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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-50363
 GLADSTONE COMMERCIAL CORPORATION
 (Exact name of registrant as specified in its charter)
 MARYLAND
    
    02-0681276(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102  (Address of principal executive office)
 (703) 287-5800  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:Common Stock, par value $0.001 per share
    
    NASDAQ Global Market7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share
    
    NASDAQ Global Market7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.001 per share
    
    NASDAQ Global Market
 (Title of Each Class)
    
    (Name of exchange on which registered)
  o þ
 o þ
 þ o
 o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




---



##### 



GLADSTONE COMMERCIAL CORPORATION
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2008
 TABLE OF CONTENTS
 PAGEPART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    18Item 1B. Unresolved Staff Comments
    
    
    30Item 2. Properties
    
    
    31Item 3. Legal Proceedings
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    34Item 6. Selected Financial Data
    
    
    35Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    37Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    53Item 8. Financial Statements and Supplementary Data
    
    
    55Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    88Item 9A. Controls and Procedures
    
    
    88Item 9B. Other Information
    
    
    88PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    89Item 11. Executive Compensation
    
    
    89Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    89Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    89Item 14. Principal Accountant Fees and Services
    
    
    89PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    90
  2




---



##### 



Forward-Looking Statements
 All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933( the Securities Act),
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). These statements may relate to, among other things, future events or our future performance
or financial condition. In some cases, you can identify forward-looking statements by terminology
such as may, might, believe, will, provided, anticipate, future, could, growth,
plan, intend, expect, should, would, if, seek, possible, potential, likely or
the negative of such terms or comparable terminology. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others: (1) further adverse changes in the economy and the capital
markets; (2) risks associated with negotiation and consummation of pending and future transactions;
(3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee
Brubaker, or George Stelljes III; (4) changes in our business strategy; (5) availability, terms and
deployment of capital, including the ability to maintain and borrow under our existing line of
credit, arrange for long-term mortgages on our properties, secure one or more additional long-term
credit facilities, and to raise equity capital; (6) changes in our industry, interest rates,
exchange rates or the general economy; (7) the degree and nature of our competition; and (8) those
factors described in the Risk Factors section of this Form 10-K. We caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of the date made. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, after the date of this Form 10-K.
 
 Item 1. Business
 Overview
    3




---



##### 



Significant Recent Developments
 Investment Activities:
 Financing Activities:
 Our Investment Objectives and Our Strategy
   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
 4




---



##### 



Property Acquisitions and Net Leasing
 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
   5




---



##### 



Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
  
    
    Credit 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. A prospective tenant that is deemed creditworthy does not
necessarily mean that we will consider the tenants property to be
investment grade. Our Adviser seeks tenants that range from small
businesses, many of which do not have publicly rated debt, to large
public companies. Our Advisers investment professionals 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). 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.
    
    Leases with Increasing Rent. Our Adviser seeks to include a clause in
each lease that provides for annual rent escalations over the term of
the lease. These increases will generally be fixed, however certain
leases are tied to increases in indices such as the consumer price
index.
    
    Diversification. Our Adviser attempts 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. Total rental income consisted of the
following tenant industry classifications as of December 31, 2008 and
December 31, 2007:
 6




---



##### 



December 31, 2008
    
    
    December 31, 2007Percentage of
    
    
    
    
    
    
    Percentage ofIndustry Classification
    
    Rental Income
    
    
    Rental Income
    
    
    Rental Income
    
    
    Rental IncomeAutomobile
    
    $
    1,166,654
    
    
    
    2.9
    %
    
    $
    1,166,654
    
    
    
    3.7
    %Beverage, Food & Tobacco
    
    
    2,079,113
    
    
    
    5.2
    %
    
    
    1,284,210
    
    
    
    4.1
    %Buildings and Real Estate
    
    
    2,013,515
    
    
    
    5.1
    %
    
    
    1,226,196
    
    
    
    3.9
    %Chemicals, Plastics & Rubber
    
    
    2,452,628
    
    
    
    6.2
    %
    
    
    1,853,217
    
    
    
    5.9
    %Containers, Packaging & Glass
    
    
    2,288,909
    
    
    
    5.8
    %
    
    
    2,232,221
    
    
    
    7.1
    %Diversified/Conglomerate Manufacturing
    
    
    3,165,747
    
    
    
    8.0
    %
    
    
    2,478,816
    
    
    
    7.9
    %Diversified/Conglomerate Services
    
    
    308,105
    
    
    
    0.8
    %
    
    
    308,105
    
    
    
    1.0
    %Electronics
    
    
    6,165,789
    
    
    
    15.5
    %
    
    
    5,699,152
    
    
    
    18.1
    %Healthcare, Education & Childcare
    
    
    5,719,016
    
    
    
    14.4
    %
    
    
    2,463,808
    
    
    
    7.8
    %Home & Office Furnishings
    
    
    529,743
    
    
    
    1.3
    %
    
    
    169,223
    
    
    
    0.5
    %Insurance
    
    
    722,866
    
    
    
    1.8
    %
    
    
    722,866
    
    
    
    2.3
    %Machinery
    
    
    2,241,752
    
    
    
    5.7
    %
    
    
    1,442,223
    
    
    
    4.6
    %Oil & Gas
    
    
    1,152,443
    
    
    
    2.9
    %
    
    
    1,152,443
    
    
    
    3.7
    %Personal & Non-Durable Consumer Products
    
    
    1,355,061
    
    
    
    3.4
    %
    
    
    1,166,453
    
    
    
    3.7
    %Personal, Food & Miscellaneous Services
    
    
    575,006
    
    
    
    1.4
    %
    
    
    575,006
    
    
    
    1.8
    %Printing & Publishing
    
    
    2,293,103
    
    
    
    5.8
    %
    
    
    2,007,554
    
    
    
    6.4
    %Telecommunications
    
    
    5,446,338
    
    
    
    13.8
    %
    
    
    5,521,150
    
    
    
    17.5
    %$
    39,675,788
    
    
    
    100.0
    %
    
    $
    31,469,297
    
    
    
    100.0
    %
 
    
    Property Valuation. The business prospects and the financial strength
of the tenant are important aspects 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 quarterly unaudited and
annual audited financial statements of the tenant in order to
continuously monitor the financial performance of the property. We
evaluate the financial capability of the tenant and its ability to
perform per the terms of the lease. We may 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. In addition, each property that we propose to
purchase will be appraised by an independent appraiser. These
appraisals may take into consideration, among other things, the terms
and conditions of the particular lease transaction, the quality of the
tenants credit and the conditions of the credit markets at the time
the lease transaction is negotiated. The appraised value may be
greater than the construction cost or the replacement cost of a
property, and the actual sale price of a property, if we resell the
property in the future, may be greater or less than its appraised
value. We generally limit our property acquisition cost or value to
between $3 million and $30 million
    
    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 typically less
likely to be rejected in the bankruptcy or otherwise terminated.
    
    Lease Provisions that Enhance and Protect Value. When appropriate, our
Adviser attempts 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 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, provides us
with additional financial security.
 7




---



##### 



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 property uses that may offer higher value.
    
    The cost of replacing the property if it were to be sold.
    
    The assessed value as determined by the local real estate taxing authority.
  Additional Investment Considerations
 Terms of Mortgage Loans
  8




---



##### 



Other Investments
    9




---



##### 



Temporary Investments
   Qualified REIT Subsidiaries
  Joint Ventures
  Use of Leverage
 Non-recourse Financing
 Our Investment
Objectives and Our Strategy
  10




---



##### 



Recourse Financing
  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.
 Investment Policies and Policies
with Respect to Certain ActivitiesUse of Leverage
 Holding Period for and Sale of Investments; Reinvestment of Sale Proceeds
    11




---



##### 



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 subsidiaries have invested except that we may lease
property to existing and prospective portfolio companies of current or future affiliates,
such as Gladstone Capital Corporation, Gladstone Investment Corporation and entities
advised by our Adviser, so long as that entity does not control the portfolio company and
the transaction is approved by both companies board of directors (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 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;
    
    make investments in unimproved property or indebtedness secured by a deed of trust or
mortgage 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;
    
    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 1940 Act;
    
    grant warrants or options to purchase shares of our stock to our Adviser or its affiliates;
    
    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;
    
    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.
 12




---



##### 



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).
  Future Revisions in Policies and Strategies
  Our Adviser and Administrator
  13




---



##### 



Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
  Investment Advisory and Administration Agreements
  Investment Advisory Agreements
    14




---



##### 



Management Services and Fees under the Amended Advisory Agreement
   
    
    no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not
exceed the hurdle rate of 1.75% (7% annualized);
    
    100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is
less than 2.1875% in any calendar quarter (8.75% annualized); and
    
    20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar
quarter (8.75% annualized).
 Quarterly Incentive Fee Based on FFO
 Pre-incentive fee FFO
(expressed as a percentage of total common stockholders equity)
 
 Percentage of pre-incentive fee FFO allocated to incentive fee
  Administration Agreement
  15




---



##### 



Adviser Duties and Authority under the Advisory Agreement
  
    
    finds, evaluates, and enters into 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;
    
    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;
    
    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.
  
    
    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 concluded 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 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;
    
    transactions that involve conflicts of interest with our Adviser (other than
reimbursement of expenses in accordance with the Amended Advisory Agreement); and
    
    the lease of assets to our Adviser, its affiliates or any of our officers or directors.
  16




---



##### 



Employees
   Number of Individuals
    
    Functional Area11
    
    Executive Management44
    
    Investment Management, Portfolio Management and Due Diligence10
    
    Administration, Accounting, Compliance, Human Resources, Legal and Treasury
 Competition
  Available Information
  17




---



##### 



Item 1A. Risk Factors
 An investment in our securities involves a number of significant risks and other factors relating
to our structure and investment objectives. As a result, we cannot assure you that we will achieve
our investment objectives. You should consider carefully the following information before making an
investment in our securities.
 Risk related to the economy
 The current state of the economy and the capital markets increases the possibility of adverse
effects on our financial position, results of operations and common stock price.
  Risks related to our financing
 Our line of credit and term loan each contain various covenants which, if not complied with, could
accelerate our repayment obligations, thereby materially and adversely affecting our liquidity,
financial condition, results of operations and ability to pay distributions.
  18




---



##### 



Our ability to renew our line of credit on terms favorable to us, or at all, and availability to
repay our term loan could adversely impact our liquidity and ability to fund new investments.
  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.
     19




---



##### 



Interest rate changes may adversely affect our results of operations.
  Risks related to the real estate industry
 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.
 Risk
related to the economy
 Competition for the acquisition of real estate may impede our ability to make acquisitions or
increase the cost of these acquisitions.
  20




---



##### 



Our ownership of properties through ground leases exposes us to risks which are different than
those resulting from our ownership of fee title to other properties.
  Risks related to our tenants, borrowers and properties
 Highly leveraged tenants and borrowers may be unable to pay rent or make mortgage payments, which
could adversely affect our cash available to make distributions to our stockholders.
 Risk related to the
economy
   
    
    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.
  21




---



##### 



Net leases may not result in fair market lease rates over time.
  Many 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 resourcesand may not be able to make their lease or mortgage payments on a
timely basis, or at all.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. In addition, because of the lack of available
credit in the current marketplace, as discussed further in Risk
related to the economyabove, our tenants might not be able to obtain
the financing necessary to fund their working capital, which could
hinder their ability to make their lease or mortgage payment on a
timely basis, or at all.
    
    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.
 22




---



##### 




    
    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 departure of key executive officers.
 We may not have funding for future tenant improvements.
  Our real estate investments may include special use and single or multi-tenant properties that may
be difficult to sell or re-lease upon tenant defaults or early lease terminations.
   Our real estate investments have a limited number of tenants and are concentrated in a limited
number of industries, which subjects us to an increased risk of significant loss if any one of
these tenants is unable to pay or if particular industries experience downturns.
  The inability of a tenant in a single tenant property to pay rent will reduce our revenues and
increase our carrying costs of the building.
  23




---



##### 



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 contaminants.
    Risks related to our Adviser
 We are dependent upon our key management personnel, who are employed by our Adviser, for our future
success, particularly David Gladstone, Terry Lee Brubaker and George Stelljes III.
  24




---



##### 



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.
   
    
    our Adviser may realize substantial compensation on account of its
activities on our behalf, and may,
therefore, be motivated to approve acquisitions solely on the basis of
increasing compensation to itself;
    
    we may experience competition with our affiliates for financing transactions;
    
    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 Adviser is not obligated to provide a waiver of the incentive fee, which could negatively
impact our earnings and our ability to maintain our current level of, or increase, distributions to
our stockholders.
  25




---



##### 



We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
  Risks of being a REIT
 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.
   
    
    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 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 prevented from re-qualifying to be taxed as a REIT for the four
taxable years following the year during which we ceased to qualify.
  26




---



##### 



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.
  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.
   Because we must distribute a substantial portion of our net income to qualify as a REIT, we largely
depend on third-party sources of capital to fund our future capital needs.
 Risk related to the economy
 27




---



##### 



Other risks
 Recent accounting pronouncements may impact our results of operations.
  We are subject to restrictions that may discourage a change of control. Certain provisions
contained in our articles of incorporation and Maryland law may prohibit or restrict a change of
control.
 
    
    Our articles of incorporation prohibit ownership of more than 9.8% of the outstanding
shares of our capital stock by one person. This restriction may discourage a change of
control and may deter individuals or entities from making tender offers for our capital
stock, which offers might otherwise be financially attractive to our stockholders or
which might cause a change in our management.
    
    Our board of directors are divided into three classes, with the term of the directors
in each class expiring every third year. At each annual meeting of stockholders, the
successors to the class of directors whose term expires at such meeting will be elected
to hold office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. After election, a director may only be
removed by our stockholders for cause. Election of directors for staggered terms with
limited rights to remove directors makes it more difficult for a hostile bidder to
acquire control of us. The existence of this provision may negatively impact the price
of our securities and may discourage third-party bids to acquire our securities. This
provision may reduce any premiums paid to stockholders in a change in control
transaction.
    
    Certain provisions of Maryland law applicable to us prohibit business combinations with:
 
    
    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.
  28




---



##### 



Market conditions could adversely affect the market price and trading volume of our securities.
  
    
    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;
    
    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;
    
    actions by institutional stockholders;
    
    speculation in the press or investment community;
    
    changes in regulatory policies or tax guidelines, particularly with respect to REITs; and
    
    investor confidence in the stock market.
 Shares of common stock eligible for future sale may have adverse effects on our share price.
  Legislative or regulatory action could adversely affect investors.
  Our Board of Directors may change our investment policy without stockholders approval.
  29




---



##### 



If our Operating Partnership fails to maintain its status as a partnership or other form of
pass-through entity for federal income tax purposes, its income may be subject to taxation.
  Our potential participation in joint ventures creates additional risk.
  
