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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
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PAGEPART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    18Item 1B.
    
    Unresolved Staff Comments
    
    
    28Item 2.
    
    Properties
    
    
    29Item 3.
    
    Legal Proceedings
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31PART IIItem 5.
    
    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    32Item 6.
    
    Selected Financial Data
    
    
    33Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    50Item 8.
    
    Financial Statements and Supplementary Data
    
    
    51Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    85Item 9A.
    
    Controls and Procedures
    
    
    85Item 9B.
    
    Other Information
    
    
    85PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    86Item 11.
    
    Executive Compensation
    
    
    86Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    86Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    86Item 14.
    
    Principal Accountant Fees and Services
    
    
    86PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    87SIGNATURES
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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) general volatility of the capital markets and the market
price of our securities; (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 credit facility, 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 are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the
date made. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, after the date of this Form
10-K.
 Item 1. Business
 Overview
    3




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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




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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




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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 to large public companies, many of the smaller companies do
not have publicly rated debt. 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.
    
    Property Valuation. The business prospects for the tenant and the
financial strength of the tenant are an important aspect of the
evaluation of any sale and leaseback of property, or acquisition of
property subject to a net lease, particularly a property that is
specifically suited to the needs of the tenant. We generally require
quarterly unaudited and annual audited financial statements of the
tenant in order to continuously monitor the financial performance of
the property. On a quarterly basis 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. 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.
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
    
    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.
    
    Appraisals.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.
 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.
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Additional Investment Considerations
 Terms of Mortgage Loans
     Other Investments
  8




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Temporary Investments
    Qualified REIT Subsidiaries
  9




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Joint Ventures
  Use of Leverage
 Non-recourse Financing
   Recourse Financing
  Securitization
  10




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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
     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, or 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);
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
    
    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.
 Conflict of Interest Policy
   
    
    acquire from or sell to any of our officers, directors or employees,
or any entity in which any of our officers, directors or employees has
an interest of more than 5%, any assets or other property;
    
    borrow from any of our directors, officers or employees, or any entity
in which any of our officers, directors or employees has an interest
of more than 5%; or
    
    engage in any other transaction with any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees has an interest of more than 5% (except that our Adviser may
lease office space in a building that we own, provided that the rental
rate under the lease is determined by our independent directors to be
at a fair market rate).
 
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Future Revisions in Policies and Strategies
  Our Adviser and Administrator
    13




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




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Management Services and Fees under the Initial Advisory Agreement
   Management Services and Fees under the Amended Advisory Agreement
  Administration Agreement
  15




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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 provided us with a representation that the property,
in conjunction with our other investments and proposed investments, is
reasonably expected to fulfill our investment objectives and policies
as established by our board of directors 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




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Employees
    Number of Individuals
    
    Functional Area6
    
    Executive Management41
    
    Investment Management, Portfolio Management and Due Diligence13
    
    Administration, Accounting, Compliance, Human Resources and Treasury
 Competition
  17




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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.
 Real estate industry risks
 We are subject to certain risks associated with real estate ownership and lending which could
reduce the value of our investments.
  
    
    changes in the general economic climate;
    
    changes in local conditions such as an oversupply of space or reduction in demand for real estate;
    
    changes in interest rates and the availability of financing;
    
    competition from other available space; and
    
    changes in laws and governmental regulations, including those governing real estate usage, zoning
and taxes.
  Competition for the acquisition of real estate may impede our ability to make acquisitions or
increase the cost of these acquisitions.
  Risks related to our tenants, borrowers and properties
 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.
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
    
    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.
  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 resources and may not be able to make their lease or mortgage payments.A small
or medium-sized tenant or borrower is more likely to have difficulty
making its lease or mortgage payments when it experiences adverse
events, such as the failure to meet its business plan, a downturn in
its industry or negative economic conditions.
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
    
    Small and medium-sized businesses typically have narrower product
lines and smaller market shares than large businesses.Because our
target tenants and borrowers are smaller businesses, they will tend to
be more vulnerable to competitors actions and market conditions, as
well as general economic downturns. In addition, our target tenants
and borrowers may face intense competition, including competition from
companies with greater financial resources, more extensive
development, manufacturing, marketing and other capabilities and a
larger number of qualified managerial and technical personnel.
    
    There is generally little or no publicly available information about
our target tenants and borrowers.Many of our tenants and borrowers
are likely to be privately owned businesses, about which there is
generally little or no publicly available operating and financial
information. As a result, we will rely on our Adviser to perform due
diligence investigations of these tenants and borrowers, their
operations and their prospects. We may not learn all of the material
information we need to know regarding these businesses through our
investigations.
    
    Small and medium-sized businesses generally have less predictable
operating results.We expect that many of our tenants and borrowers
may experience significant fluctuations in their operating results,
may from time to time be parties to litigation, may be engaged in
rapidly changing businesses with products subject to a substantial
risk of obsolescence, may require substantial additional capital to
support their operations, to finance expansion or to maintain their
competitive positions, may otherwise have a weak financial position or
may be adversely affected by changes in the business cycle. Our
tenants and borrowers may not meet net income, cash flow and other
coverage tests typically imposed by their senior lenders. The failure
of a tenant or borrower to satisfy financial or operating covenants
imposed by senior lenders could lead to defaults and, potentially,
foreclosure on credit facilities, which could additionally trigger
cross-defaults in other agreements. If this were to occur, it is
possible that the ability of the tenant or borrower to make required
payments to us would be jeopardized.
    
    Small and medium-sized businesses are more likely to be dependent on
one or two persons.Typically, the success of a small or medium-sized
business also depends on the management talents and efforts of one or
two persons or a small group of persons. The death, disability or
resignation of one or more of these persons could have a material
adverse impact on our tenant or borrower and, in turn, on us.
    
    Small and medium-sized businesses may have limited operating
histories.While we intend to target as tenants and borrowers stable
companies with proven track records, we may lease properties or lend
money to new companies that meet our other investment criteria.
Tenants or borrowers with limited operating histories will be exposed
to all of the operating risks that new businesses face and may be
particularly susceptible to, among other risks, market downturns,
competitive pressures and the 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.
  20




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The inability of a tenant in a single tenant property to pay rent will reduce our revenues.
  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.
    21




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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.
  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.
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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.
  We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
  Financing Risks
 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.
   23




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Failure to hedge effectively against interest rate changes may adversely affect our results of
operations.
  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;
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
    
    we also could be subject to the federal alternative minimum tax and
possibly increased state and local taxes; and
    
    unless we are entitled to relief under statutory provisions, we would
be prevented from re-qualifying to be taxed as a REIT for the four
taxable years following the year during which we ceased to qualify.
  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.
   25




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Because we must distribute a substantial portion of our net income to qualify as a REIT, we will be
largely dependent on third-party sources of capital to fund our future capital needs.
  Other Risks
 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.
  Market conditions could adversely affect the market price and trading volume of our securities.
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
    
    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.
  An increase in market interest rates may have an adverse effect on the market price of our
securities.
  Legislative or regulatory action could adversely affect investors.
  27




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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.
  Available Information
  Item 1B. Unresolved Staff Comments
  28




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Item 2. Properties
  Total Annualized
    
    
    Total AnnualizedRentable
    
    
    
    
    
    
    Total Rental Revenue
    
    
    Rental Revenue for the
    
    
    Rental Revenue
    
    
    Year ofYear Built/
    
    
    
    
    
    
    Square
    
    
    
    
    
    
    for the Year Ended
    
    
    Year Ended
    
    
    per Occupied
    
    
    LeaseProperty
    
    Improvements
    
    
    Date of Purchase
    
    
    Feet
    
    
    Occupancy
    
    
    December 31, 2007
    
    
    December 31, 2007 (1)
    
    
    Square Foot (2)
    
    
    Expiration208 South Rogers Lane (Raleigh NC)
    
    
    1997
    
    
    
    12/23/2003
    
    
    
    58,926
    
    
    
    100
    %
    
    $
    580,376
    
    
    
    580,376
    
    
    $
    9.85
    
    
    
    20153874 Highland Park NW (Canton, OH)
    
    
    1994
    
    
    
    1/30/2004
    
    
    
    54,018
    
    
    
    100
    %
    
    $
    412,114
    
    
    
    412,114
    
    
    $
    7.63
    
    
    
    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
    %
    
    $
    960,323
    
    
    
    960,323
    
    
    $
    14.89
    
    
    
    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
    %
    
    $
    870,000
    
    
    
    870,000
    
    
    $
    3.00
    
    
    
    20149698 Old US Hwy. 52 (Lexington, NC)
    
    
    1986
    
    
    
    8/5/2004
    
    
    
    154,000
    
    
    
    100
    %
    
    $
    397,324
    
    
    
    397,324
    
    
    $
    2.58
    
    
    
    20149100 Highway 290 East (Austin, TX)
    
    
    2001
    
    
    
    9/16/2004
    
    
    
    51,933
    
    
    
    100
    %
    
    $
    751,333
    
    
    
    751,333
    
    
    $
    14.47
    
    
    
    20153701 E. Virginia Beach Blvd (Norfolk, VA)
    
    
    1967
    
    
    
    10/15/2004
    
    
    
    25,797
    
    
    
    100
    %
    
    $
    103,501
    
    
    
    103,501
    
    
    $
    4.01
    
    
    
    202113 Industrial Park Drive (Mt. Pocono, PA)
    
    
    1995-1999
    
    
    
    10/15/2004
    
    
    
    223,275
    
    
    
    100
    %
    
    $
    628,904
    
    
    
    628,904
    
    
    $
    2.82
    
    
    
    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
    %
    
    $
    580,115
    
    
    
    580,115
    
    
    $
    9.06
    
    
    
    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
    %
    
    $
    964,897
    
    
    
    964,897
    
    
    $
    5.27
    
    
    
    2020150 & 170 Ridgeview Center Drive (Duncan, SC)
    
    
    1984/2001/2007
    
    
    
    7/14/2005
    
    
    
    278,020
    
    
    
    100
    %
    
    $
    1,996,695
    
    
    
    1,996,695
    
    
    $
    7.18
    
    
    
    20115656 Campus Parkway (St Louis, MO)
    
    
    1977
    
    
    
    8/5/2005
    
    
    
    51,155
    
    
    
    100
    %
    
    $
    289,928
    
    
    
    289,928
    
    
    $
    5.67
    
    
    
    2012
 29




---



##### 



Item 2. Properties (Continued)
 Total Annualized
    
    
    Total AnnualizedRentable
    
    
    
    
    
    
    Total Rental Revenue
    
    
    Rental Revenue for the
    
    
    Rental Revenue
    
    
    Year ofYear Built/
    
    
    
    
    
    
    Square
    
    
    
    
    
    
    for the Year Ended
    
    
    Year Ended
    
    
    per Occupied
    
    
    LeaseProperty
    
    Improvements
    
    
    Date of Purchase
    
    
    Feet
    
    
    Occupancy
    
    
    December 31, 2007
    
    
    December 31, 2007 (1)
    
    
    Square Foot (2)
    
    
    Expiration914 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
    
    
    
    20202 Opportunity Way (Newburyport, MA)
    
    
    1994
    
    
    
    10/17/2005
    
    
    
    70,598
    
    
    
    100
    %
    
    $
    704,095
    
    
    
