##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 or
    
    (I.R.S. Employer Identification No.)organization)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 þ o
 o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o.(Do not check if a smaller reporting company)
 o þ




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##### 



GLADSTONE COMMERCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2009
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the nine months ended
September 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
    
    
    37Item 4. Controls and Procedures
    
    
    38PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41EX-31.1EX-31.2EX-32.1EX-32.2
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GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30, 2009
    
    
    December 31, 2008ASSETSReal estate, at cost
    
    $
    389,699,961
    
    
    $
    390,562,138Less: accumulated depreciation
    
    
    31,754,201
    
    
    
    24,757,576Total real estate, net
    
    
    357,945,760
    
    
    
    365,804,562Lease intangibles, net
    
    
    28,962,361
    
    
    
    31,533,843Mortgage note receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    2,787,398
    
    
    
    4,503,578Restricted cash
    
    
    3,049,099
    
    
    
    2,677,561Funds held in escrow
    
    
    2,697,354
    
    
    
    2,150,919Deferred rent receivable
    
    
    8,574,415
    
    
    
    7,228,811Deferred financing costs, net
    
    
    3,344,509
    
    
    
    4,383,446Due from adviser (Refer to Note 2)
    
    
    
    
    
    
    108,898Prepaid expenses and other assets
    
    
    920,787
    
    
    
    707,167TOTAL ASSETS
    
    $
    418,281,683
    
    
    $
    429,098,785LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    253,372,911
    
    
    $
    255,111,173Short-term loan and borrowings under line of credit
    
    
    31,800,000
    
    
    
    31,500,000Deferred rent liability
    
    
    2,558,299
    
    
    
    3,147,472Asset retirement obligation liability
    
    
    2,268,997
    
    
    
    2,190,192Accounts payable and accrued expenses
    
    
    1,417,884
    
    
    
    2,673,787Due to adviser (Refer to Note 2)
    
    
    1,271,766
    
    
    
    Obligation under capital lease
    
    
    244,609
    
    
    
    235,378Rent received in advance, security deposits and funds held in escrow
    
    
    4,026,157
    
    
    
    3,745,523Total Liabilities
    
    
    296,960,623
    
    
    
    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
    
    
    (2,551,601
    )
    
    
    (2,595,886
    )Distributions in excess of accumulated earnings
    
    
    (46,760,633
    )
    
    
    (37,542,148
    )Total Stockholders Equity
    
    
    121,321,060
    
    
    
    130,495,260TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    418,281,683
    
    
    $
    429,098,785
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GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Operating revenuesRental income
    
    $
    10,383,002
    
    
    $
    10,131,678
    
    
    $
    31,150,423
    
    
    $
    29,191,410Interest income from mortgage note receivable
    
    
    191,667
    
    
    
    216,446
    
    
    
    568,750
    
    
    
    673,548Tenant recovery revenue
    
    
    82,425
    
    
    
    83,144
    
    
    
    247,593
    
    
    
    253,495Total operating revenues
    
    
    10,657,094
    
    
    
    10,431,268
    
    
    
    31,966,766
    
    
    
    30,118,453Operating expensesDepreciation and amortization
    
    
    3,284,723
    
    
    
    3,256,602
    
    
    
    9,875,156
    
    
    
    9,416,786Property operating expenses
    
    
    219,537
    
    
    
    222,647
    
    
    
    687,129
    
    
    
    665,103Due diligence expense
    
    
    
    
    
    
    2,158
    
    
    
    16,433
    
    
    
    4,282Base management fee (Refer to Note 2)
    
    
    342,743
    
    
    
    404,108
    
    
    
    1,073,041
    
    
    
    1,255,833Incentive fee (Refer to Note 2)
    
    
    835,003
    
    
    
    793,787
    
    
    
    2,433,945
    
    
    
    2,300,286Administration fee (Refer to Note 2)
    
    
    293,075
    
    
    
    238,241
    
    
    
    774,636
    
    
    
    724,978Professional fees
    
    
    105,368
    
    
    
    117,857
    
    
    
    466,529
    
    
    
    362,584Insurance
    
    
    50,757
    
    
    
    43,354
    
    
    
    147,561
    
    
    
    126,947Directors fees
    
    
    49,459
    
    
    
    54,702
    
    
    
    149,547
    
    
    
    161,202Stockholder related expenses
    
    
    32,914
    
    
    
    42,232
    
    
    
    204,806
    
    
    
    271,430Asset retirement obligation expense
    
    
    36,060
    
    
    