 Item 1B. Unresolved Staff Comments
  30




---



##### 



Item 2. Properties
  Total Annualized Rental
    
    Total AnnualizedTotal Rental Income for
    
    Income for the Year
    
    Rental Income perYear Built/
    
    
    
    
    
    Rentable
    
    
    
    
    
    the Year Ended
    
    Ended
    
    Occupied Square
    
    Year of LeaseProperty
    
    Improvements
    
    Date of Purchase
    
    Square Feet
    
    Occupancy
    
    December 31, 2008
    
    December 31, 2008 (1)
    
    Foot (2)
    
    Expiration208 South Rogers Lane
(Raleigh NC)
    
    
    1997
    
    
    
    12/23/2003
    
    
    
    58,926
    
    
    
    100
    %
    
    $
    624,118
    
    
    $
    624,118
    
    
    $
    10.59
    
    
    
    20153874 Highland Park NW
(Canton, OH)
    
    
    1994
    
    
    
    1/30/2004
    
    
    
    54,018
    
    
    
    100
    %
    
    $
    347,843
    
    
    $
    347,843
    
    
    $
    6.44
    
    
    
    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
    %
    
    $
    984,331
    
    
    $
    984,331
    
    
    $
    15.26
    
    
    
    2019171 Great Oak Drive 
(Canton, NC)
    
    
    1998
    
    
    
    7/6/2004
    
    
    
    228,000
    
    
    
    100
    %
    
    $
    600,145
    
    
    $
    600,145
    
    
    $
    2.63
    
    
    
    2024Rt. 219, Tax Parcel No. 33-251-0246,
(Snyder Township, PA)
    
    
    1991
    
    
    
    8/5/2004
    
    
    
    290,000
    
    
    
    100
    %
    
    $
    905,304
    
    
    $
    905,304
    
    
    $
    3.12
    
    
    
    20149698 Old US Hwy. 52 
(Lexington, NC)
    
    
    1986
    
    
    
    8/5/2004
    
    
    
    154,000
    
    
    
    100
    %
    
    $
    413,447
    
    
    $
    413,447
    
    
    $
    2.68
    
    
    
    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
    
    
    
    20216550 First Park Ten Boulevard 
(San Antonio, TX)
    
    
    1999
    
    
    
    2/10/2005
    
    
    
    60,245
    
    
    
    100
    %
    
    $
    769,793
    
    
    $
    769,793
    
    
    $
    12.78
    
    
    
    20144630 Journal Street 
(Columbus, OH)
    
    
    1995
    
    
    
    2/10/2005
    
    
    
    39,000
    
    
    
    100
    %
    
    $
    308,105
    
    
    $
    308,105
    
    
    $
    7.90
    
    
    
    2015199 Sing Sing Road
(Big Flats, NY)
    
    
    2001
    
    
    
    4/15/2005
    
    
    
    120,000
    
    
    
    100
    %
    
    $
    644,252
    
    
    $
    644,252
    
    
    $
    5.37
    
    
    
    20132525 North Woodlawn Avenue 
(Wichita, KS)
    
    
    2000
    
    
    
    5/18/2005
    
    
    
    69,287
    
    
    
    100
    %
    
    $
    1,109,217
    
    
    $
    1,109,217
    
    
    $
    16.01
    
    
    
    2012725 & 737 Great Southwest Pkwy 
(Arlington, TX)
    
    
    1966
    
    
    
    5/26/2005
    
    
    
    64,000
    
    
    
    100
    %
    
    $
    578,163
    
    
    $
    578,163
    
    
    $
    9.03
    
    
    
    20134032 Linden Avenue 
(Dayton, OH)
    
    
    1956
    
    
    
    6/30/2005
    
    
    
    59,894
    
    
    
    100
    %
    
    $
    268,042
    
    
    $
    268,042
    
    
    $
    4.48
    
    
    
    201881 Corbett Way 
(Eatontown, NJ)
    
    
    1991
    
    
    
    7/7/2005
    
    
    
    30,268
    
    
    
    100
    %
    
    $
    536,324
    
    
    $
    536,324
    
    
    $
    17.72
    
    
    
    201117 & 20 Veronica Avenue 
(Franklin Township, NJ)
    
    
    1978
    
    
    
    7/11/2005
    
    
    
    183,000
    
    
    
    100
    %
    
    $
    970,158
    
    
    $
    970,158
    
    
    $
    5.30
    
    
    
    2020150 & 170 Ridgeview Center Drive 
(Duncan, SC)
    
    
    1984/2001/2007
    
    
    
    7/14/2005
    
    
    
    222,670
    
    
    
    100
    %
    
    $
    1,539,286
    
    
    $
    1,539,286
    
    
    $
    6.91
    
    
    
    2020150 & 170 Ridgeview Center Drive 
(Duncan, SC)
    
    
    1984/2001/2007
    
    
    
    7/14/2005
    
    
    
    55,350
    
    
    
    100
    %
    
    $
    382,627
    
    
    $
    382,627
    
    
    $
    6.91
    
    
    
    20205656 Campus Parkway 
(Hazelwood, MO)
    
    
    1977
    
    
    
    8/5/2005
    
    
    
    51,155
    
    
    
    100
    %
    
    $
    289,928
    
    
    $
    289,928
    
    
    $
    5.67
    
    
    
    2012914 Wohlert Street
(Angola, IN)
    
    
    1982
    
    
    
    9/2/2005
    
    
    
    52,080
    
    
    
    100
    %
    
    $
    125,202
    
    
    $
    125,202
    
    
    $
    2.40
    
    
    
    2020800 Growth Parkway 
(Angola, IN)
    
    
    1998
    
    
    
    9/2/2005
    
    
    
    50,000
    
    
    
    100
    %
    
    $
    125,202
    
    
    $
    125,202
    
    
    $
    2.50
    
    
    
    2020802 East 11th Street 
(Rock Falls, IL)
    
    
    1988
    
    
    
    9/2/2005
    
    
    
    52,000
    
    
    
    100
    %
    
    $
    125,202
    
    
    $
    125,202
    
    
    $
    2.41
    
    
    
    2020
 31




---



##### 



Item 2. Properties (Continued)
 Total Annualized Rental
    
    Total AnnualizedTotal Rental Income for
    
    Income for the Year
    
    Rental Income perYear Built/
    
    
    
    
    
    Rentable
    
    
    
    
    
    the Year Ended
    
    Ended
    
    Occupied Square
    
    Year of LeaseProperty
    
    Improvements
    
    Date of Purchase
    
    Square Feet
    
    Occupancy
    
    December 31, 2008
    
    December 31, 2008 (1)
    
    Foot (2)
    
    Expiration2 Opportunity Way
(Newburyport, MA)
    
    
    1994
    
    
    
    10/17/2005
    
    
    
    86,308
    
    
    
    100
    %
    
    $
    840,153
    
    
    $
    840,153
    
    
    $
    9.73
    
    
    
    2015255 Spring Street
(Clintonville, WI)
    
    
    1992
    
    
    
    10/31/2005
    
    
    
    291,142
    
    
    
    100
    %
    
    $
    575,006
    
    
    $
    575,006
    
    
    $
    1.98
    
    
    
    20205700 Lee Road 
(Maple Heights, OH)
    
    
    1974
    
    
    
    12/21/2005
    
    
    
    347,218
    
    
    
    100
    %
    
    $
    1,152,443
    
    
    $
    1,152,443
    
    
    $
    3.32
    
    
    
    20157545 Midlothian Turnpike
(Richmond, VA)
    
    
    1972
    
    
    
    12/30/2005
    
    
    
    42,213
    
    
    
    100
    %
    
    $
    722,866
    
    
    $
    722,866
    
    
    $
    17.12
    
    
    
    20103930 Sunforest Court
(Toledo, OH)
    
    
    1979
    
    
    
    12/30/2005
    
    
    
    23,368
    
    
    
    100
    %
    
    $
    327,152
    
    
    $
    327,152
    
    
    $
    14.00
    
    
    
    201075 Canal Street 
(South Hadley, MA)
    
    
    1978
    
    
    
    2/15/2006
    
    
    
    150,000
    
    
    
    100
    %
    
    $
    359,673
    
    
    $
    359,673
    
    
    $
    2.40
    
    
    
    20102101 Fox Drive
(Champaign, IL)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    20,400
    
    
    
    100
    %
    
    $
    295,220
    
    
    $
    295,220
    
    
    $
    14.47
    
    
    
    20132109 Fox Drive
(Champaign, IL)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    40,000
    
    
    
    100
    %
    
    $
    578,863
    
    
    $
    578,863
    
    
    $
    14.47
    
    
    
    20132215 Fox Drive
(Champaign, IL)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    25,000
    
    
    
    100
    %
    
    $
    361,790
    
    
    $
    361,790
    
    
    $
    14.47
    
    
    
    20132301 Fox Drive
(Champaign, IL)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    22,862
    
    
    
    100
    %
    
    $
    330,849
    
    
    $
    330,849
    
    
    $
    14.47
    
    
    
    20132470 Highcrest Road
(Roseville, MN)
    
    
    1964
    
    
    
    2/21/2006
    
    
    
    359,540
    
    
    
    100
    %
    
    $
    3,030,458
    
    
    $
    3,030,458
    
    
    $
    8.43
    
    
    
    201212000 Portland Avenue South
(Burnsville, MN)
    
    
    1984
    
    
    
    5/10/2006
    
    
    
    114,100
    
    
    
    100
    %
    
    $
    1,234,632
    
    
    $
    1,234,632
    
    
    $
    10.82
    
    
    
    201514701 Anthony Avenue
(Menomonee Falls, WI)
    
    
    1986/2000
    
    
    
    6/30/2006
    
    
    
    125,692
    
    
    
    100
    %
    
    $
    775,274
    
    
    $
    775,274
    
    
    $
    6.17
    
    
    
    20161025 Birdsong Drive
(Baytown, TX)
    
    
    1997
    
    
    
    7/11/2006
    
    
    
    12,000
    
    
    
    100
    %
    
    $
    254,121
    
    
    $
    254,121
    
    
    $
    21.18
    
    
    
    201342400 Merrill Road
(Sterling Heights, MI)
    
    
    1979/1989
    
    
    
    9/22/2006
    
    
    
    532,869
    
    
    
    100
    %
    
    $
    1,166,654
    
    
    $
    1,166,654
    
    
    $
    2.19
    
    
    
    20162150, 2200 Pinson Valley Parkway
(Birmingham, AL)
    
    
    1961/1980
    
    
    
    9/29/2006
    
    
    
    63,514
    
    
    
    100
    %
    
    $
    271,163
    
    
    $
    271,163
    
    
    $
    4.27
    
    
    
    20162325 West Fairview Avenue
(Montgomery, AL)
    
    
    1962/1989
    
    
    
    9/29/2006
    
    
    
    29,472
    
    
    
    100
    %
    
    $
    125,826
    
    
    $
    125,826
    
    
    $
    4.27
    
    
    
    20165221 N Highway 763
(Columbia, MO)
    
    
    1978
    
    
    
    9/29/2006
    
    
    
    16,275
    
    
    
    100
    %
    
    $
    69,483
    
    
    $
    69,483
    
    
    $
    4.27
    
    
    
    20164690 Parkway Drive
(Mason, OH)
    
    
    2002
    
    
    
    1/5/2007
    
    
    
    60,000
    
    
    
    100
    %
    
    $
    681,270
    
    
    $
    681,270
    
    
    $
    11.35
    
    
    
    2013201 South Rogers Lane
(Raleigh, NC)
    
    
    1994
    
    
    
    2/16/2007
    
    
    
    115,500
    
    
    
    100
    %
    
    $
    717,203
    
    
    $
    717,203
    
    
    $
    6.21
    
    
    
    20151110 West Tenkiller
(Tulsa, OK)
    
    
    2004
    
    
    
    3/1/2007
    
    
    
    238,310
    
    
    
    100
    %
    
    $
    1,565,794
    
    
    $
    1,565,794
    
    
    $
    6.57
    
    
    
    20193725 East 10th Court
(Hialeah, FL)
    
    
    1956/1992
    
    
    
    3/9/2007
    
    
    
    132,337
    
    
    
    100
    %
    
    $
    995,388
    
    
    $
    995,388
    
    
    $
    7.52
    
    
    
    2022554 Clark Road
(Tewksbury, MA)
    
    
    1985/1989
    
    
    
    5/17/2007
    
    
    
    102,200
    
    
    
    100
    %
    
    $
    922,927
    
    
    $
    922,927
    
    
    $
    9.03
    
    
    
    20175324 Natorp Boulevard
(Mason, OH)
    
    
    2007
    
    
    
    7/1/2007
    
    
    
    21,264
    
    
    
    100
    %
    
    $
    583,131
    
    
    $
    583,131
    
    
    $
    27.42
    
    
    
    2027
 32




---



##### 



Item 2. Properties (Continued)
 Total Annualized Rental
    
    Total AnnualizedTotal Rental Income for
    
    Income for the Year
    
    Rental Income perYear Built/
    
    
    
    
    
    Rentable
    
    
    
    
    
    the Year Ended
    
    Ended
    
    Occupied Square
    
    Year of LeaseProperty
    
    Improvements
    
    Date of Purchase
    
    Square Feet
    
    Occupancy
    
    December 31, 2008
    
    December 31, 2008 (1)
    
    Foot (2)
    
    Expiration7282 Willam Barry Boulevard
(Cicero, NY)
    
    
    2005
    
    
    
    9/6/2007
    
    
    
    71,880
    
    
    
    100
    %
    
    $
    529,743
    
    
    $
    529,743
    
    
    $
    7.37
    
    
    
    20201515 Arboretum Drive SE
(Grand Rapids, MI)
    
    
    2001
    
    
    
    9/28/2007
    
    
    
    63,235
    
    
    
    100
    %
    
    $
    1,029,184
    
    
    $
    1,029,184
    
    
    $
    16.28
    
    
    
    20164 Territorial Court
(Bollingbrook, IL)
    
    
    2002
    
    
    
    9/28/2007
    
    
    
    55,869
    
    
    
    100
    %
    
    $
    619,296
    
    
    $
    619,296
    
    
    $
    11.08
    
    
    
    20142349 Lawrenceville Highway
(Decatur, GA)
    
    
    1989
    
    
    
    12/13/2007
    
    
    
    16,740
    
    
    
    100
    %
    
    $
    404,159
    
    
    $
    404,159
    
    
    $
    24.14
    
    
    
    20262341 Lawrenceville Highway
(Decatur, GA)
    
    
    1989
    
    
    
    12/13/2007
    
    
    
    4,372
    
    
    
    100
    %
    
    $
    105,555
    
    
    $
    105,555
    
    
    $
    24.14
    
    
    
    20262339 Lawrenceville Highway
(Decatur, GA)
    
    
    1989
    
    
    
    12/13/2007
    
    
    
    5,488
    
    
    
    100
    %
    
    $
    132,498
    
    
    $
    132,498
    
    
    $
    24.14
    
    
    
    2026311 Phillip Boulevard
(Lawrenceville, GA)
    
    
    2005
    
    
    
    12/13/2007
    
    
    
    12,412
    
    
    
    100
    %
    
    $
    349,871
    
    
    $
    349,871
    
    
    $
    28.19
    
    
    
    20262096 McGee Road 
(Snellville, GA)
    
    
    1986
    
    
    
    12/13/2007
    
    
    
    3,800
    
    
    
    100
    %
    
    $
    90,815
    
    
    $
    90,815
    
    
    $
    23.90
    
    
    
    20267174 Wheat Street
(Covington, GA)
    
    
    2000
    
    
    
    12/13/2007
    
    
    
    5,000
    
    
    
    100
    %
    
    $
    119,493
    
    
    $
    119,493
    
    
    $
    23.90
    
    
    
