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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, 2006
 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
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PAGEPART IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    22Item 1B. Unresolved Staff Comments
    
    
    32Item 2. Properties
    
    
    33Item 3. Legal Proceedings
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    36Item 6. Selected Financial Data
    
    
    37Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    39Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    60Item 8. Financial Statements and Supplementary Data
    
    
    61Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    96Item 9A. Controls and Procedures
    
    
    96Item 9B. Other Information
    
    
    96PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    97Item 11. Executive Compensation
    
    
    97Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    97Item 13. Certain Relationships and Related Transactions
    
    
    97Item 14. Principal Accountant Fees and Services
    
    
    97PART IV
Item 15. Exhibits and Financial Statement Schedules
    
    
    98SIGNATURES
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Forward-Looking Statements
 Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements
under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements made with respect to possible or assumed
future results of our business, financial condition, liquidity, results of operations, plans and
objectives. Such forward-looking statements can generally be identified by the use of the words
may, will, intend, believe, expect, anticipate, estimate or similar expressions. You
should not place undue reliance on these forward-looking statements. Statements regarding the
following subjects are forward-looking by their nature:
 
    
    our business strategy;
    
    pending transactions;
    
    our projected operating results;
    
    our ability to obtain future financing arrangements;
    
    estimates relating to our future distributions;
    
    our understanding of our competition;
    
    market trends;
    
    estimates of our future operating expenses, including payments to our Adviser, Gladstone
Management Corporation, under the terms of our advisory
agreement;
    
    projected capital expenditures; and
    
    use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity
securities and other future capital resources, if any.
 These statements involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or achievements to be materially
different from any future results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements.
 The forward-looking statements are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to us. Although we believe
that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common and preferred stock, along with the following factors and the risk factors set forth in Item
1A. below that could cause actual results to vary from our forward-looking statements:
 
    
    the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer;
    
    general volatility of the capital markets and the market price of our securities;
    
    risks associated with negotiation and consummation of pending and future transactions;
    
    changes in our business strategy;
    
    availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital;
    
    availability of qualified personnel;
    
    changes in our industry, interest rates, exchange rates or the general economy; and
    
    the degree and nature of our competition.
 We are under no duty to update any of the forward-looking statements after the date of this report
to conform such statements to actual results.
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Item 1. Business
 Overview
    Significant Recent Developments
 Investments
   4




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5




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Mortgage Loans
        6




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Preferred Stock Financings
   Properties Sold
  Acquisition of Building in Satisfaction of Mortgage Loan
  7




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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
  8




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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
   Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
  9




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
    
    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 will seek tenants that are small or
medium-sized businesses that may be owned by private equity buyout
funds. 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 or 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.
 11




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Additional Investment Considerations
 Terms of Mortgage Loans
     Other Investments
  12




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Temporary Investments
    Qualified REIT Subsidiaries
  
    
    that are substantially similar in all relevant ways to our organizational documents; and
    
    that comply with all applicable state securities laws and regulations.
 13




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Joint Ventures
  Use of Leverage
 Non-recourse financing
   Recourse financing
  Securitization
  14




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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 affiliates have invested
except that we may lease property to existing and prospective portfolio companies of current or future affiliates, such as Gladstone Capital
Corporation, or Gladstone Investment Corporation and entities advised by our Adviser so long as that entity does not control the portfolio
company (this policy may not be changed without the approval of our stockholders);
 15




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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
 16




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
    
    engage in any other transaction with any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees has an interest of more than 5% (except that our Adviser may
lease office space in a building that we own, provided that the rental
rate under the lease is determined by our independent directors to be
at a fair market rate).
  Future Revisions in Policies and Strategies
  Our Adviser and Administrator
    17




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Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions
  Investment Advisory and Administration Agreements
  Investment Advisory Agreements
    18




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Management services and fees under the Initial Advisory Agreement
    Management services and fees under the Amended Advisory Agreement
   19




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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 and then in effect.
  


    loans not secured or otherwise supported by real property;

    any acquisition or mortgage loan which at the time of investment would have a cost
exceeding 20% of our total assets;
    transactions that involve conflicts of interest with our Adviser (other than
reimbursement of expenses in accordance with the advisory agreement); and
    the lease of assets to our Adviser, its affiliates or any of our officers or directors.
  20




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Employees
    Number ofIndividuals
    
    Functional Area6
    
    Executive Management31
    
    Investment Management, Portfolio Management and Due Diligence8
    
    Administration, Accounting, Compliance, Human Resources and Treasury
 Competition
  21




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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, which could adversely affect our operating results and
financial condition.
  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.
  22




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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.
    
    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.
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
    
    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.
  24




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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.
    25




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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;
    
    we may experience competition with our affiliates for financing transactions; and
 26




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
    
    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.
  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.
    27




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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;
    
    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.
 28




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We have not sought a ruling from the Internal Revenue Service that we qualify as a REIT, nor do we
intend to do so in the future.
   Failure to make required distributions or to satisfy certain income requirements would subject us
to tax.
  
    
    85% of our ordinary income for that year;
    
    95% of our capital gain net income for that year; and
    
    100% of our undistributed taxable income from prior years.
   Because we must distribute a substantial portion of our net income to qualify as a REIT, we will be
largely dependent on third-party sources of capital to fund our future capital needs.
  29




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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:
 o
    
    any person who beneficially owns 10% or more of the voting power of
our common stock, referred to as an interested stockholder;o
    
    an affiliate of ours who, at any time within the two-year period
prior to the date in question, was an interested stockholder; oro
    
    an affiliate of an interested stockholder.
  Market conditions could adversely affect the market price and trading volume of our securities.
  
    
    price and volume fluctuations in the stock market from time to time, which are often
unrelated to the operating performance of particular companies;
    
    significant volatility in the market price and trading volume of shares of REITs, real
estate companies or other companies in our sector, which is not necessarily related to
the performance of those companies;
 30




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
    
    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.
  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.
 31




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Our potential participation in joint ventures creates additional risk.
  Available Information
  Item 1B. Unresolved Staff Comments
  32




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##### 



Item 2. Properties
  Total Annualized
    
    
    Total AnnualizedRentable
    
    
    
    
    
    
    Total Rental Revenue
    
    
    Rental Revenue for the
    
    
    Rental Revenue
    
    
    YearYear Built/
    
    
    
    
    
    
    Square
    
    
    
    
    
    
    for the Year Ended
    
    
    Year Ended
    
    
    per Occupied
    
    
    of LeaseProperty
    
    Improvements
    
    
    Date of Purchase
    
    
    Feet
    
    
    Occupancy
    
    
    December 31,2006
    
    
    December 31, 2006(1)
    
    
    Square Foot(2)
    
    
    Expiration208 South Rogers
Lane(Raleigh NC)
    
