39310/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,742,955
    
    
    
    15,828,61208/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,360,172
    
    
    
    6,421,71709/15/08
    
    
    
    10/01/10
    (2)
    
    
    6.85
    %
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    253,950,925
    
    
    
    255,111,173Variable-Rate Line of Credit:
    
    
    12/29/06
    
    
    
    12/29/09
    (3)
    
    LIBOR + 1.9%
    
    
    31,800,000
    
    
    
    11,500,000Variable-Rate Short-Term Loan:
    
    
    12/21/07
    
    
    
    06/20/09
    (4)
    
    LIBOR + 2.75%
    
    
    
    
    
    
    20,000,000Total Mortgage Notes Payable, Line of Credit and
Short-Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    285,750,925
    
    
    $
    286,611,173
 
 (1)
    
    The weighted average interest rate on all debt outstanding at June 30, 2009 was approximately 5.62%.(2)
    
    This note has three annual extension options, which extends the term of the note until October 1, 2013.(3)
    
    The line of credit may be extended for a one-year period at the Companys option, subject to certain conditions.(4)
    
    The short-term loan was repaid in full on March 31, 2009. Mortgage Notes Payable
  17




---



##### 



ScheduledprincipalYear
    
    paymentsSix months ending December 31, 2009
    
    $
    1,293,7272010
    
    
    50,533,4862011
    
    
    2,799,6012012
    
    
    3,087,8242013
    
    
    11,828,3752014
    
    
    20,367,143Thereafter
    
    
    164,040,769$
    253,950,925
 Line of Credit
   18




---



##### 



Short-Term Loan
  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,
2008
    
    $
    8,563
    
    
    $
    2,150
    
    
    $
    170,622,581
    
    
    $
    (2,595,886
    )
    
    $
    (37,542,148
    )
    
    $
    130,495,260Repayment of principal
on notes receivable -
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,921
    
    
    
    
    
    
    
    6,921Distributions declared
to common and preferred
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,469,322
    )
    
    
    (8,469,322
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,206,505
    
    
    
    2,206,505Balance at June 30, 2009
    
    $
    8,563
    
    
    $
    2,150
    
    
    $
    170,622,581
    
    
    $
    (2,588,965
    )
    
    $
    (43,804,965
    )
    
    $
    124,239,364
  19




---



##### 



OutstandingNumber of
    
    
    Strike Price
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    of Options
    
    
    Promissory Note
    
    
    Employee Loans at
    
    
    Maturity Date
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    6/30/09
    
    
    of Note
    
    
    on NoteSep 2004
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    360,501
    
    
    Sep 2013
    
    
    5.00
    %Apr 2006
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    199,994
    
    
    Apr 2015
    
    
    7.77
    %May 2006
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,500
    
    
    
    16.01
    
    
    
    40,000
    
    
    
    36,870
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    May 2016
    
    
    7.87
    %May 2006
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    May 2016
    
    
    7.87
    %Oct 2006
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    193,200
    
    
    Oct 2015
    
    
    8.17
    %Nov 2006
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    Nov 2015
    
    
    8.15
    %Dec 2006
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    245,000
    
    
    Feb 2010
    
    
    8.12
    %172,922
    
    
    
    
    
    
    $
    2,736,594
    
    
    $
    2,588,965
  9. Segment Information
  20




---



##### 



As of and for the three months ended June 30, 2009
    
    
    As of and for the six months ended June 30, 2009Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,461,906
    
    
    $
    189,583
    
    
    $
    
    
    
    $
    10,651,489
    
    
    $
    20,932,587
    
    
    $
    377,083
    
    
    $
    
    
    
    $
    21,309,670Operating expenses
    
    
    (3,555,776
    )
    
    
    
    
    
    
    (1,626,061
    )(1)
    
    
    (5,181,837
    )
    
    
    (7,144,850
    )
    
    
    
    
    
    
    (3,202,047
    )(1)
    
    
    (10,346,897
    )Other expense
    
    
    (4,114,021
    )
    
    
    
    
    
    
    (259,611
    )(2)
    
    
    (4,373,632
    )
    
    
    (8,196,656
    )
    
    
    
    
    
    
    (598,366
    )(2)
    
    
    (8,795,022
    )Discontinued
operations
    
    
    20,916
    
    
    
    
    
    
    
    
    
    
    
    20,916
    
    
    