    704,095
    
    
    $
    9.97
    
    
    
    2012255 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, 2109, 2201, 2215, 2301 Fox Drive
(Champaign, IL)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    108,262
    
    
    
    100
    %
    
    $
    1,566,723
    
    
    
    1,566,723
    
    
    $
    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
    %
    
    $
    1,234,662
    
    
    
    1,234,662
    
    
    $
    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
    %
    
    $
    155,490
    
    
    
    155,490
    
    
    $
    2.45
    
    
    
    20162325 West Fairview Avenue (Montgomery,
AL)
    
    
    1962/1989
    
    
    
    9/29/2006
    
    
    
    29,472
    
    
    
    100
    %
    
    $
    155,491
    
    
    
    155,491
    
    
    $
    5.28
    
    
    
    20165221 N Highway 763 (Columbia, MO)
    
    
    1978
    
    
    
    9/29/2006
    
    
    
    16,275
    
    
    
    100
    %
    
    $
    155,491
    
    
    
    155,491
    
    
    $
    9.55
    
    
    
    2016
 30




---



##### 



Item 2. Properties (Continued)
 Total Annualized
    
    
    Total AnnualizedRentable
    
    
    
    
    
    
    Total Rental Revenue
    
    
    Rental Revenue for the
    
    
    Rental Revenue
    
    
    Year ofYear Built/
    
    
    
    
    
    
    Square
    
    
    
    
    
    
    for the Year Ended
    
    
    Year Ended
    
    
    per Occupied
    
    
    LeaseProperty
    
    Improvements
    
    
    Date of Purchase
    
    
    Feet
    
    
    Occupancy
    
    
    December 31, 2007
    
    
    December 31, 2007  (1)
    
    
    Square Foot  (2)
    
    
    Expiration4690 Parkway Drive (Mason, OH)
    
    
    2002
    
    
    
    1/5/2007
    
    
    
    60,000
    
    
    
    100
    %
    
    $
    673,944
    
    
    
    683,051
    
    
    $
    11.38
    
    
    
    2013201 South Rogers Lane (Raleigh, NC)
    
    
    1994
    
    
    
    2/16/2007
    
    
    
    115,500
    
    
    
    100
    %
    
    $
    593,611
    
    
    
    680,356
    
    
    $
    5.89
    
    
    
    20151110 West Tenkiller (Tulsa, OK)
    
    
    2004
    
    
    
    3/1/2007
    
    
    
    238,310
    
    
    
    100
    %
    
    $
    1,304,829
    
    
    
    1,565,795
    
    
    $
    6.57
    
    
    
    20193725 East 10th Court (Hialeah, FL)
    
    
    1956/1992
    
    
    
    3/9/2007
    
    
    
    132,337
    
    
    
    100
    %
    
    $
    806,780
    
    
    
    1,000,140
    
    
    $
    7.56
    
    
    
    2022554 Clark Road (Tewksbury, MA)
    
    
    1985/1989
    
    
    
    5/17/2007
    
    
    
    102,200
    
    
    
    100
    %
    
    $
    573,107
    
    
    
    921,888
    
    
    $
    9.02
    
    
    
    20175324 Natorp Boulevard (Mason, OH)
    
    
    2007
    
    
    
    7/1/2007
    
    
    
    21,264
    
    
    
    100
    %
    
    $
    272,755
    
    
    
    545,510
    
    
    $
    25.65
    
    
    
    20277282 Willam Barry Boulevard (Cicero, NY)
    
    
    2005
    
    
    
    9/6/2007
    
    
    
    71,880
    
    
    
    100
    %
    
    $
    169,223
    
    
    
    534,388
    
    
    $
    7.43
    
    
    
    20201515 Arboretum Drive SE (Grand Rapids,
MI)
    
    
    2001
    
    
    
    9/28/2007
    
    
    
    63,235
    
    
    
    100
    %
    
    $
    265,873
    
    
    
    1,039,243
    
    
    $
    16.43
    
    
    
    20164 Territorial Court (Bollingbrook, IL)
    
    
    2002
    
    
    
    9/28/2007
    
    
    
    55,869
    
    
    
    100
    %
    
    $
    159,985
    
    
    
    625,349
    
    
    $
    11.19
    
    
    
    20142339-2341 Lawrenceville Highway
(Decatur, GA)
    
    
    1989
    
    
    
    12/13/2007
    
    
    
    26,600
    
    
    
    100
    %
    
    $
    14,775
    
    
    
    305,690
    
    
    $
    11.49
    
    
    
    2026311 Phillip Boulevard (Lawrenceville, GA)
    
    
    2005
    
    
    
    12/13/2007
    
    
    
    12,412
    
    
    
    100
    %
    
    $
    14,775
    
    
    
    305,690
    
    
    $
    24.63
    
    
    
    20262096 McGee Road (Snellville, GA)
    
    
    1986
    
    
    
    12/13/2007
    
    
    
    3,800
    
    
    
    100
    %
    
    $
    14,776
    
    
    
    305,710
    
    
    $
    80.45
    
    
    
    20267174 Wheat Street (Covington, GA)
    
    
    2000
    
    
    
    12/13/2007
    
    
    
    5,000
    
    
    
    100
    %
    
    $
    14,776
    
    
    
    305,710
    
    
    $
    61.14
    
    
    
    20261055 Haw Creek Parkway (Cumming, GA)
    
    
    2004
    
    
    
    12/13/2007
    
    
    
    13,919
    
    
    
    100
    %
    
    $
    14,776
    
    
    
    305,710
    
    
    $
    21.96
    
    
    
    20261293 Wellbrook Circle (Conyers, GA)
    
    
    1994
    
    
    
    12/13/2007
    
    
    
    6,400
    
    
    
    100
    %
    
    $
    14,776
    
    
    
    305,710
    
    
    $
    47.77
    
    
    
    2026Totals
    
    
    
    
    
    
    
    
    
    
    5,558,278
    
    
    
    
    
    
    $
    31,469,297
    
    
    $
    35,990,476
 
 (1)
    
    The amounts represented in total annualized rental revenue for the year ended December 31, 2007 have been calculated by taking the 2007
base rent and annualizing the partial-year results for properties
acquired during 2007. 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
  31




---



##### 



PART II
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Market price per share
    
    DistributionsQuarter Ended
    
    High
    
    Low
    
    Declared Per Share3/31/2006
    
    $
    20.25
    
    
    $
    16.46
    
    
    $
    0.366/30/2006
    
    $
    20.40
    
    
    $
    17.68
    
    
    $
    0.369/30/2006
    
    $
    20.96
    
    
    $
    18.18
    
    
    $
    0.3612/31/2006
    
    $
    22.19
    
    
    $
    19.80
    
    
    $
    0.363/31/2007
    
    $
    20.63
    
    
    $
    19.06
    
    
    $
    0.366/30/2007
    
    $
    20.40
    
    
    $
    19.01
    
    
    $
    0.369/30/2007
    
    $
    20.10
    
    
    $
    17.40
    
    
    $
    0.3612/31/2007
    
    $
    19.45
    
    
    $
    15.75
    
    
    $
    0.36
  
    
    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.
    32




---



##### 



Period February 14,2003 (inception)Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    through DecemberDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    31, 2003Operating Data:Total operating revenue
    
    $
    32,793,539
    
    
    $
    25,945,546
    
    
    $
    12,881,506
    
    
    $
    4,191,329
    
    
    $
    12,180Total operating expenses
    
    
    (15,821,630
    )
    
    
    (14,067,096
    )
    
    
    (7,185,040
    )
    
    
    (3,276,735
    )
    
    
    (557,148
    )Other income (expense)
    
    
    (10,940,394
    )
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )
    
    
    614,659
    
    
    
    304,097Income (loss) from continuing operations
    
    
    6,031,515
    
    
    
    3,357,031
    
    
    
    3,510,957
    
    
    
    1,529,253
    
    
    
    (240,871
    )Discontinued operations
    
    
    108,714
    
    
    
    1,015,797
    
    
    
    90,988
    
    
    
    94,675
    
    
    
    Net income (loss)
    
    $
    6,140,229
    
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Dividends attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common stockholders
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Share and Per Share Data:Earnings per weighted average common share - basicIncome from continuing operations (net of
dividends attributable to preferred stock)
    
    $
    0.23
    
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    (0.07
    )Discontinued operations
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income available to common stockholders
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Earnings per weighted average common share - dilutedIncome from continuing operations
(net of dividends attributable to preferred stock)
    
    $
    0.23
    
    
    $
    0.14
    
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    (0.07
    )Discontinued operations
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income available to common stockholders
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Weighted average shares outstanding-basic
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding-diluted
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Cash dividends declared per common share
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    0.96
    
    
    $
    0.48
    
    
    $
    0.01Supplemental Data:Net income (loss) available to common stockholders
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Real estate depreciation and amortization, including discontinued operations
    
    
    10,528,458
    
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Less: Gain on sale of real estate, net of taxes paid
    
    
    (78,667
    )
    
    
    (1,106,590
    )
    
    
    
    
    
    
    
    
    
    
    Funds from operations available to common stockholders (1)
    
    
    12,496,270
    
    
    
    9,428,822
    
    
    
    7,253,064
    
    
    
    2,597,273
    
    
    
    (235,044
    )Ratio of earnings to combined fixed charges and preferred
dividends (2)
    
    
    1.4
    x
    
    
    1.3
    x
    
    
    2.4
    x
    
    
    60.8
    x
    
    
    Balance Sheet Data:Real estate, before accumulated depreciation
    
    $
    340,500,406
    
    
    $
    243,713,542
    
    
    $
    165,043,639
    
    
    $
    61,251,455
    
    
    $
    5,440,772Total assets
    
    $
    378,902,689
    
    
    $
    315,766,022
    
    
    $
    207,046,954
    
    
    $
    105,585,094
    
    
    $
    105,061,370Mortgage notes payable, term loan and borrowings under the line of credit
    
    $
    226,520,471
    
    
    $
    154,494,438
    
    
    $
    105,118,961
    
    
    $
    
    
    
    $
    Total stockholders equity
    
    $
    142,368,068
    
    
    $
    152,224,176
    
    
    $
    98,948,536
    
    
    $
    102,692,693
    
    
    $
    104,750,655Total common shares outstanding
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    7,672,000
    
    
    
    7,667,000
    
    
    
    7,642,000
 
 (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. 33




---



##### 



Period February 14,2003 (inception)Year ended December
    
    
    Year ended December
    
    
    Year ended
    
    
    Year ended December
    
    
    through December 31,31, 2007
    
    
    31, 2006
    
    
    December 31, 2005
    
    
    31, 2004
    
    
    2003Net income
    
    $
    6,140,229
    
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Less: Dividends attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    
    2,046,479
    
    
    
    2,185,938
    
    
    
    3,601,945
    
    
    
    1,623,928
    
    
    
    (240,871
    )Add: Real estate depreciation and amortization, including discontinued operations
    
    
    10,528,458
    
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Less: Gain on sale of real estate, net of taxes paid
    
    
    (78,667
    )
    
    
    (1,106,590
    )
    
    
    
    
    
    
    
    
    
    
    FFO available to common stockholders
    
    $
    12,496,270
    
    
    $
    9,428,822
    
    
    $
    7,253,064
    
    
    
