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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
  MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    02-0681276
(I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102   (703) 287-5800
  
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PART I
    

    PAGEItem 1.
    Business

    
    2Item 1A.
    Risk Factors

    
    25Item 1B.
    Unresolved Staff Comments

    
    40Item 2.
    Properties

    
    41Item 3.
    Legal Proceedings

    
    42Item 4.
    Submission of Matters to a Vote of Security Holders

    
    42PART IIItem 5.
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

    
    43Item 6.
    Selected Financial Data

    
    44Item 7.
    Managements Discussion and Analysis of Financial Condition and
Results of Operations

    
    45Item 7A.
    Quantitative and Qualitative Disclosures About Market Risk

    
    65Item 8.
    Financial Statements and Supplementary Data

    
    67Item 9.
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

    
    96Item 9A.
    Controls and Procedures

    
    96Item 9B.
    Other Information

    
    96PART IIIItem 10.
    Directors and Executive Officers of the Registrant

    
    97Item 11.
    Executive Compensation

    
    97Item 12.
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

    
    97Item 13.
    Certain Relationships and Related Transactions

    
    97Item 14.
    Principal Accountant Fees and Services

    
    97PART IVItem 15.
    Exhibits and Financial Statement Schedules

    
    98SIGNATURES




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Forward-Looking Statements
 Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements
under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements made with respect to possible or assumed
future results of our business, financial condition, liquidity, results of operations, plans and
objectives. Such forward-looking statements can generally be identified by the use of the words
may, will, intend, believe, expect, anticipate, estimate or similar expressions. You
should not place undue reliance on these forward-looking statements. Statements regarding the
following subjects are forward-looking by their nature:
 
    
    our business strategy;
    
    pending transactions;
    
    our projected operating results;
    
    our ability to obtain future financing arrangements;
    
    estimates relating to our future distributions;
    
    our understanding of our competition;
    
    market trends;
    
    estimates of our future operating expenses, including payments to our Adviser under the
terms of our advisory agreement;
    
    projected capital expenditures; and
    
    use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity
securities and other future capital resources, if any.
 These statements involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or achievements to be materially
different from any future results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements.
 The forward-looking statements are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to us. Although we believe
that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common and preferred stock, along with the following factors and the risk factors set forth in Item
1A. below that could cause actual results to vary from our forward-looking statements:
 
    
    the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer;
    
    general volatility of the capital markets and the market
price of our securities;
    
    risks associated with negotiation and
consummation of pending and future transactions;
    
    changes in our business strategy;
    
    availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital;
    
    availability of qualified personnel;
    
    changes in our industry, interest rates, exchange rates or the general economy; and
    
    the degree and nature of our competition.
 We are under no duty to update any of the forward-looking statements after the date of this report
to conform such statements to actual results.
 1




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Item 1. Business
 Overview
    Significant Recent Developments
 Investments
    2




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3




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4




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Mortgage Loans
    5




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Restructuring
  Preferred Stock Financing
  Our Investment Objectives and Our Strategy
  6




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Investment Policies and Policies with Respect to Certain Activities
 Types of Investments
 Overview
 Risk
FactorsOur success depends on the performance of our Adviser and if our Adviser makes inadvisable
investment or management decisions, our operations could be materially adversely impacted
  Property Acquisitions and Net Leasing
  7




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Risk Factors-Highly leveraged
tenants or borrowers may be unable to pay rent or make mortgage payments, which could adversely
affect our cash available to make distributions to our stockholders
   Investments in Mortgage Loans
   Underwriting Criteria and Due Diligence Process
 Underwriting of the Tenant or Borrower
  8




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
    
    property that is a necessary part of the tenants operations;
    
    tenants or borrowers with annual revenue of $25 to $500 million or more;
    
    property acquisition cost or value between $3 million and $15 million;
    
    tenants or borrowers with demonstrated profitability and cash flow or that plan to achieve
profitability consistent with our underwriting criteria;
    
    tenants or borrowers with earnings between 2 and 3.5 times lease payments or greater;
    
    tenants or borrowers with a risk rating on our ten-point risk rating scale (See Risk Rating
System) of at least 4, which approximates a B3 or B- credit rating from national credit
ratings agencies (for those tenants or borrowers without publicly rated debt);
    
    tenants or borrowers whose debt is rated at least B3 or B- by a national credit ratings agency
(for those tenants or borrowers with publicly rated debt);
    
    triple net lease structures in which the tenant will be responsible for the maintenance,
insurance, taxes, and other operating costs of the property;
    
    leases with annual rent increases, such as cost of living adjustments;
    
    tenants with bank lending relationships in place and that are on good terms with their lenders;
    
    tenants or borrowers that have significant buyout fund ownership;
    
    property that has had a Member Appraisal Institute, or MAI, appraisal that is not
substantially below our purchase price; and
    
    property that has been screened for alternative uses.
  
    
    Tenant Evaluation. Our Adviser evaluates each potential tenant for its
creditworthiness, considering factors such as management experience,
industry position and fundamentals, operating history and capital
structure. Whether or not a prospective tenant is creditworthy will be
determined by our Adviser. A prospective tenant that is creditworthy
does not necessarily mean that we will consider the tenants property
to be investment grade. Our Adviser will seek tenants that are small
or medium-sized businesses, that are owned by buyout funds. Our
Advisers investment professionals, including David Gladstone (our
chairman and chief executive officer), Terry Lee Brubaker (our
president and chief operating officer) and George Stelljes III (our
executive vice president and chief investment officer), have
substantial experience in locating and financing these types of
companies. By leasing properties to these tenants, we believe that we
will generally be able to charge rent that is higher than the rent
charged to tenants with unleveraged balance sheets and recognized
credit, thereby enhancing current return from these properties as
compared with properties leased to companies whose credit potential
has already been recognized by the market. Furthermore, if a tenants
credit does improve, the value of our lease or investment will likely
increase (if all other factors affecting value remain unchanged).
 
    
    Leases with Increasing Rent. Our Adviser seeks to include a clause in
each lease that provides for increases in rent over the term of the
lease. These increases will generally be fixed or tied to
 9




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increases in indices such as the consumer price index.
 
    
    Diversification. Our Adviser will attempt to diversify our portfolio
to avoid dependence on any one particular tenant, facility type,
geographic location or tenant industry. By diversifying our portfolio,
our Adviser intends to reduce the adverse effect on our portfolio of a
single under-performing investment or a downturn in any particular
industry or geographic region.
 
    
    Property Valuation. The business prospects for the tenant and the
financial strength of the tenant will be an important aspect of the
evaluation of any sale and leaseback of property, or acquisition of
property subject to a net lease, particularly a property that is
specifically suited to the needs of the tenant. We generally require
monthly unaudited and annual audited financial statements of the
tenant in order to continuously monitor performance of the property,
and evaluate the financial capability of the tenant and its ability to
perform the terms of the lease. Where appropriate, we also examine the
available operating results of prospective investment properties to
determine whether or not projected rental levels are likely to be met.
We then compute the value of the property based on historical and
projected operating results and evaluate the potential for value
appreciation in such property.
 
    
    Properties Important to Tenant Operations. Our Adviser generally seeks
to acquire investment properties that are essential or important to
the ongoing operations of the prospective tenant. We believe that
these investment properties provide better protection in the event a
tenant becomes bankrupt, since leases on properties essential or
important to the operations of a bankrupt tenant are generally less
likely to be rejected in the bankruptcy or otherwise terminated.
 
    
    Lease Provisions that Enhance and Protect Value. When appropriate, our
Adviser will attempt to include provisions in our leases that require
our consent to specified tenant activity or require the tenant to
satisfy specific operating tests. These provisions may include, for
example, operational or financial covenants of the tenant, as well as
indemnification of us by the tenant against environmental and other
contingent liabilities. We believe that these provisions will serve to
protect our investments from changes in the operating and financial
characteristics of a tenant that may impact its ability to satisfy its
obligations to us or that could reduce the value of our properties. We
generally also seek covenants requiring tenants to receive our consent
prior to any change in control of the tenant.
 
    
    Credit Enhancement.Our Adviser may also seek to enhance the
likelihood of a tenants lease obligations being satisfied through a
cross-default with other tenant obligations, a letter of credit or a
guaranty of lease obligations from each tenants corporate parent. We
believe that this type of credit enhancement, if obtained, will
provide us with additional financial security. In evaluating a
possible investment, we believe that the creditworthiness of a
prospective tenant is normally a more significant factor than the
unleased value of the property itself. While our Adviser selects
tenants it believes to be creditworthy, tenants are not required to
meet any minimum rating established by an independent credit rating
agency. Our Advisers standards for determining whether a particular
tenant is creditworthy vary in accordance with a variety of factors
relating to specific prospective tenants. The creditworthiness of a
tenant is determined on a tenant by tenant and case by case basis.
Therefore, general standards for creditworthiness cannot be applied.
  10




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Risk Rating
  First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)>10
    
    Baa2
    
    BBB
    
    Probability of default during the
next ten years is 4% and the
expected loss is 1% or less10
    
    Baa3
    
    BBB-
    
    Probability of default during the
next ten years is 5% and the
expected loss is 1% to 2%9
    
    Ba1
    
    BB+
    
    Probability of default during the
next ten years is 10% and the
expected loss is 2% to 3%8
    
    Ba2
    
    BB
    
    Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5%5
    
    B2
    
    B
    
    Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3%2
    
    Caa2
    
    CCC
    
    Probability of default during the
next ten years is 35% and the
expected loss is 13.3% to 16.7%1
    
    Caa3
    
    CC
    
    Probability of default during the
next ten years is 65% and the
expected loss is 16.7% to 20%0
    
    N/a
    
    D
    
    Probability of default during the
next ten years is 85%, or there is a
payment default, and the expected
loss is greater than 20%
 11




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(a)
    
    The default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term.   Rating
    
    12/31/2005
    
    12/31/2004Average
    
    
    8.6
    
    
    
    7.8Weighted Average
    
    
    8.7
    
    
    
    7.6Highest
    
    
    10.0
    
    
    
    10.0Lowest
    
    
    6.0
    
    
    
    6.0
 Underwriting of the Real Estate and Due Diligence Process
 Risk
Factors-Potential liability for environmental matters could adversely affect our financial
condition
   
    
    The comparable value of similar real estate in the same general area of the
prospective property. In this regard, comparable property is hard to define since
each piece of real estate has its own distinct characteristics. But to the extent
possible, comparable property in the area that has sold or is for sale will be
used to determine if the price being paid for the property is reasonable. The
question of comparable properties sale prices is particularly relevant if a
property might be sold by us at a later date.
 
    
    The comparable real estate rental rates for similar properties in the same area of
the prospective property.
 
    
    Alternative uses for the property in order to determine if there might be another
use for the property
 12




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that would give it higher value.
 
    
    The cost of replacing the property if it were to be sold for the replacement value.
 
    
    The assessed value as determined by the local real estate taxing authority.
  Additional Investment Considerations
 Terms of Mortgage Loans
     13




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Other Investments
     Temporary Investments
   14




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Qualified REIT Subsidiaries
  
    
    that are substantially similar in all relevant ways to our organizational documents;
    
    that comply with all applicable state securities laws and regulations; and
    
    that comply with the applicable terms and conditions set forth in this report.
 Joint Ventures
  Use of Leverage
 Non-recourse financing
   15




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Recourse financing
  Securitization
  Other Investment Policies
 Working Capital Reserves
  
    
    The acquisition of any property;
    
    The refinancing of the debt upon any property; or
    
    The leveraging of any previously unleveraged property.
 16




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Investment Policies and Policies
with Respect to Certain ActivitiesUse of Leverage
 Holding Period for and Sale of Investments; Reinvestment of Sale Proceeds
     Investment Limitations
  
    
    invest in real property owned by our Adviser, any of its affiliates or any business in which our Adviser or any of its affiliates have invested
except that we may lease property to existing and prospective portfolio companies of current or future affiliates, such as Gladstone Capital
Corporation or Gladstone Investment Corporation, and entities advised by our Adviser so long as that entity does not control the portfolio
company (this policy may not be changed without the approval of our stockholders);
    
    invest in commodities or commodity futures contracts, with this limitation not being applicable to futures contracts when used solely for the
purpose of hedging in connection with our ordinary business of investing in properties and making mortgage loans;
    
    invest in contracts for the sale of real estate unless the contract is in recordable form and is appropriately recorded in the chain of title;
    
    invest in any individual property with a cost in excess of 20% of our total assets at the time of investment. However, our board of directors
may amend or waive this policy at any time or from time to time;
    
    engage in any short sale or borrowing that results in a debt to equity ratio greater than two-to-one;
    
    make investments in unimproved property or indebtedness secured by a deed of trust or mortgage
 17




