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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three and six months ended
June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the six months ended
June 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II  OTHER INFORMATIONItem 1. Legal Proceeding
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39
  2




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##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30, 2008
    
    
    December 31, 2007ASSETSReal estate, net of accumulated depreciation of
$20,102,084 and $15,738,634, respectively
    
    $
    356,463,038
    
    
    $
    324,761,772Lease intangibles, net of accumulated amortization of
$9,370,270 and $7,560,928, respectively
    
    
    30,253,544
    
    
    
    28,989,556Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    1,775,274
    
    
    
    1,356,408Restricted cash
    
    
    2,604,830
    
    
    
    1,914,067Funds held in escrow
    
    
    1,856,708
    
    
    
    1,401,695Deferred rent receivable
    
    
    6,121,058
    
    
    
    5,094,799Deferred financing costs, net of accumulated amortization of
$2,690,249 and $2,184,492, respectively
    
    
    3,955,834
    
    
    
    4,405,129Prepaid expenses and other assets
    
    
    1,215,463
    
    
    
    979,263TOTAL ASSETS
    
    $
    414,245,749
    
    
    $
    378,902,689LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    201,346,692
    
    
    $
    202,120,471Short-term loan and borrowings under line of credit
    
    
    64,550,000
    
    
    
    24,400,000Deferred rent liability
    
    
    3,540,254
    
    
    
    3,933,035Asset retirement obligation liability
    
    
    2,120,183
    
    
    
    1,811,752Accounts payable and accrued expenses
    
    
    944,723
    
    
    
    778,949Due to adviser (Refer to Note 2)
    
    
    1,321,987
    
    
    
    784,301Obligation under capital lease
    
    
    229,223
    
    
    
    Rent received in advance, security deposits and funds held in escrow
    
    
    3,519,217
    
    
    
    2,706,113Total Liabilities
    
    
    277,572,279
    
    
    
    236,534,621STOCKHOLDERS 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, 17,700,000 shares authorized and
8,565,264 shares issued and outstanding
    
    
    8,565
    
    
    
    8,565Additional paid in capital
    
    
    170,640,979
    
    
    
    170,640,979Notes receivable  employees
    
    
    (2,629,846
    )
    
    
    (2,769,923
    )Distributions in excess of accumulated earnings
    
    
    (31,348,378
    )
    
    
    (25,513,703
    )Total Stockholders Equity
    
    
    136,673,470
    
    
    
    142,368,068TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    414,245,749
    
    
    $
    378,902,689
  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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenuesRental income
    
    $
    9,922,018
    
    
    $
    7,732,322
    
    
    $
    19,111,483
    
    
    $
    14,810,358Interest income from mortgage notes receivable
    
    
    218,805
    
    
    
    252,778
    
    
    
    457,102
    
    
    
    502,778Tenant recovery revenue
    
    
    84,635
    
    
    
    94,468
    
    
    
    170,354
    
    
    
    150,203Total operating revenues
    
    
    10,225,458
    
    
    
    8,079,568
    
    
    
    19,738,939
    
    
    
    15,463,339Operating expensesDepreciation and amortization
    
    
    3,185,017
    
    
    
    2,636,154
    
    
    
    6,172,777
    
    
    
    5,053,966Property operating expenses
    
    
    203,858
    
    
    
    218,139
    
    
    
    445,426
    
    
    
    392,301Base management fee (Refer to Note 2)
    
    
    419,857
    
    
    
    471,091
    
    
    
    851,725
    
    
    
    953,135Incentive fee (Refer to Note 2)
    
    
    801,832
    
    
    
    633,805
    
    
    
    1,506,499
    
    
    
    1,219,573Administration fee (Refer to Note 2)
    
    
    274,541
    
    
    
    210,126
    
    
    
    486,737
    
    
    
    417,144Professional fees
    
    
    147,065
    
    
    
    174,667
    
    
    
    244,727
    
    
    
    324,108Insurance
    
    
    41,797
    
    
    
    58,697
    
    
    
    83,594
    
    
    
    117,332Directors fees
    
    
    52,251
    
    
    
    54,250
    
    
    
    106,500
    
    
    
    108,500Stockholder related expenses
    
    
    102,775
    
    
    
    75,361
    
    
    
    229,198
    
    
    
    174,978Asset retirement obligation expense
    
    
    32,764
    
    
    
    28,942
    
    
    
    63,232
    
    
    
    57,102General and administrative
    
    
    18,536
    
    
    
    21,314
    
    
    
    33,167
    
    
    
    61,668Total operating expenses before credit from Adviser
    
    
    5,280,293
    
    
    
    4,582,546
    
    
    
    10,223,582
    
    
    