    2,597,723
    
    
    $
    (235,044
    )Weighted average shares outstanding - basic
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding - diluted
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Basic net income per weighted average common share
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted net income per weighted average common share
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Basic FFO per weighted average common share
    
    $
    1.46
    
    
    $
    1.20
    
    
    $
    0.95
    
    
    $
    0.34
    
    
    $
    (0.07
    )Diluted FFO per weighted average common share
    
    $
    1.46
    
    
    $
    1.18
    
    
    $
    0.94
    
    
    $
    0.34
    
    
    $
    (0.07
    )
 
 (2)
    
    The calculation of the ratio of earnings to combined fixed charges and preferred dividends is
below. Earnings consist of net income (loss) 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. 34




---



##### 



For the periodFebruary 14, 2003For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Net income (loss) from continuing operations
    
    $
    6,031,515
    
    
    $
    3,357,031
    
    
    $
    3,510,957
    
    
    $
    1,529,253
    
    
    $
    (240,871
    )Add: fixed charges
    
    
    15,670,067
    
    
    
    11,490,476
    
    
    
    2,494,245
    
    
    
    25,565
    
    
    
    7,830Less: preferred dividends
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    
    
    
    
    
    
    
    
    Earnings
    
    $
    17,607,832
    
    
    $
    12,660,617
    
    
    $
    6,005,202
    
    
    $
    1,554,818
    
    
    $
    (233,041
    )Fixed Charges:Interest expense
    
    
    10,847,346
    
    
    
    8,041,412
    
    
    
    2,187,586
    
    
    
    
    
    
    
    Amortization of deferred financing fees
    
    
    717,195
    
    
    
    1,207,198
    
    
    
    260,098
    
    
    
    
    
    
    
    Estimated interest component of rent
    
    
    11,776
    
    
    
    54,976
    
    
    
    46,561
    
    
    
    25,565
    
    
    
    7,830Preferred dividends
    
    
    4,093,750
    
    
    
    2,186,890
    
    
    
    
    
    
    
    
    
    
    
    Total fixed charges
    
    
    15,670,067
    
    
    
    11,490,476
    
    
    
    2,494,245
    
    
    
    25,565
    
    
    
    7,830Ratio of earnings to combined fixed charges and preferred dividends
    
    
    1.1
    
    
    
    1.1
    
    
    
    2.4
    
    
    
    60.8
    
    
    
    
    (1)
 
 (1)
    
    Note for the period February 14, 2003 through December 31, 2003 earnings, as defined, were insufficent to cover fixed charges by $240,871. 35




---



##### 



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
 Our Investment Strategy
  Recent Events
 Investment Activities:
 Financing Activities:
 Our Investment Adviser and Administrator
    36




---



##### 



Investment Advisory and Administration Agreements
    Management Services and Fees under the Initial Advisory Agreement
   37




---



##### 



Management Services and Fees under the Amended Advisory Agreement
   Administration Agreement
  Critical Accounting Policies
  Recently Issued Accounting Pronouncements
  38




---



##### 



"
  Results of Operations
  39




---



##### 



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
    
    
    821,790
    
    
    
    645,792
    
    
    
    175,998
    
    
    
    27
    %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
    %Stock option compensation expense
    
    
    
    
    
    
    394,411
    
    
    
    (394,411
    )
    
    
    -100
    %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
    )
    
    
    100
    %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 operations(Loss) income from discontinued operations
    
    
    (3,312
    )
    
    
    112,145
    
    
    
    (115,457
    )
    
    
    -103
    %Net realized income (loss) 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 (paid) on sale of real estate
    
    
    78,667
    
    
    
    (315,436
    )
    
    
    394,103
    
    
    
    -100
    %Total discontinued operations
    
    
    108,714
    
    
    
    1,015,797
    
    
    
    (907,083
    )
    
    
    -89
    %Net income
    
    
    6,140,229
    
    
    
    4,372,828
    
    
    
    1,767,401
    
    
    
    40
    %Dividends 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
    %
 40




---



##### 



Operating Revenues
    Operating Expenses
   Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
 Investment Advisory and Administration Agreements.
  41




---



##### 



Other Income and Expense
     Discontinued Operations
  42




---



##### 



Net income available to common stockholders
  A comparison of our operating results for the years ended December 31, 2006 and 2005 is below
 For the year ended December 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    23,964,035
    
    
    $
    10,853,903
    
    
    $
    13,110,132
    
    
    
    121
    %Interest income from mortgage notes receivable
    
    
    1,845,231
    
    
    
    1,915,795
    
    
    
    (70,564
    )
    
    
    -4
    %Tenant recovery revenue
    
    
    136,280
    
    
    
    111,808
    
    
    
    24,472
    
    
    
    22
    %Total operating revenues
    
    
    25,945,546
    
    
    
    12,881,506
    
    
    
    13,064,040
    
    
    
    101
    %Operating expensesDepreciation and amortization
    
    
    8,297,174
    
    
    
    3,521,128
    
    
    
    4,776,046
    
    
    
    136
    %Property operating expenses
    
    
    645,792
    
    
    
    406,277
    
    
    
    239,515
    
    
    
    59
    %Base management fee
    
    
    2,902,053
    
    
    
    2,118,040
    
    
    
    784,013
    
    
    
    37
    %Professional fees
    
    
    953,066
    
    
    
    563,205
    
    
    
    389,861
    
    
    
    69
    %Insurance
    
    
    211,562
    
    
    
    196,657
    
    
    
    14,905
    
    
    
    8
    %Directors fees
    
    
    140,000
    
    
    
    96,219
    
    
    
    43,781
    
    
    
    46
    %Stockholder related expense
    
    
    311,049
    
    
    
    215,907
    
    
    
    95,142
    
    
    
    44
    %Asset retirement obligation expense
    
    
    129,142
    
    
    
    
    
    
    
    129,142
    
    
    
    100
    %General and administrative
    
    
    82,847
    
    
    
    67,607
    
    
    
    15,240
    
    
    
    23
    %Stock option compensation expense
    
    
    394,411
    
    
    
    
    
    
    
    394,411
    
    
    
    100
    %Total operating expenses
    
    
    14,067,096
    
    
    
    7,185,040
    
    
    
    6,882,056
    
    
    
    96
    %Other income (expense)Interest income from temporary investments
    
    
    76,772
    
    
    
    126,826
    
    
    
    (50,054
    )
    
    
    -39
    %Interest income - employee loans
    
    
    125,788
    
    
    
    21,041
    
    
    
    104,747
    
    
    
    498
    %Other income
    
    
    380,915
    
    
    
    
    
    
    
    380,915
    
    
    
    100
    %Interest expense
    
    
    (9,104,894
    )
    
    
    (2,333,376
    )
    
    
    (6,771,518
    )
    
    
    -290
    %Total other expense
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )
    
    
    (6,335,910
    )
    
    
    290
    %Income from continuing operations
    
    
    3,357,031
    
    
    
    3,510,957
    
    
    
    (153,926
    )
    
    
    -4
    %Discontinued operations(Loss) income from discontinued operations
    
    
    112,145
    
    
    
    309,545
    
    
    
    (197,400
    )
    
    
    -64
    %Net realized income (loss) from foreign currency transactions
    
    
    (202,938
    )
    
    
    (6,278
    )
    
    
    (196,660
    )
    
    
    -3133
    %Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    (212,279
    )
    
    
    212,279
    
    
    
    100
    %Gain on sale of real estate
    
    
    1,422,026
    
    
    
    
    
    
    
    1,422,026
    
    
    
    100
    %Taxes refunded (paid) on sale of real estate
    
    
    (315,436
    )
    
    
    
    
    
    
    (315,436
    )
    
    
    100
    %Total discontinued operations
    
    
    1,015,797
    
    
    
    90,988
    
    
    
    924,809
    
    
    
    1016
    %Net income
    
    
    4,372,828
    
    
    
    3,601,945
    
    
    
    770,883
    
    
    
    21
    %Dividends attributable to preferred stock
    
    
    (2,186,890
    )
    
    
    
    
    
    
    (2,186,890
    )
    
    
    100
    %Net income available to common stockholders
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    (1,416,007
    )
    
    
    -39
    %
 43




---



##### 



Operating Revenues
    Operating Expenses
      44




---



##### 



.   .
 Other Income and Expense
     45




---



##### 



Discontinued Operations
   Net income available to common stockholders
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
 Results of Operations
 Investing Activities
 Recent Events
 46




---



##### 



Financing Activities
  Future Capital Needs
  Line of Credit
  Short-Term Loan
  47




---



##### 



Mortgage Notes Payable
     Off-Balance
Sheet Arrangements
  Contractual Obligations
  48




---



##### 



Payments Due by PeriodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-Term Debt Obligations (1)
    
    $
    226,520,471
    
    
    $
    25,989,518
    
    
    $
    4,643,603
    
    
    $
    5,629,383
    
    
    $
    190,257,967Interest on Long-Term Debt Obligations (2)
    
    
    95,381,368
    
    
    
    11,922,066
    
    
    
    23,418,073
    
    
    
    22,857,413
    
    
    
    37,183,816Lease Obligations (3)
    
    
    1,814,400
    
    
    
    134,400
    
    
    
    268,800
    
    
    
    268,800
    
    
    
    1,142,400Purchase Obligations (4)
    
    
    20,700,000
    
    
    
    20,700,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    344,416,239
    
    
    $
    58,745,984
    
    
    $
    28,330,476
    
    
    $
    28,755,596
    
    
    $
    228,584,183
 
 (1)
    
    Long-term debt obligations represent borrowings under our line of credit, term loan and mortgage notes payble that were outstanding
as of December 31,
2007. The line of credit matures in December 2009 and the term loan matures in December 2008.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our line of credit or term loan.
The balance and interest rate on our line of credit and term loan are variable and, thus, the amount of interest can not be calculated for purposes of this table.(3)
    
    Lease obligations represent the ground lease payments due on our Tulsa, Oklahoma property. The lease expires in June 2021.(4)
    
    The purchase obligations reflected in the above table represents commitments outstanding at December 31, 2007 to purchase
real estate, of which one property was purchased in January 2008 for approximately $7.2 million. 49




---



##### 



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
       50




---



##### 



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements
         51




---



##### 



Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
  52




---



##### 



53




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 December 31, 2007
    
    
    December 31, 2006ASSETSReal estate, net of accumulated depreciation of
$15,738,634 and $8,595,419, respectively
    
    $
    324,761,772
    
    
    $
    235,118,123Lease intangibles, net of accumulated amortization of
$7,560,928 and $4,175,685, respectively
    
    
    28,989,556
    
    
    
    23,416,696Mortgage notes receivable
    
    
    10,000,000
    
    
    
    10,000,000Cash and cash equivalents
    
    
    1,356,408
    
    
    
    36,005,686Restricted cash
    
    
    1,914,067
    
    
    
    1,225,162Funds held in escrow
    
    
    1,401,695
    
    
    
    1,635,819Interest receivable  mortgage note
    
    
    86,111
    
    
    
    Interest receivable  employees
    
    
    39,280
    
    
    
    43,716Deferred rent receivable
    
    
    5,094,799
    
    
    
    3,607,279Deferred financing costs, net of accumulated amortization of
$2,184,492 and $1,467,297, respectively
    
    
    4,405,129
    
    
    
    3,713,004Prepaid expenses
    
    
    522,348
    
    
    