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loans on unimproved property in excess of 10% of
our total assets. Unimproved real property is property which has the following three characteristics:o
    
    the property was not acquired for the purpose of producing rental or other operating income;o
    
    no development or construction is in process on the property; ando
    
    no development or construction on the property is planned in good faith to commence on the
property within one year of acquisition;
 
    
    issue equity securities on a deferred payment basis or other similar arrangement except as set out in our equity incentive plans;
    
    issue debt securities in the absence of adequate cash flow to cover debt service;
    
    issue redeemable securities as defined in Section 2(a)(32) of the Investment Company Act;
    
    grant warrants or options to purchase shares of our stock to our Adviser or its affiliates, except pursuant to our equity incentive plans;
    
    engage in trading, as compared with investment activities, or engage in the business of underwriting, or the agency distribution of, securities
issued by other persons;
    
    invest more than 5% of the value of our assets in the securities of any one issuer if the investment would cause us to fail to qualify as a
REIT;
    
    invest in securities representing more than 10% of the outstanding securities (by vote or value) of any one issuer if the investment would
cause us to fail to qualify as a REIT;
    
    acquire securities in any company holding investments or engaging in activities prohibited in the foregoing clauses; or
    
    make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our affiliates.
 Conflict of Interest Policy
   
    
    acquire from or sell to any of our officers, directors or employees,
or any entity in which any of our officers, directors or employees has
an interest of more than 5%, any assets or other property;
    
    borrow from any of our directors, officers or employees, or any entity
in which any of our officers, directors or employees has an interest
of more than 5%; or
    
    engage in any other transaction with any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees has an interest of more than 5% (except that our Adviser may
lease office space in a building that we own, provided that the rental
rate under the lease is determined by our independent directors to be
at a fair market rate).
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
    
    the fact of the common directorship or interest is disclosed to our
board of directors or a committee of our board, and our board or the
committee authorizes the contract or transaction by the affirmative
vote of a majority of the directors not interested in the contract or
transaction, even if the disinterested directors do not constitute a
quorum of the board or committee;
    
    the fact of the common directorship or interest is disclosed to our
stockholders entitled to vote on the contract or transaction, and the
contract or transaction is approved by a majority of the votes cast by
the stockholders entitled to vote on the matter, other than votes of shares owned of record or beneficially by the interested director,
corporation, firm or other entity; or
    
    the contract or transaction is fair and reasonable to us.
  Future Revisions in Policies and Strategies
  Our Adviser
 Gladstone Management Corporation
  19




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Advisory Agreement
  Adviser Duties and Authority Under the Advisory Agreement
  
    
    finds, evaluates, presents and recommends to us real estate investment
opportunities consistent with our investment policies and objectives;
    
    provides advice to us and acts on our behalf with respect to the
negotiation, acquisition, financing, refinancing, holding, leasing and
disposition of real estate investments;
    
    enters contracts to purchase real estate and make mortgage loans on
our behalf in compliance with our investment procedures, objectives
and policies, subject to approval of our board of directors, where
required;
    
    takes the actions and obtains the services necessary to effect the
negotiation, acquisition, financing, refinancing, holding, leasing and
disposition of real estate investments; and
    
    provides day-to-day management of our business activities and other
administrative services for us as requested by our board of directors.
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
    
    our Adviser has obtained an independent appraisal for the property
indicating that the total cost of the property does not exceed its
appraised value; and
    
    our Adviser has provided us with a representation that the property,
in conjunction with our other investments and proposed investments, is
reasonably expected to fulfill our investment objectives and policies
as established by our board of directors and then in effect.
  
    
    loans not secured or otherwise supported by real property;
    
    any acquisition or mortgage loan which at the time of investment would have a cost
exceeding 20% of our total assets;
    
    any lease or mortgage loan to a tenant or borrower having a risk rating of less than 4
on our risk rating scale;
    
    transactions that involve conflicts of interest with our Adviser (other than
reimbursement of expenses in accordance with the advisory agreement); and
    
    the lease of assets to our Adviser, its affiliates or any of our officers or directors.
  Termination of the Advisory Agreement
  
    
    immediately by us for cause or upon the bankruptcy of our Adviser;
    
    without cause by a majority of our independent directors upon 60 days notice to our Adviser; or
    
    immediately with good reason by our Adviser.
 21




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Payments to our Adviser Under the Advisory Agreement
     22




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
    
    the amount of the fees paid to our Adviser in relation to our size and the
composition and performance of our investments;
    
    the success of our Adviser in generating appropriate investment opportunities;
    
    rates charged to other investment entities by advisers performing similar services;
    
    additional revenues realized by our Adviser and its affiliates through their
relationship with us, whether paid by us or by others with whom we do business;
    
    the value of our assets each quarter;
    
    the quality and extent of service and advice furnished by our Adviser and the
performance of our investment portfolio; and
 23




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
    
    the quality of our portfolio relative to the investments generated by our Adviser
for its other clients.
  Other Transactions with our Adviser and its Affiliates
   Employees
  Our Affiliates
  Competition
  24




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Item 1A. Risk Factors
 We are a relatively new company with little operating history and may not be able to operate
successfully.
  We are not currently able to set a consistent distribution rate, and the distribution rate we fix
in the future may have an adverse effect on the market price for our common stock.
  Highly leveraged tenants or borrowers may be unable to pay rent or make mortgage payments, which
could adversely affect our cash available to make distributions to our stockholders.
   
    
    the loss of lease or mortgage payments to us;
    
    an increase in the costs we incur to carry the property occupied by such tenant;
    
    a reduction in the value of our securities; or
    
    a decrease in distributions to our stockholders.
  25




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Our real estate investments may include special use and single tenant properties that may be
difficult to sell or re-lease upon tenant defaults or early lease terminations.
  The inability of a tenant in a single tenant property to pay rent will reduce our revenues.
  Our business strategy relies heavily on external financing, which may expose us to risks associated
with leverage such as restrictions on additional borrowing and payment of distributions, risks
associated with balloon payments, and risk of loss of our equity upon foreclosure.
   26




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We are subject to certain risks associated with real estate ownership and lending which could
reduce the value of our investments.
  
    
    changes in the general economic climate;
    
    changes in local conditions such as an oversupply of space or reduction in demand for real estate;
    
    changes in interest rates and the availability of financing;
    
    competition from other available space; and
    
    changes in laws and governmental regulations, including those governing real estate usage, zoning
and taxes.
 Competition for the acquisition of real estate may impede our ability to make acquisitions or
increase the cost of these acquisitions, which could adversely affect our operating results and
financial condition.
  27




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Most of our tenants are small and medium size businesses, which exposes us to additional risks
unique to these entities.
  
    
    Small and medium-sized businesses may have limited financial resources
and may not be able to make their lease or mortgage payments.A small
or medium-sized tenant or borrower is more likely to have difficulty
making its lease or mortgage payments when it experiences adverse
events, such as the failure to meet its business plan, a downturn in
its industry or negative economic conditions.
    
    Small and medium-sized businesses typically have narrower product
lines and smaller market shares than large businesses.Because our
target tenants and borrowers are smaller businesses, they will tend to
be more vulnerable to competitors actions and market conditions, as
well as general economic downturns. In addition, our target tenants
and borrowers may face intense competition, including competition from
companies with greater financial resources, more extensive
development, manufacturing, marketing and other capabilities and a
larger number of qualified managerial and technical personnel.
    
    There is generally little or no publicly available information about
our target tenants and borrowers.Many of our tenants and borrowers
are likely to be privately owned businesses, about which there is
generally little or no publicly available operating and financial
information. As a result, we will rely on our Adviser to perform due
diligence investigations of these tenants and borrowers, their
operations and their prospects. We may not learn all of the material
information we need to know regarding these businesses through our
investigations.
    
    Small and medium-sized businesses generally have less predictable
operating results.We expect that many of our tenants and borrowers
may experience significant fluctuations in their operating results,
may from time to time be parties to litigation, may be engaged in
rapidly changing businesses with products subject to a substantial
risk of obsolescence, may require substantial additional capital to
support their operations, to finance expansion or to maintain their
competitive positions, may otherwise have a weak financial position or
may be adversely affected by changes in the business cycle. Our
tenants and borrowers may not meet net income, cash flow and other
coverage tests typically imposed by their senior lenders. The failure
of a tenant or borrower to satisfy financial or operating covenants
imposed by senior lenders could lead to defaults and, potentially,
foreclosure on credit facilities, which could additionally trigger
cross-defaults in other agreements. If this were to occur, it is
possible that the ability of the tenant or borrower to make required
payments to us would be jeopardized.
    
    Small and medium-sized businesses are more likely to be dependent on
one or two persons.Typically, the success of a small or medium-sized
business also depends on the management talents and efforts of one or
two persons or a small group of persons. The death, disability or
resignation of one or more of these persons could have a material
adverse impact on our tenant or borrower and, in turn, on us.
    
    Small and medium-sized businesses may have limited operating
histories.While we intend to target as tenants and borrowers stable
companies with proven track records, we may lease properties or lend
money to new companies that meet our other investment criteria.
Tenants or borrowers with limited operating histories will be exposed
to all of the operating risks that new businesses face and may be
particularly susceptible to, among other risks, market downturns,
competitive pressures and the
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We may not have funding for future tenant improvements.
  Because we must distribute a substantial portion of our net income to qualify as a REIT, we will be
largely dependent on third-party sources of capital to fund our future capital needs.
  Our real estate portfolio is concentrated in a limited number of properties, which subjects us to
an increased risk of significant loss if any property declines in value or if we are unable to
lease a property.
  Liability for uninsured losses could adversely affect our financial condition.
  Potential liability for environmental matters could adversely affect our financial condition.
  
    
    responsibility and liability for the cost of removal or remediation of
hazardous substances released on our properties, generally without
regard to our knowledge of or responsibility for the presence of the
contaminants;
    
    liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances; and
    
    potential liability for common law claims by third parties for damages
resulting from environmental
 29




---



##### 



Our potential participation in joint ventures creates additional risk.
  Net leases may not result in fair market lease rates over time.
  Failure to hedge effectively against interest rate changes may adversely affect our results of
operations.
  30




---



##### 



Foreign currency fluctuations may adversely affect our results of operations.
  Our success depends on the performance of our Adviser and if our Adviser makes inadvisable
investment or management decisions, our operations could be materially adversely impacted.
  We may have conflicts of interest with our Adviser and other affiliates.
  31




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##### 




    
    our Adviser may realize substantial compensation on account of its activities on our behalf;
    
    we may experience competition with our affiliates for financing transactions; and
    
    our Adviser may earn fee income from our borrowers or tenants; and
    
    our Adviser and other affiliates such as Gladstone Capital, Gladstone Investment and
Gladstone Land could compete for the time and services of our officers and directors.
  Our financial condition and results of operations depend on our Advisers ability to effectively
manage our future growth.
  We are dependent upon our key management personnel for our future success, particularly David
Gladstone, Terry Lee Brubaker and George Stelljes III.
  Our rights and the rights of our stockholders to recover claims against our independent directors
are limited, which could reduce our recovery and our stockholders recovery against them if they
negligently cause us to incur losses.
  32




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##### 



The limit on the number of shares of our capital stock a person may own may discourage a takeover.
  Certain provisions of Maryland law could restrict a change in control.
  
    
    any person who beneficially owns 10% or more of the voting power of
our common stock, referred to as an interested stockholder;
    
    an affiliate of ours who, at any time within the two-year period prior
to the date in question, was an interested stockholder; or
    
    an affiliate of an interested stockholder.
  Our staggered director terms could deter takeover attempts and adversely impact the price of our
common stock.
  We may not qualify as a REIT for federal income tax purposes, which would subject us to federal
income tax on our taxable income at regular corporate rates, thereby reducing the amount of funds
available for paying distributions to our stockholders.
  33




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##### 




    
    we would not be allowed a deduction for distributions to stockholders
in computing our taxable income, we would be subject to federal income
tax at regular corporate rates and we might need to borrow money or
sell assets in order to pay any such tax;
    
    we also could be subject to the federal alternative minimum tax and
possibly increased state and local taxes; and
    
    unless we are entitled to relief under statutory provisions, we would
be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify.
   
    
    If we fail to satisfy the 95% gross income test after our 2004 taxable year, as
described under Failure to make required distributions would subject us to tax, but
nonetheless continue to qualify as a REIT because we meet other requirements, we will be
subject to a 100% tax on the excess of 95% (rather than 90%) of our gross income over our
qualifying income.
    
    For purposes of the 10% value test (i.e., the requirement that we not own more than 10%
of the value of the securities of any issuer other than a Taxable REIT Subsidiary (TRS)
or another REIT), the exception for certain straight debt securities includes debt
subject to the following contingencies:
 
    
    a contingency relating to the time of payment of interest or principal, as long as
either (i) there is no change to the effective yield of the debt obligation, other
than a change to the annual yield that does not exceed the greater of 0.25% or 5% of
the annual yield, or (ii) neither the aggregate issue price nor the aggregate face
amount of the issuers debt obligations held by us exceeds $1 million and no more than
12 months of unaccrued interest on the debt obligations can be required to be prepaid;
and
    
    a contingency relating to the time or amount of payment upon a default or
prepayment of a debt obligation, as long as the contingency is consistent with
customary commercial practice.
 In addition to straight debt securities, loans to individuals and estates, securities
issued by REITs, and accrued obligations to pay rent will not be considered securities for
purposes of the 10% value test.
    
    For purposes of the 10% value test, holding a de minimis amount of an issuers
securities that do not qualify for the straight debt safe harbor (either directly or
through a TRS) will not prevent
 34




---



##### 



straight debt of a partnership or corporation from
qualifying for the safe harbor. Specifically, we or a controlled TRS in which we own more
than 50% of the voting power or value of the stock could hold such non-straight debt
securities with a value of up to 1% of a partnerships or corporations outstanding
securities. There is no limitation on the amount of an issuers securities that a
non-controlled TRS can own.
    
    In the event that, at the end of a calendar quarter after our 2004 taxable year, more
than 5% of our assets are represented by the securities of one issuer, or we own more than
10% of the voting power or value of the securities of any issuer, we will not lose our
REIT status if (i) the failure is de minimis (up to the lesser of 1% of our assets or $10
million) and (ii) we dispose of assets or otherwise comply with the asset tests within six
months after the last day of the quarter in which we identify such failure.
    
    In the event of a more than de minimis failure of any of the asset tests after our 2004
taxable year, as long as the failure is due to reasonable cause and not to willful
neglect, we will not lose our REIT status if we (i) dispose of assets or otherwise comply
with the asset tests within six months after the last day of the quarter in which we
identify such failure and (ii) pay a tax equal to the greater of $50,000 or 35% of the net
income from the nonqualifying assets during the period in which we failed to satisfy the
asset tests.
    
    In the event that we fail to satisfy a REIT requirement after our 2004 taxable year,
other than a gross income or asset test, we will not lose our REIT status but will incur a
penalty of $50,000 for each reasonable cause failure to satisfy such a requirement.
    