    38,754
    
    
    
    
    
    
    
    
    
    
    
    38,754Net income
    
    $
    2,813,025
    
    
    $
    189,583
    
    
    $
    (1,885,672
    )
    
    $
    1,116,936
    
    
    $
    5,629,835
    
    
    $
    377,083
    
    
    $
    (3,800,413
    )
    
    $
    2,206,505Total Assets
    
    $
    401,711,306
    
    
    $
    10,062,500
    
    
    $
    10,471,976
    
    
    $
    422,245,782
    
    
    $
    401,711,306
    
    
    $
    10,062,500
    
    
    $
    10,471,976
    
    
    $
    422,245,782
 As of and for the three months ended June 30, 2008
    
    
    As of and for the six months ended June 30, 2008Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    9,980,778
    
    
    $
    218,805
    
    
    $
    
    
    
    $
    10,199,583
    
    
    $
    19,230,086
    
    
    $
    457,102
    
    
    $
    
    
    
    $
    19,687,188Operating expenses
    
    
    (3,414,488
    )
    
    
    
    
    
    
    (1,684,747
    )
    
    
    (5,099,235
    )
    
    
    (6,667,132
    )
    
    
    
    
    
    
    (2,803,434
    )
    
    
    (9,470,566
    )Other expense
    
    
    (3,084,905
    )
    
    
    
    
    
    
    (814,310
    )
    
    
    (3,899,215
    )
    
    
    (6,167,756
    )
    
    
    
    
    
    
    (1,416,519
    )(1)
    
    
    (7,584,275
    )Discontinued
operations
    
    
    18,312
    
    
    
    
    
    
    
    
    
    
    
    18,312
    
    
    
    3,801
    
    
    
    
    
    
    
    
    
    
    
    3,801Net income
    
    $
    3,499,697
    
    
    $
    218,805
    
    
    $
    (2,499,057
    )
    
    $
    1,219,445
    
    
    $
    6,398,999
    
    
    $
    457,102
    
    
    $
    (4,219,953
    )
    
    $
    2,636,148Total Assets
    
    $
    395,292,545
    
    
    $
    10,070,479
    
    
    $
    8,882,725
    
    
    $
    414,245,749
    
    
    $
    395,292,545
    
    
    $
    10,070,479
    
    
    $
    8,882,725
    
    
    $
    414,245,749
 
 (1)
    
    Operating expenses includes base management fees, incentive fees, adminstration fees,
professional fees, insurance expense, directors fees, stockholder related expenses and general and
administrative expenses that are not practicable to allocate to either operating segment, thus it
is included in the other column.(2)
    
    Other expense includes interest expense on the Companys line of credit of $319,977 and
$724,899 for the three months ended June 30, 2009 and 2008, respectively, and $911,548 and
$1,584,745 for the six months ended June 30, 2009 and 2008, respectively. It is not practicable to
allocate the interest from the line of credit to either operating segment, thus it is included in
the other column. 10. Subsequent Events
      21




---



##### 



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




---



##### 



Recent Events
 Financing Activities:
  Leasing Activities:
   23




---



##### 



Dispositions:
  Industry Classifications
  June 30, 2009
    
    
    June 30, 2008Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeAutomobile
    
    $
    583,327
    
    
    
    2.8
    %
    
    $
    583,327
    
    
    
    3.1
    %Beverage, Food & Tobacco
    
    
    1,094,371
    
    
    
    5.3
    %
    
    
    976,441
    
    
    
    5.1
    %Buildings and Real Estate
    
    
    1,012,834
    
    
    
    4.9
    %
    
    
    1,000,682
    
    
    
    5.3
    %Chemicals, Plastics & Rubber
    
    
    1,598,724
    
    
    
    7.7
    %
    
    
    1,000,838
    
    
    
    5.3
    %Containers, Packaging & Glass
    
    
    1,165,007
    
    
    
    5.6
    %
    
    
    1,123,901
    
    
    
    5.9
    %Diversified/Conglomerate Manufacturing
    
    
    1,832,344
    
    
    
    8.8
    %
    
    
    1,453,558
    
    
    
    7.6
    %Diversified/Conglomerate Services
    
    
    154,052
    
    
    
    0.7
    %
    
    
    154,052
    
    
    
    0.8
    %Electronics
    
    
    3,082,895
    
    
    
    14.8
    %
    
    
    3,082,895
    
    
    