    521,290Deposits on real estate
    
    
    300,000
    
    
    
    300,000Accounts receivable
    
    
    31,524
    
    
    
    179,247TOTAL ASSETS
    
    $
    378,902,689
    
    
    $
    315,766,022LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    202,120,471
    
    
    $
    154,494,438Short-term loan and borrowings under line of credit
    
    
    24,400,000
    
    
    
    Deferred rent liability
    
    
    3,933,035
    
    
    
    4,718,599Asset retirement obligation liability
    
    
    1,811,752
    
    
    
    1,631,294Accounts payable and accrued expenses
    
    
    778,949
    
    
    
    673,410Due to adviser
    
    
    784,301
    
    
    
    183,042Rent received in advance, security deposits and funds held in escrow
    
    
    2,706,113
    
    
    
    1,841,063Total Liabilities
    
    
    236,534,621
    
    
    
    163,541,846STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation
preference;
2,300,000 shares authorized and 2,150,000 shares issued and
outstanding
    
    
    2,150
    
    
    
    2,150Common stock, $0.001 par value, 17,700,000 shares authorized and
8,565,264 shares issued and outstanding
    
    
    8,565
    
    
    
    8,565Additional paid in capital
    
    
    170,640,979
    
    
    
    170,640,979Notes receivable - employees
    
    
    (2,769,923
    )
    
    
    (3,201,322
    )Distributions in excess of accumulated earnings
    
    
    (25,513,703
    )
    
    
    (15,226,196
    )Total Stockholders Equity
    
    
    142,368,068
    
    
    
    152,224,176TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    378,902,689
    
    
    $
    315,766,022
  54




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the year ended December 31,2007
    
    
    2006
    
    
    2005Operating revenuesRental income
    
    $
    31,469,297
    
    
    $
    23,964,035
    
    
    $
    10,853,903Interest income from mortgage notes receivable
    
    
    1,013,889
    
    
    
    1,845,231
    
    
    
    1,915,795Tenant recovery revenue
    
    
    310,353
    
    
    
    136,280
    
    
    
    111,808Total operating revenues
    
    
    32,793,539
    
    
    
    25,945,546
    
    
    
    12,881,506Operating expensesDepreciation and amortization
    
    
    10,528,458
    
    
    
    8,297,174
    
    
    
    3,521,128Property operating expenses
    
    
    821,790
    
    
    
    645,792
    
    
    
    406,277Base management fee
    
    
    1,858,120
    
    
    
    2,902,053
    
    
    
    2,118,040Incentive fee
    
    
    2,564,365
    
    
    
    
    
    
    
    Administration fee
    
    
    837,898
    
    
    
    
    
    
    
    Professional fees
    
    
    625,349
    
    
    
    953,066
    
    
    
    563,205Insurance
    
    
    214,141
    
    
    
    211,562
    
    
    
    196,657Directors fees
    
    
    229,000
    
    
    
    140,000
    
    
    
    96,219Stockholder related expenses
    
    
    244,629
    
    
    
    311,049
    
    
    
    215,907Asset retirement obligation expense
    
    
    116,478
    
    
    
    129,142
    
    
    
    General and administrative
    
    
    102,999
    
    
    
    82,847
    
    
    
    67,607Stock option compensation expense
    
    
    
    
    
    
    394,411
    
    
    
    Total operating expenses before credit from Adviser
    
    
    18,143,227
    
    
    
    14,067,096
    
    
    
    7,185,040Credit to incentive fee
    
    
    (2,321,597
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    15,821,630
    
    
    
    14,067,096
    
    
    
    7,185,040Other income (expense)Interest income from temporary investments
    
    
    354,249
    
    
    
    76,772
    
    
    
    126,826Interest income - employee loans
    
    
    222,051
    
    
    
    125,788
    
    
    
    21,041Other income
    
    
    47,847
    
    
    
    380,915
    
    
    
    Interest expense
    
    
    (11,564,541
    )
    
    
    (9,104,894
    )
    
    
    (2,333,376
    )Total other expense
    
    
    (10,940,394
    )
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )Income from continuing operations
    
    
    6,031,515
    
    
    
    3,357,031
    
    
    
    3,510,957Discontinued operations(Loss) income from discontinued operations
    
    
    (3,312
    )
    
    
    112,145
    
    
    
    309,545Net realized income (loss) from foreign currency transactions
    
    
    33,359
    
    
    
    (202,938
    )
    
    
    (6,278
    )Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    
    
    
    
    (212,279
    )Gain on sale of real estate
    
    
    
    
    
    
    1,422,026
    
    
    
    Taxes refunded (paid) on sale of real estate
    
    
    78,667
    
    
    
    (315,436
    )
    
    
    Total discontinued operations
    
    
    108,714
    
    
    
    1,015,797
    
    
    
    90,988Net income
    
    
    6,140,229
    
    
    
    4,372,828
    
    
    
    3,601,945Dividends attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )
    
    
    Net income available to common stockholders
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945Earnings per weighted average common share - basicIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.23
    
    
    $
    0.15
    
    
    $
    0.46Discontinued operations
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47Earnings per weighted average common share - dilutedIncome from continuing operations (net of dividends attributable to preferred stock)
    
    $
    0.23
    
    
    $
    0.14
    
    
    $
    0.46Discontinued operations
    
    
    0.01
    
    
    
    0.13
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47Weighted average shares outstandingBasic
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219Diluted
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220
  55




---



##### 



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
    
    
    5
    
    
    
    
    
    
    
    74,995
    
    
    
    (75,000
    )
    
    
    
    
    
    
    Repayment of Principal on
Notes Receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,718
    
    
    
    
    
    
    
    17,718Distributions Declared to
Common Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,363,820
    )
    
    
    (7,363,820
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,601,945
    
    
    
    3,601,945Balance at December 31,
2005
    
    $
    7,672
    
    
    $
    
    
    
    $
    105,502,544
    
    
    $
    (432,282
    )
    
    $
    (6,129,398
    )
    
    $
    98,948,536Issuance 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
    )
    
    $
    142,368,068
  56




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the year ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    6,140,229
    
    
    $
    4,372,828
    
    
    $
    3,601,945Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    10,528,458
    
    
    
    8,349,474
    
    
    
    3,651,119Amortization of deferred financing costs, including discontinued operations
    
    
    717,195
    
    
    
    1,207,198
    
    
    
    260,099Amortization of deferred rent asset
    
    
    253,496
    
    
    
    253,496
    
    
    
    178,070Amortization of deferred rent liability
    
    
    (785,564
    )
    
    
    (696,261
    )
    
    
    Asset retirement obligation expense, including discontinued operations
    
    
    116,478
    
    
    
    139,074
    
    
    
    Stock compensation
    
    
    
    
    
    
    394,411
    
    
    
    Increase in mortgage notes payable due to change in value of foreign currency
    
    
    
    
    
    
    202,066
    
    
    
    209,395Value of building acquired in excess of mortgage note satisfied, applied to interest income
    
    
    
    
    
    
    (335,701
    )
    
    
    Gain on sale of real estate
    
    
    
    
    
    
    (1,422,026
    )
    
    
    (Increase) decrease in mortgage interest receivable
    
    
    (86,111
    )
    
    
    70,749
    
    
    
    (5,954
    )Decrease (increase) in employee interest receivable
    
    
    4,436
    
    
    
    (43,716
    )
    
    
    4,792Increase in deferred rent receivable
    
    
    (1,741,016
    )
    
    
    (1,270,159
    )
    
    
    (562,133
    )Decrease (increase) in prepaid expenses and other assets
    
    
    146,665
    
    
    
    (89,913
    )
    
    
    (425,120
    )Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    625,398
    
    
    
    196,294
    
    
    
    359,537Increase in rent received in advance
    
    
    176,145
    
    
    
    268,037
    
    
    
    133,798Net cash provided by operating activities
    
    
    16,095,809
    
    
    
    11,595,851
    
    
    
    7,405,548Cash flows from investing activities:Real estate investments
    
    
    (105,599,587
    )
    
    
    (48,339,307
    )
    
    
    (117,531,731
    )Proceeds from sales of real estate
    
    
    
    
    
    
    2,102,567
    
    
    
    Issuance of mortgage note receivable
    
    
    
    
    
    
    
    
    
    
    (10,000,000
    )Principal repayments on mortgage notes receivable
    
    
    
    
    
    
    44,742
    
    
    
    81,902Net payments to lenders for reserves held in escrow
    
    
    (1,338,904
    )
    
    
    (3,346,216
    )
    
    
    (1,041,292
    )(Decrease) increase in restricted cash
    
    
    (688,905
    )
    
    
    749,274
    
    
    
    (513,761
    )Deposits on future acquisitions
    
    
    (2,110,000
    )
    
    
    (900,000
    )
    
    
    (2,686,000
    )Deposits applied against real estate investments
    
    
    2,110,000
    
    
    
    1,200,000
    
    
    
    1,986,000Refunds of deposits on real estate
    
    
    
    
    
    
    
    
    
    
    150,000Net cash used in investing activities
    
    
    (107,627,396
    )
    
    
    (48,488,940
    )
    
    
    (129,554,882
    )Cash flows from financing activities:Proceeds from share issuance
    
    
    
    
    
    
    65,089,026
    
    
    
    Redemption of shares for payment of taxes
    
    
    
    
    
    
    (457,634
    )
    
    
    Offering costs
    
    
    
    
    
    
    (2,654,279
    )
    
    
    Borrowings under mortgage notes payable
    
    
    48,521,690
    
    
    
    68,055,000
    
    
    
    61,419,179Principal repayments on mortgage notes payable
    
    
    (895,657
    )
    
    
    (604,318
    )
    
    
    (70,479
    )Principal repayments on employee notes receivable from sale of common stock
    
    
    431,399
    
    
    
    914
    
    
    
    17,718Borrowings from short-term loan and line of credit
    
    
    65,500,000
    
    
    
    71,400,400
    
    
    
    85,460,000Repayments on line of credit
    
    
    (41,100,000
    )
    
    
    (114,960,400
    )
    
    
    (41,900,000
    )Increase in reserves from tenants
    
    
    1,885,361
    
    
    
    1,574,464
    
    
    
    158,646Increase in security deposits
    
    
    376,572
    
    
    
    427,951
    
    
    
    355,115Payments for deferred financing costs
    
    
    (1,409,320
    )
    
    
    (3,242,881
    )
    
    
    (2,021,115
    )Dividends paid for common and preferred
    
    
    (16,427,736
    )
    
    
    (13,469,627
    )
    
    
    (8,283,860
    )Net cash provided by financing activities
    
    
    56,882,309
    
    
    
    71,158,616
    
    
    
    95,135,204Net (decrease) increase in cash and cash equivalents
    
    
    (34,649,278
    )
    
    
    34,265,527
    
    
    
    (27,014,130
    )Cash and cash equivalents, beginning of period
    
    
    36,005,686
    
    
    
    1,740,159
    
    
    
    28,754,289Cash and cash equivalents, end of period
    
    $
    1,356,408
    
    
    $
    36,005,686
    
    
    $
    1,740,159Cash paid during period for interest
    
    $
    10,693,440
    
    
    $
    8,045,342
    
    
    $
    2,014,236NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    180,458
    
    
    $
    1,631,294
    
    
    $
    Additions to real estate included in accounts payable, accrued expenses, and amount due
adviser
    