    After our 2004 taxable year, hedging transaction will mean any transaction entered
into in the normal course of our trade or business primarily to manage the risk of
interest rate, price changes, or currency fluctuations with respect to borrowings made or
to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real
estate assets. We will be required to clearly identify any such hedging transaction before
the close of the day on which it was acquired, originated or entered into. Income and gain
from hedging transactions will be excluded from gross income for purposes of the 95% gross
income test (but not the 75% gross income test). Income and gain from hedging transactions
will continue to be nonqualifying income for purposes of the 75% gross income test.
    
    For non-United States shareholders of our publicly traded shares, including our common shares, capital gain distributions occurring after our 2004 taxable year that are
attributable to our sale of real property will be treated as ordinary dividends rather
than as gain from the sale of a United States real property interest, as long as the
non-United States shareholder does not own more than 5% of that class of our shares of
beneficial interest during the taxable year.
  We have not sought a ruling from the Internal Revenue Service that we qualify as a REIT, nor do we
intend to do so in the future.
   35




---



##### 



Failure to make required distributions or to satisfy certain income requirements would subject us
to tax.
  
    
    85% of our ordinary income for that year;
    
    95% of our capital gain net income for that year; and
    
    100% of our undistributed taxable income from prior years.
   The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status.
  In order to maintain our REIT status, we may be forced to forego attractive investment
opportunities, thereby hindering or delaying our meeting our investment objectives and potentially
lowering returns to our stockholders.
  36




---



##### 



Legislative or regulatory action could adversely affect investors.
  There are special considerations for pension or profit-sharing trusts, Keogh Plans or individual
retirement accounts whose assets are being invested in our common stock.
  
    
    whether your investment is made in accordance with the documents
governing the plan or IRA, including the plans investment policies;
    
    whether your investment is consistent with the applicable provisions
of the Employee Retirement Income Security Act (ERISA) or the Internal
Revenue Code governing standards of prudence and diversification of
the plans or IRAs investments;
    
    Whether your investment will impair the liquidity of the plan or IRA;
    
    whether your investment will produce unrelated business taxable
income, referred to as UBTI, to the plan or IRA; and
    
    your need to value the assets of the benefit plan or IRA annually.
  If our Operating Partnership fails to maintain its status as a partnership for federal income
tax purposes, its income may be subject to taxation.
  37




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##### 



The market price and trading volume of our securities may be volatile.
  
    
    price and volume fluctuations in the stock market from time to time, which are often
unrelated to the operating performance of particular companies;
    
    significant volatility in the market price and trading volume of shares of REITs,
real estate companies or other companies in our sector, which is not necessarily
related to the performance of those companies;
    
    price and volume fluctuations in the stock market as a result of terrorist attacks,
or speculation regarding future terrorist attacks, in the United States or abroad;
    
    price and volume fluctuations in the stock market as a result of involvement of the
United States in armed hostilities, or uncertainty regarding United States
involvement in such activities;
    
    actual or anticipated variations in our quarterly operating results or distributions;
    
    changes in our funds from operations or earnings estimates or the publication of
research reports about us or the real estate industry generally;
    
    increases in market interest rates that lead purchasers of our shares of securities
to demand a higher yield;
    
    changes in market valuations of similar companies;
    
    adverse market reaction to our anticipated level of debt or any increased
indebtedness we incur in the future;
    
    additions or departures of key management personnel;
    
    actions by institutional stockholders;
    
    speculation in the press or investment community;
    
    changes in regulatory policies or tax guidelines, particularly with respect to REITs;
    
    loss of REIT status for federal income tax purposes;
    
    loss of a major funding source; and
    
    general market and economic conditions;
 38




---



##### 



Shares of common stock eligible for future sale may have adverse effects on our share price.
  If our stockholders approve the proposed amended and restated advisory agreement with our Adviser,
it is likely that a significant number of shares of stock issuable upon exercise of stock options,
will be sold in the public market, which could have an adverse impact on the price of our common
stock.
  If our stockholders approve the proposed amended and restated advisory agreement with our Adviser,
it could have a material adverse effect on our results of operations.
   39




---



##### 



An increase in market interest rates may have an adverse effect on the market price of our
securities.
  Available Information
  Item 1B. Unresolved Staff Comments
  40




---



##### 



Item 2. Properties
  Total Annualized
    
    Total AnnualizedTotal Rental Revenue
    
    Rental Revenue for
    
    Rental RevenueYear Built/
    
    
    
    Rentable
    
    
    
    
    
    for Year Ended
    
    Year Ended December
    
    per Occupied
    
    Year of LeaseProperty
    
    Improvements
    
    Date of Purchase
    
    Square Feet
    
    Occupancy
    
    December 31, 2005
    
    31, 2005(1)
    
    Square Foot(2)
    
    Expiration208 South Rogers Lane
(Raleigh NC)
    
    
    1997
    
    
    12/23/2003
    
    
    58,926
    
    
    
    100
    %
    
    $
    558,505
    
    
    
    558,505
    
    
    $
    9.48
    
    
    
    20103874 Highland Park NW
(Canton, OH)
    
    
    1994
    
    
    1/30/2004
    
    
    54,018
    
    
    
    100
    %
    
    
    344,108
    
    
    
    344,108
    
    
    $
    6.37
    
    
    
    2014260 Springside Drive
(Akron, OH)
    
    
    1968/1999
    
    
    4/29/2004
    
    
    83,891
    
    
    
    100
    %
    
    
    1,077,943
    
    
    
    1,077,943
    
    
    $
    12.85
    
    
    
    2009/2015
    (3)5815 Westpark Drive
(Charlotte, NC)
    
    
    1984/1995
    
    
    6/30/2004
    
    
    64,500
    
    
    
    100
    %
    
    
    914,050
    
    
    
    914,050
    
    
    $
    14.17
    
    
    
    2019171 Great Oak Drive
(Canton, NC)
    
    
    1998
    
    
    7/06/2004
    
    
    228,000
    
    
    
    100
    %
    
    
    600,145
    
    
    
    600,145
    
    
    $
    2.63
    
    
    
    2024Rt. 219, Tax Parcel No.
33-251-0246,
(Snyder Township, PA)
    
    
    1991
    
    
    8/05/2004
    
    
    290,000
    
    
    
    100
    %
    
    
    870,000
    
    
    
    870,000
    
    
    $
    3.00
    
    
    
    20149698 Old US Hwy. 52
(Lexington, NC)
    
    
    1986
    
    
    8/05/2004
    
    
    154,000
    
    
    
    100
    %
    
    
    397,324
    
    
    
    397,324
    
    
    $
    2.58
    
    
    
    20149100 Highway 290 East
(Austin, TX)
    
    
    2001
    
    
    9/16/2004
    
    
    51,933
    
    
    
    100
    %
    
    
    751,333
    
    
    
    751,333
    
    
    $
    14.47
    
    
    
    20153701 E. Virginia Beach Blvd
(Norfolk, VA)
    
    
    1967
    
    
    10/15/2004
    
    
    25,797
    
    
    
    100
    %
    
    
    103,501
    
    
    
    103,501
    
    
    $
    4.01
    
    
    
    202113 Industrial Park Drive
(Mt. Pocono, PA)
    
    
    1995-1999
    
    
    10/15/2004
    
    
    223,275
    
    
    
    100
    %
    
    
    628,904
    
    
    
    628,904
    
    
    $
    2.82
    
    
    
    2021855 Industriel Blvd
(Granby, QC)
    
    
    1970/1981
    
    
    10/15/2004
    
    
    99,981
    
    
    
    100
    %
    
    
    380,125
    
    
    
    380,125
    
    
    $
    3.80
    
    
    
    2021290 Guthrie Avenue
(Montreal, QC)
    
    
    1987
    
    
    10/15/2004
    
    
    42,490
    
    
    
    100
    %
    
    
    203,705
    
    
    
    203,705
    
    
    $
    4.79
    
    
    
    20216550 First Park Ten Boulevard
(San Antonio, TX)
    
    
    1999
    
    
    2/10/2005
    
    
    60,245
    
    
    
    100
    %
    
    
    684,078
    
    
    
    781,803
    
    
    $
    12.98
    
    
    
    20144630 Journal Street
(Columbus, OH)
    
    
    1995
    
    
    2/10/2005
    
    
    39,000
    
    
    
    100
    %
    
    
    270,931
    
    
    
    309,635
    
    
    $
    7.94
    
    
    
    2015199 Sing Sing Road
(Big Flats, NY)
    
    
    2001
    
    
    4/15/2005
    
    
    120,000
    
    
    
    100
    %
    
    
    456,412
    
    
    
    644,346
    
    
    $
    5.37
    
    
    
    20132525 North Woodlawn Avenue
(Wichita, KS)
    
    
    2000
    
    
    5/18/2005
    
    
    69,287
    
    
    
    100
    %
    
    
    677,276
    
    
    
    1,083,642
    
    
    $
    15.64
    
    
    
    2012725 & 737 Great Southwest Pkwy
(Arlington, TX)
    
    
    1966
    
    
    5/26/2005
    
    
    64,000
    
    
    
    100
    %
    
    
    302,338
    
    
    
    518,294
    
    
    $
    8.10
    
    
    
    20134032 Linden Avenue
(Dayton, OH)
    
    
    1956
    
    
    6/30/2005
    
    
    59,894
    
    
    
    100
    %
    
    
    137,864
    
    
    
    275,728
    
    
    $
    4.60
    
    
    
    201881 Corbett Way
(Eatontown, NJ)
    
    
    1991
    
    
    7/07/2005
    
    
    30,268
    
    
    
    100
    %
    
    
    253,592
    
    
    
    507,184
    
    
    $
    16.76
    
    
    
    201117 & 20 Veronica Avenue
(Franklin Township, NJ)
    
    
    1978
    
    
    7/11/2005
    
    
    183,000
    
    
    
    100
    %
    
    
    378,258
    
    
    
    825,290
    
    
    $
    4.51
    
    
    
    2020150 & 170 Ridgeview Center
Drive (Duncan, SC)
    
    
    1984/2001
    
    
    7/14/2005
    
    
    278,020
    
    
    
    100
    %
    
    
    943,614
    
    
    
    2,058,794
    
    
    $
    7.41
    
    
    
    20115656 Campus Parkway
(St Louis, MO)
    
    
    1977
    
    
    8/05/2005
    
    
    51,155
    
    
    
    100
    %
    
    
    115,716
    
    
    
    277,718
    
    
    $
    5.43
    
    
    
    2012914 Wohlert Street
(Angola, IN)
    
    
    1982
    
    
    9/02/2005
    
    
    52,080
    
    
    
    100
    %
    
    
    36,416
    
    
    
    109,248
    
    
    $
    2.10
    
    
    
    2020800 Growth Parkway
(Angola, IN)
    
    
    1998
    
    
    9/02/2005
    
    
    50,000
    
    
    
    100
    %
    
    
    36,416
    
    
    
    109,248
    
    
    $
    2.18
    
    
    
    2020802 East 11th Street
(Rock Falls, IL)
    
    
    1988
    
    
    9/02/2005
    
    
    52,000
    
    
    
    100
    %
    
    
    36,416
    
    
    
    109,248
    
    
    $
    2.10
    
    
    
    20202 Opportunity Way
(Newburyport, MA)
    
    
    1994
    
    
    10/17/2005
    
    
    70,598
    
    
    
    100
    %
    
    
    143,962
    
    
    
    691,018
    
    
    $
    9.79
    
    
    
    2012255 Spring Street
(Clintonville, WI)
    
    
    1992
    
    
    10/31/2005
    
    
    291,142
    
    
    
    100
    %
    
    
    97,175
    
    
    
    583,050
    
    
    $
    2.00
    
    
    
    20205700 Lee Road
(Maple Heights, OH)
    
    
    1974
    
    
    12/21/2005
    
    
    347,218
    
    
    
    100
    %
    
    
    34,004
    
    
    
    816,096
    
    
    $
    2.35
    
    
    
    20157545 Midlothian Turnpike
(Richmond, VA)
    
    
    1972
    
    
    12/30/2005
    
    
    42,213
    
    
    
    100
    %
    
    
    1,861
    
    
    
    319,029
    
    
    $
    7.56
    
    
    
    20103930 Sunforest Court
(Toledo, OH)
    
    
    1979
    
    
    12/30/2005
    
    
    23,368
    
    
    
    100
    %
    
    
    1,759
    
    
    
    301,543
    
    
    $
    12.90
    
    
    
    2010Totals
    
    
    
    
    
    
    
    
    3,260,299
    
    
    
    
    
    
    $
    11,437,731
    
    
    $
    17,150,557
 
 (1)
    
    The amounts represented in total annualized rental revenue for year ended December 31, 2005 have been
calculated by taking the 2005 base rent and annualizing the
partial-year results for properties acquired during 2005. Total
annualized rental revenue is a non-GAAP financial measure,
that management believes is useful to the readers of this table
so they are able to calculate the total annualized rental revenue per
square foot.(2)
    
    The amounts represented in this column were calculated by taking the total annualized revenue and dividing by the
total rentable square feet.(3)
    
    Two tenants occupy this building, each with separate leases ending in different years. 41




---



##### 



Item 3. Legal Proceedings
  Item 4. Submission of Matters to a Vote of Security Holders
  42




---



##### 



PART II
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
   DistributionsDeclared PerQuarter Ended
    