    34,711
    
    
    
    106,441
    
    
    
    97,077General and administrative
    
    
    19,643
    
    
    
    10,079
    
    
    
    45,647
    
    
    
    40,582Total operating expenses before credit from Adviser
    
    
    5,269,282
    
    
    
    5,220,478
    
    
    
    15,980,871
    
    
    
    15,427,090Credit to incentive fee
    
    
    (200,264
    )
    
    
    (205,876
    )
    
    
    (564,968
    )
    
    
    (941,928
    )Total operating expenses
    
    
    5,069,018
    
    
    
    5,014,602
    
    
    
    15,415,903
    
    
    
    14,485,162Other income (expense)Interest income from temporary investments
    
    
    524
    
    
    
    4,559
    
    
    
    17,989
    
    
    
    20,796Interest income  employee loans
    
    
    48,130
    
    
    
    49,624
    
    
    
    145,878
    
    
    
    152,620Other income
    
    
    
    
    
    
    7,500
    
    
    
    11,320
    
    
    
    56,493Interest expense
    
    
    (4,521,848
    )
    
    
    (4,354,381
    )
    
    
    (13,443,405
    )
    
    
    (12,106,885
    )Total other expense
    
    
    (4,473,194
    )
    
    
    (4,292,698
    )
    
    
    (13,268,218
    )
    
    
    (11,876,976
    )Income from continuing operations
    
    
    1,114,882
    
    
    
    1,123,968
    
    
    
    3,282,645
    
    
    
    3,756,315Discontinued operationsIncome from discontinued operations
    
    
    4,070
    
    
    
    17,591
    
    
    
    42,823
    
    
    
    21,392Gain on sale of real estate
    
    
    160,038
    
    
    
    
    
    
    
    160,038
    
    
    
    Total discontinued operations
    
    
    164,108
    
    
    
    17,591
    
    
    
    202,861
    
    
    
    21,392Net income
    
    
    1,278,990
    
    
    
    1,141,559
    
    
    
    3,485,506
    
    
    
    3,777,707Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )Net income available to common stockholders
    
    $
    255,553
    
    
    $
    118,122
    
    
    $
    415,194
    
    
    $
    707,395Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.08Discontinued operations
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.02
    
    
    
    0.00Net income available to common stockholders
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08Weighted 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 nine months ended September 30,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    3,485,506
    
    
    $
    3,777,707Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    9,885,571
    
    
    
    9,435,690Amortization of deferred financing costs
    
    
    1,144,991
    
    
    
    806,075Amortization of deferred rent asset and liability
    
    
    (399,052
    )
    
    
    (399,049
    )Accretion of obligation under capital lease
    
    
    9,232
    
    
    
    7,234Asset retirement obligation expense, including discontinued operations
    
    
    106,902
    
    
    
    98,394Gain on sale of real estate
    
    
    (160,038
    )
    
    
    Increase in prepaid expenses and other assets
    
    
    (413,620
    )
    
    
    (110,382
    )Increase in deferred rent receivable
    
    
    (1,564,298
    )
    
    
    (1,763,153
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    124,761
    
    
    
    182,694(Decrease) increase in rent received in advance
    
    
    (90,904
    )
    
    
    171,191Net cash provided by operating activities
    
    
    12,129,051
    
    
    
    12,206,401Cash flows from investing activities:Real estate investments
    
    
    (85,534
    )
    
    
    (48,935,032
    )Leasing commissions paid
    
    
    (298,270
    )
    
    
    Proceeds from sale of real estate
    
    
    1,089,031
    
    
    
    Receipts from lenders for reserves held in escrow
    
    
    853,264
    
    
    
    630,033Payments to lenders for reserves held in escrow
    
    
    (1,399,699
    )
    
    
    (1,216,896
    )Increase in restricted cash
    
    
    (371,538
    )
    
    
    (723,464
    )Deposits on future acquisitions
    
    
    
    
    
    
    (1,650,000
    )Deposits refunded or applied against real estate investments
    
    
    200,000
    
    
    
    1,750,000Net cash used in investing activities
    
    
    (12,746
    )
    
    
    (50,145,359
    )Cash flows from financing activities:Borrowings under mortgage notes payable
    
    
    
    
    
    
    48,015,000Principal repayments on mortgage notes payable
    
    
    (1,738,262
    )
    
    
    (1,171,849
    )Principal repayments on employee notes receivable
    
    
    44,285
    
    
    
    140,077Borrowings from line of credit
    
    
    49,700,000
    
    
    