    $
    81,400
    
    
    $
    
    
    
    $
    NON-CASH FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    4,506,689
    
    
    $
    30,129,654
    
    
    $
    Assumption of mortgage notes payable by buyer
    
    $
    
    
    
    $
    4,846,925
    
    
    $
    Notes receivable issued in exchange for common stock associated with the exercise of
employee stock options
    
    $
    
    
    
    $
    2,769,954
    
    
    $
    75,000Acquisition of building in satisfaction of mortgage note receivable
    
    $
    
    
    
    $
    11,316,774
    
    
    $
    
  57




---



##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      58




---



##### 



Investments in real estate
       59




---



##### 



December 31, 2007
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    12,660,732
    
    
    $
    (3,414,868
    )
    
    $
    10,738,319
    
    
    $
    (1,907,668
    )Leasing costs
    
    
    9,290,026
    
    
    
    (2,114,233
    )
    
    
    5,891,099
    
    
    
    (1,267,829
    )Customer relationships
    
    
    14,599,726
    
    
    
    (2,031,827
    )
    
    
    10,962,963
    
    
    
    (1,000,188
    )$
    36,550,484
    
    
    $
    (7,560,928
    )
    
    $
    27,592,381
    
    
    $
    (4,175,685
    )
  EstimatedYear
    
    Amortization Expense2008
    
    $
    3,442,8882009
    
    
    3,314,5272010
    
    
    3,232,4332011
    
    
    3,089,1692012
    
    
    2,736,211
 Impairment
 Investments in Real Estate
  60




---



##### 



Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  Funds held in escrow
  Deferred financing costs
  Revenue recognition
  61




---



##### 



Income taxes
    62




---



##### 



Segment information
  Foreign Currency Transactions
  Asset retirement obligations
  63




---



##### 



Real estate held for sale and discontinued operations
  Recently Issued Accounting Pronouncements
 
    64




---



##### 



Use of estimates
  Reclassifications
  2. Management Advisory Fee
  Initial Advisory Agreement
   Amended Advisory Agreement
  65




---



##### 



Administration Agreement
  3. Stock Options
    66




---



##### 



For the year endedDecember 31, 2005Net income, as reported
    
    $
    3,601,945Less: Stock-based compensation expense
determined using the fair value based method
    
    
    (187,483
    )Net income, pro-forma
    
    $
    3,414,462Basic, as reported
    
    $
    0.47Basic, pro-forma
    
    $
    0.45Diluted, as reported
    
    $
    0.47Diluted, pro-forma
    
    $
    0.44
   Weighted AverageShares
    
    Exercise PriceOptions outstanding at February 14, 2003
    
    
    Granted
    
    
    629,000
    
    
    $
    15.00Exercised
    
    
    Options outstanding at December 31, 2003, of which 629,000
shares were exercisable
    
    
    629,000
    
    
    $
    15.00Granted
    
    
    280,000
    
    
    $
    16.22Exercised
    
    
    (25,000
    )
    
    $
    15.00Forfeited
    
    
    (15,000
    )
    
    $
    15.73Options outstanding at December 31, 2004, of which 599,000
shares were exercisable
    
    
    869,000
    
    
    $
    15.39Granted
    
    
    64,500
    
    
    $
    15.47Exercised
    
    
    (5,000
    )
    
    $
    15.00Forfeited
    
    
    (12,500
    )
    
    $
    15.48Options outstanding at December 31, 2005, of which 744,250
shares were exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    (916,000
    )
    
    $
    15.40Forfeited
    
    
    
    
    
    $
    Options outstanding and exercisable at December 31, 2006
    
    
    
    
    
    $
    
 67




---



##### 



OutstandingNumber of
    
    
    Strike Price
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    of Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    
    
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 12/31/07
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    368,161
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    
    
    5,000
    
    
    
    15.00
    
    
    
    75,000
    
    
    
    57,796
    
    
    9 years
    
    
    6.00
    %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
    
    
    
    39,012
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.10
    
    
    
    32,200
    
    
    
    32,200
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    16.68
    
    
    
    33,360
    
    
    
    33,360
    
    
    10 years
    
    
    7.87
    %May-06
    
    
    
    
    2,000
    
    
    
    15.00
    
    
    
    30,000
    
    
    
    30,000
    
    
    10 years
    
    
    7.87
    %Oct-06
    
    
    
    
    12,000
    
    
    
    16.10
    
    
    
    193,200
    
    
    
    193,200
    
    
    9 years
    
    
    8.17
    %Nov-06
    
    
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    325,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    
    
    25,000
    
    
    
    15.00
    
    
    
    375,000
    
    
    
    375,000
    
    
    10 years
    
    
    8.12
    %204,922
    
    
    
    
    
    
    $
    3,219,954
    
    
    $
    2,769,923
  4. Earnings per Common Share
  For the year ended December 31,2007
    
    
    2006
    
    
    2005Net income available to common stockholders
    
    $
    2,046,479
    
    
    $
    2,185,938
    
    
    $
    3,601,945Denominator for basic weighted average
shares
    
    
    8,565,264
    
    
    
    7,827,781
    
    
    
    7,670,219Dilutive effect of stock options
    
    
    
    
    
    
    158,909
    
    
    
    53,001Denominator for diluted weighted average
shares
    
    
    8,565,264
    
    
    
    7,986,690
    
    
    
    7,723,220Basic earnings per common share
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.47Diluted earnings per common share
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.47
 68




---



##### 



5. Real Estate
  (unaudited)Date Acquired
    
    Location
    
    Square Footage
    
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    
    58,926
    
    
    Office
    
    $
    4,628,337Jan-04
    
    Canton, Ohio
    
    
    54,018
    
    
    Office and Warehouse
    
    
    2,923,963Apr-04
    
    Akron, Ohio
    
    
    83,891
    
    
    Office and Laboratory
    
    
    8,106,036Jun-04
    
    Charlotte, North Carolina
    
    
    64,500
    
    
    Office
    
    
    8,451,345Jul-04
    
    Canton, North Carolina
    
    
    228,000
    
    
    Commercial and Manufacturing
    
    
    4,749,579Aug-04
    
    Snyder Township, Pennsylvania
    
    
    290,000
    
    
    Commercial and Warehouse
    
    
    6,102,338Aug-04
    
    Lexington, North Carolina
    
    
    154,000
    
    
    Commercial and Warehouse
    
    
    2,778,380Sep-04
    
    Austin, Texas
    
    
    51,933
    
    
    Flexible Office
    
    
    6,803,840Oct-04
    
    Norfolk, Virginia
    
    
    25,797
    
    
    Commercial and Manufacturing
    
    
    885,442Oct-04
    
    Mt. Pocono, Pennsylvania
    
    
    223,275
    
    
    Commercial and Manufacturing
    
    
    5,699,851Feb-05
    
    San Antonio, Texas
    
    
    60,245
    
    
    Flexible Office
    
    
    7,638,439Feb-05
    
    Columbus, Ohio
    
    
    39,000
    
    
    Industrial
    
    
    2,615,717Apr-05
    
    Big Flats, New York
    
    
    120,000
    
    
    Industrial
    
    
    6,310,146May-05
    
    Wichita, Kansas
    
    
    69,287
    
    
    Office
    
    
    10,577,368May-05
    
    Arlington, Texas
    
    
    64,000
    
    
    Warehouse and Bakery
    
    
    3,857,133Jun-05
    
    Dayton, Ohio
    
    
    59,894
    
    
    Office
    
    
    2,339,980Jul-05
    
    Eatontown, New Jersey
    
    
    30,268
    
    
    Office
    
    
    4,606,747Jul-05
    
    Franklin Township, New Jersey
    
    
    183,000
    
    
    Office and Warehouse
    
    
    7,439,940Jul-05
    
    Duncan, South Carolina
    
    
    278,020
    
    
    Office and Manufacturing
    
    
    15,415,164Aug-05
    
    Hazelwood, Missouri
    
    
    51,155
    
    
    Office and Warehouse
    
    
    2,950,754Sep-05
    
    Angola, Indiana
    
    
    52,080
    
    
    Industrial
    
    
    1,116,968Sep-05
    
    Angola, Indiana
    
    
    50,000
    
    
    Industrial
    
    
    1,116,968Sep-05
    
    Rock Falls, Illinois
    
    
    52,000
    
    
    Industrial
    
    
    1,116,969Oct-05
    
    Newburyport, Massachusetts
    
    
    70,598
    
    
    Industrial
    
    
    6,798,268Oct-05
    
    Clintonville, Wisconsin
    
    
    291,142
    
    
    Industrial
    
    
    4,502,040Dec-05
    
    Maple Heights, Ohio
    
    
    347,218
    
    
    Industrial
    
    
    11,099,726Dec-05
    
    Richmond, Virginia
    
    
    42,213
    
    
    Office
    
    
    5,809,099Dec-05
    
    Toledo, Ohio
    
    
    23,368
    
    
    Office
    
    
    2,939,026Feb-06
    
    South Hadley, Massachusetts
    
    
    150,000
    
    
    Industrial
    
    
    3,113,051Feb-06
    
    Champaign, Illinois
    
    
    108,262
    
    
    Office
    
    
    13,878,032Feb-06
    
    Roseville, Minnesota
    
    
    359,540
    
    
    Office
    
    
    26,408,409May-06
    
    Burnsville, Minnesota
    
    
    114,100
    
    
    Office
    
    
    11,768,380Jun-06
    
    Menomonee Falls, Wisconsin
    
    
    125,692
    
    
    Industrial
    
    
    7,265,105Jul-06
    
    Baytown, Texas
    
    
    12,000
    
    
    Office
    
    
    2,558,544Sep-06
    
    Sterling Heights, Michigan
    
    
    532,869
    
    
    Industrial
    
    
    11,072,192Sep-06
    
    Birmingham, Alabama
    
    
    63,514
    
    
    Industrial
    
    
    1,527,220Sep-06
    
    Montgomery, Alabama
    
    
    29,472
    
    
    Industrial
    
    
    1,527,220Sep-06
    
    Columbia, Missouri
    
    
    16,275
    
    
    Industrial
    
    
    1,527,220Jan-07
    
    Mason, Ohio
    
    
    60,000
    
    
    Office
    
    
    6,856,787Feb-07
    
    Raleigh, North Carolina
    
    
    115,500
    
    
    Industrial
    
    
    6,993,551Mar-07
    
    Tulsa, Oklahoma
    
    
    238,310
    
    
    Manufacturing
    
    
    13,706,553Mar-07
    
    Hialeah, Florida
    
    
    132,337
    
    
    Industrial
    
    
    10,094,438May-07
    
    Tewksbury, Massachusetts
    
    
    102,200
    
    
    Industrial
    
    
    10,134,413Jul-07
    
    Mason, Ohio
    
    
    21,264
    
    
    Retail
    
    
    6,101,665Sep-07
    
    Cicero, New York
    
    
    71,880
    
    
    Industrial
    
    
    5,276,588Sep-07
    
    Grand Rapids, Michigan
    
    
    63,235
    
    
    Office
    
    
    12,052,923Sep-07
    
    Bolingbrook, Illinois
    
    
    55,869
    
    
    Industrial
    
    
    6,238,674Dec-07
    
    Decatur, Georgia
    
    
    26,600
    
    
    Office
    
    
    2,880,207Dec-07
    
    Lawrenceville, Georgia
    
    
    12,412
    
    
    Office
    
    
    2,880,207Dec-07
    
    Snellville, Georgia
    
    
    3,800
    
    
    Office
    
    
    2,880,207Dec-07
    
    Covington, Georgia
    
    
    5,000
    
    
    Office
    
    
    2,880,207Dec-07
    
    Cumming, Georgia
    
    
    13,919
    
    
    Office
    
    
    2,880,208Dec-07
    
    Conyers, Georgia
    
    
    6,400
    
    
    Office
    
    
    2,880,208Total real estate, net
    
    
    5,558,278
    
    
    