    8,879,807Credit to incentive fee
    
    
    (173,697
    )
    
    
    (633,805
    )
    
    
    (736,052
    )
    
    
    (1,219,573
    )Total operating expenses
    
    
    5,106,596
    
    
    
    3,948,741
    
    
    
    9,487,530
    
    
    
    7,660,234Other income (expense)Interest income from temporary investments
    
    
    6,689
    
    
    
    63,269
    
    
    
    16,237
    
    
    
    292,285Interest income  employee loans
    
    
    50,852
    
    
    
    56,458
    
    
    
    102,996
    
    
    
    116,880Other income
    
    
    39,697
    
    
    
    9,817
    
    
    
    48,993
    
    
    
    18,231Interest expense
    
    
    (3,996,249
    )
    
    
    (2,702,612
    )
    
    
    (7,749,853
    )
    
    
    (5,217,073
    )Total other expense
    
    
    (3,899,011
    )
    
    
    (2,573,068
    )
    
    
    (7,581,627
    )
    
    
    (4,789,677
    )Income from continuing operations
    
    
    1,219,851
    
    
    
    1,557,759
    
    
    
    2,669,782
    
    
    
    3,013,428Discontinued operationsLoss from discontinued operations
    
    
    (406
    )
    
    
    (1,503
    )
    
    
    (33,634
    )
    
    
    (5,504
    )Net realized income from foreign currency transactions
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    63Taxes refunded on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,667Total discontinued operations
    
    
    (406
    )
    
    
    (1,447
    )
    
    
    (33,634
    )
    
    
    73,226Net income
    
    
    1,219,445
    
    
    
    1,556,312
    
    
    
    2,636,148
    
    
    
    3,086,654Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,875
    )
    
    
    (2,046,874
    )Net income available to common stockholders
    
    $
    196,008
    
    
    $
    532,875
    
    
    $
    589,273
    
    
    $
    1,039,780Earnings per weighted average common share  basic & dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.11Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.12Weighted average shares outstanding- basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
  4




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##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the six months ended June 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    2,636,148
    
    
    $
    3,086,654Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,172,777
    
    
    
    5,053,966Amortization of deferred financing costs
    
    
    505,757
    
    
    
    333,174Amortization of deferred rent asset and liability
    
    
    (266,034
    )
    
    
    (266,034
    )Accretion of obligation under capital lease
    
    
    4,156
    
    
    
    Asset retirement obligation expense
    
    
    63,232
    
    
    
    57,102Increase in prepaid expenses and other assets
    
    
    (286,200
    )
    
    
    (235,916
    )Increase in deferred rent receivable
    
    
    (1,153,008
    )
    
    
    (796,530
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    703,460
    
    
    
    414,610Increase in rent received in advance
    
    
    122,341
    
    
    
    90,057Net cash provided by operating activities
    
    
    8,502,629
    
    
    
    7,737,083Cash flows from investing activities:Real estate investments
    
    
    (38,667,763
    )
    
    
    (53,035,069
    )Net payments to lenders for reserves held in escrow
    
    
    (1,211,600
    )
    
    
    (868,679
    )Increase in restricted cash
    
    
    (690,763
    )
    
    
    (244,588
    )Deposits on future acquisitions
    
    
    (1,650,000
    )
    
    
    (810,000
    )Deposits applied against real estate investments
    
    
    1,700,000
    
    
    
    810,000Net cash used in investing activities
    
    
    (40,520,126
    )
    
    
    (54,148,336
    )Cash flows from financing activities:Borrowings under mortgage notes payable
    
    
    
    
    
    
    28,015,000Principal repayments on mortgage notes payable
    
    
    (773,779
    )
    
    
    (385,070
    )Principal repayments on employee notes receivable from sale of common stock
    
    
    140,077
    
    
    
    400,142Borrowings from line of credit
    
    
    45,150,000
    
    
    
    4,200,000Repayments on line of credit
    
    
    (5,000,000
    )
    
    
    (4,200,000
    )Increase in reserves from tenants
    
    
    1,035,544
    
    
    
    818,745Increase in security deposits
    
    
    411,806
    
    
    
    140,525Payments for deferred financing costs
    
    
    (56,462
    )
    
    
    (688,025
    )Dividends paid for common and preferred
    
    
    (8,470,823
    )
    
    
    (8,213,865
    )Net cash provided by financing activities
    
    
    32,436,363
    
    
    
    20,087,452Net increase (decrease) in cash and cash equivalents
    
    
    418,866
    
    
    
    (26,323,801
    )Cash and cash equivalents, beginning of period
    
    
    1,356,408
    
    
    