    
    1997
    
    
    
    12/23/2003
    
    
    
    58,926
    
    
    
    100
    %
    
    $
    558,505
    
    
    
    558,505
    
    
    $
    9.48
    
    
    
    20103874 Highland Park
NW (Canton, OH)
    
    
    1994
    
    
    
    1/30/2004
    
    
    
    54,018
    
    
    
    100
    %
    
    $
    399,449
    
    
    
    399,449
    
    
    $
    7.39
    
    
    
    2014260 Springside
Drive (Akron, OH)
    
    
    1968/1999
    
    
    
    4/29/2004
    
    
    
    83,891
    
    
    
    100
    %
    
    $
    1,077,943
    
    
    
    1,077,943
    
    
    $
    12.85
    
    
    
    2009/20155815 Westpark Drive
(Charlotte, NC)
    
    
    1984/1995
    
    
    
    6/30/2004
    
    
    
    64,500
    
    
    
    100
    %
    
    $
    936,901
    
    
    
    936,901
    
    
    $
    14.53
    
    
    
    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
    %
    
    $
    624,335
    
    
    
    624,335
    
    
    $
    9.76
    
    
    
    20134032 Linden Avenue
(Dayton, OH)
    
    
    1956
    
    
    
    6/30/2005
    
    
    
    59,894
    
    
    
    100
    %
    
    $
    264,865
    
    
    
    264,865
    
    
    $
    4.42
    
    
    
    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
    %
    
    $
    1,038,514
    
    
    
    1,038,514
    
    
    $
    5.67
    
    
    
    2020150 & 170 Ridgeview
Center Drive
(Duncan, SC)
    
    
    1984/2001
    
    
    
    7/14/2005
    
    
    
    278,020
    
    
    
    100
    %
    
    $
    2,050,111
    
    
    
    2,050,111
    
    
    $
    7.37
    
    
    
    20115656 Campus Parkway
(St Louis, MO)
    
    
    1977
    
    
    
    8/5/2005
    
    
    
    51,155
    
    
    
    100
    %
    
    $
    289,928
    
    
    
    289,928
    
    
    $
    5.67
    
    
    
    2012914 Wohlert Street
(Angola, IN)
    
    
    1982
    
    
    
    9/2/2005
    
    
    
    52,080
    
    
    
    100
    %
    
    $
    130,563
    
    
    
    130,563
    
    
    $
    2.51
    
    
    
    2020
 33




---



##### 



Item. 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 31,2006
    
    
    December 31, 2006(1)
    
    
    Square Foot(2)
    
    
    Expiration800 Growth Parkway
(Angola, IN)
    
    
    1998
    
    
    
    9/2/2005
    
    
    
    50,000
    
    
    
    100
    %
    
    $
    130,563
    
    
    
    130,563
    
    
    $
    2.61
    
    
    
    2020802 East 11th
Street (Rock Falls,
IL)
    
    
    1988
    
    
    
    9/2/2005
    
    
    
    52,000
    
    
    
    100
    %
    
    $
    130,563
    
    
    
    130,563
    
    
    $
    2.51
    
    
    
    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,
Massachusetts)
    
    
    1978
    
    
    
    2/15/2006
    
    
    
    150,000
    
    
    
    100
    %
    
    $
    310,144
    
    
    
    354,450
    
    
    $
    2.36
    
    
    
    20102101, 2109, 2201,
2215, 2301 Fox Drive (Champaign,
Illinois)
    
    
    1996
    
    
    
    2/21/2006
    
    
    
    108,262
    
    
    
    100
    %
    
    $
    1,304,350
    
    
    
    1,490,686
    
    
    $
    13.77
    
    
    
    20132470 Highcrest Road
(Roseville,
Minnesota)
    
    
    1964
    
    
    
    2/21/2006
    
    
    
    359,540
    
    
    
    100
    %
    
    $
    2,595,270
    
    
    
    2,966,023
    
    
    $
    8.25
    
    
    
    201212000 Portland
Avenue South
(Burnsville,
Minnesota)
    
    
    1984
    
    
    
    5/10/2006
    
    
    
    114,100
    
    
    
    100
    %
    
    $
    793,268
    
    
    
    1,269,229
    
    
    $
    11.12
    
    
    
    201514701 Anthony
Avenue
(Menomonee Falls, Wisconsin)
    
    
    1986/2000
    
    
    
    6/30/2006
    
    
    
    125,692
    
    
    
    100
    %
    
    $
    389,559
    
    
    
    779,118
    
    
    $
    6.20
    
    
    
    20161025 Birdsong Drive
(Baytown, Texas)
    
    
    1997
    
    
    
    7/11/2006
    
    
    
    12,000
    
    
    
    100
    %
    
    $
    118,180
    
    
    
    257,847
    
    
    $
    21.49
    
    
    
    201342400 Merrill Road
(Sterling Heights,
Michigan)
    
    
    1979/1989
    
    
    
    9/22/2006
    
    
    
    532,869
    
    
    
    100
    %
    
    $
    501,356
    
    
    
    1,845,482
    
    
    $
    3.46
    
    
    
    20162150, 2200 Pinson
Valley Parkway
(Birmingham,
Alabama)
    
    
    1961/1980
    
    
    
    9/29/2006
    
    
    
    63,514
    
    
    
    100
    %
    
    $
    39,736
    
    
    
    158,944
    
    
    $
    2.50
    
    
    
    20162325 West Fairview
Avenue (Montgomery,
Alabama)
    
    
    1962/1989
    
    
    
    9/29/2006
    
    
    
    29,472
    
    
    
    100
    %
    
    $
    39,736
    
    
    
    158,944
    
    
    $
    5.39
    
    
    
    20165221 N Highway 763
(Columbia,
Missouri)
    
    
    1978
    
    
    
    9/29/2006
    
    
    
    16,275
    
    
    
    100
    %
    
    $
    39,736
    
    
    
    158,944
    
    
    $
    9.77
    
    
    
    2016Totals
    
    
    
    
    
    
    
    
    
    
    4,629,552
    
    
    
    
    
    
    $
    23,964,035
    
    
    $
    27,272,367
 
 (1)
    
    The amounts represented in total annualized rental revenue for year ended December 31, 2006 have been calculated by taking the 2006
base rent and annualizing the partial-year results for properties acquired during 2006. Total annualized rental revenue is a non-GAAP financial measure,
that management believes is useful to the readers of this table so they are able to calculate the total annualized rental revenue per square foot.(2)
    
    The amounts represented in this column were calculated by taking the total annualized revenue and dividing by the total rentable square feet.(3)
    
    Two tenants occupy this building, each with separate leases ending in different years. 34




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##### 



Item 3. Legal Proceedings
  Item 4. Submission of Matters to a Vote of Security Holders
  35