    
    $
    324,761,772
 69




---



##### 



December 31, 2007
    
    
    December 31, 2006Real estate:Land
    
    $
    48,867,482
    
    
    $
    33,764,113Building
    
    
    283,829,987
    
    
    
    204,115,481Tenant improvements
    
    
    7,802,937
    
    
    
    5,833,948Accumulated depreciation
    
    
    (15,738,634
    )
    
    
    (8,595,419
    )Real estate, net
    
    $
    324,761,772
    
    
    $
    235,118,123
      70




---



##### 



71




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    PriceMason, Ohio
    
    $
    797,274
    
    
    $
    5,962,067
    
    
    $
    296,277
    
    
    $
    
    
    
    $
    144,703
    
    
    $
    683,471
    
    
    $
    7,883,792Raleigh, North Carolina
    
    
    1,605,551
    
    
    
    5,464,586
    
    
    
    48,767
    
    
    
    142,209
    
    
    
    64,110
    
    
    
    478,083
    
    
    
    7,803,306Tulsa, Oklahoma
    
    
    
    
    
    
    13,858,489
    
    
    
    198,738
    
    
    
    437,117
    
    
    
    587,605
    
    
    
    723,168
    
    
    
    15,805,117Hialeah, Florida
    
    
    3,562,455
    
    
    
    6,619,258
    
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    104,508
    
    
    
    10,287,038Tewksbury,
Massachusetts
    
    
    1,394,902
    
    
    
    8,637,010
    
    
    
    256,233
    
    
    
    421,446
    
    
    
    865
    
    
    
    535,416
    
    
    
    11,245,872Mason, Ohio
    
    
    1,201,338
    
    
    
    4,854,457
    
    
    
    106,439
    
    
    
    
    
    
    
    416,142
    
    
    
    189,699
    
    
    
    6,768,075Cicero, New York
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    
    
    
    
    151,734
    
    
    
    226,998
    
    
    
    114,505
    
    
    
    5,810,931Grand Rapids, Michigan
    
    
    1,629,270
    
    
    
    10,196,137
    
    
    
    303,929
    
    
    
    
    
    
    
    246,042
    
    
    
    
    
    
    
    12,375,378Bolingbrook, Illinois
    
    
    1,271,543
    
    
    
    4,926,314
    
    
    
    76,157
    
    
    
    287,488
    
    
    
    146,364
    
    
    
    
    
    
    
    6,707,866Decatur, Georgia
    
    
    1,300,963
    
    
    
    4,836,034
    
    
    
    250,341
    
    
    
    190,506
    
    
    
    357,834
    
    
    
    287,054
    
    
    
    7,222,732Lawrenceville, Georgia
    
    
    521,243
    
    
    
    2,817,869
    
    
    
    134,276
    
    
    
    100,375
    
    
    
    188,625
    
    
    
    172,103
    
    
    
    3,934,491Snellville, Georgia
    
    
    449,406
    
    
    
    429,012
    
    
    
    37,570
    
    
    
    21,750
    
    
    
    43,097
    
    
    
    39,955
    
    
    
    1,020,790Covington, Georgia
    
    
    199,451
    
    
    
    944,807
    
    
    
    49,863
    
    
    
    31,460
    
    
    
    60,858
    
    
    
    57,743
    
    
    
    1,344,182Cumming, Georgia
    
    
    670,284
    
    
    
    2,984,821
    
    
    
    146,609
    
    
    
    97,781
    
    
    
    202,017
    
    
    
    177,026
    
    
    
    4,278,538Conyers, Georgia
    
    
    226,526
    
    
    
    1,237,558
    
    
    
    63,790
    
    
    
    40,547
    
    
    
    78,203
    
    
    
    74,029
    
    
    
    1,720,653$
    15,129,272
    
    
    $
    78,787,047
    
    
    $
    1,968,989
    
    
    $
    1,922,413
    
    
    $
    2,764,280
    
    
    $
    3,636,760
    
    
    $
    104,208,761
   Year
    
    Lease Payments2008
    
    $
    33,349,4112009
    
    
    32,781,8972010
    
    
    32,455,8032011
    
    
    31,969,6232012
    
    
    31,208,006Thereafter
    
    
    150,643,238
  6. Discontinued Operations
  72




---



##### 



For the year ended December 31,2007
    
    
    2006
    
    
    2005Operating revenue
    
    $
    
    
    
    $
    342,629
    
    
    $
    583,830Operating expense
    
    
    (3,312
    )
    
    
    (22,732
    )
    
    
    (23,537
    )Taxes & licenses
    
    
    78,667
    
    
    
    (11,736
    )
    
    
    (6,448
    )Interest expense
    
    
    
    
    
    
    (143,716
    )
    
    
    (114,309
    )Depreciation expense
    
    
    
    
    
    
    (52,300
    )
    
    
    (129,991
    )Gain on sale of real estate
    
    
    
    
    
    
    1,106,590
    
    
    
    Realized and unrealized gain
(loss) on foreign currency
transactions
    
    
    33,359
    
    
    
    (202,938
    )
    
    
    (218,557
    )Income from discontinued
operations
    
    $
    108,714
    
    
    $
    1,015,797
    
    
    $
    90,988
 7. Mortgage Note Receivable
  8. Mortgage Notes Payable
  73




---



##### 



Date of Issuance
    
    
    
    
    
    Principal Maturity
    
    
    
    
    
    
    Principal Balance Outstandingof Note
    
    
    
    
    
    Date
    
    
    Interest Rate
    
    December 31, 2007
    
    
    December 31, 20063/16/2005
    
    
    
    
    
    
    4/1/2030
    
    
    
    6.33
    %
    
    $
    3,003,582
    
    
    $
    3,060,0938/25/2005
    
    
    
    
    
    
    9/1/2015
    
    
    
    5.33
    %
    
    
    21,664,476
    
    
    
    21,757,0009/12/2005
    
    
    
    
    
    
    9/1/2015
    
    
    
    5.21
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    
    
    
    12/8/2015
    
    
    
    5.71
    %
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    
    
    
    
    12/1/2013
    
    
    
    5.91
    %
    
    
    9,480,063
    
    
    
    9,620,0502/21/2006
    
    
    
    
    
    
    6/30/2014
    
    
    
    5.20
    %
    
    
    19,782,270
    
    
    
    20,104,7163/29/2006
    
    
    
    
    
    
    4/1/2016
    
    
    
    5.92
    %
    
    
    17,000,000
    
    
    
    17,000,0004/27/2006
    
    
    
    
    
    
    5/5/2016
    
    
    
    6.58
    %
    
    
    14,514,214
    
    
    
    14,753,57911/22/2006
    
    
    
    
    
    
    12/1/2016
    
    
    
    5.76
    %
    
    
    14,309,000
    
    
    
    14,309,00012/22/2006
    
    
    
    
    
    
    1/1/2017
    
    
    
    5.79
    %
    
    
    21,846,000
    
    
    
    21,846,0002/8/2007
    
    
    
    
    
    
    3/1/2017
    
    
    
    6.00
    %
    
    
    13,775,000
    
    
    
    6/5/2007
    
    
    
    
    
    
    6/8/2017
    
    
    
    6.11
    %
    
    
    14,240,000
    
    
    
    9/6/2007
    
    
    
    
    
    
    12/11/2015
    
    
    
    5.81
    %
    
    
    4,487,205
    
    
    
    10/15/2007
    
    
    
    
    
    
    11/8/2017
    
    
    
    6.63
    %
    
    
    15,974,661
    
    
    
    $
    202,120,471
    
    
    $
    154,494,438
   Scheduled principalYear
    
    payments2008
    
    $
    1,594,3922009
    
    
    2,254,4702010
    
    
    2,389,8062011
    
    
    2,676,9072012
    
    
    2,953,229Thereafter
    
    
    190,251,667$
    202,120,471
   74




---



##### 



9. Stockholders Equity
    75




---



##### 



Long-TermOrdinary Income
    
    Return of Capital
    
    Capital GainsCommon StockFor the year ended
December 31, 2004
    
    
    68.97050
    %
    
    
    31.02945
    %
    
    
    0.00000
    %For the year ended
December 31, 2005
    
    
    50.44580
    %
    
    
    49.55420
    %
    
    
    0.00000
    %For the year ended
December 31, 2006
    
    
    2.06500
    %
    
    
    95.60560
    %
    
    
    2.32940
    %For the year ended
December 31, 2007
    
    
    74.13960
    %
    
    
    25.86040
    %
    
    
    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
    %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
    %
 10. Segment Information
  76




---



##### 



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
    
    
    (23,031,267
    )
    
    
    
    
    
    
    (4,354,904
    )
    
    
    (27,386,171
    )Other income
    
    
    
    
    
    
    
    
    
    
    624,147
    
    
    
    624,147Discontinued operations
    
    
    108,714
    
    
    
    
    
    
    
    
    
    
    
    108,714Net income (loss)
    
    $
    8,857,097
    
    
    $
    1,013,889
    
    
    $
    (3,730,757
    )
    
    $
    6,140,229Total Assets
    
    $
    360,844,356
    
    
    $
    10,000,000
    
    
    $
    8,058,333
    
    
    $
    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
    
    
    (18,177,002
    )
    
    
    
    
    
    
    (4,994,988
    )
    
    
    (23,171,990
    )Other income
    
    
    
    
    
    
    
    
    
    
    583,475
    
    
    
    583,475Discontinued operations
    
    
    1,015,797
    
    
    
    
    
    
    
    
    
    
    
    1,015,797Net income (loss)
    
    $
    6,939,110
    
    
    $
    1,845,231
    
    
    $
    (4,411,513
    )
    
    $
    4,372,828Total Assets
    
    $
    264,511,627
    
    
    $
    10,000,000
    
    
    $
    41,254,395
    
    
    $
    315,766,022
 As of and for the year ended December 31, 2005Real Estate
    
    
    Real EstateLeasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,965,711
    
    
    $
    1,915,795
    
    
    $
    
    
    
    $
    12,881,506Operating expenses
    
    
    (6,260,781
    )
    
    
    
    
    
    
    (3,257,635
    )
    
    
    (9,518,416
    )Other income
    
    
    
    
    
    
    
    
    
    
    147,867
    
    
    
    147,867Discontinued operations
    
    
    90,988
    
    
    
    
    
    
    
    
    
    
    
    90,988Net income (loss)
    
    $
    4,795,918
    
    
    $
    1,915,795
    
    
    $
    (3,109,768
    )
    