    High
    
    Low
    
    Share3/31/2004
    
    $
    17.15
    
    
    $
    16.58
    
    
    $
    0.126/30/2004
    
    $
    17.10
    
    
    $
    15.91
    
    
    $
    0.129/30/2004
    
    $
    16.96
    
    
    $
    15.57
    
    
    $
    0.1212/31/2004
    
    $
    17.28
    
    
    $
    16.10
    
    
    $
    0.123/31/2005
    
    $
    17.18
    
    
    $
    16.30
    
    
    $
    0.186/30/2005
    
    $
    16.55
    
    
    $
    15.16
    
    
    $
    0.249/30/2005
    
    $
    17.17
    
    
    $
    15.72
    
    
    $
    0.2412/31/2005
    
    $
    16.94
    
    
    $
    15.98
    
    
    $
    0.30
  
    
    the sum of (A) 90% of our REIT taxable income (computed without regard to the
dividends paid deduction and capital gain) and (B) 90% of the net income (after tax), if
any, from foreclosure property, less
    
    the sum of certain non-cash items.
   43




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##### 



Item 6. Selected Financial Data
  Period February 14,2003 (inception)Year ended
    
    
    Year ended
    
    
    throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Operating Data:Total operating revenue
    
    $
    13,465,334
    
    
    $
    4,312,402
    
    
    $
    12,180Total operating expenses
    
    
    (7,345,013
    )
    
    
    (3,303,133
    )
    
    
    (557,148
    )Other income (expense)
    
    
    (2,299,819
    )
    
    
    614,659
    
    
    
    304,097Income before realized and unrealized losses
    
    
    3,820,502
    
    
    
    1,623,928
    
    
    
    (240,871
    )Realized and unrealized loss from foreign currency
    
    
    (218,557
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    3,601,945
    
    
    
    1,623,928
    
    
    
    (240,871
    )Share and Per Share Data:Basic net income (loss)
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted net income (loss)
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Cash dividends declared per common share
    
    $
    0.96
    
    
    $
    0.48
    
    
    $
    0.01Weighted average shares outstanding-basic
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding-diluted
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Supplemental Data:Net income (loss)
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Real estate depreciation and amortization
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Funds from operations (1)
    
    
    7,253,064
    
    
    
    2,597,273
    
    
    
    (235,044
    )Ratio of Earnings to Fixed Charges
    
    
    2.5
    x
    
    
    64.5
    x
    
    
    -
    (1)Balance Sheet Data:Real estate, before accumulated depreciation
    
    $
    165,043,640
    
    
    $
    61,251,455
    
    
    $
    5,440,772Total assets
    
    $
    207,046,954
    
    
    $
    105,585,094
    
    
    $
    105,061,370Total long-term obligations
    
    $
    105,118,961
    
    
    $
    
    
    
    $
    Total stockholders equity
    
    $
    98,948,536
    
    
    $
    102,692,693
    
    
    $
    104,750,655Total common shares outstanding
    
    
    7,672,000
    
    
    
    7,667,000
    
    
    
    7,642,000
 
 (1)
    
    Note for the period February 14, 2003 through December 31, 2003 earnings, as defined, were insufficent to cover fixed charges by $240,871. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Funds from Operations
 44




---



##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-K.
 Overview
    Recent Events
 Investments
  45




---



##### 



46




---



##### 



47




---



##### 



Mortgage Loans
   48




---



##### 



Restructuring
  49




---



##### 



Preferred Stock Financing
  Expenses
    50




---



##### 



Critical Accounting Policies
  Revenue Recognition
  51




---



##### 



Investment Accounting
  Purchase Price Allocation
 
   52




---



##### 



Risk Rating
  First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)>10
    
    Baa2
    
    BBB
    
    Probability of default during the
next ten years is 4% and the
expected loss is 1% or less10
    
    Baa3
    
    BBB-
    
    Probability of default during the
next ten years is 5% and the
expected loss is 1% to 2%9
    
    Ba1
    
    BB+
    
    Probability of default during the
next ten years is 10% and the
expected loss is 2% to 3%8
    
    Ba2
    
    BB
    
    Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4%7
    
    Ba3
    
    BB-
    
    Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5%6
    
    B1
    
    B+
    
    Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5%
 53




---



##### 



First
    
    SecondOur
    
    Ratings
    
    RatingsSystem
    
    Agency
    
    Agency
    
    Description (a)5
    
    B2
    
    B
    
    Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8%4
    
    B3
    
    B-
    
    Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10%3
    
    Caa1
    
    CCC+
    
    Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3%2
    
    Caa2
    
    CCC
    
    Probability of default during the
next ten years is 35% and the
expected loss is 13.3% to 16.7%1
    
    Caa3
    
    CC
    
    Probability of default during the
next ten years is 65% and the
expected loss is 16.7% to 20%0
    
    N/a
    
    D
    
    Probability of default during the
next ten years is 85%, or there is a
payment default, and the expected
loss is greater than 20%
 
 (a)
    
    The default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term.   Rating
    
    12/31/2005
    
    12/31/2004Average
    
    8.6
    
    7.8Weighted Average
    
    8.7
    
    7.6Highest
    
    10.0
    
    10.0Lowest
    
    6.0
    
    6.0
 Investments in Real Estate
    54




---



##### 



Provision for Loan Losses
  Accounting for Derivative Financial Investments and Hedging Activities
   Income Taxes
  55




---



##### 



Stock Based Compensation
 Accounting for Stock Issued
to Employees, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25.
 Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123(R). .
 56




---



##### 



Results of Operations
   December 31, 2005
    
    
    December 31, 2004
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    11,437,731
    
    
    $
    3,331,215
    
    
    $
    8,106,516
    
    
    
    243
    %Interest income from mortgage note receivable
    
    
    1,915,795
    
    
    
    981,187
    
    
    
    934,608
    
    
    
    95
    %Tenant recovery revenue
    
    
    111,808
    
    
    
    
    
    
    
    111,808
    
    
    
    100
    %Total operating revenues
    
    
    13,465,334
    
    
    
    4,312,402
    
    
    
    9,152,932
    
    
    
    212
    %Operating expensesDepreciation and amortization
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    2,677,774
    
    
    
    275
    %Management advisory fee
    
    
    2,118,040
    
    
    
    1,187,776
    
    
    
    930,264
    
    
    
    78
    %Professional fees
    
    
    585,571
    
    
    
    448,969
    
    
    
    136,602
    
    
    
    30
    %Taxes and licenses
    
    
    249,249
    
    
    
    13,603
    
    
    
    235,646
    
    
    
    1732
    %Insurance
    
    
    274,166
    
    
    
    250,816
    
    
    
    23,350
    
    
    
    9
    %General and administrative
    
    
    466,868
    
    
    
    428,624
    
    
    
    38,244
    
    
    
    9
    %Total operating expenses
    
    
    7,345,013
    
    
    
    3,303,133
    
    
    
    4,041,880
    
    
    
    122
    %Other income (expense)Interest income from temporary investments
    
    
    126,826
    
    
    
    608,617
    
    
    
    (481,791
    )
    
    
    -79
    %Interest income  employee loans
    
    
    21,041
    
    
    
    6,042
    
    
    
    14,999
    
    
    
    248
    %Interest expense
    
    
    (2,447,686
    )
    
    
    
    
    
    
    (2,447,686
    )
    
    
    100
    %Income before realized and unrealized losses
    
    
    3,820,502
    
    
    
    1,623,928
    
    
    
    2,196,574
    
    
    
    135
    %Realized and unrealized loss from foreign currency
    
    
    (218,557
    )
    
    
    
    
    
    
    (218,557
    )
    
    
    100
    %Net Income
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    1,978,017
    
    
    
    122
    %
 Comparison of the year ended December 31, 2005 to the year ended December 31, 2004
 Revenues
    57




---



##### 



Expenses
        58




---



##### 



Interest Income
   Foreign Currency Loss
  Net Income
  Comparison of the year ended December 31, 2004 to the period from February 14, 2003(inception) to
December 31, 2003
  59




---



##### 



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
   Investing Activities
   Financing Activities
   60




---



##### 



Future Capital Needs
   Registration Statement
  Line of Credit
  61




---



##### 



Mortgage Notes Payable
       62




---



##### 



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)
    
    $
    105,118,961
    
    
    $
    148,779
    
    
    $
    44,501,097
    
    
    $
    1,857,236
    
    
    $
    58,611,849Interest on Long-Term Debt Obligations (2)
    
    
    33,067,095
    
    
    
    3,363,142
    
    
    
    6,771,624
    
    
    
    6,595,794
    
    
    
    16,336,535Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations (4)
    
    
    58,000,000
    
    
    
    58,000,000
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    196,186,056
    
    
    $
    61,511,921
    
    
    $
    51,272,721
    
    
    $
    8,453,030
    
    
    $
    74,948,384
 
 (1)
    
    Long-term debt obligations represent both borrowings under
our BB&T line of credit and mortgage notes payable that were outstanding
as of December 31, 2005. The line of credit matures in February 2008.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our line of credit.
The balance and interest rate is variable and, thus, the amount of interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is allocated to us by our Adviser
in connection with our advisory agreement.(4)
    
    The purchase obligations reflected in the above table represents commitments outstanding at December 31, 2005 to purchase
real estate, $44.8 million of which was subsequently closed in February 2006. Funds from Operations
    63




---



##### 



For the periodFebruary 14, 2003For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Net income (loss)
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Real estate depreciation and amortization
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Funds from operations
    
    
    7,253,064
    
    
    
    2,597,273
    
    
    
    (235,044
    )Weighted average shares outstanding  basic
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding  diluted
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Basic net income (loss) per weighted average common
share
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted net income (loss) per weighted average
common share
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Basic funds from operations per weighted average
common share
    
    $
    0.95
    
    
    $
    0.34
    
    
    $
    (0.07
    )Diluted funds from operations per weighted average
common share
    
    $
    0.94
    
    
    $
    0.34
    
    
    $
    (0.07
    )
 64




---



##### 



Item 7A. Quantitative and Qualitative Disclosure About Market Risk
        65




---



##### 



66




---



##### 



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements
         67




---



##### 



Report of Independent Registered Public Accounting Firm
 
  Consolidated financial statements and financial statement schedules
 
 Internal control over financial reporting
 Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission Internal Control  Integrated Framework
 68




---



##### 



69




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 December 31, 2005
    
    
    December 31, 2004ASSETSReal estate, net of accumulated depreciation of
$3,408,878 and $785,125, respectively
    
    $
    161,634,761
    
    
    $
    60,466,330Lease intangibles, net of accumulated amortization of
$1,221,413 and $194,047, respectively
    
    
    13,947,484
    
    
    
    3,230,146Mortgage notes receivable
    
    
    21,025,815
    
    
    
    11,107,717Cash and cash equivalents
    
    
    1,740,159
    
    
    
    28,754,289Restricted cash
    
    
    1,974,436
    
    
    
    1,460,675Funds held in escrow
    
    
    1,041,292
    
    
    
    Interest receivable  mortgage note
    
    
    70,749
    
    
    
    64,795Interest receivable  employees
    
    
    
    
    
    
    4,792Deferred rent receivable
    
    
    2,590,617
    
    
    
    210,846Deferred
financing costs, net of accumulated amortization of $260,099, and $0,
respectively
    
    
    1,811,017
    
    
    
    50,000Prepaid expenses
    
    
    385,043
    
    
    
    170,685Deposits on real estate
    
    
    600,000
    
    
    
    50,000Accounts receivable
    
    
    225,581
    
    
    
    14,819TOTAL ASSETS
    
    $
    207,046,954
    
    
    $
    105,585,094LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    61,558,961
    
    
    $
    Borrowings under line of credit
    
    
    43,560,000
    
    
    
    Accounts payable and accrued expenses
    
    
    493,002
    
    
    
    168,389Dividends payable
    
    
    
    
    
    
    920,040Due to Adviser
    
    
    164,155
    
    
    
    129,231Rent received in advance, security deposits and funds held in escrow
    
    
    2,322,300
    
    
    
    1,674,741Total Liabilities
    
    
    108,098,418
    
    
    
    2,892,401STOCKHOLDERS EQUITYCommon stock, $0.001 par value, 20,000,000 shares authorized and
7,672,000 and 7,667,000 shares issued and outstanding, respectively
    
    
    7,672
    
    
    
    7,667Additional paid in capital
    
    
    105,502,544
    
    
    
    105,427,549Notes receivable  employees
    
    
    (432,282
    )
    
    
    (375,000
    )Distributions in excess of accumulated earnings
    
    
    (6,129,398
    )
    
    
    (2,367,523
    )Total Stockholders Equity
    
    
    98,948,536
    
    
    
    102,692,693TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    207,046,954
    
    
    $
    105,585,094
  70




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the periodFebruary 14, 2003For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Operating revenuesRental income
    
    $
    11,437,731
    
    
    $
    3,331,215
    
    
    $
    12,180Interest income from mortgage notes receivable
    
    
    1,915,795
    
    
    
    981,187
    
    
    
    Tenant recovery revenue
    
    
    111,808
    
    
    
    
    
    
    
    Total operating revenues
    
    
    13,465,334
    
    
    
    4,312,402
    
    
    
    12,180Operating expensesDepreciation and amortization
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Management advisory fee
    
    
    2,118,040
    
    
    
    1,187,776
    
    
    
    317,188Professional fees
    
    
    585,571
    
    
    
    448,969
    
    
    
    50,584Taxes and licenses
    
    
    249,249
    
    
    
    13,603
    
    
    
    300Insurance
    
    
    274,166
    
    
    
    250,816
    
    
    
    111,240General and administrative
    
    
    466,868
    
    
    
    428,624
    
    
    
    72,009Total operating expenses
    
    
    7,345,013
    
    
    
    3,303,133
    
    
    
    557,148Other income (expense)Interest income from temporary investments
    
    
    126,826
    
    
    
    608,617
    
    
    
    304,097Interest income  employee loans
    
    
    21,041
    
    
    
    6,042
    
    
    
    Interest expense
    
    
    (2,447,686
    )
    
    
    
    
    
    
    Income before realized and unrealized losses
    
    
    3,820,502
    
    
    
    1,623,928
    
    
    