    16.2
    %Healthcare, Education & Childcare
    
    
    3,072,707
    
    
    
    14.8
    %
    
    
    2,646,309
    
    
    
    13.9
    %Home & Office Furnishings
    
    
    264,872
    
    
    
    1.3
    %
    
    
    264,872
    
    
    
    1.4
    %Insurance
    
    
    361,433
    
    
    
    1.7
    %
    
    
    361,433
    
    
    
    1.9
    %Machinery
    
    
    1,194,301
    
    
    
    5.8
    %
    
    
    1,047,449
    
    
    
    5.5
    %Oil & Gas
    
    
    572,645
    
    
    
    2.8
    %
    
    
    576,221
    
    
    
    3.0
    %Personal & Non-Durable Consumer
Products
    
    
    677,361
    
    
    
    3.3
    %
    
    
    677,700
    
    
    
    3.6
    %Personal, Food & Miscellaneous Services
    
    
    287,503
    
    
    
    1.4
    %
    
    
    287,503
    
    
    
    1.5
    %Printing & Publishing
    
    
    1,089,693
    
    
    
    5.2
    %
    
    
    1,099,366
    
    
    
    5.8
    %Telecommunications
    
    
    2,723,351
    
    
    
    13.1
    %
    
    
    2,723,185
    
    
    
    14.1
    %$
    20,767,420
    
    
    
    100.0
    %
    
    $
    19,059,732
    
    
    
    100.0
    %
 Our Adviser and Administrator
   24




---



##### 



Advisory and Administration Agreements
    Management Services and Fees under the Advisory Agreement
   
    
    no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized);
    
    100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
 25




---



##### 



Quarterly Incentive Fee Based on FFO
 Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
 
 Percentage of pre-incentive fee FFO allocated to incentive fee
  Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
  26




---



##### 




    
    The amount of purchase price allocated to the various tangible and intangible assets on
our balance sheet;
    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus, changes in the purchase price allocation
among our assets could have a material impact on our FFO, which is used by many REIT
investors to evaluate our operating performance; and
    
    The period of time that tangible and intangible assets are depreciated over varies
greatly and thus, changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years, we depreciate our
buildings over 39 years, and land is not depreciated. These differences in timing could
have a material impact on our results of operations.
 Asset Impairment Evaluation
  27




---



##### 



Overview Business Environment
 Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  Results of Operations
  28




---



##### 



A comparison of our operating results for the three and six months ended June 30, 2009 and 2008 is
below
 For the three months ended June 30,
    
    
    For the six months ended June 30,2009
    
    
    2008
    
    
    $ Change
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,379,172
    
    
    $
    9,896,143
    
    
    $
    483,029
    
    
    
    5
    %
    
    $
    20,767,420
    
    
    $
    19,059,732
    
    
    $
    1,707,688
    
    
    
    9
    %Interest income from mortgage notes receivable
    
    
    189,583
    
    
    
    218,805
    
    
    
    (29,222
    )
    
    
    -13
    %
    
    
    377,083
    
    
    
    457,102
    
    
    
    (80,019
    )
    
    
    -18
    %Tenant recovery revenue
    
    
    82,734
    
    
    
    84,635
    
    
    
    (1,901
    )
    
    
    -2
    %
    
    
    165,167
    
    
    
    170,354
    
    
    
    (5,187
    )
    
    
    -3
    %Total operating revenues
    
    
    10,651,489
    
    
    
    10,199,583
    
    
    
    451,906
    
    
    
    4
    %
    
    
    21,309,670
    
    
    
    19,687,188
    
    
    
    1,622,482
    
    
    
    8
    %Operating expensesDepreciation and amortization
    
    
    3,282,629
    
    
    
    3,178,718
    
    
    
    103,911
    
    
    
    3
    %
    
    
    6,590,438
    
    
    
    6,160,187
    
    
    
    430,251
    
    
    
    7
    %Property operating expenses
    
    
    230,785
    
    
    
    203,405
    
    
    
    27,380
    
    
    
    13
    %
    
    
    467,595
    
    
    
    442,459
    
    
    
    25,136
    
    
    
    6
    %Due diligence expense
    
    
    6,886
    
    
    
    40
    
    
    
    6,846
    
    
    
    17115
    %
    
    
    16,433
    
    
    
    2,125
    
    
    
    14,308
    
    
    