    $
    3,601,945Total Assets
    
    $
    179,848,595
    
    
    $
    21,096,564
    
    
    $
    6,101,795
    
    
    $
    207,046,954
  11. Line of Credit and Short-Term Loan
  77




---



##### 



12. Pro Forma Financial Information (unaudited)
  For the year ended December 31,2007
    
    
    2006Operating Data:Total operating revenue
    
    $
    37,261,725
    
    
    $
    30,413,732Total operating expenses
    
    
    (17,176,935
    )
    
    
    (15,422,401
    )Other expense
    
    
    (13,898,935
    )
    
    
    (11,530,105
    )Income from continuing operations
    
    
    6,185,855
    
    
    
    3,461,226Dividends attributable to preferred stock
    
    
    (4,093,750
    )
    
    
    (2,186,890
    )Net income available to common stockholders
    
    $
    2,092,105
    
    
    $
    1,274,336Share and Per Share Data:Basic net income
    
    $
    0.24
    
    
    $
    0.16Diluted net income
    
    $
    0.24
    
    
    $
    0.16Weighted average shares outstanding-basic
    
    
    8,565,264
    
    
    
    7,827,781Weighted average shares outstanding-diluted
    
    
    8,565,264
    
    
    
    7,986,690
  78




---



##### 



13. Quarterly Financial Information (unaudited)
  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 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
    
    
    
    1,463,113Dividends 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
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.05Net income available to common stockholders - diluted
    
    
    0.06
    
    
    
    0.06
    
    
    
    0.07
    
    
    
    0.05Weighted average shares outstanding - basic
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264Weighted average shares outstanding - diluted
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
    
    
    
    8,565,264
 Year ended December 31, 2006Quarter ended
    
    
    Quarter ended
    
    
    Quarter ended
    
    
    Quarter endedMarch 31, 2006
    
    
    June 30, 2006
    
    
    September 30, 2006
    
    
    December 31, 2006Operating revenues
    
    $
    5,425,611
    
    
    $
    6,630,062
    
    
    $
    6,735,976
    
    
    $
    7,153,897Operating expenses
    
    
    3,022,998
    
    
    
    3,523,818
    
    
    
    3,620,149
    
    
    
    3,900,131Other income (expense)
    
    
    (1,605,650
    )
    
    
    (2,112,922
    )
    
    
    (2,450,869
    )
    
    
    (2,351,978
    )Income from continuing operations
    
    
    796,963
    
    
    
    993,322
    
    
    
    664,958
    
    
    
    901,788Discontinued operations
    
    
    49,837
    
    
    
    (140,557
    )
    
    
    1,112,461
    
    
    
    (5,944
    )Net income
    
    
    846,800
    
    
    
    852,765
    
    
    
    1,777,419
    
    
    
    895,844Dividends attributable to preferred stock
    
    
    (344,444
    )
    
    
    (484,375
    )
    
    
    (484,375
    )
    
    
    (873,696
    )Net income available to common stockholders
    
    
    502,356
    
    
    
    368,390
    
    
    
    1,293,044
    
    
    
    22,148Net income available to common stockholders - basic
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    0.00Net income available to common stockholders - diluted
    
    
    0.06
    
    
    
    0.05
    
    
    
    0.16
    
    
    
    0.00Weighted average shares outstanding - basic
    
    
    7,672,000
    
    
    
    7,762,503
    
    
    
    7,820,376
    
    
    
    8,052,148Weighted average shares outstanding - diluted
    
    
    7,821,658
    
    
    
    7,911,871
    
    
    
    7,981,071
    
    
    
    8,196,605
 14. Subsequent Events
  
  79




---



##### 



LADSTONE COMMERCIAL CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2007
 Initial Cost
    
    Costs Capitalized
    
    Total CostBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total (2)
    
    Depreciation (1)
    
    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
    
    
    $
    812,435
    
    
    $
    4,628,337
    
    
    
    12/23/2003Canton, Ohio,
Office & Warehouse Building
    
    
    2,950,000
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    3,268,746
    
    
    
    344,783
    
    
    
    2,923,963
    
    
    
    1/30/2004Akron, Ohio,
Office & Laboratory Building
    
    
    7,560,000
    
    
    
    1,974,000
    
    
    
    6,769,565
    
    
    
    19,782
    
    
    
    1,974,000
    
    
    
    6,789,347
    
    
    
    8,763,347
    
    
    
    657,311
    
    
    
    8,106,036
    
    
    
    4/29/2004Charlotte, North Carolina,
Office Building
    
    
    7,094,700
    
    
    
    741,296
    
    
    
    8,423,389
    
    
    
    59,190
    
    
    
    741,296
    
    
    
    8,482,579
    
    
    
    9,223,875
    
    
    
    772,530
    
    
    
    8,451,345
    
    
    
    6/30/2004Canton, North Carolina,
Commercial & Manufacturing Building
    
    
    3,003,582
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    5,200,000
    
    
    
    450,421
    
    
    
    4,749,579
    
    
    
    7/6/2004Snyder Township, Pennsylvania,
Commercial & Warehouse Building
    
    
    5,760,000
    
    
    
    100,000
    
    
    
    6,573,902
    
    
    
    6,907
    
    
    
    100,000
    
    
    
    6,580,809
    
    
    
    6,680,809
    
    
    
    578,471
    
    
    
    6,102,338
    
    
    
    8/5/2004Lexington, North Carolina,
Commercial & Warehouse Building
    
    
    2,881,000
    
    
    
    850,000
    
    
    
    2,106,845
    
    
    
    6,637
    
    
    
    850,000
    
    
    
    2,113,482
    
    
    
    2,963,482
    
    
    
    185,102
    
    
    
    2,778,380
    
    
    
    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
    
    
    
    538,049
    
    
    
    6,803,840
    
    
    
    9/16/2004Norfolk, Virginia,
Commercial & Manufacturing Building
    
    
    
    
    
    
    190,000
    
    
    
    739,521
    
    
    
    18,190
    
    
    
    190,000
    
    
    
    757,711
    
    
    
    947,711
    
    
    
    62,269
    
    
    
    885,442
    
    
    
    10/15/2004Mt. Pocono, Pennsylvania,
Commercial & Manufacturing Building
    
    
    5,346,519
    
    
    
    350,000
    
    
    
    5,818,703
    
    
    
    18,430
    
    
    
    350,000
    
    
    
    5,837,133
    
    
    
    6,187,133
    
    
    
    487,282
    
    
    
    5,699,851
    
    
    
    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
    
    
    
    740,984
    
    
    
    7,638,439
    
    
    
    2/10/2005Columbus, Ohio,
Industrial Building
    
    
    2,800,000
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    2,795,108
    
    
    
    179,391
    
    
    
    2,615,717
    
    
    
    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
    
    
    
    457,838
    
    
    
    6,310,146
    
    
    
    4/15/2005Wichita, Kansas,
Office Building
    
    
    8,798,419
    
    
    
    1,525,000
    
    
    
    9,702,731
    
    
    
    51,453
    
    
    
    1,525,000
    
    
    
    9,754,184
    
    
    
    11,279,184
    
    
    
    701,816
    
    
    
    10,577,368
    
    
    
    5/18/2005Arlington, Texas,
Warehouse & Bakery Building
    
    
    4,168,000
    
    
    
    635,964
    
    
    
    3,431,307
    
    
    
    37,604
    
    
    
    635,964
    
    
    
    3,468,911
    
    
    
    4,104,875
    
    
    
    247,742
    
    
    
    3,857,133
    
    
    
    5/26/2005Dayton, Ohio,
Office Building
    
    
    2,078,000
    
    
    
    525,000
    
    
    
    1,876,992
    
    
    
    119,736
    
    
    
    525,000
    
    
    
    1,996,728
    
    
    
    2,521,728
    
    
    
    181,748
    
    
    
    2,339,980
    
    
    
    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
    
    
    
    270,626
    
    
    
    4,606,747
    
    
    
    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
    
    
    
    391,443
    
    
    
    7,439,940
    
    
    
    7/11/2005Duncan, South Carolina,
Office & Manufacturing Building
    
    
    14,569,776
    
    
    
    977,898
    
    
    
    13,472,678
    
    
    
    1,902,582
    
    
    
    977,898
    
    
    
    15,375,260
    
    
    
    16,353,158
    
    
    
    937,994
    
    
    
    15,415,164
    
    
    
    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
    
    
    
    151,444
    
    
    
    2,950,754
    
    
    
    8/5/2005
 80




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 DECEMBER 31, 2007
 Initial Cost
    
    Costs Capitalized
    

    Total CostBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total (2)
    
    Depreciation (1)
    
    Net Real Estate
    
    Date AcquiredAngola, Indiana,
Industrial Building
    
    
    727,922
    
    
    
    65,780
    
    
    
    1,074,758
    
    
    
    
    
    
    
    65,780
    
    
    
    1,074,758
    
    
    
    1,140,538
    
    
    
    66,496
    
    
    
    1,116,968
    
    
    
    9/2/2005Angola, Indiana,
Industrial Building
    
    
    727,922
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    1,261,433
    
    
    
    66,496
    
    
    
    1,116,968
    
    
    
    9/2/2005Rock Falls, Illinois,
Industrial Building
    
    
    727,922
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    1,148,422
    
    
    
    66,495
    
    
    
    1,116,969
    
    
    
    9/2/2005Newburyport, Massachusetts,
Industrial Building
    
    
    6,846,000
    
    
    
    628,690
    
    
    
    6,504,056
    
    
    
    42,895
    
    
    
    628,690
    
    
    
    6,546,951
    
    
    
    7,175,641
    
    
    
    377,373
    
    
    
    6,798,268
    
    
    
    10/17/2005Clintonville, Wisconsin,
Industrial Manufacturing Building
    
    
    3,532,029
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    4,771,764
    
    
    
    269,724
    
    
    
    4,502,040
    
    
    
    10/31/2005Maple Heights, Ohio,
Industrial Building
    
    
    10,896,000
    
    
    
    1,608,976
    
    
    
    10,065,475
    
    
    
    37,869
    
    
    
    1,608,976
    
    
    
    10,103,344
    
    
    
    11,712,320
    
    
    
    612,594
    
    
    
    11,099,726
    
    
    
    12/21/2005Richmond, Virginia
Industrial Building
    
    
    5,275,000
    
    
    
    735,820
    
    
    
    5,335,863
    
    
    
    36,437
    
    
    
    735,820
    
    
    
    5,372,300
    
    
    
    6,108,120
    
    
    
    299,021
    
    
    
    5,809,099
    
    
    
    12/30/2005Toledo, Oho
Industrial Building
    
    
    3,000,000
    
    
    
    263,068
    
    
    
    2,811,801
    
    
    
    39,916
    
    
    
    263,068
    
    
    
    2,851,717
    
    
    
    3,114,785
    
    
    
    175,759
    
    
    
    2,939,026
    
    
    
    12/30/2005South Hadley, Massachusetts Industrial
Building
    
    
    
    
    
    
    470,636
    
    
    
    2,765,376
    
    
    
    10,000
    
    
    
    470,636
    
    
    
    2,775,376
    
    
    
    3,246,012
    
    
    
    132,961
    
    
    
    3,113,051
    
    
    
    2/15/2006Champaign, Illinois Office
Building
    
    
    9,480,063
    
    
    
    3,645,770
    
    
    
    10,803,824
    
    
    