    (240,871
    )Realized and unrealized loss from foreign currencyNet realized loss from foreign currency transactions
    
    
    (6,278
    )
    
    
    
    
    
    
    Net
unrealized depreciation on translation of assets and liabilities in a foreign currency
    
    
    (212,279
    )
    
    
    
    
    
    
    Total net realized and unrealized loss from foreign currency
    
    
    (218,557
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Earnings (loss) per weighted average common shareBasic
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Weighted average shares outstandingBasic
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Diluted
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119
  71




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Notes
    
    
    
    
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Stock
    
    
    Excess of
    
    
    TotalCommon Stock
    
    
    Excess of
    
    
    From Sale of
    
    
    Subscription
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Par Value
    
    
    Common Stock
    
    
    Receivable
    
    
    Earnings
    
    
    EquityBalance at February
14, 2003
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of Common
Shares
    
    
    52,000
    
    
    
    52
    
    
    
    51,948
    
    
    
    
    
    
    
    (42,000
    )
    
    
    
    
    
    
    10,000Payment of Stock
Subscription
Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,000
    
    
    
    
    
    
    
    42,000Issuance of Common
Stock in Public
Offering (net of
offering costs of
$864,554)
    
    
    7,590,000
    
    
    
    7,590
    
    
    
    105,008,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,015,946Distributions
Declared ($0.01 per
common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,420
    )
    
    
    (76,420
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240,871
    )
    
    
    (240,871
    )Balance at December
31, 2003
    
    
    7,642,000
    
    
    
    7,642
    
    
    
    105,060,304
    
    
    
    
    
    
    
    
    
    
    
    (317,291
    )
    
    
    104,750,655Issuance of Common
Stock Under Stock
Option Plan
    
    
    25,000
    
    
    
    25
    
    
    
    374,975
    
    
    
    (375,000
    )
    
    
    
    
    
    
    
    
    
    
    Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (7,730
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,730
    )Distributions
Declared ($0.48 per
common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,674,160
    )
    
    
    (3,674,160
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,623,928
    
    
    
    1,623,928Balance at December
31, 2004
    
    
    7,667,000
    
    
    $
    7,667
    
    
    $
    105,427,549
    
    
    $
    (375,000
    )
    
    $
    
    
    
    $
    (2,367,523
    )
    
    $
    102,692,693Issuance of Common
Stock Under Stock
Option Plan
    
    
    5,000
    
    
    
    5
    
    
    
    74,995
    
    
    
    (75,000
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of
Principal on Notes
Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,718
    
    
    
    
    
    
    
    
    
    
    
    17,718Distributions
Declared ($0.96 per
common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,363,820
    )
    
    
    (7,363,820
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,601,945
    
    
    
    3,601,945Balance at December
31, 2005
    
    
    7,672,000
    
    
    $
    7,672
    
    
    $
    105,502,544
    
    
    $
    (432,282
    )
    
    $
    
    
    
    $
    (6,129,398
    )
    
    $
    98,948,536
  72




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the period February14, 2003 (inception)For the year ended
    
    
    For the year ended
    
    
    throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Cash flows from operating activities:Net income (loss)
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Amortization of deferred financing costs
    
    
    260,099
    
    
    
    
    
    
    
    Amortization of deferred rent receivable
    
    
    178,070
    
    
    
    
    
    
    
    Unrealized depreciation on the translation of assets and
liabilities in a foreign currency
    
    
    212,279
    
    
    
    
    
    
    
    Changes in assets and liabilities:Increase in mortgage interest receivable
    
    
    (5,954
    )
    
    
    (64,795
    )
    
    
    Decrease (increase) in employee interest receivable
    
    
    4,792
    
    
    
    (4,792
    )
    
    
    (Increase) decrease in prepaid expenses
    
    
    (214,358
    )
    
    
    20,747
    
    
    
    (191,432
    )Increase in accounts receivable
    
    
    (210,762
    )
    
    
    (14,819
    )
    
    
    Increase in deferred rent receivable
    
    
    (565,017
    )
    
    
    (210,846
    )
    
    
    Increase in accounts payable and accrued expenses
    
    
    324,613
    
    
    
    168,389
    
    
    
    Increase (decrease) in due to Adviser
    
    
    34,924
    
    
    
    (105,064
    )
    
    
    234,295Increase in rent received in advance and security deposits
    
    
    488,913
    
    
    
    214,066
    
    
    
    Payments to
lenders for operating reserves held in escrow
    
    
    (275,383
    )
    
    
    
    
    
    
    Increase in operating reserves from tenants
    
    
    72,837
    
    
    
    
    
    
    
    Net cash provided by (used in) operating activities
    
    
    7,558,117
    
    
    
    2,600,159
    
    
    
    (192,181
    )Cash flows from investing activities:Real estate investments
    
    
    (117,531,731
    )
    
    
    (58,875,648
    )
    
    
    (5,800,000
    )Increase in restricted cash
    
    
    (513,761
    )
    
    

    

    
    
    Receipts from tenants for capital reserves
    
    
    1,015,069
    
    
    
    
    
    
    
    Payments to tenants from capital reserves
    
    
    (929,260
    )
    
    
    
    
    
    
    Payments to lenders for capital reserves held in escrow
    
    
    (1,065,909
    )
    
    
    
    
    
    
    Receipts from lenders for capital reserves held in escrow
    
    
    300,000
    
    
    
    
    
    
    
    Deposits on future acquisitions
    
    
    (2,686,000
    )
    
    
    (775,000
    )
    
    
    Refund of deposit on real estate
    
    
    150,000
    
    
    
    
    
    
    
    Deposits applied against real estate investments
    
    
    1,986,000
    
    
    
    725,000
    
    
    
    Principal repayments on mortgage loans
    
    
    81,902
    
    
    
    62,283
    
    
    
    Income of mortgage loan
    
    
    (10,000,000
    )
    
    
    (11,170,000
    )
    
    
    Net cash used in investing activities
    
    
    (129,193,690
    )
    
    
    (70,033,365
    )
    
    
    (5,800,000
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    
    
    
    
    105,067,946Offering costs
    
    
    
    
    
    
    (7,730
    )
    
    
    Borrowings under mortgage note payable
    
    
    61,419,179
    
    
    
    
    
    
    
    Principal repayments on mortgage note payable
    
    
    (70,479
    )
    
    
    
    
    
    
    Borrowings from line of credit
    
    
    85,460,000
    
    
    
    
    
    
    
    Repayments on line of credit
    
    
    (41,900,000
    )
    
    
    
    
    
    
    Principal repayments on employee loans
    
    
    17,718
    
    
    
    
    
    
    
    Payments for deferred financing costs
    
    
    (2,021,115
    )
    
    
    (50,000
    )
    
    
    Dividends paid
    
    
    (8,283,860
    )
    
    
    (2,830,540
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    94,621,443
    
    
    
    (2,888,270
    )
    
    
    105,067,946Net (decrease) increase in cash and cash equivalents
    
    
    (27,014,130
    )
    
    
    (70,321,476
    )
    
    
    99,075,765Cash and cash equivalents, beginning of period
    
    
    28,754,289
    
    
    
    99,075,765
    
    
    
    Cash and cash equivalents, end of period
    
    $
    1,740,159
    
    
    $
    28,754,289
    
    
    $
    99,075,765Cash paid during period for interest
    
    $
    2,014,236
    
    
    $
    
    
    
    $
    NON-CASH FINANCING ACTIVITIESNotes receivable issued in exchange for common stock
associated with the exercise of employee stock options
    
    $
    75,000
    
    
    $
    375,000
    
    
    $
    
  73




---



##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      Investments in real estate
  74




---



##### 



75




---



##### 



December 31, 2005
    
    
    December 31, 2004In-place leases
    
    $
    5,625,736
    
    
    $
    1,929,800Leasing costs
    
    
    5,047,033
    
    
    
    1,494,393Customer relationships
    
    
    4,496,128
    
    
    
    Accumulated amortization
    
    
    (1,221,413
    )
    
    
    (194,047
    )$
    13,947,484
    
    
    $
    3,230,146
 Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  76




---



##### 



Restricted cash
  Funds held in escrow
  Deferred financing costs
  Revenue recognition
   77




---



##### 



Stock based compensation
   Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123(R). .
  For the periodFebruary14, 2003For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Net income, as reported
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Less: Stock-based compensation expense
determined using the fair value
based method
    
    
    (187,483
    )
    
    
    (325,815
    )
    
    
    (94,781
    )Net income, pro-forma
    
    $
    3,414,462
    
    
    $
    1,298,113
    
    
    $
    (335,652
    )Basic, as reported
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Basic, pro-forma
    
    $
    0.45
    
    
    $
    0.17
    
    
    $
    (0.10
    )Diluted, as reported
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted, pro-forma
    
    $
    0.44
    
    
    $
    0.17
    
    
    $
    (0.10
    )
 78




---



##### 



Income taxes
   Segment information
 Disclosures about Segments of an Enterprise
and Related Information
 Foreign Currency Transactions
 Foreign Currency
Translation,
 79




---



##### 



Asset retirement obligations
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
    80




---



##### 



For the Period from February 14, 2003 (inception)For the Year Ended December 31, 2005
    
    
    For the Year Ended December 31, 2004
    
    
    through December 31, 2003Total
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    Total
    
    
    
    
    
    Total
    
    
    TotalAllocated
    
    
    Allocated
    
    
    Total
    
    
    Allocated
    
    
    Allocated
    
    
    Total
    
    
    Allocated
    
    
    Allocated
    
    
    TotalPayroll and
    
    
    Overhead
    
    
    Management
    
    
    Payroll and
    
    
    Overhead
    
    
    Management
    
    
    Payroll and
    
    
    Overhead
    
    
    ManagementPeriod
    
    Benefits
    
    
    Expenses
    
    
    Advisory Fee
    
    
    Benefits
    
    
    Expenses
    
    
    Advisory Fee
    
    
    Benefits
    
    
    Expenses
    
    
    Advisory FeeQuarter ended March
31
    
    $
    347,314
    
    
    $
    124,547
    
    
    $
    471,861
    
    
    $
    165,838
    
    
    $
    63,577
    
    
    $
    229,415
    
    
    $
    
    
    
    $
    
    
    
    $
    Quarter ended June
30
    
    $
    349,801
    
    
    $
    149,231
    
    
    $
    499,032
    
    
    $
    215,414
    
    
    $
    64,708
    
    
    $
    280,122
    
    
    $
    
    
    
    $
    
    
    
    $
    Quarter ended
September 30
    
    $
    458,814
    
    
    $
    162,546
    
    
    $
    621,360
    
    
    $
    265,887
    
    
    $
    67,937
    
    
    $
    333,824
    
    
    $
    88,434
    
    
    $
    35,663
    
    
    $
    124,097Quarter ended
December 31
    
    $
    390,614
    
    
    $
    135,173
    
    
    $
    525,787
    
    
    $
    256,063
    
    
    $
    88,352
    
    
    $
    344,415
    
    
    $
    133,410
    
    
    $
    59,681
    
    
    $
    193,091Total
    
    $
    1,546,543
    
    
    $
    571,497
    
    
    $
    2,118,040
    
    
    $
    903,202
    
    
    $
    284,574
    
    
    $
    1,187,776
    
    
    $
    221,844
    
    
    $
    95,344
    
    
    $
    317,188
 . Stock Options
   Weighted AverageShares
    
    
    Exercise PriceOptions outstanding at February 14, 2003
    
    
    Granted
    
    
    629,000
    
    
    $
    15.00Exercised
    
    
    Options outstanding at December 31, 2003, of which 629,000
shares were exercisable
    
    
    629,000
    
    
    $
    15.00Granted
    
    
    280,000
    
    
    $
    16.22Exercised
    
    
    (25,000
    )
    
    $
    15.00Forfeited
    
    
    (15,000
    )
    
    $
    15.73Options outstanding at December 31, 2004, of which 599,000
shares are exercisable
    
    
    869,000
    
    
    $
    15.39Granted
    
    
    64,500
    
    
    $
    15.47Exercised
    
    
    (5,000
    )
    
    $
    15.00Forfeited
    
    
    (12,500
    )
    
    $
    15.48Options outstanding at December 31, 2005, of which 744,250
shares are exercisable
    
    
    916,000
    
    
    $
    15.39
  Number of
    
    Strike Price of
    
    Amount ofOptions
    
    Options
    
    Promissory
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    Exercised
    
    Note
    
    Term of Note
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    9 years
    
    
    5.0
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    9 years
    
    
    6.0
    %
  81




---



##### 



4. Earnings Per Common Share
  For the periodFebruary 14, 2003For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Net income
(loss)
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Denominator for basic weighted average shares
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Dilutive effect of stock options (1)
    
    
    53,001
    
    
    
    58,679
    
    
    
    Denominator for diluted weighted average shares
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Basic
earnings (loss) per common share
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted
earnings (loss) per common share
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )
 
 (1)
    
    The dilutive effect of options outstanding for the period ending December 31, 2003 in the amount of 28,301 shares are not included in the calculation as they are anti-dilutive. 5. Real Estate
  Square FootageDate Acquired
    
    Location
    
    (unaudited)
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    5,020,471Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    3,491,506Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,370,654Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    9,004,794Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    5,008,554Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,429,249Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,886,764Sep-04
    
    Austin, Texas
    
    
    51,993
    
    
    Flexible Office
    
    
    7,117,245Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    904,066Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    6,003,634Oct-04
    
    Granby, Quebec
    
    
    99,981
    
    
    Commercial and Manufacturing
    
    
    2,957,863Oct-04
    
    Montreal, Quebec
    
    
    42,490
    
    
    Commercial and Manufacturing
    
    
    1,818,275Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    8,146,675Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,738,728Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,643,119May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    11,102,219May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,999,604Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,383,797Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,816,613Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    8,128,717Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,119,915Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    3,016,328Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,012,861Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,134,434Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,012,861Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    7,119,862Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    5,281,639Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,842,127Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    6,061,860Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    3,060,3273,260,359
    