    62,600,000Repayments on line of credit
    
    
    (29,400,000
    )
    
    
    (56,800,000
    )Repayment of short-term loan
    
    
    (20,000,000
    )
    
    
    Receipts from tenants for reserves
    
    
    2,541,657
    
    
    
    1,746,804Payments to tenants from reserves
    
    
    (2,197,535
    )
    
    
    (1,555,146
    )Increase in security deposits
    
    
    27,415
    
    
    
    531,806Payments for deferred financing costs
    
    
    (106,054
    )
    
    
    (1,153,228
    )Distributions paid for common and preferred
    
    
    (12,703,991
    )
    
    
    (12,706,239
    )Net cash (used in) provided by financing activities
    
    
    (13,832,485
    )
    
    
    39,647,225Net (decrease) increase in cash and cash equivalents
    
    
    (1,716,180
    )
    
    
    1,708,267Cash and cash equivalents, beginning of period
    
    
    4,503,578
    
    
    
    1,356,408Cash and cash equivalents, end of period
    
    $
    2,787,398
    
    
    $
    3,064,675NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    
    
    
    $
    245,195Fixed rate debt assumed in connection with acquisitions
    
    $
    
    
    
    $
    6,461,603
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GLADSTONE
COMMERCIAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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 September 30,
    
    
    For the nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income available to common stockholders
    
    $
    255,553
    
    
    $
    118,122
    
    
    $
    415,194
    
    
    $
    707,395Denominator for basic & diluted weighted
average shares
    
    
    8,563,264
    
    
    
    8,565,264
    
    
    
    8,563,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08
 4. Real Estate and Intangible Assets
 Real Estate
  September 30,       2009
    
    
    December 31, 2008Real estate:Land
    
    $
    55,035,962
    (1)
    
    $
    55,226,042
    (1)Building
    
    
    324,843,293
    
    
    
    325,515,390Tenant improvements
    
    
    9,820,706
    
    
    
    9,820,706Accumulated
depreciation
    
    
    (31,754,201
    )
    
    
    (24,757,576
    )Real estate, net
    
    $
    357,945,760
    
    
    $
    365,804,562
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.  14




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TenantYear
    
    Lease PaymentsThree months ending December 31, 2009
    
    $
    9,831,6182010
    
    
    38,819,4462011
    
    
    38,525,8052012
    
    
    38,614,8452013
    
    
    33,261,3842014
    
    
    29,025,909Thereafter
    
    $
    160,507,642
  Intangible Assets
  September 30, 2009
    
    
    December 31, 2008Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,935,445
    
    
    $
    (6,323,990
    )
    
    $
    15,981,245
    
    
    $
    (5,079,343
    )Leasing costs
    
    
    9,909,528
    
    
    
    (3,618,782
    )
    
    
    9,662,731
    
    
    
    (2,987,360
    )Customer relationships
    
    
    17,136,501
    
    
    
    (4,076,341
    )
    
    
    17,136,501
    
    
    
    (3,179,931
    )$
    42,981,474
    
    
    $
    (14,019,113
    )
    
    $
    42,780,477
    
    
    $
    (11,246,634
    )
  15




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EstimatedYear
    
    Amortization ExpenseThree months ending December
31, 2009
    
    $
    1,363,5652010
    
    
    5,339,7212011
    
    
    4,875,2792012
    
    
    4,229,7922013
    
    
    2,292,5442014
    
    
    2,036,328Thereafter
    
    $
    8,825,133
 5. Real Estate Held for Sale and Discontinued Operations
   For the three months ended September 30,
    
    
    For the nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Operating revenue
    
    $
    4,452
    
    
    $
    25,875
    
    
    $
    56,202
    
    
    $
    77,626Operating expense
    
    
    (382
    )
    
    
    (8,284
    )
    
    
    (13,379
    )
    
    
    (56,234
    )Income from
discontinued
operations
    
    $
    4,070
    
    
    $
    17,591
    
    
    $
    42,823
    
    
    $
    21,392
 6. Mortgage Note Receivable
    16




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7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  Principal Balance OutstandingDate ofIssuance/
    
    Principal
    
    Stated Interest     Rate atAssumption
    
    Maturity Date
    

September  30, 2009(1)
    
    September 30, 2009
    
    
    December 31, 2008Fixed-Rate Mortgage Notes Payable:03/16/05
    
    04/01/30
    
    6.33%
    
    $
    2,901,378
    
    
    $
    2,948,75308/25/05
    
    09/01/15
    
    5.33%
    
    
    21,172,666
    
    
    