---



##### 



PART II
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
   DistributionsQuarter Ended
    
    High
    
    Low
    
    Declared Per Share3/31/2005
    
    $
    17.18
    
    
    $
    16.30
    
    
    $
    0.186/30/2005
    
    $
    16.55
    
    
    $
    15.16
    
    
    $
    0.249/30/2005
    
    $
    17.17
    
    
    $
    15.72
    
    
    $
    0.2412/31/2005
    
    $
    16.94
    
    
    $
    15.98
    
    
    $
    0.303/31/2006
    
    $
    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
    
    
    $
    0.36
  
    
    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.
   36




---



##### 



Item 6. Selected Financial Data
  Period February 14,2003 (inception)Year ended
    
    
    Year ended
    
    
    Year ended
    
    
    through DecemberDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    31, 2003Operating Data:Total operating revenue
    
    $
    25,945,546
    
    
    $
    12,881,506
    
    
    $
    4,191,329
    
    
    $
    12,180Total operating expenses
    
    
    (14,067,096
    )
    
    
    (7,185,040
    )
    
    
    (3,276,735
    )
    
    
    (557,148
    )Other income (expense)
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )
    
    
    614,659
    
    
    
    304,097Income (loss) from continuing operations
    
    
    3,357,031
    
    
    
    3,510,957
    
    
    
    1,529,253
    
    
    
    (240,871
    )Discontinued operations
    
    
    1,015,797
    
    
    
    90,988
    
    
    
    94,675
    
    
    
    Net income (loss)
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Dividends attributable to preferred stock
    
    
    (2,186,890
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common
stockholders
    
    $
    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)
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    (0.07
    )Discontinued operations
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income available to common
stockholders
    
    $
    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)
    
    $
    0.14
    
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    (0.07
    )Discontinued operations
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income available to common
stockholders
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Weighted
average shares outstanding  basic
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares
outstanding-diluted
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Cash dividends declared per common share
    
    $
    1.44
    
    
    $
    0.96
    
    
    $
    0.48
    
    
    $
    0.01Supplemental Data:Net income (loss) available to common
stockholders
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Real estate depreciation and
amortization, including discontinued
operations
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Less: Gain on sale of real estate, net
of taxes paid
    
    
    (1,106,590
    )
    
    
    
    
    
    
    
    
    
    
    Funds from operations available to
common stockholders (1)
    
    
    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
    
    
    2.4
    x
    
    
    64.5
    x
    
    
    Balance Sheet Data:Real estate, before accumulated
depreciation
    
    $
    243,713,542
    
    
    $
    165,043,639
    
    
    $
    61,251,455
    
    
    $
    5,440,772Total assets
    
    $
    315,766,022
    
    
    $
    207,046,954
    
    
    $
    105,585,094
    
    
    $
    105,061,370Mortgage notes payable and borrowings
under the line of credit
    
    $
    154,494,438
    
    
    $
    105,118,961
    
    
    $
    
    
    
    $
    Total stockholders equity
    
    $
    152,224,176
    
    
    $
    98,948,536
    
    
    $
    102,692,693
    
    
    $
    104,750,655Total common shares outstanding
    
    
    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 (which, unlike FFO, generally reflects all cash effects of transactions and other events in
the determination of net income (loss)), 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. For a more detailed description of FFO, including a
reconciliation of FFO to net income and the reasons why we
 37




---



##### 



Managements Discussion and Analysis of
Financial Condition and Results of Operations  Funds from Operations
  For the periodFebruary 14, 2003For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    (inception) throughDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Net income (loss)
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Add fixed charges
    
    
    11,346,760
    
    
    
    2,494,248
    
    
    
    25,565
    
    
    
    7,830Earnings
    
    $
    15,719,588
    
    
    $
    6,096,193
    
    
    $
    1,649,493
    
    
    $
    (233,041
    )Fixed Charges:Interest expense
    
    
    7,905,185
    
    
    
    2,187,588
    
    
    
    
    
    
    
    Amortization of Deferred Financing Fees
    
    
    1,199,709
    
    
    
    260,099
    
    
    
    
    
    
    
    Estimated interest component of rent
    
    
    54,976
    
    
    
    46,561
    
    
    
    25,565
    
    
    
    7,830Total fixed charges
    
    
    9,159,870
    
    
    
    2,494,248
    
    
    
    25,565
    
    
    
    7,830Total preferred dividends
    
    
    2,186,890
    
    
    
    
    
    
    
    
    
    
    
    Total fixed charges and preferred dividends
    
    
    11,346,760
    
    
    
    2,494,248
    
    
    
    25,565
    
    
    
    7,830Ratio of earnings to combined fixed
charges and preferred dividends
    
    
    1.4
    
    
    
    2.4
    
    
    
    64.5
    
    
    
    
    (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. 38




---



##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-K.
 Overview
    Recent Events
 Investments
  39




---



##### 



40




---



##### 



Mortgage Loans
       41




---



##### 



Preferred Stock Financings
   Properties Sold
  Acquisition of Building in Satisfaction of Mortgage Loan
  42




---



##### 



Investment Advisory and Administration Agreements
    43




---



##### 



Management services and fees under the Initial Advisory Agreement
   Management services and fees under the Amended Advisory Agreement
   44




---



##### 



Critical Accounting Policies
  Revenue Recognition
   Purchase Price Allocation
 
 45




---



##### 



Investments in Real Estate
  46




---



##### 



Provision for Loan Losses
  Income Taxes
  Stock Based Compensation
 , .
 47




---



##### 



). .
 48




---



##### 



Results of Operations
  A comparison of our operating results for the years ended December 31, 2006 and 2005 is below
 For the year endedDecember 31, 2006
    
    
    December 31, 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
    %Management advisory fee
    
    
    2,902,053
    
    
    
    2,118,040
    
    
    
    784,013
    
    
    
    37
    %Professional fees
    
    
    953,066
    
    
    
    563,205
    
    
    
    389,861
    
    
    
    69
    %Taxes and licenses
    
    
    193,032
    
    
    
    242,803
    
    
    
    (49,771
    )
    
    
    -20
    %Insurance
    
    
    417,909
    
    
    
    274,166
    
    
    
    143,743
    
    
    
    52
    %General and administrative
    
    
    469,260
    
    
    
    249,791
    
    
    
    219,469
    
    
    
    88
    %Shareholder related expense
    
    
    311,049
    
    
    
    215,907
    
    
    
    95,142
    
    
    
    44
    %Asset retirement obligation expense
    
    
    129,142
    
    
    
    
    
    
    
    129,142
    
    
    
    100
    %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 operationsIncome from discontinued operations
    
    
    112,145
    
    
    
    309,545
    
    
    
    (197,400
    )
    