    36,005,686Cash and cash equivalents, end of period
    
    $
    1,775,274
    
    
    $
    9,681,885NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    245,199
    
    
    $
    121,084
  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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##### 



June 30, 2008
    
    
    December 31, 2007Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    13,475,625
    
    
    $
    (4,232,147
    )
    
    $
    12,660,732
    
    
    $
    (3,414,868
    )Leasing costs
    
    
    9,470,137
    
    
    
    (2,553,011
    )
    
    
    9,290,026
    
    
    
    (2,114,233
    )Customer relationships
    
    
    16,678,052
    
    
    
    (2,585,112
    )
    
    
    14,599,726
    
    
    
    (2,031,827
    )$
    39,623,814
    
    
    $
    (9,370,270
    )
    
    $
    36,550,484
    
    
    $
    (7,560,928
    )
  EstimatedYear
    
    Amortization Expense2008
    
    $
    1,854,9702009
    
    
    3,582,3002010
    
    
    3,493,8962011
    
    
    3,303,1022012
    
    
    2,901,870
 Impairment
 Investments in Real Estate
  8




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##### 



Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  Deferred financing costs
  9




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##### 



Prepaid expenses and other assets
  Obligation under capital lease
  Revenue recognition
    Income taxes
  10




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##### 



Segment information
  Foreign currency transactions
  Asset retirement obligations
  Real estate held for sale and discontinued operations
  11




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##### 



Recently Issued Accounting Pronouncements
      12




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##### 



Use of estimates
  Reclassifications
  2. Management Advisory Fee
  Amended 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income available to common stockholders
    
    $
    196,008
    
    
    $
    532,875
    
    
    $
    589,273
    
    
    $
    1,039,780Denominator for basic & diluted weighted average shares
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.12
 14




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##### 



4. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,559,736Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,879,949Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,017,985Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,340,983Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,684,836Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,017,586Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,721,041Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,718,983Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    875,734Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,623,904Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,511,380Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,584,965Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,226,902May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,445,767May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    4,071,284Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,303,106Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,552,581Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,359,724Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,240,649Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,919,407Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,102,524Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,102,524Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,102,524Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    8,015,028Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,439,796Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    10,952,569Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,734,291Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    2,895,052Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,077,540Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    13,721,285Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    26,012,981May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,619,690Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,175,022Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,522,334Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    10,961,694Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,510,932Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,510,932Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,510,932Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    6,755,972Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    6,920,899Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    13,495,016Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,008,251May-07
    
    Tewksbury, Massachusetts
    
    
    102,200
    
    
    Industrial
    
    
    10,010,930Jul-07
    
    Mason, Ohio
    
    
    21,264
    
    
    Retail
    
    
    6,036,834Sep-07
    
    Cicero, New York
    
    
    71,880
    
    
    Industrial
    
    
    5,212,246Sep-07
    
    Grand Rapids, Michigan
    
    
    63,235
    
    
    Office
    
    
    11,905,025Sep-07
    
    Bolingbrook, Illinois
    
    
    55,869
    
    
    Industrial
    
    
    6,170,920Dec-07
    
    Decatur, Georgia
    
    
    26,600
    
    
    Office
    
    
    2,849,743Dec-07
    
    Lawrenceville, Georgia
    
    
    12,412
    
    
    Office
    
    
    2,849,743Dec-07
    
    Snellville, Georgia
    
    
    3,800
    
    
    Office
    
    
    2,849,743Dec-07
    
    Covington, Georgia
    
    
    5,000
    
    
    Office
    
    
    2,849,743Dec-07
    
    Cumming, Georgia
    
    
    13,919
    
    
    Office
    
    
    2,849,743Dec-07
    
    Conyers, Georgia
    
    
    6,400
    
    
    Office
    
    
    2,849,743Jan-08
    
    Reading, Pennsylvania
    
    
    42,900
    
    
    Industrial
    
    
    6,625,191Feb-08
    
    Fridley, Minnesota
    
    
    74,160
    
    
    Office
    
    
    9,318,576Mar-08
    
    Concord Township, Ohio
    
    
    273,300
    
    
    Industrial
    
    
    14,450,294Apr-08
    
    Pineville, North Carolina
    
    
    74,950
    
    
    Industrial
    
    
    3,830,277Total real estate, net
    
    
    6,023,588
    
    
    
    
    $
    356,463,038
 15




---



##### 



June 30, 2008
    
    
    December 31, 2007Real estate:Land
    
    $
    53,398,865
    
    
    $
    48,867,482Building
    
    
    313,615,129
    
    
    
    283,829,987Tenant improvements
    
    
    9,551,128
    
    
    
    7,802,937Accumulated depreciation
    
    
    (20,102,084
    )
    
    
    (15,738,634
    )Real estate, net
    
    $
    356,463,038
    
    
    $
    324,761,772
      16




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Capital Lease
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    Obligations
    