    
    
    
    $
    161,634,761
 82




---



##### 



December 31, 2005
    
    
    December 31, 2004Real estate:Land
    
    $
    20,329,568
    
    
    $
    7,669,000Building
    
    
    141,660,553
    
    
    
    52,641,933Tenant improvements
    
    
    3,053,518
    
    
    
    940,522Accumulated depreciation
    
    
    (3,408,878
    )
    
    
    (785,125
    )Real estate, net
    
    $
    161,634,761
    
    
    $
    60,466,330
       83




---



##### 



84




---



##### 



Tenant
    
    
    Lease
    
    
    Deferred Rent
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    Intangibles
    
    
    Asset
    
    
    PriceSan Antonio, Texas
    
    $
    843,000
    
    
    $
    6,817,984
    
    
    $
    718,439
    
    
    $
    664,218
    
    
    
    
    
    
    $
    9,043,641Columbus, Ohio
    
    
    410,000
    
    
    
    2,379,947
    
    
    
    5,161
    
    
    
    243,063
    
    
    
    395,000
    
    
    
    3,433,171Big Flats, New York
    
    
    275,000
    
    
    
    6,492,984
    
    
    
    
    
    
    
    337,589
    
    
    
    
    
    
    
    7,105,573Wichita Kansas
    
    
    1,525,000
    
    
    
    9,633,478
    
    
    
    119,182
    
    
    
    606,701
    
    
    
    1,587,822
    
    
    
    13,472,183Arlington, Texas
    
    
    635,964
    
    
    
    3,350,586
    
    
    
    68,246
    
    
    
    1,300,087
    
    
    
    12,024
    
    
    
    5,366,907Dayton, Ohio
    
    
    525,000
    
    
    
    1,449,856
    
    
    
    444,137
    
    
    
    392,741
    
    
    
    
    
    
    
    2,811,734Eatontown, New Jersey
    
    
    1,350,630
    
    
    
    3,388,970
    
    
    
    131,091
    
    
    
    774,996
    
    
    
    
    
    
    
    5,645,687Franklin Township, New Jersey
    
    
    1,800,000
    
    
    
    6,410,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,210,908Duncan, South Carolina
    
    
    977,898
    
    
    
    14,325,669
    
    
    
    
    
    
    
    3,980,102
    
    
    
    
    
    
    
    19,283,669Hazelwood, Missouri
    
    
    763,178
    
    
    
    2,257,115
    
    
    
    21,463
    
    
    
    165,285
    
    
    
    
    
    
    
    3,207,041Angola, Indiana & Rock Falls, Illinois
    
    
    257,732
    
    
    
    2,927,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,185,176Newburyport, Massachusetts
    
    
    628,690
    
    
    
    6,532,839
    
    
    
    
    
    
    
    688,177
    
    
    
    
    
    
    
    7,849,706Clintonville, Wisconsin
    
    
    60,612
    
    
    
    5,243,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,304,047Maple Heights, Ohio
    
    
    1,608,976
    
    
    
    9,799,518
    
    
    
    458,392
    
    
    
    1,771,081
    
    
    
    
    
    
    
    13,637,967Richmond, Virginia
    
    
    735,820
    
    
    
    5,264,349
    
    
    
    61,691
    
    
    
    216,151
    
    
    
    
    
    
    
    6,278,011Toledo, Ohio
    
    
    263,068
    
    
    
    2,712,065
    
    
    
    85,194
    
    
    
    604,513
    
    
    
    
    
    
    
    3,664,840$
    12,660,568
    
    
    $
    88,987,147
    
    
    $
    2,112,996
    
    
    $
    11,744,704
    
    
    $
    1,994,846
    
    
    $
    117,500,261
 85




---



##### 



Year
    
    Rental Payments2006
    
    $
    17,564,1502007
    
    
    17,832,5492008
    
    
    18,166,6102009
    
    
    17,351,1262010
    
    
    16,637,981Thereafter
    
    
    79,054,040
   Location
    
    Real Estate TaxesRaleigh, North Carolina
    
    $
    45,743Canton, Ohio
    
    
    6,374Akron, Ohio
    
    
    81,933Charlotte, North Carolina
    
    
    65,724Canton, North Carolina
    
    
    47,877Snyder Township, Pennsylvania
    
    
    99,222Lexington, North Carolina
    
    
    21,102Austin, Texas
    
    
    167,499Norfolk, Virginia
    
    
    11,570Mt. Pocono, Pennsylvania
    
    
    115,232Granby, Quebec
    
    
    38,201Montreal, Quebec
    
    
    81,944San Antonio, Texas
    
    
    159,551Columbus, Ohio
    
    
    37,610Big Flats, New York
    
    
    24,594Wichita, Kansas
    
    
    5,222Arlington, Texas
    
    
    63,520Dayton, Ohio
    
    
    49,156Eatontown, New Jersey
    
    
    53,240Franklin Township, New Jersey
    
    
    140,280Duncan, South Carolina
    
    
    319,757Hazelwood, Missouri
    
    
    75,876Angola, Indiana
    
    
    12,934Angola, Indiana
    
    
    12,934Rock Falls, Illinois
    
    
    17,723Newburyport, Massachusetts
    
    
    27,663Clintonville, Wisconsin
    
    
    129,803Maple Heights, Ohio
    
    
    336,163Richmond, Virginia
    
    
    39,024Toledo, Ohio
    
    
    38,146$
    2,325,617
 86




---



##### 



6. Mortgage Notes Receivable
   7. Dividends Declared per Share
  Record Date
    
    Payment Date
    
    Dividend per ShareDecember 31, 2003
    
    January 15, 2004
    
    $
    0.01March 31, 2004
    
    April 15, 2004
    
    $
    0.12June 25, 2004
    
    July 9, 2004
    
    $
    0.12September 24, 2004
    
    October 8, 2004
    
    $
    0.12December 23, 2004
    
    January 5, 2005
    
    $
    0.12January 17, 2005
    
    January 31, 2005
    
    $
    0.06February 14, 2005
    
    February 25, 2005
    
    $
    0.06March 16, 2005
    
    March 30, 2005
    
    $
    0.06April 15, 2005
    
    April 29, 2005
    
    $
    0.08May 13, 2005
    
    May 27, 2005
    
    $
    0.08June 16, 2005
    
    June 30, 2005
    
    $
    0.08July 21, 2005
    
    July 29, 2005
    
    $
    0.08August 23, 2005
    
    August 31, 2005
    
    $
    0.08September 22, 2005
    
    September 30, 2005
    
    $
    0.08October 21, 2005
    
    October 31, 2005
    
    $
    0.10November 21, 2005
    
    November 30, 2005
    
    $
    0.10December 21, 2005
    
    December 30, 2005
    
    $
    0.10
 
   87




---



##### 



8. Segment Information
  As of and for the Year Ended December 31, 2005Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    11,549,539
    
    
    $
    1,915,795
    
    
    $
    
    
    
    $
    13,465,334Operating expenses
    
    
    (3,651,119
    )
    
    
    
    
    
    
    (3,693,894
    )
    
    
    (7,345,013
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    (2,299,819
    )
    
    
    (2,299,819
    )Net realized and unrealized loss from foreign currency
    
    
    (218,557
    )
    
    
    
    
    
    
    
    
    
    
    (218,557
    )Net income (loss)
    
    $
    7,679,863
    
    
    $
    1,915,795
    
    
    $
    (5,993,713
    )
    
    $
    3,601,945Total Assets
    
    $
    179,848,595
    
    
    $
    21,096,564
    
    
    $
    6,101,795
    
    
    $
    207,046,954
 As of and for the Year Ended December 31, 2004Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    3,331,215
    
    
    $
    981,187
    
    
    $
    
    
    
    $
    4,312,402Operating expenses
    
    
    (973,345
    )
    
    
    
    
    
    
    (2,329,788
    )
    
    
    (3,303,133
    )Other income (loss)
    
    
    
    
    
    
    
    
    
    
    614,659
    
    
    
    614,659Net realized and unrealized loss from foreign currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,357,870
    
    
    $
    981,187
    
    
    $
    (1,715,129
    )
    
    $
    1,623,928Total Assets
    
    $
    64,889,448
    
    
    $
    11,301,364
    
    
    $
    29,394,282
    
    
    $
    105,585,094
 9. Line of Credit
  88




---



##### 



10. Mortgage Notes Payable
      89




---



##### 



11. Quarterly Financial Information (unaudited)
  Year ended December 31, 2005Quarter endedQuarter ended
    
    
    Quarter ended
    
    
    September 30,
    
    
    Quarter endedMarch 31, 2005
    
    
    June 30, 2005
    
    
    2005
    
    
    December 31, 2005Operating revenues
    
    $
    2,144,633
    
    
    $
    2,776,443
    
    
    $
    4,035,952
    
    
    $
    4,508,306Operating
expenses(1)
    
    
    1,672,344
    
    
    
    1,387,827
    
    
    
    2,063,851
    
    
    
    2,220,991Income before realized and unrealized losses
    
    
    535,276
    
    
    
    1,152,241
    
    
    
    1,091,980
    
    
    
    1,041,005Net income (loss)
    
    
    535,184
    
    
    
    1,149,531
    
    
    
    867,411
    
    
    
    1,049,819Basic earnings (loss) per share
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.14Diluted earnings (loss) per share
    
    
    0.07
    
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.14Weighted average shares outstanding  basic
    
    
    7,667,000
    
    
    
    7,669,802
    
    
    
    7,672,000
    
    
    
    7,672,000Weighted average shares outstanding  diluted
    
    
    7,733,335
    
    
    
    7,692,639
    
    
    
    7,725,667
    
    
    
    7,737,297
 
 (1)
    
    Interest expense was included in operating expenses in
previous quarters
and is now reflected as a separate line item included in income
before realized and unrealized losses. Year ended December 31, 2004Quarter endedQuarter ended
    
    
    Quarter ended
    
    
    September 30,
    
    
    Quarter endedMarch 31, 2004
    
    
    June 30, 2004
    
    
    2004
    
    
    December 31, 2004Operating revenues
    
    $
    331,192
    
    
    $
    682,670
    
    
    $
    1,350,735
    
    
    $
    1,947,805Operating expenses
    
    
    696,958
    
    
    
    712,918
    
    
    
    820,663
    
    
    
    1,072,594Income before realized and unrealized losses
    
    
    (193,305
    )
    
    
    132,275
    
    
    
    685,038
    
    
    
    999,920Net income (loss)
    
    
    (193,305
    )
    
    
    132,275
    
    
    
    685,038
    
    
    
    999,920Basic earnings (loss) per share
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.13Diluted earnings (loss) per share
    
    
    (0.03
    )
    
    
    0.02
    
    
    
    0.09
    
    
    
    0.13Weighted average shares outstanding  basic
    
    
    7,642,000
    
    
    
    7,642,000
    
    
    
    7,648,250
    
    
    
    7,667,000Weighted average shares outstanding  diluted
    
    
    7,642,000
    
    
    
    7,695,134
    
    
    
    7,697,079
    
    
    
    7,725,434
 12. Pro Forma Financial Information (unaudited)
  For the year ended
    
    
    For the year endedDecember 31, 2005
    
    
    December 31, 2004Operating Data:Total operating revenue
    
    $
    19,109,386
    
    
    $
    9,956,454Total operating expenses
    
    
    (10,716,145
    )
    
    
    (6,674,265
    )Other income (expense)
    
    
    (2,299,819
    )
    
    
    614,659Income before realized and unrealized losses
    
    
    6,093,422
    
    
    
    3,896,848Realized and unrealized loss from foreign currency
    
    
    (218,557
    )
    
    
    Net income (loss)
    
    
    5,874,865
    
    
    
    3,896,848Share and Per Share Data:Basic net income (loss)
    
    $
    0.77
    
    
    $
    0.51Diluted net income (loss)
    
    $
    0.76
    
    
    $
    0.51Weighted average shares outstanding  basic
    
    
    7,670,219
    
    
    
    7,649,855Weighted average shares outstanding  diluted
    
    
    7,723,220
    
    
    
    7,708,534
 90




---



##### 



For the period February 14,For the year ended
    
    
    2003 (inception) throughDecember 31, 2004
    
    
    December 31, 2003Operating Data:Total operating revenue
    
    $
    7,726,722
    
    
    $
    2,999,710Total operating expenses
    
    
    (4,615,013
    )
    
    
    (1,705,043
    )Other income (expense)
    
    
    614,659
    
    
    
    304,097Income before realized and unrealized losses
    
    
    3,726,368
    
    
    
    1,598,764Realized and unrealized loss from foreign currency
    
    
    
    
    
    
    Net income (loss)
    
    
    3,726,368
    
    
    
    1,598,764Share and Per Share Data:Basic net income (loss)
    
    $
    0.49
    
    
    $
    0.50Diluted net income (loss)
    
    $
    0.48
    
    
    $
    0.50Weighted average shares outstanding-basic
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding-diluted
    
    
    7,708,534
    
    
    
    3,229,119
 13. Subsequent Events
     91




---



##### 



92




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2005
 Initial Cost
    
    
    
    
    
    
    Total CostCosts CapitalizedBuildings &
    
    
    Subsequent to
    
    
    
    
    
    
    Buildings &
    
    
    
    
    
    
    Accumulated
    
    
    Net
    
    
    DateLocation of Property
    
    Encumbrances
    
    
    Land
    
    
    Improvements
    
    
    Acquisition
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    Depreciation(1)
    
    
    Real Estate
    
    
    AcquiredRaleigh, North Carolina,
Office Building
    
    $
    
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    5,440,772
    
    
    $
    420,301
    
    
    $
    5,020,471
    
    
    
    12/23/2003Canton, Ohio,
Office & Warehouse Building
    
    
    2,950,000
    
    
    