    
    -64
    %Net realized 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 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
    %
 Revenues
   49




---



##### 



Expenses
         50




---



##### 



.   .
     Foreign currency gains and losses
  51




---



##### 



Gain on sale of real estate
  Net income available to common stockholders
  A comparison of our operating results for the years ended December 31, 2005 and 2004 is below
 December 31, 2005
    
    
    December 31, 2004
    
    
    $ Change
    
    
    % ChangeOperating revenuesRental income
    
    $
    10,853,903
    
    
    $
    3,210,142
    
    
    $
    7,643,761
    
    
    
    238
    %Interest income from
mortgage notes
receivable
    
    
    1,915,795
    
    
    
    981,187
    
    
    
    934,608
    
    
    
    95
    %Tenant recovery revenue
    
    
    111,808
    
    
    
    
    
    
    
    111,808
    
    
    
    100
    %Total operating
revenues
    
    
    12,881,506
    
    
    
    4,191,329
    
    
    
    8,690,177
    
    
    
    207
    %Operating expensesDepreciation and
amortization
    
    
    3,521,128
    
    
    
    946,971
    
    
    
    2,574,157
    
    
    
    272
    %Management advisory fee
    
    
    2,118,040
    
    
    
    1,187,776
    
    
    
    930,264
    
    
    
    78
    %Professional fees
    
    
    563,205
    
    
    
    448,969
    
    
    
    114,236
    
    
    
    25
    %Taxes and licenses
    
    
    242,803
    
    
    
    13,603
    
    
    
    229,200
    
    
    
    1685
    %Insurance
    
    
    274,166
    
    
    
    250,816
    
    
    
    23,350
    
    
    
    9
    %General and
administrative
    
    
    249,791
    
    
    
    276,192
    
    
    
    (26,401
    )
    
    
    -10
    %Shareholder related
expense
    
    
    215,907
    
    
    
    152,408
    
    
    
    63,499
    
    
    
    42
    %Total operating
expenses
    
    
    7,185,040
    
    
    
    3,276,735
    
    
    
    3,908,305
    
    
    
    119
    %Other income (expense)Interest income from
temporary investments
    
    
    126,826
    
    
    
    608,617
    
    
    
    (481,791
    )
    
    
    -79
    %Interest income -
employee loans
    
    
    21,041
    
    
    
    6,042
    
    
    
    14,999
    
    
    
    248
    %Interest expense
    
    
    (2,333,376
    )
    
    
    
    
    
    
    (2,333,376
    )
    
    
    100
    %Total other expense
    
    
    (2,185,509
    )
    
    
    614,659
    
    
    
    (2,800,168
    )
    
    
    -456
    %Income from continuing
operations
    
    
    3,510,957
    
    
    
    1,529,253
    
    
    
    1,981,704
    
    
    
    130
    %Discontinued operationsIncome from
discontinued operations
    
    
    309,545
    
    
    
    94,675
    
    
    
    214,870
    
    
    
    227
    %Net realized gain
(loss) from foreign
currency transactions
    
    
    (6,278
    )
    
    
    
    
    
    
    (6,278
    )
    
    
    100
    %Net unrealized (loss)
gain from foreign
currency transactions
    
    
    (212,279
    )
    
    
    
    
    
    
    (212,279
    )
    
    
    100
    %Total discontinued
operations
    
    
    90,988
    
    
    
    94,675
    
    
    
    (3,687
    )
    
    
    -4
    %Net income
    
$
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    1,978,017
    
    
    
    122
    %
 52




---



##### 



Revenues
    Expenses
      53




---



##### 



Interest Income
   Foreign Currency Loss
  Net Income
  54




---



##### 



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Operating Activities
  Investing Activities
  Financing Activities
  Future Capital Needs
   55




---



##### 



Preferred Stock Offerings
   Line of Credit
  56




---



##### 



Mortgage Notes Payable
        57




---



##### 



Contractual Obligations
  Contractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsLong-Term Debt Obligations (1)
    
    $
    154,494,438
    
    
    $
    868,213
    
    
    $
    3,389,289
    
    
    $
    4,544,629
    
    
    $
    145,692,307Interest on Long-Term Debt Obligations (2)
    
    
    76,658,992
    
    
    
    8,901,464
    
    
    
    17,599,624
    
    
    
    17,108,930
    
    
    
    33,048,974Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations (4)
    
    
    15,650,000
    
    
    
    15,650,000
    
    
    
    
    
    
    
    
    
    
    
    Other
Long-Term Liabilities Reflected on the Registrants Balance Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    246,803,430
    
    
    $
    25,419,677
    
    
    $
    20,988,913
    
    
    $
    21,653,559
    
    
    $
    178,741,281
 
 (1)
    
    Long-term debt obligations represent both borrowings under our KeyBank line of credit and
mortgage notes payble that were outstanding as of December 31, 2006. The line of credit matures
in December of 2009.(2)
    
    Interest on long-term debt obligations does not include interest on our borrowings under our
line of credit. The balance and interest rate on our line of credit is variable and, thus, the
amount of interest can not be calculated for purposes of this table.(3)
    
    This does not include the portion of the operating lease on office space that is allocated to
us by our Adviser in connection with our advisory agreement.(4)
    
    The purchase obligations reflected in the above table represents commitments outstanding
at December 31, 2006 to purchase real estate, of which $7.9 million closed in January of 2007, and
$7.8 million closed in February of 2007. Funds from Operations
     58




---



##### 



Period February 14,2003 (inception)For the year ended
    
    
    For the year ended
    
    
    For the year ended
    
    
    through DecemberDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004
    
    
    31, 2003Net income
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928
    
    
    $
    (240,871
    )Less: Dividends attributable to preferred stock
    
    
    (2,186,890
    )
    
    
    
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    
    2,185,938
    
    
    
    3,601,945
    
    
    
    1,623,928
    
    
    
    (240,871
    )Add: Real estate depreciation and amortization,
including discontinued operations
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345
    
    
    
    5,827Less: Gain on sale of real estate, net of taxes paid
    
    
    (1,106,590
    )
    
    
    
    
    
    
    
    
    
    
    FFO available to common stockholders
    
    $
    9,428,822
    
    
    $
    7,253,064
    
    
    $
    2,597,273
    
    
    $
    (235,044
    )Weighted average shares outstanding  basic
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855
    
    
    
    3,229,119Weighted average shares outstanding  diluted
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534
    
    
    
    3,229,119Basic net income per weighted average common share
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Diluted net income per weighted average common share
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    (0.07
    )Basic FFO per weighted average common share
    