    
    PriceReading, Pennsylvania
    
    $
    490,646
    
    
    $
    6,188,032
    
    
    $
    14,208
    
    
    $
    362,479
    
    
    $
    1,786
    
    
    $
    141,232
    
    
    $
    
    
    
    $
    7,198,383Fridley, Minnesota
    
    
    1,354,233
    
    
    
    7,454,098
    
    
    
    619,428
    
    
    
    452,414
    
    
    
    171,005
    
    
    
    807,950
    
    
    
    (225,067
    )
    
    
    10,634,061Concord Township,
Ohio
    
    
    2,020,982
    
    
    
    11,258,232
    
    
    
    1,012,613
    
    
    
    
    
    
    
    5,102
    
    
    
    1,032,347
    
    
    
    
    
    
    
    15,329,276Pineville, North
Carolina
    
    
    695,762
    
    
    
    3,046,673
    
    
    
    101,942
    
    
    
    
    
    
    
    2,218
    
    
    
    96,800
    
    
    
    
    
    
    
    3,943,395$
    4,561,623
    
    
    $
    27,947,035
    
    
    $
    1,748,191
    
    
    $
    814,893
    
    
    $
    180,111
    
    
    $
    2,078,329
    
    
    $
    (225,067
    )
    
    $
    37,105,115
   Year
    
    Lease Payments2008
    
    $
    18,642,9002009
    
    
    36,157,3252010
    
    
    35,887,9182011
    
    
    35,460,1182012
    
    
    34,749,047Thereafter
    
    
    195,972,278
  5. Discontinued Operations
  17




---



##### 



For the three months ended June 30,
    
    
    For the six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating expense
    
    $
    (406
    )
    
    $
    (1,503
    )
    
    $
    (33,634
    )
    
    $
    (5,504
    )Taxes & licenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,667Realized gain on
foreign currency
transactions
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    63Income from
discontinued
operations
    
    $
    (406
    )
    
    $
    (1,447
    )
    
    $
    (33,634
    )
    
    $
    73,226
 6. Mortgage Note Receivable
  18




---



##### 



7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  Principal Maturity
    
    
    Stated Interest Rate at


    
    Principal Balance OutstandingDate of Issuance
    
    
    Date
    
    
    June 30, 2008 (1)
    
    
    June 30, 2008
    
    
    December 31, 2007Fixed-Rate Mortgage Notes Payable:3/16/2005
    
    
    
    4/1/2030
    
    
    
    6.33
    %
    
    $
    2,973,691
    
    
    $
    3,003,5828/25/2005
    
    
    
    9/1/2015
    
    
    
    5.33
    %
    
    
    21,519,316
    
    
    
    21,664,4769/12/2005
    
    
    
    9/1/2015
    
    
    
    5.21
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    12/8/2015
    
    
    
    5.71
    %
    
    
    19,337,950
    
    
    
    19,456,0002/21/2006
    
    
    
    12/1/2013
    
    
    
    5.91
    %
    
    
    9,406,130
    
    
    
    9,480,0632/21/2006
    
    
    
    6/30/2014
    
    
    
    5.20
    %
    
    
    19,613,214
    
    
    
    19,782,2703/29/2006
    
    
    
    4/1/2016
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    
    5/5/2016
    
    
    
    6.58
    %
    
    
    14,387,175
    
    
    
    14,514,21411/22/2006
    
    
    
    12/1/2016
    
    
    
    5.76
    %
    
    
    14,309,000
    
    
    
    14,309,00012/22/2006
    
    
    
    1/1/2017
    
    
    
    5.79
    %
    
    
    21,846,000
    
    
    
    21,846,0002/8/2007
    
    
    
    3/1/2017
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,0006/5/2007
    
    
    
    6/8/2017
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,0009/6/2007
    
    
    
    12/11/2015
    
    
    
    5.81
    %
    
    
    4,457,247
    
    
    
    4,487,20510/15/2007
    
    
    
    11/8/2017
    
    
    
    6.63
    %
    
    
    15,893,969
    
    
    
    15,974,661Total Fixed-Rate Mortgage Notes Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,346,692
    
    
    
    202,120,471Variable-Rate Line of Credit:
    
    
    12/29/2006
    
    
    
    12/29/2009
    (2)
    
    LIBOR + 1.9%
    
    
    44,550,000
    
    
    
    4,400,000Variable-Rate Short-Term Loan:
    
    
    12/21/2007
    
    
    
    12/21/2008
    (3)
    
    LIBOR + 2.75%
    
    
    20,000,000
    
    
    
    20,000,000Total Mortgage Notes Payable, Line of
Credit and Short-Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    265,896,692
    