    21,399,64409/12/05
    
    09/01/15
    
    5.21%
    
    
    12,433,691
    
    
    
    12,560,67312/21/05
    
    12/08/15
    
    5.71%
    
    
    19,056,322
    
    
    
    19,241,11702/21/06
    
    12/01/13
    
    5.91%
    
    
    9,228,511
    
    
    
    9,344,90802/21/06
    
    06/30/14
    
    5.20%
    
    
    19,207,834
    
    
    
    19,472,74003/29/06
    
    04/01/16
    
    5.92%
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    05/05/16
    
    6.58%
    
    
    14,080,170
    
    
    
    14,281,61611/22/06
    
    12/01/16
    
    5.76%
    
    
    14,181,437
    
    
    
    14,309,00012/22/06
    
    01/01/17
    
    5.79%
    
    
    21,672,370
    
    
    
    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%
    
    
    4,377,989
    
    
    
    4,426,39310/15/07
    
    11/08/17
    
    6.63%
    
    
    15,701,935
    
    
    
    15,828,61208/29/08
    
    06/01/16
    
    6.80%
    
    
    6,328,608
    
    
    
    6,421,71709/15/08
    
    10/01/10(2)
    
    6.85%
    
    
    48,015,000
    
    
    
    48,015,000Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    253,372,911
    
    
    
    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
    
    
    
    
    
    
    
    $
    285,172,911
    
    
    $
    286,611,173
 
 (1)
    
    The weighted average interest rate on all debt outstanding at September 30, 2009 was approximately 5.61%.(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




---



##### Table of Contents



Scheduled principalYear
    
    paymentsThree months ending December 31, 2009
    
    $
    715,7132010
    
    
    50,533,486
    (1)2011
    
    
    2,799,6012012
    
    
    3,087,8242013
    
    
    11,828,3752014
    
    
    20,367,143Thereafter
    
    
    164,040,769$
    253,372,911
 
 (1)
    
    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. Line of Credit
    18




---



##### Table of Contents



Short-Term Loan
  8. Stockholders Equity
  Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalPreferred
    
    
    Common
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityBalance at December
31, 2008
    
    $
    2,150
    
    
    $
    8,563
    
    
    $
    170,622,581
    
    
    $
    (2,595,886
    )
    
    $
    (37,542,148
    )
    
    $
    130,495,260Repayment of
principal on notes
receivable -
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,285
    
    
    
    
    
    
    
    44,285Distributions
declared to common
and preferred
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,703,991
    )
    
    
    (12,703,991
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,485,506
    
    
    
    3,485,506Balance at
September 30, 2009
    
    $
    2,150
    
    
    $
    8,563
    
    
    $
    170,622,581
    
    
    $
    (2,551,601
    )
    
    $
    (46,760,633
    )
    
    $
    121,321,060
   19




---



##### Table of Contents



Amount of
    
    
    Outstanding BalanceNumber of Options
    
    
    Strike Price of
    
    
    Promissory Note
    
    
    of Employee Loans
    
    
    Maturity Date of
    
    
    Interest Rate onDate Issued
    
    Exercised
    
    
    Options Exercised
    
    
    Issued to Employees
    
    
    at 9/30/09
    
    
    Note
    
    
    NoteSep 2004
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    360,007
    
    
    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
    
    
    2,000
    
    
    
    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
    %170,422
    
    
    
    
    
    
    $
    2,696,594
    
    
    $
    2,551,601
  9. Segment Information
   20




---



##### Table of Contents



As of and for the three months ended September 30, 2009
    
    
    As of and for the nine months ended September 30, 2009Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,465,427
    
    
    $
    191,667
    
    
    $
    
    
    
    $
    10,657,094
    
    
    $
    31,398,016
    
    
    $
    568,750
    
    
    $
    
    
    
    $
    31,966,766Operating expenses
    
    
    (3,540,320
    )
    
    
    
    
    
    
    (1,528,698
    )(1)
    
    
    (5,069,018
    )
    
    
    (10,685,159
    )
    
    
    
    
    
    
    (4,730,744
    )(1)
    
    
    (15,415,903
    )Other expense
    
    
    (4,146,341
    )
    
    
    
    
    
    
    (326,853
    )(2)
    
    
    (4,473,194
    )
    
    
    (12,343,000
    )
    
    
    
    
    
    
    (925,218
    )(2)
    
    
    (13,268,218
    )Discontinued
operations
    
    
    164,108
    
    
    
    
    
    
    
    
    
    
    