    673
    %Base management fee
    
    
    357,650
    
    
    
    419,857
    
    
    
    (62,207
    )
    
    
    -15
    %
    
    
    730,298
    
    
    
    851,725
    
    
    
    (121,427
    )
    
    
    -14
    %Incentive fee
    
    
    812,653
    
    
    
    801,832
    
    
    
    10,821
    
    
    
    1
    %
    
    
    1,598,942
    
    
    
    1,506,499
    
    
    
    92,443
    
    
    
    6
    %Administration fee
    
    
    257,207
    
    
    
    274,541
    
    
    
    (17,334
    )
    
    
    -6
    %
    
    
    481,561
    
    
    
    486,737
    
    
    
    (5,176
    )
    
    
    -1
    %Professional fees
    
    
    125,965
    
    
    
    147,065
    
    
    
    (21,100
    )
    
    
    -14
    %
    
    
    361,161
    
    
    
    244,727
    
    
    
    116,434
    
    
    
    48
    %Insurance
    
    
    48,125
    
    
    
    41,797
    
    
    
    6,328
    
    
    
    15
    %
    
    
    96,804
    
    
    
    83,594
    
    
    
    13,210
    
    
    
    16
    %Directors fees
    
    
    50,386
    
    
    
    52,251
    
    
    
    (1,865
    )
    
    
    -4
    %
    
    
    100,088
    
    
    
    106,500
    
    
    
    (6,412
    )
    
    
    -6
    %Stockholder related expense
    
    
    88,245
    
    
    
    102,775
    
    
    
    (14,530
    )
    
    
    -14
    %
    
    
    171,892
    
    
    
    229,198
    
    
    
    (57,306
    )
    
    
    -25
    %Asset retirement obligation expense
    
    
    35,476
    
    
    
    32,325
    
    
    
    3,151
    
    
    
    10
    %
    
    
    70,384
    
    
    
    62,361
    
    
    
    8,023
    
    
    
    13
    %General and administrative
    
    
    15,453
    
    
    
    18,326
    
    
    
    (2,873
    )
    
    
    -16
    %
    
    
    26,005
    
    
    
    30,506
    
    
    
    (4,501
    )
    
    
    -15
    %Total operating expenses before credit
from Adviser
    
    
    5,311,460
    
    
    
    5,272,932
    
    
    
    38,528
    
    
    
    1
    %
    
    
    10,711,601
    
    
    
    10,206,618
    
    
    
    504,983
    
    
    
    5
    %Credit to incentive fee
    
    
    (129,623
    )
    
    
    (173,697
    )
    
    
    44,074
    
    
    
    -25
    %
    
    
    (364,704
    )
    
    
    (736,052
    )
    
    
    371,348
    
    
    
    -50
    %Total operating expenses
    
    
    5,181,837
    
    
    
    5,099,235
    
    
    
    82,602
    
    
    
    2
    %
    
    
    10,346,897
    
    
    
    9,470,566
    
    
    
    876,331
    
    
    
    9
    %Other income (expense)Interest income from temporary investments
    
    
    184
    
    
    
    6,689
    
    
    
    (6,505
    )
    
    
    -97
    %
    
    
    17,465
    
    
    
    16,237
    
    
    
    1,228
    
    
    
    8
    %Interest income  employee loans
    
    
    48,862
    
    
    
    50,852
    
    
    
    (1,990
    )
    
    
    -4
    %
    
    
    97,748
    
    
    
    102,996
    
    
    
    (5,248
    )
    
    
    -5
    %Other income
    
    
    11,320
    
    
    
    39,697
    
    
    
    (28,377
    )
    
    
    -71
    %
    
    
    11,320
    
    
    
    48,993
    
    
    
    (37,673
    )
    
    
    -77
    %Interest expense
    
    
    (4,433,998
    )
    
    
    (3,996,453
    )
    
    
    (437,545
    )
    
    
    11
    %
    
    
    (8,921,555
    )
    
    
    (7,752,501
    )
    
    
    (1,169,054
    )
    
    
    15
    %Total other expense
    
    
    (4,373,632
    )
    
    
    (3,899,215
    )
    
    
    (474,417
    )
    
    
    12
    %
    
    
    (8,795,022
    )
    
    
    (7,584,275
    )
    
    
    (1,210,747
    )
    