    
    $
    226,520,471
 
 (1)
    
    The weighted average interest rate on all debt outstanding at June 30, 2008 was
approximately 5.54%.(2)
    
    The line of credit may be extended for a one-year period at the Companys option,
subject to certain conditions.(3)
    
    The short-term loan may be extended for a six-month period at the Companys option,
subject to certain conditions.   19




---



##### 



Scheduled principalYear
    
    payments2008
    
    $
    820,6132009
    
    
    2,254,4702010
    
    
    2,389,8062011
    
    
    2,676,9072012
    
    
    2,953,229Thereafter
    
    
    190,251,667$
    201,346,692
   20




---



##### 



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, 2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,769,923
    )
    
    $
    (25,513,703
    )
    
    $
    142,368,068Repayment of
Principal on Notes
Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,077
    
    
    
    
    
    
    
    140,077Distributions
Declared to Common
and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,470,823
    )
    
    
    (8,470,823
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,636,148
    
    
    
    2,636,148Balance at June 30,
2008
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,629,846
    )
    
    $
    (31,348,378
    )
    
    $
    136,673,470
   OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    
    
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 6/30/08
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    366,348
    
    
    9 years
    
    
    5.00
    %Apr-06
    
    
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,500
    
    
    
    16.01
    
    
    
    40,000
    
    
    
    38,544
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.68
    
    
    
    33,360
    
    
    
    33,360
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    10 years
    
    
    7.87
    %Oct-06
    
    
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    193,200
    
    
    9 years
    
    
    8.17
    %Nov-06
    
    
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    245,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %174,922
    
    
    
    
    
    
    $
    2,769,954
    
    
    $
    2,629,846
   21




---



##### 



9. Segment Information
  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
    
    $
    10,006,653
    
    
    $
    218,805
    
    
    $
    
    
    
    $
    10,225,458
    
    
    $
    19,281,837
    
    
    $
    457,102
    
    
    $
    
    
    
    $
    19,738,939Operating expenses
    
    
    (3,421,639
    )
    
    
    
    
    
    
    (1,684,957
    )
    
    
    (5,106,596
    )
    
    
    (6,681,435
    )
    
    
    
    
    
    
    (2,806,095
    )
    
    
    (9,487,530
    )Other expense
    
    
    
    
    
    
    
    
    
    
    (3,899,011
    )
    
    
    (3,899,011
    )
    
    
    
    
    
    
    
    
    
    
    (7,581,627
    )
    
    
    (7,581,627
    )Discontinued
operations
    
    
    (406
    )
    
    
    
    
    
    
    
    
    
    
    (406
    )
    
    
    (33,634
    )
    
    
    
    
    
    
    
    
    
    
    (33,634
    )Net income
    
    $
    6,584,608
    
    
    $
    218,805
    
    
    $
    (5,583,968
    )
    
    $
    1,219,445
    
    
    $
    12,566,768
    
    
    $
    457,102
    
    
    $
    (10,387,722
    )
    
    $
    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
 As of and for the three months ended June 30, 2007
    
    
    As of and for the six months ended June 30, 2007Real Estate
    
    
    Real Estate
    
    
    
    
    
    
    
    
    
    
    Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    Total
    
    
    Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    7,826,790
    
    
    $
    252,778
    
    
    $
    
    
    
    $
    8,079,568
    
    
    $
    14,960,561
    
    
    $
    502,778
    
    
    $
    
    
    
    $
    15,463,339Operating expenses
    
    
    (2,883,235
    )
    
    
    
    
    
    
    (1,065,506
    )
    
    
    (3,948,741
    )
    
    
    (5,503,369
    )
    
    
    
    
    
    
    (2,156,865
    )
    
    
    (7,660,234
    )Other expense
    
    
    
    
    
    
    
    
    
    
    (2,573,068
    )
    
    
    (2,573,068
    )
    
    
    
    
    
    
    
    
    
    
    (4,789,677
    )
    
    
    (4,789,677
    )Discontinued
operations
    
    
    (1,447
    )
    
    
    
    
    
    
    
    
    
    
    (1,447
    )
    
    
    73,226
    
    
    
    
    
    
    
    
    
    
    
    73,226Net income
    
    $
    4,942,108
    
    
    $
    252,778
    
    
    $
    (3,638,574
    )
    
    $
    1,556,312
    
    
    $
    9,530,418
    
    
    $
    502,778
    
    
    $
    (6,946,542
    )
    
    $
    3,086,654Total Assets
    
    $
    313,272,218
    
    
    $
    10,000,000
    
    
    $
    15,874,221
    
    
    $
    339,146,439
    
    
    $
    313,272,218
    
    
    $
    10,000,000
    
    
    $
    15,874,221
    
    
    $
    339,146,439
  10. Pro Forma Financial Information
  For the three months ended June 30,
    