    164,108
    
    
    
    202,861
    
    
    
    
    
    
    
    
    
    
    
    202,861Net income
    
    $
    2,942,874
    
    
    $
    191,667
    
    
    $
    (1,855,551
    )
    
    $
    1,278,990
    
    
    $
    8,572,718
    
    
    $
    568,750
    
    
    $
    (5,655,962
    )
    
    $
    3,485,506Total Assets
    
    $
    398,456,908
    
    
    $
    10,062,500
    
    
    $
    9,762,275
    
    
    $
    418,281,683
    
    
    $
    398,456,908
    
    
    $
    10,062,500
    
    
    $
    9,762,275
    
    
    $
    418,281,683
 As of and for the three months ended September 30, 2008
    
    
    As of and for the nine months ended September 30, 2008Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,214,822
    
    
    $
    216,446
    
    
    $
    
    
    
    $
    10,431,268
    
    
    $
    29,444,905
    
    
    $
    673,548
    
    
    $
    
    
    
    $
    30,118,453Operating expenses
    
    
    (3,516,118
    )
    
    
    
    
    
    
    (1,498,484
    )(1)
    
    
    (5,014,602
    )
    
    
    (10,183,248
    )
    
    
    
    
    
    
    (4,301,914
    )(1)
    
    
    (14,485,162
    )Other expense
    
    
    (3,426,160
    )
    
    
    
    
    
    
    (866,538
    )(2)
    
    
    (4,292,698
    )
    
    
    (9,593,917
    )
    
    
    
    
    
    
    (2,283,059
    )(2)
    
    
    (11,876,976
    )Discontinued
operations
    
    
    17,591
    
    
    
    
    
    
    
    
    
    
    
    17,591
    
    
    
    21,392
    
    
    
    
    
    
    
    
    
    
    
    21,392Net income
    
    $
    3,290,135
    
    
    $
    216,446
    
    
    $
    (2,365,022
    )
    
    $
    1,141,559
    
    
    $
    9,689,132
    
    
    $
    673,548
    
    
    $
    (6,584,973
    )
    
    $
    3,777,707Total Assets
    
    $
    409,461,178
    
    
    $
    10,070,714
    
    
    $
    10,751,163
    
    
    $
    430,283,055
    
    
    $
    409,461,178
    
    
    $
    10,070,714
    
    
    $
    10,751,163
    
    
    $
    430,283,055
 
 (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 and short-term loan
of $375,507 and $1,100,405 for the three months ended September 30, 2009 and 2008, respectively,
and $1,100,405 and $2,512,968 for the nine months ended September 30, 2009 and 2008, respectively.
It is not practicable to allocate the interest from the line of credit or short-term loan to either
operating segment, thus it is included in the other column. 10. Subsequent Events
    21




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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




---



##### Table of Contents



Recent Events
 Financing Activities:
   Leasing Activities:
   23




---



##### Table of Contents



Dispositions:
  Industry Classifications
  September 30, 2009
    
    
    September 30, 2008Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeAutomobile
    
    $
    874,990
    
    
    
    2.8
    %
    
    $
    874,990
    
    
    
    3.0
    %Beverage, Food & Tobacco
    
    
    1,641,563
    
    
    
    5.3
    %
    
    
    1,534,622
    
    
    
    5.3
    %Buildings and Real Estate
    
    
    1,519,251
    
    
    
    4.9
    %
    
    
    1,507,099
    
    
    
    5.2
    %Chemicals, Plastics & Rubber
    
    
    2,395,845
    
    
    
    7.7
    %
    
    
    1,655,620
    
    
    
    5.7
    %Containers, Packaging & Glass
    
    
    1,747,626
    
    
    
    5.6
    %
    
    
    1,706,406
    
    
    
    5.8
    %Diversified/Conglomerate Manufacturing
    
    
    2,748,515
    
    
    
    8.8
    %
    
    
    2,249,576
    
    
    
    7.7
    %Diversified/Conglomerate Services
    
    
    231,079
    
    
    
    0.7
    %
    
    
    231,079
    
    
    
    0.8
    %Electronics
    
    
    4,624,341
    
    
    
    14.8
    %
    
    
    4,624,341
    
    
    
    15.8
    %Healthcare, Education & Childcare
    
    
    4,609,061
    
    
    
    14.8
    %
    
    
    4,182,663
    
    
    
    14.3
    %Home & Office Furnishings
    
    
    397,307
    
    
    
    1.3
    %
    
    
    397,307
    
    
    
    1.4
    %Insurance
    
    
    542,150
    
    
    