    425,000
    
    
    
    3,225,000
    
    
    
    
    
    
    
    425,000
    
    
    
    3,225,000
    
    
    
    3,650,000
    
    
    
    158,494
    
    
    
    3,491,506
    
    
    
    1/30/2004Akron, Ohio,
Office & Laboratory Building
    
    
    7,560,000
    
    
    
    1,974,000
    
    
    
    6,676,417
    
    
    
    19,782
    
    
    
    1,974,000
    
    
    
    6,696,199
    
    
    
    8,670,199
    
    
    
    299,545
    
    
    
    8,370,654
    
    
    
    4/29/2004Charlotte, North Carolina,
Office Building
    
    
    7,125,000
    
    
    
    760,000
    
    
    
    8,515,396
    
    
    
    59,190
    
    
    
    760,000
    
    
    
    8,574,586
    
    
    
    9,334,586
    
    
    
    329,792
    
    
    
    9,004,794
    
    
    
    6/30/2004Canton, North Carolina,
Commercial & Manufacturing Building
    
    
    3,113,102
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    5,200,000
    
    
    
    191,446
    
    
    
    5,008,554
    
    
    
    7/6/2004Snyder Township, Pennsylvania,
Commercial & Warehouse Building
    
    
    5,760,000
    
    
    
    100,000
    
    
    
    6,561,985
    
    
    
    6,907
    
    
    
    100,000
    
    
    
    6,568,892
    
    
    
    6,668,892
    
    
    
    239,643
    
    
    
    6,429,249
    
    
    
    8/5/2004Lexington, North Carolina,
Commercial & Warehouse Building
    
    
    
    
    
    
    850,000
    
    
    
    2,106,845
    
    
    
    6,637
    
    
    
    850,000
    
    
    
    2,113,482
    
    
    
    2,963,482
    
    
    
    76,718
    
    
    
    2,886,764
    
    
    
    8/5/2004Austin, Texas,
Office Building
    
    
    
    
    
    
    1,000,000
    
    
    
    6,295,794
    
    
    
    46,095
    
    
    
    1,000,000
    
    
    
    6,341,889
    
    
    
    7,341,889
    
    
    
    224,644
    
    
    
    7,117,245
    
    
    
    9/16/2004Norfolk, Virginia,
Commercial & Manufacturing Building
    
    
    
    
    
    
    190,000
    
    
    
    718,663
    
    
    
    18,190
    
    
    
    190,000
    
    
    
    736,853
    
    
    
    926,853
    
    
    
    22,787
    
    
    
    904,066
    
    
    
    10/15/2004Mt. Pocono, Pennsylvania,
Commercial & Manufacturing Building
    
    
    
    
    
    
    350,000
    
    
    
    5,818,703
    
    
    
    18,430
    
    
    
    350,000
    
    
    
    5,837,133
    
    
    
    6,187,133
    
    
    
    183,499
    
    
    
    6,003,634
    
    
    
    10/15/2004Granby, Quebec,
Commercial & Manufacturing Building
    
    
    2,897,711
    
    
    
    206,000
    
    
    
    2,729,130
    
    
    
    110,186
    
    
    
    206,000
    
    
    
    2,839,316
    
    
    
    3,045,316
    
    
    
    87,453
    
    
    
    2,957,863
    
    
    
    10/15/2004Montreal, Quebec,
Commercial & Manufacturing Building
    
    
    1,747,148
    
    
    
    704,000
    
    
    
    1,057,933
    
    
    
    91,870
    
    
    
    704,000
    
    
    
    1,149,803
    
    
    
    1,853,803
    
    
    
    35,528
    
    
    
    1,818,275
    
    
    
    10/15/2004San Antonio, Texas,
Flexible Office Building
    
    
    
    
    
    
    843,000
    
    
    
    7,513,750
    
    
    
    22,673
    
    
    
    843,000
    
    
    
    7,536,423
    
    
    
    8,379,423
    
    
    
    232,748
    
    
    
    8,146,675
    
    
    
    2/10/2005Columbus, Ohio,
Industrial Building
    
    
    2,800,000
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    2,795,108
    
    
    
    56,380
    
    
    
    2,738,728
    
    
    
    2/10/2005Big Flats, New York,
Industrial Building
    
    
    
    
    
    
    275,000
    
    
    
    6,459,318
    
    
    
    33,666
    
    
    
    275,000
    
    
    
    6,492,984
    
    
    
    6,767,984
    
    
    
    124,865
    
    
    
    6,643,119
    
    
    
    4/15/2005Wichita, Kansas,
Office Building
    
    
    
    
    
    
    1,525,000
    
    
    
    9,702,731
    
    
    
    49,929
    
    
    
    1,525,000
    
    
    
    9,752,660
    
    
    
    11,277,660
    
    
    
    175,441
    
    
    
    11,102,219
    
    
    
    5/18/2005Arlington, Texas,
Warehouse & Bakery Building
    
    
    
    
    
    
    635,964
    
    
    
    3,381,228
    
    
    
    37,604
    
    
    
    635,964
    
    
    
    3,418,832
    
    
    
    4,054,796
    
    
    
    55,192
    
    
    
    3,999,604
    
    
    
    5/26/2005Dayton, Ohio,
Office Building
    
    
    2,078,000
    
    
    
    525,000
    
    
    
    1,833,771
    
    
    
    60,222
    
    
    
    525,000
    
    
    
    1,893,993
    
    
    
    2,418,993
    
    
    
    35,196
    
    
    
    2,383,797
    
    
    
    6/30/2005Eatontown, New Jersey,
Office Building
    
    
    
    
    
    
    1,350,630
    
    
    
    3,520,061
    
    
    
    
    
    
    
    1,350,630
    
    
    
    3,520,061
    
    
    
    4,870,691
    
    
    
    54,078
    
    
    
    4,816,613
    
    
    
    7/7/2005Frankling Township, New Jersey,
Office & Warehouse Building
    
    
    
    
    
    
    1,800,000
    
    
    
    6,410,908
    
    
    
    
    
    
    
    1,800,000
    
    
    
    6,410,908
    
    
    
    8,210,908
    
    
    
    82,191
    
    
    
    8,128,717
    
    
    
    7/11/2005Duncan, South Carolina,
Office & Manufacturing Building
    
    
    14,632,000
    
    
    
    977,898
    
    
    
    14,285,738
    
    
    
    39,935
    
    
    
    977,898
    
    
    
    14,325,673
    
    
    
    15,303,571
    
    
    
    183,656
    
    
    
    15,119,915
    
    
    
    7/14/2005Hazelwood, Missouri,
Office & Warehouse Building
    
    
    
    
    
    
    763,178
    
    
    
    2,248,616
    
    
    
    29,962
    
    
    
    763,178
    
    
    
    2,278,578
    
    
    
    3,041,756
    
    
    
    25,428
    
    
    
    3,016,328
    
    
    
    8/5/2005Angola, Indiana,
Industrial Building
    
    
    
    
    
    
    72,943
    
    
    
    948,258
    
    
    
    
    
    
    
    72,943
    
    
    
    948,258
    
    
    
    1,021,201
    
    
    
    8,340
    
    
    
    1,012,861
    
    
    
    9/2/2005Angola, Indiana,
Industrial Building
    
    
    
    
    
    
    145,886
    
    
    
    996,887
    
    
    
    
    
    
    
    145,886
    
    
    
    996,887
    
    
    
    1,142,773
    
    
    
    8,339
    
    
    
    1,134,434
    
    
    
    9/2/2005Rock Falls, Illinois,
Industrial Building
    
    
    
    
    
    
    38,903
    
    
    
    982,299
    
    
    
    
    
    
    
    38,903
    
    
    
    982,299
    
    
    
    1,021,202
    
    
    
    8,341
    
    
    
    1,012,861
    
    
    
    9/2/2005Newburyport, Massachusetts,
Industrial Building
    
    
    
    
    
    
    628,690
    
    
    
    6,504,056
    
    
    
    28,783
    
    
    
    628,690
    
    
    
    6,532,839
    
    
    
    7,161,529
    
    
    
    41,667
    
    
    
    7,119,862
    
    
    
    10/17/2005Clintonville, Wisconsin,
Industrial Manufacturing Building
    
    
    
    
    
    
    60,612
    
    
    
    5,243,435
    
    
    
    
    
    
    
    60,612
    
    
    
    5,243,435
    
    
    
    5,304,047
    
    
    
    22,408
    
    
    
    5,281,639
    
    
    
    10/31/2005Maple Heights, Ohio,
Industrial Building
    
    
    10,896,000
    
    
    
    1,608,976
    
    
    
    10,257,910
    
    
    
    
    
    
    
    1,608,976
    
    
    
    10,257,910
    
    
    
    11,866,886
    
    
    
    24,759
    
    
    
    11,842,127
    
    
    
    12/21/2005Richmond, Virginia
Industrial Building
    
    
    
    
    
    
    735,820
    
    
    
    5,326,040
    
    
    
    
    
    
    
    735,820
    
    
    
    5,326,040
    
    
    
    6,061,860
    
    
    
    
    
    
    
    6,061,860
    
    
    
    12/30/2005Toledo, Oho
Industrial Building
    
    
    
    
    
    
    263,068
    
    
    
    2,797,259
    
    
    
    
    
    
    
    263,068
    
    
    
    2,797,259
    
    
    
    3,060,327
    
    
    
    
    
    
    
    3,060,327
    
    
    
    12/30/2005$
    61,558,961
    
    
    $
    20,329,568
    
    
    $
    144,034,011
    
    
    $
    680,061
    
    
    $
    20,329,568
    
    
    $
    144,714,072
    
    
    $
    165,043,640
    
    
    $
    3,408,879
    
    
    $
    161,634,761
 
 (1)Depreciable life of all buildings is 39 years. Depreciable life of all improvements
is the life of the respective leases on each building, which range from 5-20 years. 93




---



##### 



For the period February 14,For the year ended
    
    
    For the year ended
    
    
    2003 (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Balance at beginning of period
    
    $
    61,251,455
    
    
    $
    5,440,772
    
    
    $
    Additions during period
    
    
    103,792,185
    
    
    
    55,810,683
    
    
    
    5,440,772Balance at end of period
    
    $
    165,043,640
    
    
    $
    61,251,455
    
    
    $
    5,440,772
  For the period February 14,For the year ended
    
    
    For the year ended
    
    
    2003 (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Balance at beginning of period
    
    $
    785,125
    
    
    $
    4,619
    
    
    $
    Additions during period
    
    
    2,623,754
    
    
    
    780,506
    
    
    
    4,619Balance at end of period
    
    $
    3,408,879
    
    
    $
    785,125
    
    
    $
    4,619
 94




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2005
 Final
    
    
    
    
    
    
    
    
    
    
    
    Carrying
    
    
    Principal Amount of LoansMaturity
    
    
    
    
    
    
    
    Face Amount
    
    
    Amount of
    
    
    Subject to DelinquentLocation of Real Estate
    
    Type of Loan
    
    Interest Rate
    
    Date
    
    Periodic Payment Term
    Prior Lien
    
    of Mortgage
    
    
    Mortgage
    
    
    Principal or Interest1 month LIBOR +4%;
    
    
    
    Monthly payment based upon a 25 year amortization term, which variates based on LIBOR, with a floor of 11%. BalloonSterling Heights, Michigan
    
    First Mortgage
    
    Floor of 10%
    
    2/18/2014
    
    payment at maturity is $9,659,388.28.
    
    
    
    
    $
    
    11,170,000
    
    
    $
    11,025,815
    
    
    $
    1 month LIBOR +6%; Floor of 7.5%, Ceiling of
    
    
    
    Monthly payment based upon a 24 year amortization term, which variates based on LIBOR, with a floor of 7.5% and aMcLean, Virginia
    
    First Mortgage
    
    10%
    
    5/30/2017
    
    ceiling of 10%. Balloon payment at maturity is $8,488,577.88.
    