    10,546
    
    
    
    3,645,770
    
    
    
    10,814,370
    
    
    
    14,460,140
    
    
    
    582,108
    
    
    
    13,878,032
    
    
    
    2/21/2006Roseville, Minnesota
Office Building
    
    
    19,782,270
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    27,877,884
    
    
    
    1,469,477
    
    
    
    26,408,409
    
    
    
    2/21/2006Burnsville, Minnesota
Office Building
    
    
    12,000,000
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    12,257,118
    
    
    
    488,738
    
    
    
    11,768,380
    
    
    
    5/10/2006Menomonee Falls, Wisconsin Industrial
Building
    
    
    6,940,000
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    7,535,316
    
    
    
    270,211
    
    
    
    7,265,105
    
    
    
    6/30/2006Baytown, Texas
Office Building
    
    
    2,000,000
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    2,664,783
    
    
    
    106,239
    
    
    
    2,558,544
    
    
    
    7/11/2006Sterling Heights, Michigan Industrial
Building
    
    
    
    
    
    
    2,734,887
    
    
    
    8,606,190
    
    
    
    12,676
    
    
    
    2,734,887
    
    
    
    8,618,866
    
    
    
    11,353,753
    
    
    
    281,561
    
    
    
    11,072,192
    
    
    
    9/22/2006Birmingham, Alabama
Industrial Building
    
    
    
    
    
    
    326,516
    
    
    
    1,241,666
    
    
    
    
    
    
    
    326,516
    
    
    
    1,241,666
    
    
    
    1,568,182
    
    
    
    40,963
    
    
    
    1,527,220
    
    
    
    9/29/2006Montgomery, Alabama
Industrial Building
    
    
    
    
    
    
    326,517
    
    
    
    1,241,667
    
    
    
    
    
    
    
    326,517
    
    
    
    1,241,667
    
    
    
    1,568,184
    
    
    
    40,963
    
    
    
    1,527,220
    
    
    
    9/29/2006Columbia, Missouri Industrial
Building
    
    
    
    
    
    
    326,517
    
    
    
    1,241,667
    
    
    
    
    
    
    
    326,517
    
    
    
    1,241,667
    
    
    
    1,568,184
    
    
    
    40,963
    
    
    
    1,527,220
    
    
    
    9/29/2006
 81




---



##### 



LADSTONE COMMERCIAL CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2007
 Initial Cost
    
    
    Costs Capitalized
    
    
    Total CostBuildings &
    
    
    Subsequent to
    
    
    
    
    
    
    Buildings &
    
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    
    Land
    
    
    Improvements
    
    
    Acquisition
    
    
    Land
    
    
    Improvements
    
    
    Total(2)
    
    
    Depreciation(1)
    
    
    Net Real Estate
    
    
    Date AcquiredMason, Ohio
Office Building
    
    
    
    
    
    
    797,274
    
    
    
    6,258,344
    
    
    
    
    
    
    
    797,274
    
    
    
    6,258,344
    
    
    
    7,055,618
    
    
    
    198,831
    
    
    
    6,856,787
    
    
    
    1/5/2007Raleigh, North Carolina
Industrial Building
    
    
    5,647,043
    
    
    
    1,605,551
    
    
    
    5,513,353
    
    
    
    
    
    
    
    1,605,551
    
    
    
    5,513,353
    
    
    
    7,118,904
    
    
    
    125,353
    
    
    
    6,993,551
    
    
    
    2/16/2007Tulsa, Oklahoma
Manufacturing Building
    
    
    
    
    
    
    
    
    
    
    14,057,227
    
    
    
    
    
    
    
    
    
    
    
    14,057,227
    
    
    
    14,057,227
    
    
    
    350,674
    
    
    
    13,706,553
    
    
    
    3/1/2007Hialeah, Florida
Industrial Building
    
    
    
    
    
    
    3,562,452
    
    
    
    6,671,600
    
    
    
    
    
    
    
    3,562,452
    
    
    
    6,671,600
    
    
    
    10,234,052
    
    
    
    139,614
    
    
    
    10,094,438
    
    
    
    3/9/2007Tewksbury, Massachusetts
Industrial Building
    
    
    
    
    
    
    1,394,902
    
    
    
    8,893,243
    
    
    
    
    
    
    
    1,394,902
    
    
    
    8,893,243
    
    
    
    10,288,145
    
    
    
    153,732
    
    
    
    10,134,413
    
    
    
    5/17/2007Mason, Ohio
Retail Building
    
    
    4,981,099
    
    
    
    1,201,338
    
    
    
    4,960,896
    
    
    
    
    
    
    
    1,201,338
    
    
    
    4,960,896
    
    
    
    6,162,234
    
    
    
    60,569
    
    
    
    6,101,665
    
    
    
    7/1/2007Cicero, New York
Industrial Building
    
    
    4,487,205
    
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    
    
    
    
    299,066
    
    
    
    5,018,628
    
    
    
    5,317,694
    
    
    
    41,106
    
    
    
    5,276,588
    
    
    
    9/6/2007Grand Rapids, Michigan
Office Building
    
    
    
    
    
    
    1,629,270
    
    
    
    10,500,066
    
    
    
    
    
    
    
    1,629,270
    
    
    
    10,500,066
    
    
    
    12,129,336
    
    
    
    76,413
    
    
    
    12,052,923
    
    
    
    9/28/2007Bollingbrook, Illinois
Industrial Building
    
    
    
    
    
    
    1,271,543
    
    
    
    5,002,471
    
    
    
    
    
    
    
    1,271,543
    
    
    
    5,002,471
    
    
    
    6,274,014
    
    
    
    35,340
    
    
    
    6,238,674
    
    
    
    9/28/2007Decatur, Georgia
Office Building
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    2,883,404
    
    
    
    3,196
    
    
    
    2,880,207
    
    
    
    12/13/2007Lawrenceville, Georgia
Office Building
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    2,883,404
    
    
    
    3,197
    
    
    
    2,880,207
    
    
    
    12/13/2007Snellville, Georgia
Office Building
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    2,883,404
    
    
    
    3,197
    
    
    
    2,880,207
    
    
    
    12/13/2007Covington, Georgia
Office Building
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    2,883,404
    
    
    
    3,197
    
    
    
    2,880,207
    
    
    
    12/13/2007Cumming, Georgia
Office Building
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,312
    
    
    
    2,322,092
    
    
    
    2,883,404
    
    
    
    3,197
    
    
    
    2,880,208
    
    
    
    12/13/2007Conyers, Georgia
Office Building
    
    
    
    
    
    
    561,313
    
    
    
    2,322,092
    
    
    
    
    
    
    
    561,313
    
    
    
    2,322,092
    
    
    
    2,883,405
    
    
    
    3,197
    
    
    
    2,880,208
    
    
    
    12/13/2007$
    202,120,471
    
    
    $
    48,867,482
    
    
    $
    289,062,997
    
    
    $
    2,569,927
    
    
    $
    48,867,482
    
    
    $
    291,632,924
    
    
    $
    340,500,406
    
    
    $
    15,738,634
    
    
    $
    324,761,772
 
 (1)
    
    Depreciable life of all buildings is 39 years. Depreciable life of all
improvements is the life of the respective leases on each building, which range from 5-20
years.(2)
    
    The aggregate cost for federal income tax purposes is the same as the
total gross cost. 82




---



##### 



2007
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    243,713,542
    
    
    $
    165,043,640
    
    
    $
    61,251,455Acquisitions during period
    
    
    95,396,039
    
    
    
    83,466,860
    
    
    
    103,792,185Improvements or other additions
    
    
    1,390,825
    
    
    
    183,000Dispositions during period
    
    
    
    
    
    
    (4,979,958
    )
    
    
    Balance at end of period
    
    $
    340,500,406
    
    
    $
    243,713,542
    
    
    $
    165,043,640
  2007
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    8,595,419
    
    
    $
    3,408,879
    
    
    $
    785,125Additions during period
    
    
    7,143,215
    
    
    
    5,351,414
    
    
    
    2,623,754Dispositions during period
    
    
    
    
    
    
    (164,874
    )
    
    
    Balance at end of period
    
    $
    15,738,634
    
    
    $
    8,595,419
    
    
    $
    3,408,879
 83




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2007
 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%. Balloon payment at maturity is $8,488,578.


    
    
    
    
    
    $
    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 total gross cost.  2007
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    10,000,000
    
    
    $
    21,025,815
    
    
    $
    11,107,717New mortgage loans
    
    
    
    
    
    
    
    
    
    
    10,000,000Collections of principal
    
    
    
    
    
    
    (44,742
    )
    
    
    (81,902
    )Satisfaction of mortgage loan receivable
    
    
    
    
    
    
    (10,981,073
    )
    
    
    Balance at end of period
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    
    $
    21,025,815
 84




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  Item 9A. Controls and Procedures
    Internal
Control  Integrated Framework Internal Control  Integrated
Framework
      Item 9B. Other Information
  85




---



##### 



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
  86




---



##### 



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 a. DOCUMENTS FILED AS PART OF THIS REPORT
 1. The following financial statements are filed herewith:
 Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2007 and December 31, 2006Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and
2005Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005Notes to Financial Statements
 2. Financial statement schedules
 Schedule III  Real Estate and Accumulated Depreciation is filed herewith.Schedule IV  Mortgage Loans on Real Estate is filed herewith.All other schedules are omitted because they are not applicable, or because the required
information is included in the financial statements or notes thereto.
 3. Exhibits
  87




---



##### 



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, 2003.3.3
    
    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.
 88




---



##### 



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.
 89




---



##### 



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 Corporations, 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.
 90




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##### 



Exhibit
    
    Description of Document10.28
    
    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, 2006.10.29
    
    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, 2007.10.36
    
    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, 2007.10.37
    
    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.
 91




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##### 



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.
 
 
    
    Incorporated by reference.*
    
    Denotes management contract, compensation plan, contract or other arrangement. 92




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##### 



Gladstone Commercial CorporationDate: February 27, 2008
    By:
    /s/ Harry BrillHarry Brill
Chief Financial Officer  Date: February 27, 2008
    By:
    /s/ David GladstoneDavid Gladstone
Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer)Date: February 27, 2008
    By:
    /s/ Terry Lee BrubakerTerry Lee Brubaker
Vice Chairman, Chief Operating Officer and DirectorDate: February 27, 2008
    By:
    /s/ George Stelljes IIIGeorge Stelljes III
President, Chief Investment Officer and DirectorDate: February 27, 2008
    By:
    /s/ Harry BrillHarry Brill
Chief Financial Officer
(principal financial and accounting officer)Date: February 27, 2008
    By:
    /s/ David A.R. DullumDavid A.R. Dullum
DirectorDate: February 27, 2008
    By:
    /s/ Anthony W. ParkerAnthony W. Parker
DirectorDate: February 27, 2008
    By:
    /s/ Michela A. EnglishMichela A. English
Director 93




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##### 



Date: February 27, 2008
    By:
    /s/ Paul AdelgrenPaul Adelgren
DirectorDate: February 27, 2008
    By:
    /s/ Maurice CoulonMaurice Coulon
DirectorDate: February 27, 2008
    By:
    /s/ John OutlandJohn Outland
DirectorDate: February 27, 2008
    By:
    /s/ Gerard MeadGerard Mead
Director 94