    
    16
    %Income from continuing operations
    
    
    1,096,020
    
    
    
    1,201,133
    
    
    
    (105,113
    )
    
    
    -9
    %
    
    
    2,167,751
    
    
    
    2,632,347
    
    
    
    (464,596
    )
    
    
    -18
    %Discontinued operationsIncome from discontinued operations
    
    
    20,916
    
    
    
    18,312
    
    
    
    2,604
    
    
    
    14
    %
    
    
    38,754
    
    
    
    3,801
    
    
    
    34,953
    
    
    
    920
    %Total discontinued operations
    
    
    20,916
    
    
    
    18,312
    
    
    
    2,604
    
    
    
    14
    %
    
    
    38,754
    
    
    
    3,801
    
    
    
    34,953
    
    
    
    920
    %Net income
    
    
    1,116,936
    
    
    
    1,219,445
    
    
    
    (102,509
    )
    
    
    -8
    %
    
    
    2,206,505
    
    
    
    2,636,148
    
    
    
    (429,643
    )
    
    
    -16
    %Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %
    
    
    (2,046,875
    )
    
    
    (2,046,875
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    93,499
    
    
    $
    196,008
    
    
    $
    (102,509
    )
    
    
    -52
    %
    
    $
    159,630
    
    
    $
    589,273
    
    
    $
    (429,643
    )
    
    
    -73
    %
 29




---



##### 



Operating Revenues
    Operating Expenses
    Advisory
and Administration Agreements.
 Advisory and Administration Agreements.
 Advisory and Administration
Agreements.
 30




---



##### 



Other Income and Expense
     Discontinued Operations
  31




---



##### 



Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Future Capital Needs
  Overview Business Environment Overview Business Environment
  Operating Activities
  32




---



##### 



Investing Activities
 Overview Business
Environment
 Financing Activities
  Mortgage Notes Payable
  Line of Credit
   33




---



##### 



Short-Term Loan
  Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    $
    285,750,925
    
    
    $
    34,359,312
    
    
    $
    53,562,845
    
    
    $
    32,322,354
    
    
    $
    165,506,414Interest on Debt Obligations (2)
    
    
    86,135,280
    
    
    
    16,214,405
    
    
    
    24,973,032
    
    
    
    22,711,158
    
    
    
    22,236,685Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Operating Lease Obligations (4)
    
    
    1,612,800
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    940,800Total
    
    $
    373,799,005
    
    
    $
    50,708,117
    
    
    $
    78,804,677
    
    
    $
    55,302,312
    
    
    $
    188,983,899
 
 (1)
    
    Debt obligations represent borrowings under our line of credit and mortgage notes payable that were outstanding as of June 30, 2009.The line of credit matures in December 2009, and we expect to exercise our option to extend the term for an additional year.The $48.0 million mortgage note issued in September 2008 matures in October 2010, and we expect to exercise our options to extend through October 2013.(2)
    
    Interest on debt obligations includes estimated interest on our borrowings under our line of credit.The balance and interest rate on our line of credit is variable, thus the amount of interest calculated for purposes of this table was based upon rates and
balances as of June 30, 2009.(3)
    
    Capital lease obligations represent the obligation to purchase the land held under the ground lease on our property located in Fridley, Minnesota.(4)
    
    Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021. Off-Balance Sheet Arrangements
  Funds from Operations
   34




---



##### 



For the three months ended June 30,
    
    
    For the six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    1,116,936
    
    
    $
    1,219,445
    
    
    $
    2,206,505
    
    
    $
    2,636,148Less: Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,875
    )
    
    
    (2,046,875
    )Net income available to common stockholders
    
    
    93,499
    
    
    
    196,008
    
    
    
    159,630
    
    
    
    589,273Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    3,286,743
    
    
    
    3,185,017
    
    
    
    6,600,853
    
    
    
    6,172,777FFO available to common stockholders
    
    $
    3,380,242
    
    
    $
    3,381,025
    
    
    $
    6,760,483
    
    
    $
    6,762,050Weighted average shares outstanding  basic & diluted
    
    
    8,563,264
    
    
    
    8,565,264
    
    
    
    8,563,264
    
    
    
    8,565,264Basic & diluted net income per weighted average
common share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.07Basic & diluted FFO per weighted average common share
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    0.79
    
    
    $
    0.79Distributions declared per common share
    
    $
    0.375
    
    
    $
    0.375
    
    
    $
    0.750
    
    
    $
    0.750Percentage of FFO paid per common share
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
 35