    
    
    
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    
    $
    $
    21,170,000
    
    
    $
    21,025,815
  For the period February 14,For the year ended
    
    
    For the year ended
    
    
    2003 (inception) throughDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Balance at beginning of period
    
    $
    11,107,717
    
    
    $
    
    
    
    $
    New mortgage loans
    
    
    10,000,000
    
    
    
    11,170,000
    
    
    
    Collections of principal
    
    
    (81,902
    )
    
    
    (62,283
    )Balance at end of period
    
    $
    21,025,815
    
    
    $
    11,107,717
    
    
    $
    
 95




---



##### 



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  Item 9A. Controls and Procedures
    Internal Control  Integrated Framework Internal Control  Integrated Framework
      Item 9B. Other Information
  96




---



##### 



PART III
  Item 10. Directors and Executive Officers of the Registrant
  Item 11. Executive Compensation
  Item 12. Security Ownership of Certain Beneficial Owners and Management
  Item 13. Certain Relationships and Related Transactions
  Item 14. Principal Accountant Fees and Services
  97




---



##### 



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 a. DOCUMENTS FILED AS PART OF THIS REPORT
   
  
   Exhibit Index
 Exhibit
    
    Description of Document3 .1
    
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S
-11 (File No. 333-106024), filed June 11, 2003.3 .2
    
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
June 11, 2003.3.3
    
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.1
    
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed on January 19, 2006.10.1
    
    
    Amended and Restated Advisory Agreement between Gladstone
Commercial Corporation and Gladstone Management Corporation,
dated August 7, 2003, incorporated by reference to Exhibit 10.1
to Pre-Effective Amendment No. 2 to the Registration Statement on
Form S-11 (File No. 333-106024), filed August 8, 2003.10.2
    
    
    2003 Equity Incentive Plan, as amended, incorporated by reference
to Exhibit 10.2 to Pre-
 98




---



##### 



Exhibit
    
    Description of DocumentEffective Amendment No. 1 to the Registration Statement on Form S-11 (File No. 333-106024),
filed July 22, 2003.10.3
    
    
    Agreement of Limited Partnership of Gladstone Commercial Limited
Partnership, dated July 17, 2003, incorporated by reference to
Exhibit 10.3 to Pre -Effective Amendment No. 1 to the
Registration Statement on Form S -11 (File No. 333-106024), filed
July 22, 2003.10.4
    
    
    Real Property Purchase and Sale Agreement between 3058348 Nova
Scotia Company, 3058349 Nova Scotia Company and Gladstone
Commercial Limited Partnership, dated August 11, 2004,
incorporated by reference to Exhibit 10.4 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.10.5
    
    
    Real Property Purchase and Sale Agreement between PBC  Pocono,
L.L.C., PBC Norfolk, L.L.C. and Gladstone Commercial Limited
Partnership, dated August 11, 2004, incorporated by reference to
Exhibit 10.5 to the Form 10-K (File No. 000-50363), filed March
8, 2005.10.6
    
    
    Trademark License Agreement, dated December 20, 2004, between
Gladstone Commercial Corporation and Gladstone Management
Corporation, incorporated by reference to Exhibit 10.6 to the
Form 10-K (File No. 000-50363), filed March 8, 2005.10.7
    
    
    Amendment No. 2 to the 2003 Equity Incentive Plan, incorporated
by reference to Exhibit 10.7 to the Form 10-K (File No.
000-50363), filed March 8, 2005.10.8
    
    
    First Amendment to Agreement of Limited Partnership of Gladstone
Commercial Limited Partnership, dated September 1, 2004,
incorporated by reference to Exhibit 10.8 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.10.9
    
    
    Credit Agreement by and among Gladstone Commercial Corporation,
Gladstone Commercial Limited Partnership, Branch Banking and
Trust Company and certain other parties, dated as of February 28,
2005, incorporated by reference to Exhibit 10.9 to Current Report
on Form 8-K (File No. 000-50363), filed March 1, 2005.10.10
    
    
    Promissory Note between Key Bank National Association and CMI04
Canton NC LLC, dated March 14, 2005, incorporated by reference to
Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 (File No. 000-50363), filed on May 4, 2005.10.11
    
    
    First Amendment to Credit Agreement and Waiver by and among
Gladstone Commercial Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust Company and certain other
parties, dated as of April 21, 2005, incorporated by reference to
Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 (File No. 000-50363), filed on May 4, 2005.10.12
    
    
    Second Amendment to Credit Agreement and Loan Documents by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of July 6, 2005, incorporated by
reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File No. 000-50363), filed
on August 2, 2005.10.13
    
    
    Loan Agreement between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of August
25, 2005, incorporated by reference to Exhibit 10.4 of the
Current Report on Form 8-K (File No. 000-50363), filed on August
29, 2005.10.14
    
    
    Promissory Note between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of August
25, 2005, incorporated by reference to
 99




---



##### 



Exhibit
    
    Description of DocumentExhibit 10.5 of the Current Report on Form 8-K (File No. 000-50363), filed on August
29, 2005.10.15
    
    
    Mortgage and Security Agreement between 260 Springside Drive,
Akron OH LLC and JP Morgan Chase Bank, N.A., dated as of
September 12, 2005,, incorporated by reference to Exhibit 10.6 of
the Current Report on Form 8-K (File No. 000-50363), filed on
September 13, 2005.10.16
    
    
    Fixed Rate Note between 260 Springside Drive, Akron OH LLC and JP
Morgan Chase Bank, N.A., dated as of September 12, 2005,
incorporated by reference to Exhibit 10.7 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 13, 2005.10.17
    
    
    Loan Agreement between PZ05 Maple Heights OH LLC, WMI05 Columbus
OH LLC, and OB Crenshaw GCC, LP, and Countrywide Commercial Real
Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.8 of the Current Report on Form 8-K
(File No. 000-50363), filed on December 22, 2005.10.18
    
    
    Promissory Note between PZ05 Maple Heights OH LLC, WMI05 Columbus
OH LLC, and OB Crenshaw GCC, LP, and Countrywide Commercial Real
Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.9 of the Current Report on Form 8-K
(File No. 000-50363), filed on December 22, 2005.10.19
    
    
    First Amended and Restated Agreement of Limited Partnership of
Gladstone Commercial Limited Partnership, incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K (File
No. 000-50363), filed on February 1, 2006.10.20
    
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo
Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.20 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.21
    
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06
Champaign IL LLC, Gladstone Commercial Corporation and LaSalle
Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.22
    
    
    Promissory note between Stonewater Dox Funding LLC and Wells
Fargo Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.23
    
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006., incorporated by reference to Exhibit 10.23 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.24
    
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.24 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.25
    
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and
UC06 Roseville MN LLC, Gladstone Commercial Corporation and
LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report
on
 100




---



##### 



Exhibit
    
    Description of DocumentForm 8-K (File No. 000-50363), filed on February 24, 2006.10.26
    
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.26 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.27
    
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006, incorporated by reference to Exhibit 10.27 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.11
    
    
    Computation of Per Share Earnings from Operations (included in
the notes to the audited financial statements contained in this
report)14
    
    
    Code of Business Conduct and Ethics, dated October 11, 2005,
incorporated by reference to Exhibit 14.1 to Current Report on
Form 8-K (File No. 000-50363), filed October 12, 2005.21
    
    
    Subsidiaries of Gladstone Commercial Corporation.23
    
    
    Consent of Independent Registered Public Accounting Firm.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. 101




---



##### 



Gladstone Commercial CorporationDate: February 28, 2006
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer and Treasurer  Date: February 28, 2006
    
    By:
    
    /s/ David GladstoneDavid GladstoneChief Executive Officer and Chairman of the Board of Directors(principal executive officer)Date: February 28, 2006
    
    By:
    
    /s/ Terry Lee BrubakerTerry Lee BrubakerPresident, Chief Operating Officer and DirectorDate: February 28, 2006
    
    By:
    
    /s/ Harry BrillHarry BrillChief Financial Officer(principal financial and accounting officer)Date: February 28, 2006
    
    By:
    
    /s/ David A.R. DullumDavid A.R. DullumDirectorDate: February 28, 2006
    
    By:
    
    /s/ Anthony W. ParkerAnthony W. ParkerDirectorDate: February 28, 2006
    
    By:
    
    /s/ Michela A. EnglishMichela A. EnglishDirector
 102




---



##### 



Date: February 28, 2006
    
    By:
    
    /s/ Paul AdelgrenPaul AdelgrenDirectorDate: February 28, 2006
    
    By:
    
    /s/ Maurice CoulonMaurice CoulonDirectorDate: February 28, 2006
    
    By:
    
    /s/ John OutlandJohn OutlandDirectorDate: February 28, 2006
    
    By:
    
    /s/ Gerard MeadGerard MeadDirector
 103




---



##### 



Exhibit Index
 Exhibit
    
    Description of Document3 .1
    
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S
-11 (File No. 333-106024), filed June 11, 2003.3 .2
    
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
June 11, 2003.3.3
    
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.1
    
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed on January 19, 2006.10.1
    
    
    Amended and Restated Advisory Agreement between Gladstone
Commercial Corporation and Gladstone Management Corporation,
dated August 7, 2003, incorporated by reference to Exhibit 10.1
to Pre-Effective Amendment No. 2 to the Registration Statement on
Form S-11 (File No. 333-106024), filed August 8, 2003.10.2
    
    
    2003 Equity Incentive Plan, as amended, incorporated by reference
to Exhibit 10.2 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
July 22, 2003.10.3
    
    
    Agreement of Limited Partnership of Gladstone Commercial Limited
Partnership, dated July 17, 2003, incorporated by reference to
Exhibit 10.3 to Pre -Effective Amendment No. 1 to the
Registration Statement on Form S -11 (File No. 333-106024), filed
July 22, 2003.10.4
    
    
    Real Property Purchase and Sale Agreement between 3058348 Nova
Scotia Company, 3058349 Nova Scotia Company and Gladstone
Commercial Limited Partnership, dated August 11, 2004,
incorporated by reference to Exhibit 10.4 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.10.5
    
    
    Real Property Purchase and Sale Agreement between PBC  Pocono,
L.L.C., PBC Norfolk, L.L.C. and Gladstone Commercial Limited
Partnership, dated August 11, 2004, incorporated by reference to
Exhibit 10.5 to the Form 10-K (File No. 000-50363), filed March
8, 2005.10.6
    
    
    Trademark License Agreement, dated December 20, 2004, between
Gladstone Commercial Corporation and Gladstone Management
Corporation, incorporated by reference to Exhibit 10.6 to the
Form 10-K (File No. 000-50363), filed March 8, 2005.10.7
    
    
    Amendment No. 2 to the 2003 Equity Incentive Plan, incorporated
by reference to Exhibit 10.7 to the Form 10-K (File No.
000-50363), filed March 8, 2005.10.8
    
    
    First Amendment to Agreement of Limited Partnership of Gladstone
Commercial Limited Partnership, dated September 1, 2004,
incorporated by reference to Exhibit 10.8 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.10.9
    
    
    Credit Agreement by and among Gladstone Commercial Corporation,
Gladstone Commercial Limited Partnership, Branch Banking and
Trust Company and certain other parties, dated as of February 28,
2005, incorporated by reference to Exhibit 10.9 to Current Report
on Form 8-K (File No. 000-50363), filed March 1, 2005.
 104




---



##### 



Exhibit
    
    Description of Document10.10
    
    
    Promissory Note between Key Bank National Association and CMI04
Canton NC LLC, dated March 14, 2005, incorporated by reference to
Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 (File No. 000-50363), filed on May 4, 2005.10.11
    
    
    First Amendment to Credit Agreement and Waiver by and among
Gladstone Commercial Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust Company and certain other
parties, dated as of April 21, 2005, incorporated by reference to
Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 (File No. 000-50363), filed on May 4, 2005.10.12
    
    
    Second Amendment to Credit Agreement and Loan Documents by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of July 6, 2005, incorporated by
reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File No. 000-50363), filed
on August 2, 2005.10.13
    
    
    Loan Agreement between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of August
25, 2005, incorporated by reference to Exhibit 10.4 of the
Current Report on Form 8-K (File No. 000-50363), filed on August
29, 2005.10.14
    
    
    Promissory Note between AFL05 Duncan SC LLC and Little Arch
Charlotte NC LLC and Bank of America, N.A., dated as of August
25, 2005, incorporated by reference to Exhibit 10.5 of the
Current Report on Form 8-K (File No. 000-50363), filed on August
29, 2005.10.15
    
    
    Mortgage and Security Agreement between 260 Springside Drive,
Akron OH LLC and JP Morgan Chase Bank, N.A., dated as of
September 12, 2005,, incorporated by reference to Exhibit 10.6 of
the Current Report on Form 8-K (File No. 000-50363), filed on
September 13, 2005.10.16
    
    
    Fixed Rate Note between 260 Springside Drive, Akron OH LLC and JP
Morgan Chase Bank, N.A., dated as of September 12, 2005,
incorporated by reference to Exhibit 10.7 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 13, 2005.10.17
    
    
    Loan Agreement between PZ05 Maple Heights OH LLC, WMI05 Columbus
OH LLC, and OB Crenshaw GCC, LP, and Countrywide Commercial Real
Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.8 of the Current Report on Form 8-K
(File No. 000-50363), filed on December 22, 2005.10.18
    
    
    Promissory Note between PZ05 Maple Heights OH LLC, WMI05 Columbus
OH LLC, and OB Crenshaw GCC, LP, and Countrywide Commercial Real
Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.9 of the Current Report on Form 8-K
(File No. 000-50363), filed on December 22, 2005.10.19
    
    
    First Amended and Restated Agreement of Limited Partnership of
Gladstone Commercial Limited Partnership, incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K (File
No. 000-50363), filed on February 1, 2006.10.20
    
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo
Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.20 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.
 105




---



##### 



Exhibit
    
    Description of Document10.21
    
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06
Champaign IL LLC, Gladstone Commercial Corporation and LaSalle
Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.22
    
    
    Promissory note between Stonewater Dox Funding LLC and Wells
Fargo Bank, National Association, dated as of November 21, 2003,
incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.23
    
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006., incorporated by reference to Exhibit 10.23 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.10.24
    
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.24 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.25
    
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and
UC06 Roseville MN LLC, Gladstone Commercial Corporation and
LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.26
    
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich
Capital Financial Products, Inc, dated as of May 12, 2004,
incorporated by reference to Exhibit 10.26 of the Current Report
on Form 8-K (File No. 000-50363), filed on February 24, 2006.10.27
    
    
    Purchase agreement between Stonewater UIS Funding LLC and
Gladstone Commercial Limited Partnership, dated as of November
23, 2005, as the same has been modified by that certain Amendment
to Purchase Agreement dated December 22, 2005, that certain
Amendment to Purchase Agreement dated December 30, 2005, that
certain Amendment to Purchase Agreement dated January 6, 2006,
that certain Amendment to Purchase Agreement dated January 13,
2006, that certain Amendment to Purchase Agreement dated January
17, 2006 and that certain Amendment to Purchase Agreement dated
January 20, 2006, incorporated by reference to Exhibit 10.27 of
the Current Report on Form 8-K (File No. 000-50363), filed on
February 24, 2006.11
    
    
    Computation of Per Share Earnings (included in the notes to the
audited financial statements contained in this report)14
    
    
    Code of Business Conduct and Ethics, dated October 11, 2005,
incorporated by reference to Exhibit 14.1 to Current Report on
Form 8-K (File No. 000-50363), filed October 12, 2005.21
    
    
    Subsidiaries of Gladstone Commercial Corporation.23
    
    
    Consent of Independent Registered Public Accounting Firm.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
 106




---



##### 



Exhibit
    
    Description of Documentof 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.
 
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    Previously filed and incorporated by reference. 107