    20261055 Haw Creek Parkway 
(Cumming, GA)
    
    
    2004
    
    
    
    12/13/2007
    
    
    
    13,919
    
    
    
    100
    %
    
    $
    380,410
    
    
    $
    380,410
    
    
    $
    27.33
    
    
    
    20261293 Wellbrook Circle
(Conyers, GA)
    
    
    1994
    
    
    
    12/13/2007
    
    
    
    6,400
    
    
    
    100
    %
    
    $
    152,951
    
    
    $
    152,951
    
    
    $
    23.90
    
    
    
    2026425 Gateway Drive
(Reading, PA)
    
    
    2007
    
    
    
    1/29/2008
    
    
    
    42,900
    
    
    
    100
    %
    
    $
    660,797
    
    
    $
    716,664
    
    
    $
    16.71
    
    
    
    20286499 University Avenue NE
(Fridley, MN)
    
    
    1985/2006
    
    
    
    2/26/2008
    
    
    
    74,160
    
    
    
    100
    %
    
    $
    799,528
    
    
    $
    946,380
    
    
    $
    12.76
    
    
    
    20137528 Auburn Road 
(Concord Township, OH)
    
    
    1957/2008
    
    
    
    3/31/2008
    
    
    
    273,300
    
    
    
    100
    %
    
    $
    1,297,734
    
    
    $
    1,724,136
    
    
    $
    6.31
    
    
    
    202810021 Rodney Street
(Pineville, NC)
    
    
    1985
    
    
    
    4/30/2008
    
    
    
    74,950
    
    
    
    100
    %
    
    $
    293,265
    
    
    $
    438,072
    
    
    $
    5.84
    
    
    
    202828305 State Route 7 
(Marietta, OH)
    
    
    1992/2007
    
    
    
    8/29/2008
    
    
    
    223,458
    
    
    
    100
    %
    
    $
    306,146
    
    
    $
    896,748
    
    
    $
    4.01
    
    
    
    2028400 Highpoint Drive 
(Chalfont, PA)
    
    
    1987
    
    
    
    8/29/2008
    
    
    
    67,200
    
    
    
    100
    %
    
    $
    258,632
    
    
    $
    757,572
    
    
    $
    11.27
    
    
    
    2016Totals
    
    
    
    
    
    
    
    
    
    
    6,329,956
    
    
    
    
    
    
    $
    39,675,788
    
    
    $
    41,539,258
 
 (1)
    
    The amounts represented in total annualized rental revenue
for the year ended December 31, 2008 have been calculated by
taking the 2008 base rent and annualizing the partial-year results
for properties acquired during 2008. Because annualized base rent is not derived from historical results that were accounted
for in accordance with GAAP, historical results differ from the
annualized amounts. Management believes this measure 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. 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  33




---



##### 



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Market Price Per Share
    
    Distributions PaidQuarter Ended
    
    High
    
    Low
    
    Per Share03/31/07
    
    $
    20.63
    
    
    $
    19.06
    
    
    $
    0.36006/30/07
    
    
    20.40
    
    
    
    19.01
    
    
    
    0.36009/30/07
    
    
    20.10
    
    
    
    17.40
    
    
    
    0.36012/31/07
    
    
    19.45
    
    
    
    15.75
    
    
    
    0.36003/31/08
    
    
    18.00
    
    
    
    15.01
    
    
    
    0.37506/30/08
    
    
    18.29
    
    
    
    15.75
    
    
    
    0.37509/30/08
    
    
    17.00
    
    
    
    14.40
    
    
    
    0.37512/31/08
    
    
    15.79
    
    
    
    7.30
    
    
    
    0.375
  
    
    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.
    34




---



##### 



Item 6. Selected Financial Data
  Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2008
    
    
    December 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Operating Data:Total operating revenue
    
    $
    40,910,998
    
    
    $
    32,793,539
    
    
    $
    25,945,546
    
    
    $
    12,881,506
    
    
    $
    4,191,329Total operating expenses
    
    
    (19,391,922
    )
    
    
    (15,821,630
    )
    
    
    (14,067,096
    )
    
    
    (7,185,040
    )
    
    
    (3,276,735
    )Other expense
    
    
    (16,570,753
    )
    
    
    (10,940,394
    )
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )
    
    
    614,659Income from continuing operations
    
    
    4,948,323
    
    
    
    6,031,515
    
    
    
    3,357,031
    
    
    
    3,510,957
    
    
    
    1,529,253Discontinued operations
    
    
    (35,376
    )
    
    
    108,714
    
    
    
    1,015,797
    
    
    
    90,988
    
    
    
    94,675Net income
    
    $
    4,912,947
    
    
    $
    6,140,229
    
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    Net income available to common stockholders
    
    $
    819,197
    
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928Share and Per Share Data:Earnings per weighted average common share  basicIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.20Discontinued operations
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21Earnings per weighted average common share  dilutedIncome from continuing operations (net of distributions attributable to preferred stock)
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.14
    
    
    $
    0.46
    
    
    $
    0.20Discontinued operations
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21Weighted average shares outstanding-basic
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855Weighted average shares outstanding-diluted
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534Cash distributions declared per common share
    
    $
    1.50
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    0.96
    
    
    $
    0.48Supplemental Data:Net income available to common stockholders
    
    $
    819,197
    
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928Real estate depreciation and amortization, including discontinued operations
    
    
    12,704,641
    
    
    
    10,528,458
    
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345Less: Gain on sale of real estate, net of taxes paid
    
    
    
    
    
    
    (78,667
    )
    
    
    (1,106,590
    )
    
    
    
    
    
    
    Funds from operations available to common stockholders (1)
    
    
    13,523,838
    
    
    
    12,496,270
    
    
    
    9,428,822
    
    
    
    7,253,064
    
    
    
    2,597,273Ratio of earnings to combined fixed charges and preferred distributions (2)
    
    
    1.0
    x
    
    
    1.1
    x
    
    
    1.1
    x
    
    
    2.4
    x
    
    
    60.8
    xBalance Sheet Data:Real estate, before accumulated depreciation
    
    $
    390,562,138
    
    
    $
    340,500,406
    
    
    $
    243,713,542
    
    
    $
    165,043,639
    
    
    $
    61,251,455Total assets
    
    $
    429,098,785
    
    
    $
    378,902,689
    
    
    $
    315,766,022
    
    
    $
    207,046,954
    
    
    $
    105,585,094Mortgage notes payable, term loan and borrowings under the line of credit
    
    $
    286,611,173
    
    
    $
    226,520,471
    
    
    $
    154,494,438
    
    
    $
    105,118,961
    
    
    $
    Total stockholders equity
    
    $
    130,495,260
    
    
    $
    142,368,068
    
    
    $
    152,224,176
    
    
    $
    98,948,536
    
    
    $
    102,692,693Total common shares outstanding
    
    
    8,563,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    7,672,000
    
    
    
    7,667,000
 
 (1)
    
    Funds from Operations (FFO) was developed by The National Association of Real Estate
Investment Trusts (NAREIT), as a relative non-GAAP (Generally Accepted Accounting Principles in
the United States) supplemental measure of operating performance of an equity REIT in order to
recognize that income-producing real estate historically has not depreciated on the basis
determined under GAAP. FFO, as defined by NAREIT, is net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization
of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not
be considered an alternative to either net income (loss) as an indication of our performance or to
cash flow from operations as a measure of liquidity or ability to make distributions. Comparison
of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to
possible differences in the application of the NAREIT definition used by such REITs.
FFO available to common stockholders is FFO adjusted to subtract preferred share distributions. We
believe that net income available to common stockholders is the most directly comparable GAAP
measure to FFO available to common stockholders. 35




---



##### 



For the year ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Net income
    
    $
    4,912,947
    
    
    $
    6,140,229
    
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928Less: Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    Net income available to common stockholders
    
    
    819,197
    
    
    
    2,046,479
    
    
    
    2,185,938
    
    
    
    3,601,945
    
    
    
    1,623,928Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    12,704,641
    
    
    
    10,528,458
    
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345Less: Gain on sale of real estate, net of taxes paid
    
    
    
    
    
    
    (78,667
    )
    
    
    (1,106,590
    )
    
    
    
    
    
    
    FFO available to common stockholders
    
    $
    13,523,838
    
    
    $
    12,496,270
    
    
    $
    9,428,822
    
    
    $
    7,253,064
    
    
    $
    2,597,273Weighted average shares outstanding  basic
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855Weighted average shares outstanding  diluted
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534Basic net income per weighted average common share
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21Diluted net income per weighted average common share
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21Basic FFO per weighted average common share
    
    $
    1.58
    
    
    $
    1.46
    
    
    $
    1.20
    
    
    $
    0.95
    
    
    $
    0.34Diluted FFO per weighted average common share
    
    $
    1.58
    
    
    $
    1.46
    
    
    $
    1.18
    
    
    $
    0.94
    
    
    $
    0.34Distributions declared per common share
    
    $
    1.50
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    0.96
    
    
    $
    0.48Percentage of FFO paid per common share
    
    
    95
    %
    
    
    99
    %
    
    
    120
    %
    
    
    102
    %
    
    
    141
    %
 
 (2)
    
    The calculation of the ratio of earnings to combined fixed charges and preferred distributions
is below. Earnings consist of net income from continuing operations before fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing fees and the portion of
operating lease expense that represents interest. The portion of operating lease expense that
represents interest is calculated by dividing the amount of rent expense, allocated to us by our
Adviser as part of the administration fee payable under the Amended Advisory Agreement, by three. For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    For the year endedDecember 31, 2008
    
    
    December 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Net income from continuing operations
    
    $
    4,948,323
    
    
    $
    6,031,515
    
    
    $
    3,357,031
    
    
    $
    3,510,957
    
    
    $
    1,529,253Add: fixed charges
    
    
    20,283,961
    
    
    
    15,670,067
    
    
    
    11,490,476
    
    
    
    2,494,245
    
    
    
    25,565Less: preferred distributions
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    Earnings
    
    $
    21,138,534
    
    
    $
    17,607,832
    
    
    $
    12,660,617
    
    
    $
    6,005,202
    
    
    $
    1,554,818Fixed charges:Interest expense
    
    
    15,574,731
    
    
    
    10,847,346
    
    
    
    8,041,412
    
    
    
    2,187,586
    
    
    
    Amortization of deferred financing fees
    
    
    604,433
    
    
    
    717,195
    
    
    
    1,207,198
    
    
    
    260,098
    
    
    
    Estimated interest component of rent
    
    
    11,047
    
    
    
    11,776
    
    
    
    54,976
    
    
    
    46,561
    
    
    
    25,565Preferred distributions
    
    
    4,093,750
    
    
    
    4,093,750
    
    
    
    2,186,890
    
    
    
    
    
    
    
    Total fixed charges and preferred distributions
    
    
    20,283,961
    
    
    
    15,670,067
    
    
    
    11,490,476
    
    
    
    2,494,245
    
    
    
    25,565Ratio of earnings to combined fixed charges
and preferred distributions
    
    
    1.0
    
    
    
    1.1
    
    
    
    1.1
    
    
    
    2.4
    
    
    
    60.8
 36




---



##### 



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
 General
  Business Environment
   37




---



##### 



Recent Events
 Investment Activities:
 Financing Activities:
 Property Classifications
  As of:
    
    
    
    Total properties ownedMarch 31, 2007
    
    
    
    46June 30, 2007
    
    
    
    47September 30, 2007
    
    
    
    51December 31, 2007
    
    
    
    59March 31, 2008
    
    
    
    62June 30, 2008
    
    
    
    63September 30, 2008
    
    
    
    65December 31, 2008
    
    
    
    65
 38




---



##### 



Our Adviser and Administrator
  
 Investment Advisory and Administration Agreements
    Management Services and Fees under the Amended Advisory Agreement
  39




---



##### 



Administration Agreement
  Critical Accounting Policies
  Allocation of Purchase Price
   40




---



##### 




    
    The amount of acquisition costs allocated to the various tangible and intangible assets
on our balance sheet;
    
    The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts allocated to all other tangible and intangible assets are amortized
to depreciation or amortization expense. Thus changes in the purchase price allocation
among our assets could have a material impact on our FFO, which is used by investors of
REITs to evaluate our operating performance; and
    
    The period of time that tangible and intangible assets are depreciated over varies
greatly, and thus changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years, we depreciate our
buildings over 39 years, and land is not depreciated. These differences in timing could
have a material impact on our results of operations.
 Asset Impairment Evaluation
  Business Environment
 Provision for Loan Losses
  41




---



##### 



Recently Issued Accounting Pronouncements
  Results of Operations
  Date Acquired
    
    Property Location
    
    Weighted-Average Yield1/29/08
    
    Reading, Pennsylvania
    
    
    9.95
    %2/26/08
    
    Fridley, Minnesota
    
    
    8.93
    %3/31/08
    
    Concord Township, Ohio
    
    
    11.27
    %4/30/08
    
    Pineville, North Carolina
    
    
    11.06
    %8/29/08
    
    Marietta, Ohio
    
    
    11.07
    %8/29/08
    
    Chalfont, Pennsylvania
    
    
    9.01
    %
  42




---



##### 



A comparison of our operating results for the years ended December 31, 2008 and 2007 is below
 For the year ended December 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    39,675,788
    
    
    $
    31,469,297
    
    
    $
    8,206,491
    
    
    
    26
    %Interest income from mortgage notes receivable
    
    
    898,573
    
    
    
    1,013,889
    
    
    
    (115,316
    )
    
    
    -11
    %Tenant recovery revenue
    
    
    336,637
    
    
    
    310,353
    
    
    
    26,284
    
    
    
    8
    %Total operating revenues
    
    
    40,910,998
    
    
    
    32,793,539
    
    
    
    8,117,459
    
    
    
    25
    %Operating expensesDepreciation and amortization
    
    
    12,704,641
    
    
    
    10,528,458
    
    
    
    2,176,183
    
    
    
    21
    %Property operating expenses
    
    
    877,073
    
    
    
    800,822
    
    
    
    76,251
    
    
    
    10
    %Due diligence expense
    
    
    1,176,379
    
    
    
    20,968
    
    
    
    1,155,411
    
    
    
    5510
    %Base management fee
    
    
    1,637,851
    
    
    
    1,858,120
    
    
    
    (220,269
    )
    
    
    -12
    %Incentive fee
    
    
    2,831,722
    
    
    
    2,564,365
    
    
    
    267,357
    
    
    
    10
    %Administration fee
    
    
    954,635
    
    
    
    837,898
    
    
    
    116,737
    
    
    
    14
    %Professional fees
    
    
    521,410
    
    
    
    625,349
    
    
    
    (103,939
    )
    
    
    -17
    %Insurance
    
    
    173,414
    
    
    
    214,141
    
    
    
    (40,727
    )
    
    
    -19
    %Directors fees
    
    
    216,851
    
    
    
    229,000
    
    
    
    (12,149
    )
    
    
    -5
    %Stockholder related expense
    
    
    298,384
    
    
    
    244,629
    
    
    
    53,755
    
    
    
    22
    %Asset retirement obligation expense
    
    
    133,244
    
    
    
    116,478
    
    
    
    16,766
    
    
    
    14
    %General and administrative
    
    
    63,263
    
    
    