    $
    1.20
    
    
    $
    0.95
    
    
    $
    0.34
    
    
    $
    (0.07
    )Diluted FFO per weighted average common share
    
    $
    1.18
    
    
    $
    0.94
    
    
    $
    0.34
    
    
    $
    (0.07
    )
 59




---



##### 



Item 7A. Quantitative and Qualitative Disclosure about Market Risk
       60




---



##### 



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements
         61




---



##### 



Report of Independent Registered Public Accounting Firm
 
  Consolidated financial statements and financial statement schedules
 
 Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
 62




---



##### 



63




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS
 December 31, 2006
    
    
    December 31, 2005ASSETSReal estate, net of accumulated depreciation of
$8,595,419 and $3,408,878, respectively
    
    $
    235,118,123
    
    
    $
    161,634,761Lease intangibles, net of accumulated amortization of
$4,175,685 and $1,221,413, respectively
    
    
    23,416,696
    
    
    
    13,947,484Mortgage notes receivable
    
    
    10,000,000
    
    
    
    21,025,815Cash and cash equivalents
    
    
    36,005,686
    
    
    
    1,740,159Restricted cash
    
    
    1,225,162
    
    
    
    1,974,436Funds held in escrow
    
    
    1,635,819
    
    
    
    1,041,292Interest receivable  mortgage note
    
    
    
    
    
    
    70,749Interest receivable  employees
    
    
    43,716
    
    
    
    Deferred rent receivable
    
    
    3,607,279
    
    
    
    2,590,617Deferred financing costs, net of accumulated amortization of
$1,467,297 and $260,099, respectively
    
    
    3,713,004
    
    
    
    1,811,017Prepaid expenses
    
    
    521,290
    
    
    
    385,043Deposits on real estate
    
    
    300,000
    
    
    
    600,000Accounts receivable
    
    
    179,247
    
    
    
    225,581TOTAL ASSETS
    
    $
    315,766,022
    
    
    $
    207,046,954LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESMortgage notes payable
    
    $
    154,494,438
    
    
    $
    61,558,961Borrowings under line of credit
    
    
    
    
    
    
    43,560,000Deferred rent liability
    
    
    4,718,599
    
    
    
    Asset retirement obligation liability
    
    
    1,631,294
    
    
    
    Accounts payable and accrued expenses
    
    
    673,410
    
    
    
    493,002Due to adviser
    
    
    183,042
    
    
    
    164,155Rent received in advance, security deposits and funds held in escrow
    
    
    1,841,063
    
    
    
    2,322,300Total Liabilities
    
    
    163,541,846
    
    
    
    108,098,418STOCKHOLDERS EQUITYRedeemable preferred stock, $0.001 par value; $25 liquidation preference;2,300,000 shares authorized and 2,150,000 shares issued and outstanding
at December 31, 2006
    
    
    2,150
    
    
    
    Common stock, $0.001 par value, 17,700,000 shares authorized and
8,565,264 and 7,672,000 shares issued and outstanding, respectively
    
    
    8,565
    
    
    
    7,672Additional paid in capital
    
    
    170,640,979
    
    
    
    105,502,544Notes receivable  employees
    
    
    (3,201,322
    )
    
    
    (432,282
    )Distributions in excess of accumulated earnings
    
    
    (15,226,196
    )
    
    
    (6,129,398
    )Total Stockholders Equity
    
    
    152,224,176
    
    
    
    98,948,536TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    315,766,022
    
    
    $
    207,046,954
  64




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the year ended December 31,2006
    
    
    2005
    
    
    2004Operating revenuesRental income
    
    $
    23,964,035
    
    
    $
    10,853,903
    
    
    $
    3,210,142Interest income from mortgage notes receivable
    
    
    1,845,231
    
    
    
    1,915,795
    
    
    
    981,187Tenant recovery revenue
    
    
    136,280
    
    
    
    111,808
    
    
    
    Total operating revenues
    
    
    25,945,546
    
    
    
    12,881,506
    
    
    
    4,191,329Operating expensesDepreciation and amortization
    
    
    8,297,174
    
    
    
    3,521,128
    
    
    
    946,971Management advisory fee
    
    
    2,902,053
    
    
    
    2,118,040
    
    
    
    1,187,776Professional fees
    
    
    953,066
    
    
    
    563,205
    
    
    
    448,969Taxes and licenses
    
    
    193,032
    
    
    
    242,803
    
    
    
    13,603Insurance
    
    
    417,909
    
    
    
    274,166
    
    
    
    250,816General and administrative
    
    
    469,260
    
    
    
    249,791
    
    
    
    276,192Shareholder related expenses
    
    
    311,049
    
    
    
    215,907
    
    
    
    152,408Asset retirement obligation expense
    
    
    129,142
    
    
    
    
    
    
    
    Stock option compensation expense
    
    
    394,411
    
    
    
    
    
    
    
    Total operating expenses
    
    
    14,067,096
    
    
    
    7,185,040
    
    
    
    3,276,735Other income (expense)Interest income from temporary investments
    
    
    76,772
    
    
    
    126,826
    
    
    
    608,617Interest income  employee loans
    
    
    125,788
    
    
    
    21,041
    
    
    
    6,042Other income
    
    
    380,915
    
    
    
    
    
    
    
    Interest expense
    
    
    (9,104,894
    )
    
    
    (2,333,376
    )
    
    
    Total other income (expense)
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )
    
    
    614,659Income from continuing operations
    
    
    3,357,031
    
    
    
    3,510,957
    
    
    
    1,529,253Discontinued operationsIncome from discontinued operations
    
    
    112,145
    
    
    
    309,545
    
    
    
    94,675Net realized loss from foreign currency transactions
    
    
    (202,938
    )
    
    
    (6,278
    )
    
    
    Net unrealized loss from foreign currency transactions
    
    
    
    
    
    
    (212,279
    )
    
    
    Gain on sale of real estate
    
    
    1,422,026
    
    
    
    
    
    
    
    Taxes on sale of real estate
    
    
    (315,436
    )
    
    
    
    
    
    
    Total discontinued operations
    
    
    1,015,797
    
    
    
    90,988
    
    
    
    94,675Net income
    
    
    4,372,828
    
    
    
    3,601,945
    
    
    
    1,623,928Dividends attributable to preferred stock
    
    
    (2,186,890
    )
    
    
    
    
    
    
    Net income available to common stockholders
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928Earnings per weighted average common share  basicIncome from continuing operations
(net of dividends attributable to preferred stock)
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.20Discontinued operations
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21Earnings per weighted average common share  dilutedIncome from continuing operations
(net of dividends attributable to preferred stock)
    
    $
    0.14
    
    
    $
    0.46
    
    
    $
    0.20Discontinued operations
    
    
    0.13
    
    
    
    0.01
    
    
    
    0.01Net income available to common stockholders
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21Weighted average shares outstandingBasic
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855Diluted
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534
  65




---



##### 



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
    
    
    EquityBalance at December 31, 2003
    
    $
    7,642
    
    
    $
    
    
    