    
    For the six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating Data:Total operating revenue
    
    $
    10,262,573
    
    
    $
    9,040,747
    
    
    $
    20,510,506
    
    
    $
    17,376,698Total operating expenses
    
    
    (5,118,465
    )
    
    
    (4,354,643
    )
    
    
    (9,798,787
    )
    
    
    (8,476,116
    )Other expense
    
    
    (3,913,799
    )
    
    
    (2,990,500
    )
    
    
    (7,909,126
    )
    
    
    (5,624,540
    )Income from continuing operations
    
    
    1,230,309
    
    
    
    1,695,604
    
    
    
    2,802,593
    
    
    
    3,276,042Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,875
    )
    
    
    (2,046,874
    )Net income from continuing operations available to
common stockholders
    
    $
    206,872
    
    
    $
    672,167
    
    
    $
    755,718
    
    
    $
    1,229,168Share and Per Share Data:Basic & diluted net income from continuing operations
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.09
    
    
    $
    0.14Weighted average shares outstanding-basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
 22




---



##### 



11. Subsequent Events
   23




---



##### 



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
 Our Investment Strategy
  Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
 24
      Investment Advisory and Administration Agreements
    Management Services and Fees under the Amended Advisory Agreement
  25
      Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
   26
      
    
    The amount of acquisition costs allocated to the various tangible and intangible assets
on our balance sheet; and
    
    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 investors of
REITs 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 result of operations.
 Asset Impairment Evaluation
  Provision for Loan Losses
  Recently Issued Accounting Pronouncements
  27
      Results of Operations
  A comparison of our operating results for the three and six months ended June 30, 2008 and 2007 is
below
 For the three months ended June 30,
    
    
    For the six months ended June 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    9,922,018
    
    
    $
    7,732,322
    
    
    $
    2,189,696
    
    
    
    28
    %
    
    $
    19,111,483
    
    
    $
    14,810,358
    
    
    $
    4,301,125
    
    
    
    29
    %Interest income from mortgage notes receivable
    
    
    218,805
    
    
    
    252,778
    
    
    
    (33,973
    )
    
    
    -13
    %
    
    
    457,102
    
    
    
    502,778
    
    
    
    (45,676
    )
    
    
    -9
    %Tenant recovery revenue
    
    
    84,635
    
    
    
    94,468
    
    
    
    (9,833
    )
    
    
    -10
    %
    
    
    170,354
    
    
    
    150,203
    
    
    
    20,151
    
    
    
    13
    %Total operating revenues
    
    
    10,225,458
    
    
    
    8,079,568
    
    
    
    2,145,890
    
    
    
    27
    %
    
    
    19,738,939
    
    
    
    15,463,339
    
    
    
    4,275,600
    
    
    
    28
    %Operating expensesDepreciation and amortization
    
    
    3,185,017
    
    
    
    2,636,154
    
    
    
    548,863
    
    
    
    21
    %
    
    
    6,172,777
    
    
    
    5,053,966
    
    
    
    1,118,811
    
    
    
    22
    %Property operating expenses
    
    
    203,858
    
    
    
    218,139
    
    
    
    (14,281
    )
    
    
    -7
    %
    
    
    445,426
    
    
    
    392,301
    
    
    
    53,125
    
    
    
    14
    %Base management fee
    
    
    419,857
    
    
    
    471,091
    
    
    
    (51,234
    )
    
    
    -11
    %
    
    
    851,725
    
    
    
    953,135
    
    
    
    (101,410
    )
    
    
    -11
    %Incentive fee
    
    
    801,832
    
    
    
    633,805
    
    
    
    168,027
    
    
    
    27
    %
    
    
    1,506,499
    
    
    
    1,219,573
    
    
    
    286,926
    
    
    
    24
    %Administration fee
    
    
    274,541
    
    
    
    210,126
    
    
    
    64,415
    
    
    
    31
    %
    
    
    486,737
    
    
    
    417,144
    
    
    
    69,593
    
    
    
    17
    %Professional fees
    
    
    147,065
    
    
    
    174,667
    
    
    
    (27,602
    )
    
    
    -16
    %
    
    
    244,727
    
    
    
    324,108
    
    
    
    (79,381
    )
    
    
    -24
    %Insurance
    
    
    41,797
    
    
    
    58,697
    
    
    
    (16,900
    )
    
    
    -29
    %
    
    
    83,594
    
    
    
    117,332
    
    
    
    (33,738
    )
    
    
    -29
    %Directors fees
    
    
    52,251
    
    
    
    54,250
    
    
    