    102,999
    
    
    
    (39,736
    )
    
    
    -39
    %Total operating expenses before credit from Adviser
    
    
    21,588,867
    
    
    
    18,143,227
    
    
    
    3,445,640
    
    
    
    19
    %Credit to incentive fee
    
    
    (2,196,945
    )
    
    
    (2,321,597
    )
    
    
    124,652
    
    
    
    -5
    %Total operating expenses
    
    
    19,391,922
    
    
    
    15,821,630
    
    
    
    3,570,292
    
    
    
    23
    %Other income (expense)Interest income from temporary investments
    
    
    21,844
    
    
    
    354,249
    
    
    
    (332,405
    )
    
    
    -94
    %Interest income  employee loans
    
    
    202,097
    
    
    
    222,051
    
    
    
    (19,954
    )
    
    
    -9
    %Other income
    
    
    63,993
    
    
    
    47,847
    
    
    
    16,146
    
    
    
    34
    %Interest expense
    
    
    (16,858,687
    )
    
    
    (11,564,541
    )
    
    
    (5,294,146
    )
    
    
    46
    %Total other expense
    
    
    (16,570,753
    )
    
    
    (10,940,394
    )
    
    
    (5,630,359
    )
    
    
    51
    %Income from continuing operations
    
    
    4,948,323
    
    
    
    6,031,515
    
    
    
    (1,083,192
    )
    
    
    -18
    %Discontinued operationsLoss from discontinued operations
    
    
    (35,376
    )
    
    
    (3,312
    )
    
    
    (32,064
    )
    
    
    968
    %Net realized income from foreign currency transactions
    
    
    
    
    
    
    33,359
    
    
    
    (33,359
    )
    
    
    -100
    %Taxes refunded on sale of real estate
    
    
    
    
    
    
    78,667
    
    
    
    (78,667
    )
    
    
    -100
    %Total discontinued operations
    
    
    (35,376
    )
    
    
    108,714
    
    
    
    (144,090
    )
    
    
    -133
    %Net income
    
    
    4,912,947
    
    
    
    6,140,229
    
    
    
    (1,227,282
    )
    
    
    -20
    %Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )
    
    
    
    
    
    
    0
    %Net income available to common stockholders
    
    $
    819,197
    
    
    $
    2,046,479
    
    
    $
    (1,227,282
    )
    
    
    -60
    %
 43




---



##### 



Operating Revenues
    Operating Expenses
    Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and
Administration Agreements.
  44




---



##### 



Other Income and Expense
     Discontinued Operations
  45




---



##### 



Net Income Available to Common Stockholders
  A comparison of our operating results for the years ended December 31, 2007 and 2006 is below
 For the year ended December 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    31,469,297
    
    
    $
    23,964,035
    
    
    $
    7,505,262
    
    
    
    31
    %Interest income from mortgage notes receivable
    
    
    1,013,889
    
    
    
    1,845,231
    
    
    
    (831,342
    )
    
    
    -45
    %Tenant recovery revenue
    
    
    310,353
    
    
    
    136,280
    
    
    
    174,073
    
    
    
    128
    %Total operating revenues
    
    
    32,793,539
    
    
    
    25,945,546
    
    
    
    6,847,993
    
    
    
    26
    %Operating expensesDepreciation and amortization
    
    
    10,528,458
    
    
    
    8,297,174
    
    
    
    2,231,284
    
    
    
    27
    %Property operating expenses
    
    
    800,822
    
    
    
    636,427
    
    
    
    164,395
    
    
    
    26
    %Due diligence expense
    
    
    20,968
    
    
    
    9,365
    
    
    
    11,603
    
    
    
    124
    %Base management fee
    
    
    1,858,120
    
    
    
    2,902,053
    
    
    
    (1,043,933
    )
    
    
    -36
    %Incentive fee
    
    
    2,564,365
    
    
    
    
    
    
    
    2,564,365
    
    
    
    100
    %Administration fee
    
    
    837,898
    
    
    
    
    
    
    
    837,898
    
    
    
    100
    %Professional fees
    
    
    625,349
    
    
    
    953,066
    
    
    
    (327,717
    )
    
    
    -34
    %Insurance
    
    
    214,141
    
    
    
    211,562
    
    
    
    2,579
    
    
    
    1
    %Directors fees
    
    
    229,000
    
    
    
    140,000
    
    
    
    89,000
    
    
    
    64
    %Stockholder related expense
    
    
    244,629
    
    
    
    311,049
    
    
    
    (66,420
    )
    
    
    -21
    %Asset retirement obligation expense
    
    
    116,478
    
    
    
    129,142
    
    
    
    (12,664
    )
    
    
    -10
    %General and administrative
    
    
    102,999
    
    
    
    82,847
    
    
    
    20,152
    
    
    
    24
    %Total operating expenses before credit from Adviser
    
    
    18,143,227
    
    
    
    14,067,096
    
    
    
    4,076,131
    
    
    
    29
    %Credit to incentive fee
    
    
    (2,321,597
    )
    
    
    
    
    
    
    (2,321,597
    )
    
    
    100
    %Total operating expenses
    
    
    15,821,630
    
    
    
    14,067,096
    
    
    
    1,754,534
    
    
    
    12
    %Other income (expense)Interest income from temporary investments
    
    
    354,249
    
    
    
    76,772
    
    
    
    277,477
    
    
    
    361
    %Interest income  employee loans
    
    
    222,051
    
    
    
    125,788
    
    
    
    96,263
    
    
    
    77
    %Other income
    
    
    47,847
    
    
    
    380,915
    
    
    
    (333,068
    )
    
    
    -87
    %Interest expense
    
    
    (11,564,541
    )
    
    
    (9,104,894
    )
    
    
    (2,459,647
    )
    
    
    27
    %Total other expense
    
    
    (10,940,394
    )
    
    
    (8,521,419
    )
    
    
    (2,418,975
    )
    
    
    28
    %Income from continuing operations
    
    
    6,031,515
    
    
    
    3,357,031
    
    
    
    2,674,484
    
    
    
    80
    %Discontinued operationsLoss from discontinued operations
    
    
    (3,312
    )
    
    
    112,145
    
    
    
    (115,457
    )
    
    
    -103
    %Net realized income from foreign currency transactions
    
    
    33,359
    
    
    
    (202,938
    )
    
    
    236,297
    
    
    
    -116
    %Gain on sale of real estate
    
    
    
    
    
    
    1,422,026
    
    
    
    (1,422,026
    )
    
    
    100
    %Taxes refunded on sale of real estate
    
    
    78,667
    
    
    
    (315,436
    )
    
    
    394,103
    
    
    
    -125
    %Total discontinued operations
    
    
    108,714
    
    
    
    1,015,797
    
    
    
    (907,083
    )
    
    
    -89
    %Net income
    
    
    6,140,229
    
    
    
    4,372,828
    
    
    
    1,767,401
    
    
    
    40
    %Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    (1,906,860
    )
    
    
    87
    %Net income available to common stockholders
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    (139,459
    )
    
    
    -6
    %
 46




---



##### 



Operating Revenues
    Operating Expenses
    Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
  47




---



##### 



Other Income and Expense
     48




---



##### 



Discontinued Operations
  Net Income Available to Common Stockholders
  Liquidity and Capital Resources
 Future Capital Needs
  Business Environment
  49




---



##### 



Operating Activities
  Investing Activities
 Recent
Events
 Financing Activities
  Mortgage Notes Payable
    50




---



##### 



Line of Credit
  Short-Term Loan
  51




---



##### 



Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsDebt Obligations (1)
    
    $
    286,611,173
    
    
    $
    33,953,975
    
    
    $
    53,333,089
    
    
    $
    6,431,796
    
    
    $
    192,892,313Interest on Debt Obligations (2)
    
    
    94,181,075
    
    
    
    16,530,519
    
    
    
    26,763,348
    
    
    
    23,261,607
    
    
    
    27,625,601Capital Lease Obligations (3)
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Operating Lease Obligations (4)
    
    
    1,680,000
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,008,000Total
    
    $
    382,772,248
    
    
    $
    50,618,894
    
    
    $
    80,365,237
    
    
    $
    29,962,203
    
    
    $
    221,825,914
 
 (1)
    
    Debt obligations represent borrowings under our line of credit, term loan and mortgage notes
payable that were outstanding as of December 31, 2008.
The line of credit matures in December 2009, and we expect to exercise our
option to extend for an additional year. The term loan matures in June 2009. The
$48.0 million mortgage note issued in September 2008 matures in October 2010,
and we expect to exercise our options to extend through October 2013.(2)
    
    Interest on debt obligations includes estimated interest on our borrowings under our line of
credit or term loan. The balance and interest rate on our line of credit and term loan are
variable, thus the amount of interest calculated for purposes of this
table was based upon rates and balances as of December 31, 2008.(3)
    
    Capital lease obligations represent the obligation to purchase the land held under the ground
lease on our property located in Fridley, Minnesota.(4)
    
    Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma
property. The lease expires in June 2021.
 Off-Balance Sheet Arrangements
  52




---



##### 



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    Year ended December 31,2008
    
    
    20071% increase in the one month LIBORRental & interest income
    
    $
    106,031
    
    
    $
    36,500Interest expense
    
    
    320,250
    
    
    
    247,389Net decrease
    
    $
    (214,219
    )
    
    $
    (210,889
    )Net income available to common stockholders (as reported)
    
    $
    819,197
    
    
    $
    2,046,479Net decrease as percentage of

Net income available to common stockholders (as reported)
    
    
    -26.1
    %
    
    
    -10.3
    %1% decrease in the one month LIBORRental & interest income
    
    $
    (96,882
    )
    
    $
    (38,948
    )Interest expense
    
    $
    (320,250
    )
    
    $
    (248,067
    )Net increase
    
    $
    223,368
    
    
    $
    209,119Net income available to common stockholders (as reported)
    
    $
    819,197
    
    
    $
    2,046,479Net increase as percentage of

Net income available to common stockholders (as reported)
    
    
    27.3
    %
    
    
    10.2
    %
  53




---



##### 



54




---



##### 



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements
 Report of Management on Internal Controls over Financial Reporting
    
    
    56Report of Independent Registered Public Accounting Firm
    
    
    57Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
    
    
    59Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
    
    
    60Consolidated Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and
2006
    
    
    61Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
    
    
    62Notes to Financial Statements
    
    
    63Schedule III  Real Estate and Accumulated Depreciation
    
    
    82Schedule IV  Mortgage Loans on Real Estate
    
    
    87
 55




---



##### 



Report of Management on Internal Controls over Financial Reporting
    Internal Control -
Integrated Framework
   56




---



##### 



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
  57




---



##### 



58




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31, 2008
    
    
    December 31, 2007ASSETSReal estate, at cost
    
    $
    390,562,138
    
    
    $
    340,500,406Less: accumulated depreciation
    
    
    24,757,576
    
    
    
    15,738,634Total real estate, net
    
    
    365,804,562
    
    
    
    324,761,772Lease intangibles, net
    
    
    31,533,843
    
    
    
    28,989,556Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    4,503,578
    
    
    
    1,356,408Restricted cash
    
    
    2,677,561
    
    
    
    1,914,067Funds held in escrow
    
    
    2,150,919
    
    
    
    1,401,695Deferred rent receivable
    
    
    7,228,811
    
    
    
    5,094,799Deferred financing costs, net
    
    
    4,383,446
    
    
    
    4,405,129Due from adviser (Refer to Note 2)
    
    
    108,898
    
    
    
    Prepaid expenses and other assets
    
    
    707,167
    
    
    
    979,263TOTAL ASSETS
    
    $
    429,098,785
    
    
    $
    378,902,689LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    255,111,173
    
    
    $
    202,120,471Short-term loan and borrowings under line of credit
    
    
    31,500,000
    
    
    
    24,400,000Deferred rent liability
    
    
    3,147,472
    
    
    
    3,933,035Asset retirement obligation liability
    
    
    2,190,192
    
    
    
    1,811,752Accounts payable and accrued expenses
    
    
    2,673,787
    
    
    
    778,949Due to adviser (Refer to Note 2)
    
    
    
    
    
    
    784,301Obligation under capital lease
    
    
    235,378
    
    
    
    Rent received in advance, security deposits and funds held in escrow
    
    
    3,745,523
    
    
    
    2,706,113Total Liabilities
    
    
    298,603,525
    
    
    
    236,534,621STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;
2,300,000 shares authorized and 2,150,000 shares issued and outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 47,700,000 shares authorized and 8,563,264
and 8,565,264 shares issued and outstanding, respectively
    
    
    8,563
    
    
    
    8,565Additional paid in capital
    
    
    170,622,581
    
    
    
    170,640,979Notes receivable  employees
    
    
    (2,595,886
    )
    
    
    (2,769,923
    )Distributions in excess of accumulated earnings
    
    
    (37,542,148
    )
    
    
    (25,513,703
    )Total Stockholders Equity
    
    
    130,495,260
    
    
    
    142,368,068TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    429,098,785
    
    
    $
    378,902,689
  59




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the year ended December 31,2008
    
    
    2007
    
    
    2006Operating revenuesRental income
    
    $
    39,675,788
    
    
    $
    31,469,297
    
    
    $
    23,964,035Interest income from mortgage notes receivable
    
    
    898,573
    
    
    
    1,013,889
    
    
    
    1,845,231Tenant recovery revenue
    
    
    336,637
    
    
    
    310,353
    
    
    
    136,280Total operating revenues
    
    
    40,910,998
    
    
    
    32,793,539
    
    
    
    25,945,546Operating expensesDepreciation and amortization
    
    
    12,704,641
    
    
    
    10,528,458
    
    
    
    8,297,174Property operating expense
    
    
    877,073
    
    
    
    800,822
    
    
    
    636,427Due diligence expense
    
    
    1,176,379
    
    
    
    20,968
    
    
    
    9,365Base management fee (Refer to Note 2)
    
    
    1,637,851
    
    
    
    1,858,120
    
    
    
    2,902,053Incentive fee (Refer to Note 2)
    
    
    2,831,722
    
    
    
    2,564,365
    
    
    
    Administration fee (Refer to Note 2)
    
    
    954,635
    
    
    
    837,898
    
    
    
    Professional fees
    
    
    521,410
    
    
    
    625,349
    
    
    
    953,066Insurance
    
    
    173,414
    
    
    
    214,141
    
    
    
    211,562Directors fees
    
    
    216,851
    
    
    
    229,000
    
    
    
    140,000Stockholder related expenses
    
    
    298,384
    
    
    
    244,629
    
    
    
    311,049Asset retirement obligation expense
    
    
    133,244
    
    
    
    116,478
    
    
    
    129,142General and administrative
    
    
    63,263
    
    
    
    102,999
    
    
    
    82,847Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    394,411Total operating expenses before credit from Adviser
    
    
    21,588,867
    
    
    
    18,143,227
    
    
    
    14,067,096Credit to incentive fee (Refer to Note 2)
    
    
    (2,196,945
    )
    
    
    (2,321,597
    )
    
    
    Total operating expenses
    
    
    19,391,922
    
    
    
    15,821,630
    
    
    
    14,067,096Other income (expense)Interest income from temporary investments
    
    
    21,844
    
    
    
    354,249
    
    
    
    76,772Interest income  employee loans
    
    
    202,097
    
    
    