    1.7
    %
    
    
    542,150
    
    
    
    1.9
    %Machinery
    
    
    1,791,453
    
    
    
    5.8
    %
    
    
    1,644,601
    
    
    
    5.6
    %Oil & Gas
    
    
    855,391
    
    
    
    2.7
    %
    
    
    864,332
    
    
    
    3.0
    %Personal & Non-Durable Consumer
Products
    
    
    1,016,041
    
    
    
    3.3
    %
    
    
    1,016,380
    
    
    
    3.5
    %Personal, Food & Miscellaneous Services
    
    
    431,255
    
    
    
    1.4
    %
    
    
    431,255
    
    
    
    1.5
    %Printing & Publishing
    
    
    1,639,363
    
    
    
    5.3
    %
    
    
    1,644,212
    
    
    
    5.6
    %Telecommunications
    
    
    4,085,192
    
    
    
    13.1
    %
    
    
    4,084,777
    
    
    
    13.8
    %$
    31,150,423
    
    
    
    100.0
    %
    
    $
    29,191,410
    
    
    
    100.0
    %
 Our Adviser and Administrator
   24




---



##### Table of Contents



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




---



##### Table of Contents



Quarterly Incentive Fee Based on FFO
 
 
   Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
  26




---



##### Table of Contents




    
    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




---



##### Table of Contents



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




---



##### Table of Contents



Results of Operations
  A comparison of our operating results for the three and nine months ended September 30, 2009 and 2008 is below
 For the three months ended September 30,
    
    
    For the nine months ended September 30,%2009
    
    
    2008
    
    
    $ Change
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,383,002
    
    
    $
    10,131,678
    
    
    $
    251,324
    
    
    
    2
    %
    
    $
    31,150,423
    
    
    $
    29,191,410
    
    
    $
    1,959,013
    
    
    
    7
    %Interest income from mortgage notes receivable
    
    
    191,667
    
    
    
    216,446
    
    
    
    (24,779
    )
    
    
    -11
    %
    
    
    568,750
    
    
    
    673,548
    
    
    
    (104,798
    )
    
    
    -16
    %Tenant recovery revenue
    
    
    82,425
    
    
    
    83,144
    
    
    
    (719
    )
    
    
    -1
    %
    
    
    247,593
    
    
    
    253,495
    
    
    
    (5,902
    )
    
    
    -2
    %Total operating revenues
    
    
    10,657,094
    
    
    
    10,431,268
    
    
    
    225,826
    
    
    
    2
    %
    
    
    31,966,766
    
    
    
    30,118,453
    
    
    
    1,848,313
    
    
    
    6
    %Operating expensesDepreciation and amortization
    
    
    3,284,723
    
    
    
    3,256,602
    
    
    
    28,121
    
    
    
    1
    %
    
    
    9,875,156
    
    
    
    9,416,786
    
    
    
    458,370
    
    
    
    5
    %Property operating expenses
    
    
    219,537
    
    
    
    222,647
    
    
    
    (3,110
    )
    
    
    -1
    %
    
    
    687,129
    
    
    
    665,103
    
    
    
    22,026
    
    
    
    3
    %Due diligence expense
    
    
    
    
    
    
    2,158
    
    
    
    (2,158
    )
    
    
    -100
    %
    
    
    16,433
    
    
    
    4,282
    
    
    
    12,151
    
    
    
    284
    %Base management fee
    
    
    342,743
    
    
    
    404,108
    
    
    
    (61,365
    )
    
    
    -15
    %
    
    
    1,073,041
    
    
    
    1,255,833
    
    
    
    (182,792
    )
    
    
    -15
    %Incentive fee
    
    
    835,003
    
    
    
    793,787
    
    
    
    41,216
    
    
    
    5
    %
    
    
    2,433,945
    
    
    
    2,300,286
    
    
    
    133,659
    
    
    
    6
    %Administration fee
    
    
    293,075
    
    
    
    238,241
    
    
    
    54,834
    
    
    
    23
    %
    
    
    774,636
    
    
    
    724,978
    
    
    
    49,658
    
    
    
    7
    %Professional fees
    
    
    105,368
    
    
    
    117,857
    
    
    
    (12,489
    )
    
    
    -11
    %
    
    
    466,529
    
    
    
    362,584
    
    
    
    103,945
    
    
    
    29
    %Insurance
    
    
    50,757
    
    
    
    43,354
    
    
    
    7,403
    
    
    
    17
    %
    
    
    147,561
    
    
    