    $
    105,060,304
    
    
    $
    
    
    
    $
    (317,291
    )
    
    $
    104,750,655Issuance of Common Stock Under
Stock Option Plan
    
    
    25
    
    
    
    
    
    
    
    374,975
    
    
    
    (375,000
    )
    
    
    
    
    
    
    Public Offering Costs
    
    
    
    
    
    
    
    
    
    
    (7,730
    )
    
    
    
    
    
    
    
    
    
    
    (7,730
    )Distributions Declared to Common
Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,674,160
    )
    
    
    (3,674,160
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,623,928
    
    
    
    1,623,928Balance at December 31, 2004
    
    $
    7,667
    
    
    $
    
    
    
    $
    105,427,549
    
    
    $
    (375,000
    )
    
    $
    (2,367,523
    )
    
    $
    102,692,693Issuance 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
    )
    
    $
    152,224,176
  66




---



##### 



GLADSTONE COMMERCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the year ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    4,372,828
    
    
    $
    3,601,945
    
    
    $
    1,623,928Adjustments
to reconcile net income to net cash provided by operating activities:Depreciation and amortization, including discontinued operations
    
    
    8,349,474
    
    
    
    3,651,119
    
    
    
    973,345Amortization of deferred financing costs, including discontinued operations
    
    
    1,207,198
    
    
    
    260,099
    
    
    
    Amortization of deferred rent asset
    
    
    253,496
    
    
    
    178,070
    
    
    
    Amortization of deferred rent liability
    
    
    (696,261
    )
    
    
    
    
    
    
    Asset retirement obligation expense, including discontinued operations
    
    
    139,074
    
    
    
    
    
    
    
    Increase in deferred rent receivable
    
    
    (1,270,159
    )
    
    
    (562,133
    )
    
    
    (210,846
    )Stock compensation
    
    
    394,411
    
    
    
    
    
    
    
    Increase in mortgage notes payable due to change in value of foreign currency
    
    
    202,066
    
    
    
    209,395
    
    
    
    Value of building acquired in excess of mortgage note satisfied, applied to interest income
    
    
    (335,701
    )
    
    
    
    
    
    
    Gain on sale of real estate
    
    
    (1,422,026
    )
    
    
    
    
    
    
    Decrease (increase) in mortgage interest receivable
    
    
    70,749
    
    
    
    (5,954
    )
    
    
    (64,795
    )(Increase) decrease in employee interest receivable
    
    
    (43,716
    )
    
    
    4,792
    
    
    
    (4,792
    )Increase in prepaid expenses and other assets
    
    
    (89,913
    )
    
    
    (425,120
    )
    
    
    5,928Increase in accounts payable, accrued expenses, and amount due adviser
    
    
    196,294
    
    
    
    359,537
    
    
    
    63,325Increase in rent received in advance and security deposits
    
    
    695,988
    
    
    
    488,913
    
    
    
    214,066Net cash provided by operating activities
    
    
    12,023,802
    
    
    
    7,760,663
    
    
    
    2,600,159Cash flows from investing activities:Real estate investments
    
    
    (48,339,307
    )
    
    
    (117,531,731
    )
    
    
    (58,875,648
    )Proceeds from sales of real estate
    
    
    2,102,567
    
    
    
    
    
    
    
    Issuance of mortgage note receivable
    
    
    
    
    
    
    (10,000,000
    )
    
    
    (11,170,000
    )Principal repayments on mortgage notes receivable
    
    
    44,742
    
    
    
    81,902
    
    
    
    62,283Net payments to lenders for reserves held in escrow
    
    
    (3,346,216
    )
    
    
    (1,041,292
    )
    
    
    Increase in reserves from tenants
    
    
    1,574,464
    
    
    
    158,646
    
    
    
    Deposits on future acquisitions
    
    
    (900,000
    )
    
    
    (2,686,000
    )
    
    
    (775,000
    )Deposits applied against real estate investments
    
    
    1,200,000
    
    
    
    1,986,000
    
    
    
    725,000Refunds of deposits on real estate
    
    
    
    
    
    
    150,000
    
    
    
    Net cash used in investing activities
    
    
    (47,663,750
    )
    
    
    (128,882,475
    )
    
    
    (70,033,365
    )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
    )
    
    
    
    
    
    
    (7,730
    )Borrowings under mortgage notes payable
    
    
    68,055,000
    
    
    
    61,419,179
    
    
    
    Principal repayments on mortgage notes payable
    
    
    (604,318
    )
    
    
    (70,479
    )
    
    
    Borrowings from line of credit
    
    
    71,400,400
    
    
    
    85,460,000
    
    
    
    Repayments on line of credit
    
    
    (114,960,400
    )
    
    
    (41,900,000
    )
    
    
    Increase (decrease) in restricted cash
    
    
    749,274
    
    
    
    (513,761
    )
    
    
    Principal repayments on employee loans
    
    
    914
    
    
    
    17,718
    
    
    
    Payments for deferred financing costs
    
    
    (3,242,881
    )
    
    
    (2,021,115
    )
    
    
    (50,000
    )Dividends paid for common and preferred
    
    
    (13,469,627
    )
    
    
    (8,283,860
    )
    
    
    (2,830,540
    )Net cash provided by (used in) financing activities
    
    
    69,905,475
    
    
    
    94,107,682
    
    
    
    (2,888,270
    )Net increase (decrease) in cash and cash equivalents
    
    
    34,265,527
    
    
    
    (27,014,130
    )
    
    
    (70,321,476
    )Cash and cash equivalents, beginning of period
    
    
    1,740,159
    
    
    
    28,754,289
    
    
    
    99,075,765Cash and cash equivalents, end of period
    
    $
    36,005,686
    
    
    $
    1,740,159
    
    
    $
    28,754,289Cash paid during period for interest
    
    $
    8,045,342
    
    
    $
    2,014,236
    
    
    $
    NON-CASH INVESTING ACTIVITIESIncrease in asset retirement obligation
    
    $
    1,631,294
    
    
    $
    
    
    
    $
    NON-CASH
FINANCING ACTIVITIESFixed rate debt assumed in connection with acquisitions
    
    $
    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
    
    
    $
    75,000
    
    
    $
    375,000Acquisition of building in satisfaction of mortgage note receivable
    
    $
    11,316,774
    
    
    $
    
    
    
    $
    
  67




---



##### 



GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Significant Accounting Policies
  Subsidiaries
      68




---



##### 



Investments in real estate
       69




---



##### 



December 31, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    AccumulatedLease Intangibles
    
    
    Amortization
    
    
    Lease Intangibles
    
    
    AmortizationIn-place leases
    
    $
    10,738,319
    
    
    $
    (1,907,668
    )
    