    222,051
    
    
    
    125,788Other income
    
    
    63,993
    
    
    
    47,847
    
    
    
    380,915Interest expense
    
    
    (16,858,687
    )
    
    
    (11,564,541
    )
    
    
    (9,104,894
    )Total other expense
    
    
    (16,570,753
    )
    
    
    (10,940,394
    )
    
    
    (8,521,419
    )Income from continuing operations
    
    
    4,948,323
    
    
    
    6,031,515
    
    
    
    3,357,031Discontinued operations(Loss) income from discontinued operations
    
    
    (35,376
    )
    
    
    (3,312
    )
    
    
    112,145Net realized income (loss) from foreign currency transactions
    
    
    
    
    
    
    33,359
    
    
    
    (202,938
    )Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    1,422,026Taxes refunded (paid) on sale of real estate
    
    
    
    
    
    
    78,667
    
    
    
    (315,436
    )Total discontinued operations
    
    
    (35,376
    )
    
    
    108,714
    
    
    
    1,015,797Net income
    
    
    4,912,947
    
    
    
    6,140,229
    
    
    
    4,372,828Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )Net income available to common stockholders
    
    $
    819,197
    
    
    $
    2,046,479
    
    
    $
    2,185,938Earnings per weighted average common share  basicIncome from continuing operations (net of distributions
attributable to preferred stock)
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.15Discontinued operations
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.13Net income available to common stockholders
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.28Earnings per weighted average common share  dilutedIncome from continuing operations (net of distributions
attributable to preferred stock)
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.14Discontinued operations
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.13Net income available to common stockholders
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.27Weighted average shares outstandingBasic
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,827,781Diluted
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,986,690
  60




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Notes
    
    
    Distributions inCapital in
    
    
    Receivable
    
    
    Excess of
    
    
    TotalCommon
    
    
    Preferred
    
    
    Excess of
    
    
    From Sale of
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Stock
    
    
    Par Value
    
    
    Common Stock
    
    
    Earnings
    
    
    EquityIssuance of Common Stock
Under Stock Option Plan
    
    
    893
    
    
    
    
    
    
    
    13,650,453
    
    
    
    (2,769,954
    )
    
    
    
    
    
    
    10,881,392Issuance of Preferred Stock
    
    
    
    
    
    
    2,150
    
    
    
    53,747,850
    
    
    
    
    
    
    
    
    
    
    
    53,750,000Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (2,654,279
    )
    
    
    
    
    
    
    
    
    
    
    (2,654,279
    )Stock Option Compensation
Expense
    
    
    
    
    
    
    
    
    
    
    394,411
    
    
    
    
    
    
    
    
    
    
    
    394,411Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    914Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,469,626
    )
    
    
    (13,469,626
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,372,828
    
    
    
    4,372,828Balance at December 31, 2006
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (3,201,322
    )
    
    $
    (15,226,196
    )
    
    $
    152,224,176Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431,399
    
    
    
    
    
    
    
    431,399Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,427,736
    )
    
    
    (16,427,736
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,140,229
    
    
    
    6,140,229Balance at December 31, 2007
    
    $
    8,565
    
    
    $
    2,150
    
    
    $
    170,640,979
    
    
    $
    (2,769,923
    )
    
    $
    (25,513,703
    )
    
    $
    142,368,068Forfeiture of Common Stock
    
    
    (2
    )
    
    
    
    
    
    
    (18,398
    )
    
    
    
    
    
    
    
    
    
    
    (18,400
    )Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174,037
    
    
    
    
    
    
    
    174,037Distributions Declared to
Common and Preferred
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,941,392
    )
    
    
    (16,941,392
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,912,947
    
    
    
    4,912,947Balance at December 31, 2008
    
    $
    8,563
    
    
    $
    2,150
    
    
    $
    170,622,581
    
    
    $
    (2,595,886
    )
    
    $
    (37,542,148
    )
    
    $
    130,495,260
  61




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the year ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    4,912,947
    
    
    $
    6,140,229
    
    
    $
    4,372,828Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    12,704,641
    
    
    
    10,528,458
    
    
    
    8,349,474Amortization of deferred financing costs, including discontinued operations
    
    
    1,283,956
    
    
    
    717,195
    
    
    
    1,207,198Amortization of deferred rent asset and liability
    
    
    (532,066
    )
    
    
    (532,068
    )
    
    
    (442,765
    )Accretion of obligation under capital lease
    
    
    10,311
    
    
    
    
    
    
    
    Asset retirement obligation expense, including discontinued operations
    
    
    133,244
    
    
    
    116,478
    
    
    
    139,074Stock compensation
    
    
    
    
    
    
    
    
    
    
    394,411Increase in mortgage notes payable due to change in value of foreign currency
    
    
    
    
    
    
    
    
    
    
    202,066Value of building acquired in excess of mortgage note satisfied, applied to interest income
    
    
    
    
    
    
    
    
    
    
    (335,701
    )Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    (1,422,026
    )Decrease (increase) in prepaid expenses and other assets
    
    
    172,096
    
    
    
    64,990
    
    
    
    (62,880
    )Increase in deferred rent receivable
    
    
    (2,387,509
    )
    
    
    (1,741,016
    )
    
    
    (1,270,159
    )Increase in accounts payable, accrued expenses, and amount due adviser, net
    
    
    1,001,639
    
    
    
    625,398
    
    
    
    196,294Increase in rent received in advance
    
    
    275,916
    
    
    
    176,145
    
    
    
    268,037Net cash provided by operating activities
    
    
    17,575,175
    
    
    
    16,095,809
    
    
    
    11,595,851Cash flows from investing activities:Real estate investments
    
    
    (49,359,852
    )
    
    
    (105,599,587
    )
    
    
    (48,339,307
    )Proceeds from sales of real estate
    
    
    
    
    
    
    
    
    
    
    2,102,567Principal repayments on mortgage notes receivable
    
    
    
    
    
    
    
    
    
    
    44,742Receipts from lenders for reserves held in escrow
    
    
    874,227
    
    
    
    1,603,309
    
    
    
    1,127,753Payments to lenders for reserves held in escrow
    
    
    (1,623,452
    )
    
    
    (1,369,186
    )
    
    
    (1,722,280
    )(Increase) decrease in restricted cash
    
    
    (763,494
    )
    
    
    (688,905
    )
    
    
    749,274Deposits on future acquisitions
    
    
    (1,650,000
    )
    
    
    (2,110,000
    )
    
    
    (900,000
    )Deposits applied against real estate investments
    
    
    1,750,000
    
    
    
    2,110,000
    
    
    
    1,200,000Net cash used in investing activities
    
    
    (50,772,571
    )
    
    
    (106,054,369
    )
    
    
    (45,737,251
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    
    
    
    
    65,089,026Redemption of shares for payment of taxes
    
    
    
    
    
    
    
    
    
    
    (457,634
    )Offering costs
    
    
    
    
    
    
    
    
    
    
    (2,654,279
    )Borrowings under mortgage notes payable
    
    
    48,015,000
    
    
    
    48,521,690
    
    
    
    68,055,000Principal repayments on mortgage notes payable
    
    
    (1,485,901
    )
    
    
    (895,657
    )
    
    
    (604,318
    )Principal repayments on employee notes receivable
    
    
    155,637
    
    
    
    431,399
    
    
    
    914Borrowings from short-term loan and line of credit
    
    
    76,900,000
    
    
    
    65,500,000
    
    
    
    71,400,400Repayments on line of credit
    
    
    (69,800,000
    )
    
    
    (41,100,000
    )
    
    
    (114,960,400
    )Receipts from tenants for reserves
    
    
    2,391,360
    
    
    
    2,023,019
    
    
    
    2,099,506Payments to tenants from reserves
    
    
    (2,159,671
    )
    
    
    (1,710,685
    )
    
    
    (3,276,731
    )Increase in security deposits
    
    
    531,806
    
    
    
    376,572
    
    
    
    427,951Payments for deferred financing costs
    
    
    (1,262,273
    )
    
    
    (1,409,320
    )
    
    
    (3,242,881
    )Distributions paid for common and preferred
    
    
    (16,941,392
    )
    
    
    (16,427,736
    )
    
    
    (13,469,627
    )Net cash provided by financing activities
    
    
    36,344,566
    
    
    
    55,309,282
    
    
    
    68,406,927Net increase (decrease) in cash and cash equivalents
    
    
    3,147,170
    
    
    
    (34,649,278
    )
    
    
    34,265,527Cash and cash equivalents, beginning of year
    
    
    1,356,408
    
    
    
    36,005,686
    
    
    
    1,740,159Cash and cash equivalents, end of year
    
    $
    4,503,578
    
    
    $
    1,356,408
    
    
    $
    36,005,686Cash paid during period for interest
    
    $
    14,337,944
    
    
    $
    10,693,440
    
    
    $
    8,045,342NON-CASH OPERATING, INVESTING AND FINANCING INFORMATIONAdditions to real estate included in accounts payable, accrued expenses, and amount due adviser
    
    $
    
    
    
    $
    81,400
    
    
    $
    Increase in asset retirement obligation
    
    $
    245,196
    
    
    $
    180,458
    
    
    $
    1,631,294Fixed rate debt assumed in connection with acquisitions
    
    $
    6,461,603
    
    
    $
    4,506,689
    
    
    $
    30,129,654Obligation under capital lease
    
    $
    225,068
    
    
    $
    
    
    
    $
    Assumption of mortgage notes payable by buyer
    
    $
    
    
    
    $
    
    
    
    $
    4,846,925Acquisition of building in satisfaction of mortgage note receivable
    
    $
    
    
    
    $
    
    
    
    $
    11,316,774Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options
    
    $
    
    
    
    $
    
    
    
    $
    2,769,954Forfeiture of common stock in satisfaction of employee note receivable
    
    $
    18,400
    
    
    $
    
    
    
    $
    
  62




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      63




---



##### 



Investments in Real Estate
       64




---



##### 



Impairment
 Investments in Real Estate
  Managements Discussion and Analysis Business Environment
 Provision for Loan Losses
  Cash and Cash Equivalents
  65




---



##### 



Restricted Cash
  Funds Held in Escrow
  Deferred Financing Costs
  Prepaid Expenses and Other Assets
  Obligation under Capital Lease
  Revenue Recognition
  66




---



##### 



Income Taxes
   Segment Information
  Foreign Currency Transactions
  67




---



##### 



Asset Retirement Obligations
  Real Estate Held for Sale and Discontinued Operations
  Recently Issued Accounting Pronouncements
   68




---



##### 



69




---



##### 



Use of Estimates
  Reclassifications
  2. Management Advisory Fee
  Initial Advisory Agreement
   Amended Advisory Agreement
  70




---



##### 



Administration Agreement
  3. Stock Options
  71




---



##### 



Weighted AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2005, of which 744,250
shares were exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    (916,000
    )
    
    $
    15.40Forfeited
    
    
    
    
    
    $
    Options outstanding and exercisable at December 31, 2006
    
    
    
    
    
    $
    
  OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 12/31/08
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    365,927
    
    
    9 years
    
    
    5.00
    %Apr-06
    
    
    12,422
    
    
    
    16.10
    
    
    
    199,994
    
    
    
    199,994
    
    
    9 years
    
    
    7.77
    %May-06
    
    
    50,000
    
    
    
    16.85
    
    
    
    842,500
    
    
    
    842,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    15,000
    
    
    
    16.10
    
    
    
    241,500
    
    
    
    241,500
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,500
    
    
    
    16.01
    
    
    
    40,000
    
    
    
    38,365
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    10 years
    
    
    7.87
    %Oct-06
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    193,200
    
    
    9 years
    
    
    8.17
    %Nov-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    245,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %172,922
    
    
    
    
    
    
    $
    2,736,594
    
    
    $
    2,595,886
  4. Earnings per Common Share
  For the year ended December 31,2008
    
    
    2007
    
    
    2006Net income available to common stockholders
    
    $
    819,197
    
    
    $
    2,046,479
    
    
    $
    2,185,938Denominator for basic & diluted weighted average shares
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,827,781Dilutive effect of stock options
    
    
    
    
    
    
    
    
    
    
    158,909Denominator for diluted weighted average shares
    
    
    8,565,149
    
    
    
    8,565,264
    
    
    
    7,986,690Basic earnings per common share
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.28Diluted earnings per common share
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.27
 72




---



##### 



5. Real Estate and Intangible Assets
 Real Estate
  December 31, 2008
    
    
    December 31, 2007Real estate:Land
    
    $
    55,226,042
    (1)
    
    $
    48,867,482Building
    
    
    325,515,390
    
    
    
    283,829,987Tenant improvements
    
    
    9,820,706
    
    
    
    7,802,937Accumulated depreciation
    
    
    (24,757,576
    )
    
    
    (15,738,634
    )Real estate, net
    
    $
    365,804,562
    
    
    $
    324,761,772
 
 (1)
    
    Includes land held under a capital lease carried at approximately $1.1 million.       73




---



##### 



TenantLease Payments2009
    
    $
    39,037,0282010
    
    
    38,980,2172011
    
    
    38,516,1592012
    
    
    38,222,1962013
    
    
    32,860,916Thereafter
    
    $
    184,512,854
   Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    
    
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place Leases
    
    
    Leasing Costs
    
    
    Relationships
    
    
    Obligations
    
    
    PriceReading, Pennsylvania
    
    $
    490,646
    
    
    $
    6,188,168
    
    
    $
    14,208
    
    
    $
    362,479
    
    
    $
    1,786
    
    
    $
    141,232
    
    
    $
    
    
    
    $
    7,198,519Fridley, Minnesota
    
    
    1,354,233
    
    
    
    7,454,098
    
    
    
    619,428
    
    
    
    452,414
    
    
    
    171,005
    
    
    
    807,950
    
    
    
    (225,068
    )
    
    
    10,634,060Concord Township, Ohio
    
    
    1,796,467
    
    
    
    10,254,003
    
    
    
    900,120
    
    
    
    1,702,792
    
    
    
    5,102
    
    
    
    917,661
    
    
    
    (245,196
    )
    
    
    15,330,949Pineville, North Carolina
    
    
    669,025
    
    
    
    2,930,295
    
    
    
    98,025
    
    
    
    151,426
    
    
    
    2,218
    
    
    
    93,080
    
    
    
    
    
    
    
    3,944,069Marietta, Ohio
    
    
    829,014
    
    
    
    6,537,796
    
    
    
    69,469
    
    
    
    479,124
    
    
    
    3,268
    
    
    
    179,014
    
    
    
    
    
    
    
    8,097,685Chalfont, Pennsylvania
    
    
    1,249,415
    
    
    
    6,103,088
    
    
    
    316,519
    
    
    
    172,278
    
    
    
    189,326
    
    
    
    397,841
    
    
    
    
    
    
    
    8,428,467$
    6,388,800
    
    
    $
    39,467,448
    
    
    $
    2,017,769
    
    
    $
    3,320,513
    
    
    $
    372,705
    
    
    $
    2,536,778
    
    
    $
    (470,264
    )
    
    $
    53,633,749
 Intangible Assets
  Intangible assets
    
    YearsIn-place leases
    
    
    16.8Leasing costs
    
    
    18.2Customer relationships
    
    
    22.7All intangible assets
    
    
    16.7
  74




---



##### 



December 31, 2008
    
    
    December 31, 2007Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    15,981,245
    