    126,947
    
    
    
    20,614
    
    
    
    16
    %Directors fees
    
    
    49,459
    
    
    
    54,702
    
    
    
    (5,243
    )
    
    
    -10
    %
    
    
    149,547
    
    
    
    161,202
    
    
    
    (11,655
    )
    
    
    -7
    %Stockholder related expense
    
    
    32,914
    
    
    
    42,232
    
    
    
    (9,318
    )
    
    
    -22
    %
    
    
    204,806
    
    
    
    271,430
    
    
    
    (66,624
    )
    
    
    -25
    %Asset retirement obligation expense
    
    
    36,060
    
    
    
    34,711
    
    
    
    1,349
    
    
    
    4
    %
    
    
    106,441
    
    
    
    97,077
    
    
    
    9,364
    
    
    
    10
    %General and administrative
    
    
    19,643
    
    
    
    10,079
    
    
    
    9,564
    
    
    
    95
    %
    
    
    45,647
    
    
    
    40,582
    
    
    
    5,065
    
    
    
    12
    %Total operating expenses before
credit from Adviser
    
    
    5,269,282
    
    
    
    5,220,478
    
    
    
    48,804
    
    
    
    1
    %
    
    
    15,980,871
    
    
    
    15,427,090
    
    
    
    553,781
    
    
    
    4
    %Credit to incentive fee
    
    
    (200,264
    )
    
    
    (205,876
    )
    
    
    5,612
    
    
    
    -3
    %
    
    
    (564,968
    )
    
    
    (941,928
    )
    
    
    376,960
    
    
    
    -40
    %Total operating expenses
    
    
    5,069,018
    
    
    
    5,014,602
    
    
    
    54,416
    
    
    
    1
    %
    
    
    15,415,903
    
    
    
    14,485,162
    
    
    
    930,741
    
    
    
    6
    %Other income (expense)Interest income from temporary investments
    
    
    524
    
    
    
    4,559
    
    
    
    (4,035
    )
    
    
    -89
    %
    
    
    17,989
    
    
    
    20,796
    
    
    
    (2,807
    )
    
    
    -13
    %Interest income  employee loans
    
    
    48,130
    
    
    
    49,624
    
    
    
    (1,494
    )
    
    
    -3
    %
    
    
    145,878
    
    
    
    152,620
    
    
    
    (6,742
    )
    
    
    -4
    %Other income
    
    
    
    
    
    
    7,500
    
    
    
    (7,500
    )
    
    
    -100
    %
    
    
    11,320
    
    
    
    56,493
    
    
    
    (45,173
    )
    
    
    -80
    %Interest expense
    
    
    (4,521,848
    )
    
    
    (4,354,381
    )
    
    
    (167,467
    )
    
    
    4
    %
    
    
    (13,443,405
    )
    
    
    (12,106,885
    )
    
    
    (1,336,520
    )
    
    
    11
    %Total other expense
    
    
    (4,473,194
    )
    
    
    (4,292,698
    )
    
    
    (180,496
    )
    
    
    4
    %
    
    
    (13,268,218
    )
    
    
    (11,876,976
    )
    
    
    (1,391,242
    )
    
    
    12
    %Income from continuing operations
    
    
    1,114,882
    
    
    
    1,123,968
    
    
    
    (9,086
    )
    
    
    -1
    %
    
    
    3,282,645
    
    
    
    3,756,315
    
    
    
    (473,670
    )
    
    
    -13
    %Discontinued operationsIncome from discontinued operations
    
    
    4,070
    
    
    
    17,591
    
    
    
    (13,521
    )
    
    
    -77
    %
    
    
    42,823
    
    
    
    21,392
    
    
    
    21,431
    
    
    
    100
    %Gain on sale of real estate
    
    
    160,038
    
    
    
    
    
    
    
    160,038
    
    
    
    100
    %
    
    
    160,038
    
    
    
    
    
    
    
    160,038
    
    
    
    100
    %Total discontinued operations
    
    
    164,108
    
    
    
    17,591
    
    
    
    146,517
    
    
    
    833
    %
    
    
    202,861
    
    
    
    21,392
    
    
    
    181,469
    
    
    
    848
    %Net income
    
    
    1,278,990
    
    
    
    1,141,559
    
    
    
    137,431
    
    
    
    12
    %
    
    
    3,485,506
    
    
    
    3,777,707
    
    
    
    (292,201
    )
    
    
    -8
    %Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    255,553
    
    
    $
    118,122
    
    
    $
    137,431
    
    
    