    $
    5,625,736
    
    
    $
    (558,997
    )Leasing costs
    
    
    5,891,099
    
    
    
    (1,267,829
    )
    
    
    5,047,033
    
    
    
    (505,078
    )Customer relationships
    
    
    10,962,963
    
    
    
    (1,000,188
    )
    
    
    4,496,128
    
    
    
    (157,338
    )$
    27,592,381
    
    
    $
    (4,175,685
    )
    
    $
    15,168,897
    
    
    $
    (1,221,413
    )
 70




---



##### 



Estimated AmortizationYear
    
    Expense2007
    
    $
    3,209,3862008
    
    
    3,209,3862009
    
    
    3,081,7462010
    
    
    2,972,6632011
    
    
    2,532,889
 Impairment
 Investments in Real Estate
  Provision for Loan Losses
  Cash and cash equivalents
  Restricted cash
  71




---



##### 



Funds held in escrow
  Deferred financing costs
  Revenue recognition
    72




---



##### 



Stock based compensation
  . .
 Income taxes
   73




---



##### 



Segment information
  Foreign Currency Transactions
  74




---



##### 



Asset retirement obligations
  Real estate held for sale and discontinued operations
  Use of estimates
  Reclassifications
  2. Management Advisory Fee
  75




---



##### 



76




---



##### 



For the Year Ended December 31, 2006
    
    
    For the Year Ended December 31, 2005
    
    
    For the Year Ended December 31, 2004Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    TotalTotal Allocated
    
    
    Allocated
    
    
    Total
    
    
    Allocated
    
    
    Total Allocated
    
    
    Total
    
    
    Allocated
    
    
    Allocated
    
    
    TotalPayroll and
    
    
    Overhead
    
    
    Management
    
    
    Payroll and
    
    
    Overhead
    
    
    Management
    
    
    Payroll and
    
    
    Overhead
    
    
    ManagementPeriod
    
    Benefits
    
    
    Expenses
    
    
    Advisory Fee
    
    
    Benefits
    
    
    Expenses
    
    
    Advisory Fee
    
    
    Benefits
    
    
    Expenses
    
    
    Advisory FeeQuarter
ended
March
31
    
    
    467,719
    
    
    
    185,023
    
    
    
    652,742
    
    
    
    347,314
    
    
    
    124,547
    
    
    
    471,861
    
    
    
    165,838
    
    
    
    63,577
    
    
    
    229,415Quarter
ended
June
30
    
    
    561,316
    
    
    
    158,076
    
    
    
    719,392
    
    
    
    349,801
    
    
    
    149,231
    
    
    
    499,032
    
    
    
    215,414
    
    
    
    64,708
    
    
    
    280,122Quarter
ended
September
30
    
    
    513,220
    
    
    
    143,696
    
    
    
    656,916
    
    
    
    458,814
    
    
    
    162,546
    
    
    
    621,360
    
    
    
    265,887
    
    
    
    67,937
    
    
    
    333,824Quarter ended
December 31
    
    
    723,839
    
    
    
    149,164
    
    
    
    873,003
    
    
    
    390,614
    
    
    
    135,173
    
    
    
    525,787
    
    
    
    256,063
    
    
    
    88,352
    
    
    
    344,415Total
    
    $
    2,266,094
    
    
    $
    635,959
    
    
    $
    2,902,053
    
    
    $
    1,546,543
    
    
    $
    571,497
    
    
    $
    2,118,040
    
    
    $
    903,202
    
    
    $
    284,574
    
    
    $
    1,187,776
   3. Stock Options
  77




---



##### 



For the year endedDecember 31, 2005
    
    
    December 31, 2004Net income, as reported
    
    $
    3,601,945
    
    
    $
    1,623,928Less: Stock-based compensation expense
determined using the fair value based method
    
    
    (187,483
    )
    
    
    (325,815
    )Net income, pro-forma
    
    $
    3,414,462
    
    
    $
    1,298,113Basic, as reported
    
    $
    0.47
    
    
    $
    0.21Basic, pro-forma
    
    $
    0.45
    
    
    $
    0.17Diluted, as reported
    
    $
    0.47
    
    
    $
    0.21Diluted, pro-forma
    
    $
    0.44
    
    
    $
    0.17
    78




---



##### 



Weighted AverageShares
    
    
    Exercise PriceOptions outstanding at February 14, 2003
    
    
    Granted
    
    
    629,000
    
    
    $
    15.00Exercised
    
    
    Options outstanding at December 31, 2003, of which 629,000
shares were exercisable
    
    
    629,000
    
    
    $
    15.00Granted
    
    
    280,000
    
    
    $
    16.22Exercised
    
    
    (25,000
    )
    
    $
    15.00Forfeited
    
    
    (15,000
    )
    
    $
    15.73Options outstanding at December 31, 2004, of which 599,000
shares are exercisable
    
    
    869,000
    
    
    $
    15.39Granted
    
    
    64,500
    
    
    $
    15.47Exercised
    
    
    (5,000
    )
    
    $
    15.00Forfeited
    
    
    (12,500
    )
    
    $
    15.48Options outstanding at December 31, 2005, of which 744,250
shares were exercisable
    
    
    916,000
    
    
    $
    15.39Granted
    
    
    
    
    
    $
    Exercised
    
    
    (916,000
    )
    
    $
    15.40Forfeited
    
    
    
    
    
    $
    Options outstanding and exercisable at December 31, 2006
    
    
    
    
    
    $
    
  OutstandingNumber of
    
    
    Strike Price of
    
    
    Amount of
    
    
    Balance ofOptions
    
    
    Options
    
    
    Promissory Note
    
    
    Employee Loans
    
    
    
    
    
    
    Interest RateDate Issued
    
    Exercised
    
    
    Exercised
    
    
    Issued to Employees
    
    
    at 12/31/06
    
    
    Term of Note
    
    
    on NoteSep-04
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    374,155
    
    
    9 years
    
    
    5.00
    %May-05
    
    
    5,000
    
    
    $
    15.00
    
    
    $
    75,000
    
    
    $
    57,808
    
    
    9 years
    
    
    6.00
    %Apr-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    375,000
    
    
    5 years
    
    
    7.77
    %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
    
    
    $
    39,405
    
    
    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
    
    
    $
    375,000
    
    
    9 years
    
    
    8.15
    %Dec-06
    
    
    25,000
    
    
    $
    15.00
    
    
    $
    375,000
    
    
    $
    375,000
    
    
    10 years
    
    
    8.12
    %204,922
    
    
    
    
    
    
    $
    3,219,954
    
    
    $
    3,201,322
  79




---



##### 



4. Earnings per Common Share
  For the year endedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Net income available to common stockholders
    
    $
    2,185,938
    
    
    $
    3,601,945
    
    
    $
    1,623,928Denominator for basic weighted average shares
    
    
    7,827,781
    
    
    