    
    $
    (5,079,343
    )
    
    $
    12,660,732
    
    
    $
    (3,414,868
    )Leasing costs
    
    
    9,662,731
    
    
    
    (2,987,360
    )
    
    
    9,290,026
    
    
    
    (2,114,233
    )Customer relationships
    
    
    17,136,501
    
    
    
    (3,179,931
    )
    
    
    14,599,726
    
    
    
    (2,031,827
    )$
    42,780,477
    
    
    $
    (11,246,634
    )
    
    $
    36,550,484
    
    
    $
    (7,560,928
    )
  Estimated AggregateAmortization Expense2009
    
    $
    3,768,6332010
    
    
    3,691,3592011
    
    
    3,500,5652012
    
    
    3,114,2802013
    
    
    1,903,712Thereafter
    
    $
    9,656,867
 6. Discontinued Operations
   For the year ended December 31,2008
    
    
    2007
    
    
    2006Operating (expense) income
    
    $
    (35,376
    )
    
    $
    (3,312
    )
    
    $
    112,145Net realized income (loss) from foreign currency
transactions
    
    
    
    
    
    
    33,359
    
    
    
    (202,938
    )Taxes refunded (paid) on sale of real estate
    
    
    
    
    
    
    78,667
    
    
    
    (315,436
    )Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    1,422,026(Loss) income from discontinued operations
    
    $
    (35,376
    )
    
    $
    108,714
    
    
    $
    1,015,797
 7. Mortgage Note Receivable
  75




---



##### 



8. Mortgage Notes Payable, Line of Credit and Short-Term Loan
  Stated InterestDate of Issuance/
    
    
    Principal Maturity
    
    
    Rate at
    
    
    Principal Balance OutstandingAssumption
    
    
    Date
    
    
    December 31, 2008 (1)
    
    
    December 31, 2008
    
    
    December 31, 2007Fixed-Rate Mortgage Notes Payable:03/16/05
    
    
    
    04/01/30
    
    
    
    6.33
    %
    
    $
    2,948,753
    
    
    $
    3,003,58208/25/05
    
    
    
    09/01/15
    
    
    
    5.33
    %
    
    
    21,399,644
    
    
    
    21,664,47609/12/05
    
    
    
    09/01/15
    
    
    
    5.21
    %
    
    
    12,560,673
    
    
    
    12,588,00012/21/05
    
    
    
    12/08/15
    
    
    
    5.71
    %
    
    
    19,241,117
    
    
    
    19,456,00002/21/06
    
    
    
    12/01/13
    
    
    
    5.91
    %
    
    
    9,344,908
    
    
    
    9,480,06302/21/06
    
    
    
    06/30/14
    
    
    
    5.20
    %
    
    
    19,472,740
    
    
    
    19,782,27003/29/06
    
    
    
    04/01/16
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,00004/27/06
    
    
    
    05/05/16
    
    
    
    6.58
    %
    
    
    14,281,616
    
    
    
    14,514,21411/22/06
    
    
    
    12/01/16
    
    
    
    5.76
    %
    
    
    14,309,000
    
    
    
    14,309,00012/22/06
    
    
    
    01/01/17
    
    
    
    5.79
    %
    
    
    21,846,000
    
    
    
    21,846,00002/08/07
    
    
    
    03/01/17
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    13,775,00006/05/07
    
    
    
    06/08/17
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    14,240,00009/06/07
    
    
    
    12/11/15
    
    
    
    5.81
    %
    
    
    4,426,393
    
    
    
    4,487,20510/15/07
    
    
    
    11/08/17
    
    
    
    6.63
    %
    
    
    15,828,612
    
    
    
    15,974,66108/29/08
    
    
    
    06/01/16
    
    
    
    6.80
    %
    
    
    6,421,717
    
    
    
    09/15/08
    
    
    
    10/01/10
    (2)
    
    
    6.85
    %
    
    
    48,015,000
    
    
    
    Total Fixed-Rate Mortgage Notes
Payable:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,111,173
    
    
    
    202,120,471Variable-Rate Line of Credit:
    
    
    12/29/06
    
    
    
    12/29/09
    (3)
    
    LIBOR + 1.9%
    
    
    11,500,000
    
    
    
    4,400,000Variable-Rate Short-Term Loan:
    
    
    12/21/07
    
    
    
    06/20/09
    
    
    LIBOR + 2.75%
    
    
    20,000,000
    
    
    
    20,000,000Total Mortgage Notes Payable, Line of Credit and
Short-Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    286,611,173
    
    
    $
    226,520,471
 
 (1)
    
    The weighted average interest rate on all debt outstanding at December 31, 2008 was
approximately 5.70%.(2)
    
    This note has three annual extension options, which extends the term of the note
until October 1, 2013.(3)
    
    The line of credit may be extended for a one-year period at the Companys option,
subject to certain conditions. Mortgage Notes Payable
   76




---



##### 



Scheduled principalpayments2009
    
    
    2,453,9752010
    
    
    50,533,4862011
    
    
    2,799,6012012
    
    
    3,087,8242013
    
    
    11,828,375Thereafter
    
    
    184,407,912$
    255,111,173
 Line of Credit
   77




---



##### 



Short-Term Loan
  9. Stockholders Equity
  Long-TermOrdinary Income
    
    Return of Capital
    
    Capital GainsCommon StockFor the year ended
December 31, 2006
    
    
    2.06500
    %
    
    
    95.60560
    %
    
    
    2.32940
    %For the year ended
December 31, 2007
    
    
    25.86040
    %
    
    
    74.13960
    %
    
    
    0.00000
    %For the year ended
December 31, 2008
    
    
    9.26770
    %
    
    
    90.73230
    %
    
    
    0.00000
    %Series A Preferred StockFor the year ended
December 31, 2006
    
    
    46.99260
    %
    
    
    0.00000
    %
    
    
    53.00740
    %For the year ended
December 31, 2007
    
    
    100.00000
    %
    
    
    0.00000
    %
    
    
    0.00000
    %For the year ended
December 31, 2008
    
    
    100.00000
    %
    
    
    0.00000
    %
    
    
    0.00000
    %Series B Preferred StockFor the year ended
December 31, 2006
    
    
    46.99260
    %
    
    
    0.00000
    %
    
    
    53.00740
    %For the year ended
December 31, 2007
    
    
    100.00000
    %
    
    
    0.00000
    %
    
    
    0.00000
    %For the year ended
December 31, 2008
    
    
    100.00000
    %
    
    
    0.00000
    %
    
    
    0.00000
    %
 78




---



##### 



10. Segment Information
 
 As of and for the year ended December 31, 2008Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    40,012,425
    
    
    $
    898,573
    
    
    $
    
    
    
    $
    40,910,998Operating expenses
    
    
    (14,891,337
    )
    
    
    
    
    
    
    (4,500,585
    )
    
    
    (19,391,922
    )Other expense
    
    
    (13,673,497
    )
    
    
    
    
    
    
    (2,897,256
    )
    
    
    (16,570,753
    )Discontinued
operations
    
    
    (35,376
    )
    
    
    
    
    
    
    
    
    
    
    (35,376
    )Net income (loss)
    
    $
    11,412,215
    
    
    $
    898,573
    
    
    $
    (7,397,841
    )
    
    $
    4,912,947Total Assets
    
    $
    413,760,683
    
    
    $
    10,000,000
    
    
    $
    5,338,102
    
    
    $
    429,098,785
 As of and for the year ended December 31, 2007Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    31,779,650
    
    
    $
    1,013,889
    
    
    $
    
    
    
    $
    32,793,539Operating expenses
    
    
    (11,466,726
    )
    
    
    
    
    
    
    (4,354,904
    )
    
    
    (15,821,630
    )Other expense
    
    
    (10,832,171
    )
    
    
    
    
    
    
    (108,223
    )
    
    
    (10,940,394
    )Discontinued
operations
    
    
    108,714
    
    
    
    
    
    
    
    
    
    
    
    108,714Net income (loss)
    
    $
    9,589,467
    
    
    $
    1,013,889
    
    
    $
    (4,463,127
    )
    
    $
    6,140,229Total Assets
    
    $
    366,231,132
    
    
    $
    10,086,111
    
    
    $
    2,585,446
    
    
    $
    378,902,689
 As of and for the year ended December 31, 2006Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    24,100,315
    
    
    $
    1,845,231
    
    
    $
    
    
    
    $
    25,945,546Operating expenses
    
    
    (9,072,108
    )
    
    
    
    
    
    
    (4,994,988
    )
    
    
    (14,067,096
    )Other income
    
    
    (6,398,534
    )
    
    
    
    
    
    
    (2,122,885
    )
    
    
    (8,521,419
    )Discontinued
operations
    
    
    1,015,797
    
    
    
    
    
    
    
    
    
    
    
    1,015,797Net income (loss)
    
    $
    9,645,470
    
    
    $
    1,845,231
    
    
    $
    (7,117,873
    )
    
    $
    4,372,828Total Assets
    
    $
    268,666,706
    
    
    $
    10,000,000
    
    
    $
    37,099,316
    
    
    $
    315,766,022
 79




---



##### 



11. Pro Forma Financial Information (unaudited)
  For the year ended December 31,2008
    
    
    2007Operating Data:Total operating revenue
    
    $
    42,774,460
    
    
    $
    38,273,105Total operating expenses
    
    
    (20,166,594
    )
    
    
    (18,519,132
    )Other expense
    
    
    (17,336,795
    )
    
    
    (11,766,179
    )Income from continuing operations
    
    
    5,271,071
    
    
    
    7,987,794Distributions attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (4,093,750
    )Net income from continuing operations available to common stockholders
    
    $
    1,177,321
    
    
    $
    3,894,044Share and Per Share Data:Basic & diluted net income from continuing operations
    
    $
    0.14
    
    
    $
    0.45Weighted average shares outstanding-basic & diluted
    
    
    8,565,149
    
    
    
    8,565,264
  12. Quarterly Financial Information (unaudited)
  Year ended December 31, 2008Quarter ended
    
    
    Quarter ended
    
    
    Quarter ended
    
    
    Quarter endedMarch 31, 2008
    
    
    June 30, 2008
    
    
    September 30, 2008
    
    
    December 31, 2008Operating revenues
    
    $
    9,513,481
    
    
    $
    10,225,458
    
    
    $
    10,457,143
    
    
    $
    10,714,916Operating expenses
    
    
    4,378,486
    
    
    
    5,106,392
    
    
    
    5,021,564
    
    
    
    4,885,480Other expense
    
    
    (3,685,065
    )
    
    
    (3,899,215
    )
    
    
    (4,292,698
    )
    
    
    (4,693,775
    )Income from continuing operations
    
    
    1,449,930
    
    
    
    1,219,851
    
    
    
    1,142,881
    
    
    
    1,135,661Discontinued operations
    
    
    (33,228
    )
    
    
    (406
    )
    
    
    (1,322
    )
    
    
    (420
    )Net income
    
    
    1,416,702
    
    
    
    1,219,445
    
    
    
    1,141,559
    
    
    
    1,135,241Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (1,023,439
    )Net income available to common stockholders
    
    
    393,265
    
    
    
    196,008
    
    
    
    118,122
    
    
    
    111,802Net income available to common stockholders  basic
& diluted
    
    $
    0.046
    
    
    $
    0.023
    
    
    $
    0.014
    
    
    $
    0.013Weighted average shares outstanding  basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,564,807
 Year ended December 31, 2007Quarter ended
    
    
    Quarter ended
    
    
    Quarter ended
    
    
    Quarter endedMarch 31, 2007
    
    
    June 30, 2007
    
    
    September 30, 2007
    
    
    December 31, 2007Operating revenues
    
    $
    7,383,771
    
    
    $
    8,079,568
    
    
    $
    8,360,508
    
    
    $
    8,969,692Operating expenses
    
    
    3,711,491
    
    
    
    3,948,741
    
    
    
    3,984,969
    
    
    
    4,176,429Other income (expense)
    
    
    (2,216,609
    )
    
    
    (2,573,068
    )
    
    
    (2,824,541
    )
    
    
    (3,326,176
    )Income from continuing operations
    
    
    1,455,671
    
    
    
    1,557,759
    
    
    
    1,550,998
    
    
    
    1,467,087Discontinued operations
    
    
    74,673
    
    
    
    (1,447
    )
    
    
    39,462
    
    
    
    (3,974
    )Net income
    
    
    1,530,344
    
    
    
    1,556,312
    
    
    
    1,590,460
    
    
    
    1,463,113Distributions attributable to preferred stock
    
    
    (1,023,437
    )
    
    
    (1,023,437
    )
    
    
    (1,023,438
    )
    
    
    (1,023,438
    )Net income available to common stockholders
    
    
    506,907
    
    
    
    532,875
    
    
    
    567,022
    
    
    
    439,675Net income available to common stockholders  basic
& diluted
    
    $
    0.059
    
    
    $
    0.060
    
    
    $
    0.070
    
    
    $
    0.051Weighted average shares outstanding  basic & diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
 80




---



##### 



13. Subsequent Events
  81




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 
 SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
 DECEMBER 31, 2008
 Initial Cost
    
    Costs Capitalized
    
    Total CostBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total(1)
    
    Depreciation(2)
    
    Net Real Estate
    
    Date AcquiredRaleigh, North Carolina
Office Building
    
    $
    4,940,000
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    5,440,772
    
    
    $
    949,636
    
    
    $
    4,491,136
    
    
    
    12/23/2003Canton, Ohio Office
& Warehouse Building
    
    
    2,948,753
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    3,268,746
    
    
    
    432,810
    
    
    
    2,835,936
    
    
    
    1/30/2004Akron, Ohio
Office & Laboratory Building
    
    
    7,543,588
    
    
    
    1,974,000
    
    
    
    6,769,565
    
    
    
    19,782
    
    
    
    1,974,000
    
    
    
    6,789,347
    
    
    
    8,763,347
    
    
    
    833,413
    
    
    
    7,929,934
    
    
    
    4/29/2004Charlotte, North Carolina
Office Building
    
    
    7,007,973
    
    
    
    741,296
    
    
    
    8,423,389
    
    
    
    59,190
    
    
    
    741,296
    
    
    
    8,482,579
    
    
    
    9,223,875
    
    
    
    993,253
    
    
    
    8,230,622
    
    
    
    6/30/2004Canton, North Carolina
Commercial & Manufacturing Building
    
    
    2,943,596
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    5,200,000
    
    
    
    579,908
    
    
    
    4,620,092
    
    
    
    7/6/2004Snyder Township,
Pennsylvania
Commercial & Warehouse Building
    
    
    5,696,383
    
    
    
    100,000
    
    
    
    6,573,902
    
    
    
    6,907
    
    
    
    100,000
    
    
    
    6,580,809
    
    
    
    6,680,809
    
    
    
    747,597
    
    
    
    5,933,212
    
    
    
    8/5/2004Lexington, North Carolina
Commercial & Warehouse Building
    
    
    2,881,000
    
    
    
    819,760
    
    
    
    2,106,845
    
    
    
    6,637
    
    
    
    819,760
    
    
    
    2,113,482
    
    
    
    2,933,242
    
    
    
    239,297
    
    
    
    2,693,945
    
    
    
    8/5/2004Austin, Texas
Office Building
    
    
    6,500,000
    
    
    