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    For the three months ended June 30,
    
    
    For the six months ended June 30,1% increase in the one month LIBOR
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Rental & interest income
    
    $
    5
    
    
    $
    31,192
    
    
    $
    5
    
    
    $
    54,797Interest expense
    
    
    80,383
    
    
    
    79,625
    
    
    
    159,883
    
    
    
    159,250Net decrease
    
    $
    (80,378
    )
    
    $
    (48,433
    )
    
    $
    (159,878
    )
    
    $
    (104,453
    )Net income available to common
stockholders (as reported)
    
    $
    93,499
    
    
    $
    196,008
    
    
    $
    159,630
    
    
    $
    589,273Net decrease as percentage ofNet income available to common
stockholders (as reported)
    
    
    -86.0
    %
    
    
    -24.7
    %
    
    
    -100.2
    %
    
    
    -17.7
    %
 1% decrease in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    (24,924
    )
    
    $
    0
    
    
    $
    (51,160
    )Interest expense
    
    $
    (80,383
    )
    
    $
    (79,625
    )
    
    $
    (159,883
    )
    
    $
    (159,250
    )Net increase
    
    $
    80,383
    
    
    $
    54,701
    
    
    $
    159,883
    
    
    $
    108,090Net income available to common stockholders
    
    $
    93,499
    
    
    $
    196,008
    
    
    $
    159,630
    
    
    $
    589,273Net increase as percentage ofNet income available to common stockholders
    
    
    86.0
    %
    
    
    27.9
    %
    
    
    100.2
    %
    
    
    18.3
    %
   36




---



##### 



Item 4. Controls and Procedures
     37




---



##### 



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
  
    
    The election of three directors to hold office until the 2012 Annual Meeting of
Stockholders.
 Nominee
    
    Shares Voted For
    
    Authority WithheldDavid A.R. Dullum
    
    7,635,093
    
    105,559Maurice W. Coulon
    
    7,672,195
    
    68,457Terry Brubaker
    
    7,682,319
    
    58,333
 The following directors will continue to hold office until the 2010 Annual Meeting of
Stockholders:
 
 The following directors will continue to hold office until the 2011 Annual Meeting of
Stockholders:
 
 38




---



##### 




    
    To ratify the selection by the Audit Committee of the Board of Directors of
PricewaterhouseCoopers LLP as our independent registered public accounting firm for our
fiscal year ending December 31, 2009.
 Shares Voted
    
    AuthorityShares Voted For
    
    Against
    
    Withheld7,681,942
    
    
    22,142
    
    
    
    36,566
 
 Item 5. Other Information
  39




---



##### 



Item 6. Exhibits
 Exhibit Index
 Exhibit
    
    Description of Document3.1
    
    Amended and Restated Articles of Incorporation, incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S -11 (File No. 333-106024),
filed September 11, 2003.3.1.1
    
    Articles of Amendment to Articles of Amended and Restated Articles of Incorporation.3.2
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-11 (File No. 333-106024), filed September 11, 2003.3.2.1
    
    First Amendment to Bylaws, incorporated by reference to Exhibit 99.1 of the Current
Report on Form 8-K (File No. 000-50363), filed July 10, 2007.4.1
    
    Articles Supplementary Establishing and Fixing the Rights and Preferences of the
7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to
Exhibit 3.3 of Form 8-A (File No. 000-50363), filed January 19, 2006.4.2
    
    Articles Supplementary Establishing and Fixing the Rights and Preferences of the
7.5% Series B Cumulative Redeemable Preferred Stock, incorporated by reference to
Exhibit 3.4 of Form 8-A (File No. 000-50363), filed October 19, 2006.4.3
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of
Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form
8-A (File No. 000-50363), filed January 19, 2006.4.4
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable Preferred Stock of
Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.2 of Form
8-A (File No. 000-50363), filed October 19, 2006.10.1
    
    Second Amendment to Credit Agreement by and among Gladstone Commercial Limited
Partnership and KeyBank National Association, dated as of June 30, 2009,
incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File
No. 000-50363), filed July 1, 2009.11
    
    Computation of Per Share Earnings from Operations (included in the notes to the
unaudited consolidated 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.
 40




---



##### 



Gladstone Commercial CorporationDate: July 30, 2009
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 41