    (1,999
    )
    
    
    -4
    %
    
    
    106,500
    
    
    
    108,500
    
    
    
    (2,000
    )
    
    
    -2
    %Stockholder related expense
    
    
    102,775
    
    
    
    75,361
    
    
    
    27,414
    
    
    
    36
    %
    
    
    229,198
    
    
    
    174,978
    
    
    
    54,220
    
    
    
    31
    %Asset retirement obligation expense
    
    
    32,764
    
    
    
    28,942
    
    
    
    3,822
    
    
    
    13
    %
    
    
    63,232
    
    
    
    57,102
    
    
    
    6,130
    
    
    
    11
    %General and administrative
    
    
    18,536
    
    
    
    21,314
    
    
    
    (2,778
    )
    
    
    -13
    %
    
    
    33,167
    
    
    
    61,668
    
    
    
    (28,501
    )
    
    
    -46
    %Total operating expenses before credit from Adviser
    
    
    5,280,293
    
    
    
    4,582,546
    
    
    
    697,747
    
    
    
    15
    %
    
    
    10,223,582
    
    
    
    8,879,807
    
    
    
    1,343,775
    
    
    
    15
    %Credit to incentive fee
    
    
    (173,697
    )
    
    
    (633,805
    )
    
    
    460,108
    
    
    
    -73
    %
    
    
    (736,052
    )
    
    
    (1,219,573
    )
    
    
    483,521
    
    
    
    -40
    %Total operating expenses
    
    
    5,106,596
    
    
    
    3,948,741
    
    
    
    1,157,855
    
    
    
    29
    %
    
    
    9,487,530
    
    
    
    7,660,234
    
    
    
    1,827,296
    
    
    
    24
    %Other income (expense)Interest income from temporary investments
    
    
    6,689
    
    
    
    63,269
    
    
    
    (56,580
    )
    
    
    -89
    %
    
    
    16,237
    
    
    
    292,285
    
    
    
    (276,048
    )
    
    
    -94
    %Interest income  employee loans
    
    
    50,852
    
    
    
    56,458
    
    
    
    (5,606
    )
    
    
    -10
    %
    
    
    102,996
    
    
    
    116,880
    
    
    
    (13,884
    )
    
    
    -12
    %Other income
    
    
    39,697
    
    
    
    9,817
    
    
    
    29,880
    
    
    
    304
    %
    
    
    48,993
    
    
    
    18,231
    
    
    
    30,762
    
    
    
    169
    %Interest expense
    
    
    (3,996,249
    )
    
    
    (2,702,612
    )
    
    
    (1,293,637
    )
    
    
    48
    %
    
    
    (7,749,853
    )
    
    
    (5,217,073
    )
    
    
    (2,532,780
    )
    
    
    -49
    %Total other expense
    
    
    (3,899,011
    )
    
    
    (2,573,068
    )
    
    
    (1,325,943
    )
    
    
    52
    %
    
    
    (7,581,627
    )
    
    
    (4,789,677
    )
    
    
    (2,791,950
    )
    
    
    58
    %Income from continuing operations
    
    
    1,219,851
    
    
    
    1,557,759
    
    
    
    (337,908
    )
    
    
    -22
    %
    
    
    2,669,782
    
    
    
    3,013,428
    
    
    
    (343,646
    )
    
    
    -11
    %Discontinued operationsLoss from discontinued operations
    
    
    (406
    )
    
    
    (1,503
    )
    
    
    1,097
    
    
    
    -73
    %
    
    
    (33,634
    )
    
    
    (5,504
    )
    
    
    (28,130
    )
    
    
    511
    %Net realized income from foreign currency transactions
    
    
    
    
    
    
    56
    
    
    
    (56
    )
    
    
    -100
    %
    
    
    
    
    
    
    63
    
    
    
    (63
    )
    
    
    100
    %Taxes refunded on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    78,667
    
    
    
    (78,667
    )
    
    
    100
    %Total discontinued operations
    
    
    (406
    )
    
    
    (1,447
    )
    
    
    1,041
    
    
    
    -72
    %
    
    
    (33,634
    )
    
    
    73,226
    
    
    
    (106,860
    )
    
    
    -146
    %Net income
    
    
    1,219,445
    
    
    
    1,556,312
    
    
    
    (336,867
    )
    
    
    -22
    %
    
    
    2,636,148
    
    
    
    3,086,654
    
    
    
    (450,506
    )
    
    
    -15
    %Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    
    
    
    
    0
    %
    
    
    (2,046,875
    )
    
    
    (2,046,874
    )
    
    
    (1
    )
    
    
    0
    %Net income available to common stockholders
    
    $
    196,008
    
    
    $
    532,875
    
    
    $
    (336,867
    )
    