    1,000,000
    
    
    
    6,295,794
    
    
    
    46,095
    
    
    
    1,000,000
    
    
    
    6,341,889
    
    
    
    7,341,889
    
    
    
    707,763
    
    
    
    6,634,126
    
    
    
    9/16/2004Norfolk, Virginia
Commercial & Manufacturing Building
    
    
    
    
    
    
    190,000
    
    
    
    739,521
    
    
    
    18,190
    
    
    
    190,000
    
    
    
    757,711
    
    
    
    947,711
    
    
    
    81,684
    
    
    
    866,027
    
    
    
    10/15/2004Mt. Pocono, Pennsylvania
Commercial & Manufacturing Building
    
    
    5,297,639
    
    
    
    350,000
    
    
    
    5,818,703
    
    
    
    18,430
    
    
    
    350,000
    
    
    
    5,837,133
    
    
    
    6,187,133
    
    
    
    639,175
    
    
    
    5,547,958
    
    
    
    10/15/2004San Antonio, Texas Flexible
Office Building
    
    
    7,260,000
    
    
    
    843,000
    
    
    
    7,513,750
    
    
    
    22,673
    
    
    
    843,000
    
    
    
    7,536,423
    
    
    
    8,379,423
    
    
    
    995,102
    
    
    
    7,384,321
    
    
    
    2/10/2005Columbus, Ohio
Industrial Building
    
    
    2,769,075
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    2,795,108
    
    
    
    240,896
    
    
    
    2,554,212
    
    
    
    2/10/2005Big Flats, New York
Industrial Building
    
    
    5,630,000
    
    
    
    275,000
    
    
    
    6,459,318
    
    
    
    33,666
    
    
    
    275,000
    
    
    
    6,492,984
    
    
    
    6,767,984
    
    
    
    624,325
    
    
    
    6,143,659
    
    
    
    4/15/2005Wichita, Kansas
Office Building
    
    
    8,657,420
    
    
    
    1,525,000
    
    
    
    9,702,731
    
    
    
    51,453
    
    
    
    1,525,000
    
    
    
    9,754,184
    
    
    
    11,279,184
    
    
    
    965,017
    
    
    
    10,314,167
    
    
    
    5/18/2005Arlington, Texas
Warehouse & Bakery Building
    
    
    4,168,000
    
    
    
    635,964
    
    
    
    3,694,876
    
    
    
    37,604
    
    
    
    635,964
    
    
    
    3,732,480
    
    
    
    4,368,444
    
    
    
    348,469
    
    
    
    4,019,975
    
    
    
    5/26/2005Dayton, Ohio
Office Building
    
    
    2,073,489
    
    
    
    525,000
    
    
    
    1,876,992
    
    
    
    119,736
    
    
    
    525,000
    
    
    
    1,996,728
    
    
    
    2,521,728
    
    
    
    255,496
    
    
    
    2,266,232
    
    
    
    6/30/2005Eatontown, New Jersey
Office Building
    
    
    4,580,000
    
    
    
    1,350,630
    
    
    
    3,520,062
    
    
    
    6,681
    
    
    
    1,350,630
    
    
    
    3,526,743
    
    
    
    4,877,373
    
    
    
    378,958
    
    
    
    4,498,415
    
    
    
    7/7/2005Frankling Township, New
Jersey
Office & Warehouse Building
    
    
    6,790,000
    
    
    
    1,631,534
    
    
    
    6,199,849
    
    
    
    
    
    
    
    1,631,534
    
    
    
    6,199,849
    
    
    
    7,831,383
    
    
    
    551,875
    
    
    
    7,279,508
    
    
    
    7/11/2005Duncan, South Carolina
Office & Warehouse Building
    
    
    11,526,486
    
    
    
    783,212
    
    
    
    10,790,451
    
    
    
    2,033,148
    
    
    
    783,212
    
    
    
    12,823,599
    
    
    
    13,606,811
    
    
    
    1,067,835
    
    
    
    12,134,204
    
    
    
    7/14/2005Duncan, South Carolina
Manufacturing Building
    
    
    2,865,186
    
    
    
    194,686
    
    
    
    2,682,227
    
    
    
    
    
    
    
    194,686
    
    
    
    2,682,227
    
    
    
    2,876,913
    
    
    
    265,436
    
    
    
    3,016,249
    
    
    
    7/14/2005Hazelwood, Missouri
Office & Warehouse Building
    
    
    2,360,000
    
    
    
    763,178
    
    
    
    2,309,058
    
    
    
    29,962
    
    
    
    763,178
    
    
    
    2,339,020
    
    
    
    3,102,198
    
    
    
    214,137
    
    
    
    2,888,061
    
    
    
    8/5/2005
 82




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2008
 Initial Cost
    
    Costs Capitalized
    
    Total CostBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total(1)
    
    Depreciation(2)
    
    Net Real Estate
    
    Date AcquiredAngola, Indiana
Industrial Building
    
    $
    688,919
    
    
    $
    65,780
    
    
    $
    1,074,758
    
    
    $
    
    
    
    $
    65,780
    
    
    $
    1,074,758
    
    
    $
    1,140,538
    
    
    $
    91,744
    
    
    $
    1,046,550
    
    
    
    9/2/2005Angola, Indiana
Industrial Building
    
    
    770,933
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    1,261,433
    
    
    
    102,666
    
    
    
    1,171,139
    
    
    
    9/2/2005Rock Falls, Illinois
Industrial Building
    
    
    688,919
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    1,148,422
    
    
    
    91,744
    
    
    
    1,046,550
    
    
    
    9/2/2005Newburyport, Massachusetts
Industrial Building
    
    
    6,846,000
    
    
    
    628,690
    
    
    
    6,504,056
    
    
    
    1,839,895
    
    
    
    628,690
    
    
    
    8,343,951
    
    
    
    8,972,641
    
    
    
    566,219
    
    
    
    8,406,422
    
    
    
    10/17/2005Clintonville, Wisconsin
Industrial Manufacturing Building
    
    
    3,475,426
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    4,771,764
    
    
    
    394,213
    
    
    
    4,377,551
    
    
    
    10/31/2005Maple Heights, Ohio
Industrial Building
    
    
    10,775,658
    
    
    
    1,608,976
    
    
    
    10,065,475
    
    
    
    58,905
    
    
    
    1,608,976
    
    
    
    10,124,380
    
    
    
    11,733,356
    
    
    
    907,040
    
    
    
    10,826,316
    
    
    
    12/21/2005Richmond, Virginia
Industrial Building
    
    
    5,275,000
    
    
    
    735,820
    
    
    
    5,335,863
    
    
    
    36,437
    
    
    
    735,820
    
    
    
    5,372,300
    
    
    
    6,108,120
    
    
    
    448,636
    
    
    
    5,659,484
    
    
    
    12/30/2005Toledo, Oho
Industrial Building
    
    
    3,000,000
    
    
    
    263,068
    
    
    
    2,811,801
    
    
    
    39,916
    
    
    
    263,068
    
    
    
    2,851,717
    
    
    
    3,114,785
    
    
    
    263,707
    
    
    
    2,851,078
    
    
    
    12/30/2005South Hadley, Massachusetts Industrial
Building
    
    
    2,418,750
    
    
    
    470,636
    
    
    
    2,765,376
    
    
    
    10,000
    
    
    
    470,636
    
    
    
    2,775,376
    
    
    
    3,246,012
    
    
    
    203,983
    
    
    
    3,042,029
    
    
    
    2/15/2006Champaign, Illinois
Office Building
    
    
    1,760,878
    
    
    
    686,979
    
    
    
    2,035,784
    
    
    
    10,546
    
    
    
    686,979
    
    
    
    2,046,330
    
    
    
    2,733,309
    
    
    
    168,760
    
    
    
    2,555,990
    
    
    
    2/21/2006Champaign, Illinois
Office Building
    
    
    3,452,701
    
    
    
    1,347,017
    
    
    
    3,991,733
    
    
    
    
    
    
    
    1,347,017
    
    
    
    3,991,733
    
    
    
    5,338,750
    
    
    
    330,901
    
    
    
    5,011,745
    
    
    
    2/21/2006Champaign, Illinois
Office Building
    
    
    2,157,938
    
    
    
    841,886
    
    
    
    2,494,833
    
    
    
    
    
    
    
    841,886
    
    
    
    2,494,833
    
    
    
    3,336,719
    
    
    
    206,814
    
    
    
    3,132,341
    
    
    
    2/21/2006Champaign, Illinois
Office Building
    
    
    1,973,391
    
    
    
    769,888
    
    
    
    2,281,475
    
    
    
    
    
    
    
    769,888
    
    
    
    2,281,475
    
    
    
    3,051,363
    
    
    
    189,127
    
    
    
    2,864,463
    
    
    
    2/21/2006Roseville, Minnesota
Office Building
    
    
    19,472,740
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    27,877,884
    
    
    
    2,260,331
    
    
    
    25,617,553
    
    
    
    2/21/2006Burnsville, Minnesota
Office Building
    
    
    12,000,000
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    12,257,118
    
    
    
    786,119
    
    
    
    11,470,999
    
    
    
    5/10/2006Menomonee Falls, Wisconsin
Industrial Building
    
    
    6,940,000
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    7,535,316
    
    
    
    450,378
    
    
    
    7,084,938
    
    
    
    6/30/2006Baytown, Texas
Office Building
    
    
    2,000,000
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    2,664,783
    
    
    
    178,660
    
    
    
    2,486,123
    
    
    
    7/11/2006Sterling Heights, Michigan
Industrial Building
    
    
    
    
    
    
    2,734,887
    
    
    
    8,606,190
    
    
    
    12,676
    
    
    
    2,734,887
    
    
    
    8,618,866
    
    
    
    11,353,753
    
    
    
    502,557
    
    
    
    10,851,196
    
    
    
    9/22/2006Birmingham, Alabama
Industrial Building
    
    
    
    
    
    
    611,597
    
    
    
    2,325,761
    
    
    
    
    
    
    
    611,597
    
    
    
    2,325,761
    
    
    
    2,937,359
    
    
    
    137,747
    
    
    
    2,799,612
    
    
    
    9/29/2006Montgomery, Alabama
Industrial Building
    
    
    
    
    
    
    221,965
    
    
    
    844,081
    
    
    
    
    
    
    
    221,965
    
    
    
    844,081
    
    
    
    1,066,046
    
    
    
    49,992
    
    
    
    1,016,054
    
    
    
    9/29/2006Columbia, Missouri
Industrial Building
    
    
    
    
    
    
    145,988
    
    
    
    555,157
    
    
    
    
    
    
    
    145,988
    
    
    
    555,157
    
    
    
    701,145
    
    
    
    32,880
    
    
    
    668,265
    
    
    
    9/29/2006
 83




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2008
 Initial Cost
    
    Costs Capitalized
    
    Total CostBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total(1)
    
    Depreciation(2)
    
    Net Real Estate
    
    Date AcquiredMason, Ohio
Office Building
    
    $
    5,400,000
    
    
    $
    797,274
    
    
    $
    6,258,344
    
    
    $
    
    
    
    $
    797,274
    
    
    $
    6,258,344
    
    
    $
    7,055,618
    
    
    $
    400,461
    
    
    $
    6,655,157
    
    
    
    1/5/2007Raleigh, North Carolina
Industrial Building
    
    
    5,595,414
    
    
    
    1,605,551
    
    
    
    5,513,353
    
    
    
    
    
    
    
    1,605,551
    
    
    
    5,513,353
    
    
    
    7,118,904
    
    
    
    270,656
    
    
    
    6,848,248
    
    
    
    2/16/2007Tulsa, Oklahoma
Manufacturing Building
    
    
    
    
    
    
    
    
    
    
    14,057,227
    
    
    
    
    
    
    
    
    
    
    
    14,057,227
    
    
    
    14,057,227
    
    
    
    773,749
    
    
    
    13,283,478
    
    
    
    3/1/2007Hialeah, Florida
Industrial Building
    
    
    
    
    
    
    3,562,452
    
    
    
    6,671,600
    
    
    
    
    
    
    
    3,562,452
    
    
    
    6,671,600
    
    
    
    10,234,052
    
    
    
    311,989
    
    
    
    9,922,063
    
    
    
    3/9/2007Tewksbury, Massachusetts
Industrial Building
    
    
    
    
    
    
    1,394,902
    
    
    
    8,893,243
    
    
    
    
    
    
    
    1,394,902
    
    
    
    8,893,243
    
    
    
    10,288,145
    
    
    
    400,699
    
    
    
    9,887,446
    
    
    
    5/17/2007Mason, Ohio
Retail Building
    
    
    4,935,559
    
    
    
    1,201,338
    
    
    
    4,960,987
    
    
    
    
    
    
    
    1,201,338
    
    
    
    4,960,987
    
    
    
    6,162,325
    
    
    
    190,415
    
    
    
    5,971,910
    
    
    
    7/1/2007Cicero, New York
Industrial Building
    
    
    4,426,393
    
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    
    
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    5,317,694
    
    
    
    169,789
    
    
    
    5,147,905
    
    
    
    9/6/2007Grand Rapids, Michigan
Office Building
    
    
    9,225,000
    
    
    
    1,629,270
    
    
    
    10,500,066
    
    
    
    
    
    
    
    1,629,270
    
    
    
    10,500,066
    
    
    
    12,129,336
    
    
    
    372,209
    
    
    
    11,757,127
    
    
    
    9/28/2007Bollingbrook, Illinois
Industrial Building
    
    
    4,968,750
    
    
    
    1,271,543
    
    
    
    5,003,124
    
    
    
    
    
    
    
    1,271,543
    
    
    
    5,003,124
    
    
    
    6,274,667
    
    
    
    172,155
    
    
    
    6,102,512
    
    
    
    9/28/2007Decatur, Georgia
Office Building
    
    
    3,283,096
    
    
    
    784,188
    
    
    
    3,245,281
    
    
    
    
    
    
    
    784,188
    
    
    
    3,245,281
    
    
    
    4,029,469
    
    
    
    91,938
    
    
    
    3,937,531
    
    
    
    12/13/2007Decatur, Georgia
Office Building
    
    
    857,449
    
    
    
    204,807
    
    
    
    847,573
    
    
    
    
    
    
    
    204,807
    
    
    
    847,573
    
    
    
    1,052,380
    
    
    
    24,011
    
    
    
    1,028,368
    
    
    
    12/13/2007Decatur, Georgia
Office Building
    
    
    1,076,322
    
    
    
    257,086
    
    
    
    1,063,925
    
    
    
    
    
    
    
    257,086
    
    
    
    1,063,925
    
    
    
    1,321,011
    
    
    
    30,141
    
    
    
    1,290,870
    
    
    
    12/13/2007Lawrenceville, Georgia
Office Building
    
    
    2,842,102
    
    
    
    678,854
    
    
    
    2,809,365
    
    
    
    
    
    
    
    678,854
    
    
    
    2,809,365
    
    
    
    3,488,219
    
    
    
    79,588
    
    
    
    3,408,631
    
    
    
    12/13/2007Snellville, Georgia
Office Building
    
    
    737,714
    
    
    
    176,208
    
    
    
    729,217
    
    
    
    
    
    
    
    176,208
    
    
    
    729,217
    
    
    