    116
    %
    
    $
    415,194
    
    
    $
    707,395
    
    
    $
    (292,201
    )
    
    
    -41
    %
 29




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##### Table of Contents



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




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##### Table of Contents



Other Income and Expense
     Discontinued Operations
  31




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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)
    
    $
    285,172,911
    
    
    $
    34,397,254
    
    
    $
    53,728,980
    
    
    $
    32,256,072
    
    
    $
    164,790,605Interest on Debt Obligations (2)
    
    
    82,209,977
    
    
    
    16,166,528
    
    
    
    24,049,137
    
    
    
    22,255,673
    
    
    
    19,738,639Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Operating Lease Obligations (4)
    
    
    1,791,997
    
    
    
    152,510
    
    
    
    305,021
    
    
    
    305,021
    
    
    
    1,029,445Total
    
    $
    369,474,885
    
    
    $
    50,716,292
    
    
    $
    78,083,138
    
    
    $
    54,816,766
    
    
    $
    185,858,689
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, which represents $31.8
million of the debt obligation due in less than 1 year,
and mortgage notes payable that were outstanding as of September 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 the term 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 September 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. 34




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##### Table of Contents



Off-Balance Sheet Arrangements
  Funds from Operations
      35




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##### Table of Contents



For the three months ended September 30,
    
    
    For the nine months ended September 30,2009
    
    

2008
    
    

2009
    
    

2008Net income
    
    $
    1,278,990
    
    
    $
    1,141,559
    
    
    $
    3,485,506
    
    
    $
    3,777,707Less: Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (3,070,312
    )
    
    
    (3,070,312
    )Net income available to common stockholders
    
    
    255,553
    
    
    
    118,122
    
    
    
    415,194
    
    
    
    707,395Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    3,284,723
    
    
    
    3,262,903
    
    
    
    9,885,571
    
    
    
    9,435,690Less: Gain on sale of real estate
    
    
    (160,038
    )
    
    
    
    
    
    
    (160,038
    )
    
    
    FFO available to common stockholders
    
    $
    3,380,238
    
    
    $
    3,381,025
    
    
    $
    10,140,727
    
    
    $
    10,143,085Weighted 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
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08Basic & diluted FFO per weighted average common
share
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    1.18
    
    
    $
    1.18Distributions declared per common share
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    1.13
    
    
    $
    1.13Percentage of FFO paid per common share
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
    
    
    95
    %
 36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
    For the three months ended September 30,
    
    
    For the nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    20081% increase in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    27,308
    
    
    $
    5
    
    
    $
    82,106Interest expense
    
    
    81,267
    
    
    
    77,178
    
    
    
    241,150
    
    
    
    229,856Net decrease
    
    $
    (81,267
    )
    
    $
    (49,869
    )
    
    $
    (241,145
    )
    
    $
    (147,750
    )Net income available to common
stockholders (as reported)
    
    $
    255,553
    
    
    $
    118,122
    
    
    $
    415,194
    
    
    $
    707,395Net decrease as percentage ofNet income available to common
stockholders (as reported)
    
    
    -31.8
    %
    
    
    -42.2
    %
    
    
    -58.1
    %
    
    
    -20.9
    %1% decrease in the one month LIBORRental & interest income
    
    $
    
    
    
    $
    (24,779
    )
    
    $
    
    
    
    $
    (75,939
    )Interest expense
    
    $
    (81,267
    )
    
    $
    (77,178
    )
    
    $
    (241,150
    )
    
    $
    (229,856
    )Net increase
    
    $
    81,267
    
    
    $
    52,399
    
    
    $
    241,150
    
    
    $
    153,917Net income available to common stockholders
    
    $
    255,553
    
    
    $
    118,122
    
    
    $
    415,194
    
    
    $
    707,395Net increase as percentage ofNet income available to common stockholders
    
    
    31.8
    %
    
    
    44.4
    %
    
    
    58.1
    %
    
    
    21.8
    %
   37




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##### Table of Contents



Item 4. Controls and Procedures
     38




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our real estate investments have a limited number of tenants and are concentrated in a limited
number of industries, which subjects us to an increased risk of significant loss if any one of
these tenants is unable to pay or if particular industries experience downturns.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  39




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##### Table of Contents



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, incorporated by reference to Exhibit 3.1.1 to
the Form 10-Q (File No. 001-33097), filed July 30, 2009.3.2
    
    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, 2006.11
    
    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




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##### Table of Contents



Gladstone Commercial CorporationDate: November 4, 2009
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer 41