    
    -63
    %
    
    $
    589,273
    
    
    $
    1,039,780
    
    
    $
    (450,507
    )
    
    
    -43
    %
 28
      Operating Revenues
    Operating Expenses
   Investment Advisory and Administration
Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration
Agreements.
  29
      Other Income and Expense
     Discontinued Operations
  30
      Net income available to common stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
 Recent Events
 Financing Activities
  31
      Future Capital Needs
  Line of Credit
  Short-Term Loan
  Off-Balance Sheet Arrangements
  32
      Contractual Obligations
  Payments Due by PeriodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-Term Debt Obligations(1)
    
    $
    265,896,692
    
    
    $
    21,962,913
    
    
    $
    49,378,847
    
    
    $
    5,929,630
    
    
    $
    188,625,302Interest on Long-Term Debt
Obligations (2)
    
    
    89,499,628
    
    
    
    11,838,478
    
    
    
    23,281,586
    
    
    
    22,689,584
    
    
    
    31,689,980Capital Lease Obligations (3)
    
    
    229,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,223Operating Lease Obligations (4)
    
    
    1,747,200
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,075,200Purchase Obligations (5)
    
    
    21,800,000
    
    
    
    21,800,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    379,172,743
    
    
    $
    55,735,791
    
    
    $
    72,929,233
    
    
    $
    28,888,014
    
    
    $
    221,619,705
 
 (1)
    
    Long-term debt obligations represent borrowings under our line of credit, term loan and
mortgage notes payble that were outstanding as of June 30, 2008. The line of credit matures in
December 2009 and the term loan matures in December 2008 with an option to extend for an additional
six months.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our
line of credit or term loan. The balance and interest rate on our line of credit and term loan are
variable and, thus, the amount of interest has not been calculated for purposes of this table.(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.(5)
    
    The purchase obligations reflected in the above table represents commitments outstanding at
June 30, 2008 to purchase real estate. Funds from Operations
     33
      For the three months ended June 30,
    
    
    For the six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    1,219,445
    
    
    $
    1,556,312
    
    
    $
    2,636,148
    
    
    $
    3,086,654Less: Dividends attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (2,046,875
    )
    
    
    (2,046,874
    )Net income available to common stockholders
    
    
    196,008
    
    
    
    532,875
    
    
    
    589,273
    
    
    
    1,039,780Add: Real estate depreciation and amortization
    
    
    3,185,017
    
    
    
    2,636,154
    
    
    
    6,172,777
    
    
    
    5,053,966Less: Gain on sale of real estate, net of taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,667
    )FFO available to common stockholders
    
    $
    3,381,025
    
    
    $
    3,169,029
    
    
    $
    6,762,050
    
    
    $
    6,015,079Weighted average shares outstanding  basic &
diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264Basic & diluted net income per weighted average
common share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.12Basic & diluted FFO per weighted average common
share
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.79
    
    
    $
    0.70Dividends declared per common share
    
    $
    0.38
    
    
    $
    0.36
    
    
    $
    0.75
    
    
    $
    0.72Percentage of FFO paid per common share
    
    
    95
    %
    
    
    97
    %
    
    
    95
    %
    
    
    103
    %
 34
      Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
     35
      PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Recent accounting pronouncements may impact our results of operations.
  
 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 four directors to hold office until the 2011 Annual Meeting of
Stockholders.
 Nominee
    
    Shares Voted For
    
    Authority WithheldMichela A. English
    
    
    7,767,953
    
    
    
    125,386Anthony W. Parker
    
    
    7,766,181
    
    
    
    127,158Gerard Mead
    
    
    7,770,737
    
    
    
    122,602George Stelljes III
    
    
    7,771,724
    
    
    
    121,615
  
  
 36
      
    
    The approval of an amendment to our Amended and Restated Articles of Incorporation to
increase the number of authorized shares of our capital stock from 20,000,000 to
50,000,000.
 Shares Voted
    
    Authority
    
    Broker Non-Shares Voted For
    
    Against
    
    Withheld
    
    Votes4,295,602
    
    1,724,752
    
    123,645
    
    2,421,264
 
    
    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, 2008.
 Shares Voted
    
    Authority
    
    Broker Non-Shares Voted For
    
    Against
    
    Withheld
    
    Votes7,754,467
    
    38,667
    
    100,205
    
    671,924
 
 Item 5. Other Information
  37
      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, 2003.3.2
    
    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 financial statements contained in this
report).31.1
    
    Certification of Chief Executive Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002.
 
 
    
    Previously filed and incorporated by reference. 38
      Gladstone Commercial CorporationDate: August 5, 2008
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer 39