    905,425
    
    
    
    20,659
    
    
    
    884,766
    
    
    
    12/13/2007Covington, Georgia
Office Building
    
    
    970,677
    
    
    
    231,852
    
    
    
    959,496
    
    
    
    
    
    
    
    231,852
    
    
    
    959,496
    
    
    
    1,191,348
    
    
    
    27,182
    
    
    
    1,164,166
    
    
    
    12/13/2007Cumming, Georgia
Office Building
    
    
    3,090,174
    
    
    
    738,107
    
    
    
    3,054,580
    
    
    
    
    
    
    
    738,107
    
    
    
    3,054,580
    
    
    
    3,792,687
    
    
    
    86,535
    
    
    
    3,706,152
    
    
    
    12/13/2007Conyers, Georgia
Office Building
    
    
    1,242,466
    
    
    
    296,771
    
    
    
    1,228,155
    
    
    
    
    
    
    
    296,771
    
    
    
    1,228,155
    
    
    
    1,524,926
    
    
    
    34,793
    
    
    
    1,490,133
    
    
    
    12/13/2007
 84




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2008
 Initial Cost
    
    
    Costs Capitalized
    
    
    Total CostBuildings &
    
    
    Subsequent to
    
    
    
    
    
    
    Buildings &
    
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    
    Improvements
    
    
    Acquisition
    
    
    Land
    
    
    Improvements
    
    
    Total(1)
    
    
    Depreciation(2)
    
    
    Net Real Estate
    
    
    Date AcquiredReading, Pennsylvania
Industrial Building
    
    $
    5,257,500
    
    
    $
    490,646
    
    
    $
    6,202,376
    
    
    $
    
    
    
    $
    490,646
    
    
    $
    6,202,376
    
    
    $
    6,693,022
    
    
    $
    147,383
    
    
    $
    6,545,639
    
    
    
    1/29/2008Fridley, Minnesota
Office Building
    
    
    
    
    
    
    1,354,233
    
    
    
    8,073,526
    
    
    
    
    
    
    
    1,354,233
    
    
    
    8,073,526
    
    
    
    9,427,759
    
    
    
    267,499
    
    
    
    9,160,260
    
    
    
    2/26/2008Concord Township, Ohio
Industrial Building
    
    
    
    
    
    
    1,796,467
    
    
    
    11,154,123
    
    
    
    
    
    
    
    1,796,467
    
    
    
    11,154,123
    
    
    
    12,950,590
    
    
    
    230,595
    
    
    
    12,719,995
    
    
    
    3/31/2008Pineville, North Carolina
Industrial Building
    
    
    2,145,000
    
    
    
    669,025
    
    
    
    3,028,320
    
    
    
    
    
    
    
    669,025
    
    
    
    3,028,320
    
    
    
    3,697,345
    
    
    
    53,578
    
    
    
    3,643,767
    
    
    
    4/30/2008Marietta, Ohio
Industrial Building
    
    
    4,500,000
    
    
    
    829,014
    
    
    
    6,607,265
    
    
    
    
    
    
    
    829,014
    
    
    
    6,607,265
    
    
    
    7,436,279
    
    
    
    57,956
    
    
    
    7,378,323
    
    
    
    8/29/2008Chalfont, Pennsylvania
Industrial Building
    
    
    6,421,717
    
    
    
    1,249,415
    
    
    
    6,419,607
    
    
    
    
    
    
    
    1,249,415
    
    
    
    6,419,607
    
    
    
    7,669,022
    
    
    
    67,296
    
    
    
    7,601,726
    
    
    
    8/29/2008$
    255,111,173
    
    
    $
    55,226,042
    
    
    $
    330,817,567
    
    
    $
    4,518,529
    
    
    $
    55,226,042
    
    
    $
    335,336,096
    
    
    $
    390,562,138
    
    
    $
    24,757,576
    
    
    $
    365,804,562
 
 (1)
    
    The aggregate cost for land and building improvements for federal income tax
purposes is the same as the total gross cost of land and building improvements.(2)
    
    Depreciable life of all buildings is 39 years. Depreciable life of all improvements
is the shorter of the useful life of the assets or the life of the respective leases on each
building, which range from 5-20 years. 85




---



##### 



2008
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    340,500,406
    
    
    $
    243,713,542
    
    
    $
    165,043,640Acquisitions during period
    
    
    47,874,020
    
    
    
    95,396,039
    
    
    
    83,466,860Improvements or other additions
    
    
    2,187,712
    
    
    
    1,390,825
    
    
    
    183,000Dispositions during period
    
    
    
    
    
    
    
    
    
    
    (4,979,958
    )Balance at end of period
    
    $
    390,562,138
    
    
    $
    340,500,406
    
    
    $
    243,713,542
  2008
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    15,738,634
    
    
    $
    8,595,419
    
    
    $
    3,408,879Additions during period
    
    
    9,018,942
    
    
    
    7,143,215
    
    
    
    5,351,414Dispositions during period
    
    
    
    
    
    
    
    
    
    
    (164,874
    )Balance at end of period
    
    $
    24,757,576
    
    
    $
    15,738,634
    
    
    $
    8,595,419
 86




---



##### 



GLADSTONE
COMMERCIAL CORPORATION
 
 SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2008
 Final
    
    
    
    
    
    
    
    
    
    
    
    Carrying
    
    
    Principal Amount of LoansLocation and Type of Real
    
    
    
    
    
    Maturity
    
    
    
    
    
    
    
    Face Amount
    
    
    Amount of
    
    
    Subject to DelinquentEstate
    
    Type of Loan
    
    Interest Rate
    
    Date
    
    Periodic Payment Term
    
    Prior Lien
    
    
    of Mortgage
    
    
    Mortgage(1)
    
    
    Principal or InterestMcLean, Virginia Office Property
    
    First Mortgage
    
    1 month LIBOR +6%; Floor of 7.5%, Ceiling of 10%
    
    5/30/2017
    
    Monthly payment based upon a 24 year amortization term, which changes based on LIBOR, with a floor of 7.5% and a ceiling of 10%. Payments are interest only until June 2011. Balloon payment at maturity is $8,324,514.
    
    
    
    
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    
    $
    $
    10,000,000
    
    
    $
    10,000,000
 
 (1)
    
    The aggregate cost for federal income tax purposes is the same
as the carrying amount of the mortgage.  2008
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    
    $
    21,025,815Collections of principal
    
    
    
    
    
    
    
    
    
    
    (44,742
    )Satisfaction of mortgage loan receivable
    
    
    
    
    
    
    
    
    
    
    (10,981,073
    )Balance at end of period
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    
    $
    10,000,000
 87




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures
         
 Item 9B. Other Information
  88




---



##### 



PART III
  
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  89




---



##### 



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 a. DOCUMENTS FILED AS PART OF THIS REPORT
  
  
   90




---



##### 



Exhibit Index
 Exhibit
    
    
    
    Description of Document3.1
    
    
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form
S-11 (File No. 333-106024), filed September 11, 2003.3.2
    
    
    
    Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003.3.2.1
    
    
    
    First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363),
filed July 10, 2007.4.1
    
    
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006.4.2
    
    
    
    Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.5% Series B Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.4 of Form 8-A (File
No. 000-50363), filed October 19, 2006.4.3
    
    
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed January 19, 2006.4.4
    
    
    
    Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.2 of Form 8-A (File No. 000-50363),
filed October 19, 2006.4.5
    
    
    
    Amendment to the Stock Transfer Agency Agreement dated as of
August 18, 2003 by and between Gladstone Commercial Corporation,
and The Bank of New York.10.1
    
    
    
    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,
2003.10.2
    
    
    
    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, 2005.10.3
    
    
    
    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, 2005.10.4
    
    
    
    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, 2005.10.5
    
    
    
    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.
 91




---



##### 



Exhibit
    
    
    
    Description of Document10.6
    
    
    
    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 May 4, 2005.10.7
    
    
    
    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 August 29,
2005.10.8
    
    
    
    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 August 29,
2005.10.9
    
    
    
    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
September 13, 2005.10.10
    
    
    
    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 September 13, 2005.10.11
    
    
    
    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 December 22, 2005.10.12
    
    
    
    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 December 22, 2005.10.13
    
    
    
    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 February 1, 2006.10.14
    
    
    
    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 February 24, 2006.10.15
    
    
    
    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 February 24, 2006.10.16
    
    
    
    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 February 24, 2006.10.17
    
    
    
    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
February 24, 2006.
 92




---



##### 



Exhibit
    
    
    
    Description of Document10.18
    
    
    
    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 February 24, 2006.10.19
    
    
    
    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 February 24, 2006.10.20
    
    
    
    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 February 24, 2006.10.21
    
    
    
    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
February 24, 2006.10.22
    
    
    
    Loan agreement between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006, incorporated by
reference to Exhibit 10.29 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed May 2, 2006.10.23
    
    
    
    Promissory note between IXIS Real Estate Capital Inc. and 2525 N
Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and
MSI05-3 LLC, dated as of April 27, 2006, incorporated by
reference to Exhibit 10.30 of the Quarterly Report on Form 10-Q
(File No. 000-50363), filed May 2, 2006.10.24*
    
    
    
    Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporation, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed July 12, 2006.10.25
    
    
    
    Custodial Agreement between Branch Banking and Trust Company of
Virginia, as Custodian, and Gladstone Commercial Company, dated
as of May 1, 2006, incorporated by reference to Exhibit 10.33 of
the Quarterly Report on Form 10-Q (File No. 000-50363), filed May
2, 2006.10. 26
    
    
    
    Deed of Trust, Assignment of Leases and Rents and Security
Agreement between First Park Ten COCO San Antonio, L.P. and CIBC
Inc., dated as of November 22, 2006, incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K (File No.
000-50363), filed November 28, 2006.10.27
    
    
    
    Deed of Trust, Assignment of Leases and Rents and Security
Agreement between SLEE Grand Prairie, L.P. and CIBC Inc., dated
as of November 22, 2006, incorporated by reference to Exhibit
10.2 of the Current Report on Form 8-K (File No. 000-50363),
filed November 28, 2006.10.28
    
    
    
    Deed of Trust, Assignment of Leases and Rents and Security
Agreement between OB Midway NC Gladstone Commercial LLC, and CIBC
Inc., dated as of November 22, 2006, incorporated by reference to
Exhibit 10.3 of the Current Report on Form 8-K (File No.
000-50363), filed November 28, 2006.
 93




---



##### 



Exhibit
    
    
    
    Description of Document10.29
    
    
    
    Promissory Note First Park Ten COCO San Antonio, L.P., SLEE Grand
Prairie, L.P. and OB Midway NC Gladstone Commercial LLC and CIBC
Inc., N.A., dated as of November 22, 2006, incorporated by
reference to Exhibit 10.4 of the Current Report on Form 8-K (File
No. 000-50363), filed November 28, 2006.10.30
    
    
    
    Mortgage, Assignment of Leases and Rents and Security Agreement
between HMBF05 Newburyport MA LLC and CIBC Inc., dated as of
December 22, 2006, incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K (File No. 000-50363), filed
December 28, 2006.10.31
    
    
    
    Open-end Mortgage, Assignment of Leases and Rents and Security
Agreement between SVMMC05 Toledo OH LLC and CIBC Inc., dated as
of December 22, 2006, incorporated by reference to Exhibit 10.2
of the Current Report on Form 8-K (File No. 000-50363), filed
December 28, 2006.10.32
    
    
    
    Mortgage, Assignment of Leases and Rents and Security Agreement
between TCI06 Burnsville MC LLC and CIBC Inc., dated as of
December 22, 2006, incorporated by reference to Exhibit 10.3 of
the Current Report on Form 8-K (File No. 000-50363), filed
December 28, 2006.10.33
    
    
    
    Promissory Note between HMBF05 Newburyport MA LLC, SVMMC05 Toledo
OH LLC and TCI06 Burnsville MC LLC and CIBC Inc., dated as of
December 22, 2006, incorporated by reference to Exhibit 10.4 of
the Current Report on Form 8-K (File No. 000-50363), filed
December 28, 2006.10.34
    
    
    
    Credit Agreement dated as of December 29, 2006 among Gladstone
Commercial Limited Partnership as Borrower and Gladstone
Commercial Corporation as Guarantor, the Initial Guarantors
Listed Therein, the Banks Listed Therein and KeyBank National
Association, as Administrative Agent, incorporated by reference
to Exhibit 10.1 of the Current Report on Form 8-K (File No.
000-50363), filed January 3, 2007.10.35
    
    
    
    Amended and Restated Investment Advisory Agreement between
Gladstone Commercial Corporation and Gladstone Management
Corporation, dated January 1, 2007 incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K (File No.
000-50363), filed January 3, 2007 (renewed on July 9, 2008).10.36
    
    
    
    Administration Agreement between Gladstone Commercial Corporation
and Gladstone Administration, LLC, dated January 1, 2007
incorporated by reference to Exhibit 99.2 of the Current Report
on Form 8-K (File No. 000-50363), filed January 3, 2007 (renewed
on July 9, 2008).10.37
    
    
    
    Accordian Agreement between Gladstone Commercial Limited
Partnership and KeyBank National Association, dated November 13,
2007 incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K (File No. 000-50363), filed November 16, 2007.10.38
    
    
    
    Note Agreement between Gladstone Commercial Limited Partnership
and KeyBank National Association, dated December 21, 2007
incorporated by reference to Exhibit 10.1 of the Current Report
on Form 8-K (File No. 000-50363), filed December 27, 2007.11
    
    
    
    Computation of Per Share Earnings from Operations (included in
the notes to the audited financial statements contained in this
report).12
    
    
    
    Statements re: computation of ratios (included in Selected
Financial Data contained in this report).
 94




---



##### 



Exhibit
    
    
    
    Description of Document14
    
    
    
    Gladstone Commercial Corporation 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.
 
 *
    
    Denotes management contract, compensation plan, contract or other arrangement. 95




---



##### 



Gladstone Commercial CorporationDate: February 25, 2009
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer  Date: February 25, 2009
    By:
    /s/ David GladstoneDavid GladstoneChief Executive Officer and Chairman of the Board of Directors
(principal executive officer)Date: February 25, 2009
    By:
    /s/ Terry Lee BrubakerTerry Lee BrubakerVice Chairman, Chief Operating Officer and DirectorDate: February 25, 2009
    By:
    /s/ George Stelljes IIIGeorge Stelljes IIIPresident, Chief Investment Officer and DirectorDate: February 25, 2009
    By:
    /s/ Danielle JonesDanielle JonesChief Financial Officer
(principal financial and accounting officer)Date: February 25, 2009
    By:
    /s/ David A.R. DullumDavid A.R. DullumDirectorDate: February 25, 2009
    By:
    /s/ Anthony W. ParkerAnthony W. ParkerDirectorDate: February 25, 2009
    By:
    /s/ Michela A. EnglishMichela A. EnglishDirector 96




---



##### 



Date: February 25, 2009
    By:
    /s/ Paul AdelgrenPaul AdelgrenDirectorDate: February 25, 2009
    By:
    /s/ Maurice CoulonMaurice CoulonDirectorDate: February 25, 2009
    By:
    /s/ John OutlandJohn OutlandDirectorDate: February 25, 2009
    By:
    /s/ Gerard MeadGerard MeadDirector 97