    7,670,219
    
    
    
    7,649,855Dilutive effect of stock options
    
    
    158,909
    
    
    
    53,001
    
    
    
    58,679Denominator for diluted weighted average shares
    
    
    7,986,690
    
    
    
    7,723,220
    
    
    
    7,708,534Basic earnings per common share
    
    $
    0.28
    
    
    $
    0.47
    
    
    $
    0.21Diluted earnings per common share
    
    $
    0.27
    
    
    $
    0.47
    
    
    $
    0.21
 80




---



##### 



5. Real Estate
  Date Acquired
    
    Location
    
    Square Footage
    
    Property Description
    
    Net Real EstateDec-03
    
    Raleigh, North Carolina
    
    58,926
    
    Office
    
    $  4,812,630Jan-04
    
    Canton, Ohio
    
    54,018
    
    Office and Warehouse
    
    3,011,989Apr-04
    
    Akron, Ohio
    
    83,891
    
    Office and Laboratory
    
    8,282,137Jun-04
    
    Charlotte, North Carolina
    
    64,500
    
    Office
    
    8,672,068Jul-04
    
    Canton, North Carolina
    
    228,000
    
    Commercial and Manufacturing
    
    4,879,067Aug-04
    
    Snyder Township, Pennsylvania
    
    290,000
    
    Commercial and Warehouse
    
    6,271,841Aug-04
    
    Lexington, North Carolina
    
    154,000
    
    Commercial and Warehouse
    
    2,832,572Sep-04
    
    Austin, Texas
    
    51,933
    
    Flexible Office
    
    6,973,555Oct-04
    
    Norfolk, Virginia
    
    25,797
    
    Commercial and Manufacturing
    
    904,857Oct-04
    
    Mt. Pocono, Pennsylvania
    
    223,275
    
    Commercial and Manufacturing
    
    5,851,742Feb-05
    
    San Antonio, Texas
    
    60,245
    
    Flexible Office
    
    7,892,557Feb-05
    
    Columbus, Ohio
    
    39,000
    
    Industrial
    
    2,677,223Apr-05
    
    Big Flats, New York
    
    120,000
    
    Industrial
    
    6,476,632May-05
    
    Wichita, Kansas
    
    69,287
    
    Office
    
    10,840,568May-05
    
    Arlington, Texas
    
    64,000
    
    Warehouse and Bakery
    
    3,952,990Jun-05
    
    Dayton, Ohio
    
    59,894
    
    Office
    
    2,390,966Jul-05
    
    Eatontown, New Jersey
    
    30,268
    
    Office
    
    4,715,079Jul-05
    
    Franklin Township, New Jersey
    
    183,000
    
    Office and Warehouse
    
    7,600,373Jul-05
    
    Duncan, South Carolina
    
    278,020
    
    Office and Manufacturing
    
    14,975,010Aug-05
    
    Hazelwood, Missouri
    
    51,155
    
    Office and Warehouse
    
    3,013,447Sep-05
    
    Angola, Indiana
    
    52,080
    
    Industrial
    
    1,145,851Sep-05
    
    Angola, Indiana
    
    50,000
    
    Industrial
    
    1,145,852Sep-05
    
    Rock Falls, Illinois
    
    52,000
    
    Industrial
    
    1,145,852Oct-05
    
    Newburyport, Massachusetts
    
    70,598
    
    Industrial
    
    6,966,136Oct-05
    
    Clintonville, Wisconsin
    
    291,142
    
    Industrial
    
    4,626,528Dec-05
    
    Maple Heights, Ohio
    
    347,218
    
    Industrial
    
    11,394,039Dec-05
    
    Richmond, Virginia
    
    42,213
    
    Office
    
    5,958,713Dec-05
    
    Toledo, Ohio
    
    23,368
    
    Office
    
    3,026,974Feb-06
    
    South Hadley, Massachusetts
    
    150,000
    
    Industrial
    
    3,173,873Feb-06
    
    Champaign, Illinois
    
    108,262
    
    Office
    
    14,191,527Feb-06
    
    Roseville, Minnesota
    
    359,540
    
    Office
    
    27,199,265May-06
    
    Burnsville, Minnesota
    
    114,100
    
    Office
    
    12,065,762Jun-06
    
    Menomonee Falls, Wisconsin
    
    125,692
    
    Industrial
    
    7,445,274Jul-06
    
    Baytown, Texas
    
    12,000
    
    Office
    
    2,630,964Sep-06
    
    Sterling Heights, Michigan
    
    532,869
    
    Industrial
    
    11,280,432Sep-06
    
    Birmingham, Alabama
    
    63,514
    
    Industrial
    
    1,564,592Sep-06
    
    Montgomery, Alabama
    
    29,472
    
    Industrial
    
    1,564,593Sep-06
    
    Columbia, Missouri
    
    16,275
    
    Industrial
    
    1,564,593Total real estate, net
    
    4,629,552
    
    
    
    $235,118,123
  December 31, 2006
    
    
    December 31, 2005Real estate:Land
    
    $
    33,764,113
    
    
    $
    20,329,568Building
    
    
    204,115,481
    
    
    
    141,660,553Tenant improvements
    
    
    5,833,948
    
    
    
    3,053,518Accumulated depreciation
    
    
    (8,595,419
    )
    
    
    (3,408,878
    )Real estate, net
    
    $
    235,118,123
    
    
    $
    161,634,761
  81




---



##### 



82




---



##### 



Tenant
    
    
    
    
    
    
    
    
    
    
    Customer
    
    
    Below Market
    
    
    Total PurchaseLand
    
    
    Building
    
    
    Improvements
    
    
    In-place leases
    
    
    Leasing Costs
    
    
    relationships
    
    
    Rents
    
    
    PriceSouth Hadley, Massachusetts
    
    $
    470,636
    
    
    $
    2,543,800
    
    
    $
    
    
    
    $
    225,959
    
    
    $
    46,710
    
    
    $
    183,052
    
    
    $
    
    
    
    $
    3,470,157Champaign, Illinois
    
    
    3,645,770
    
    
    
    10,589,003
    
    
    
    225,367
    
    
    
    838,387
    
    
    
    165,893
    
    
    
    869,041
    
    
    
    (1,223,286
    )
    
    
    15,110,175Roseville, Minnesota
    
    
    2,587,757
    
    
    
    23,623,407
    
    
    
    1,182,263
    
    
    
    2,448,286
    
    
    
    491,342
    
    
    
    2,881,122
    
    
    
    (3,473,624
    )
    
    
    29,740,553Burnsville, Minnesota
    
    
    3,510,711
    
    
    
    7,827,812
    
    
    
    863,658
    
    
    
    463,237
    
    
    
    316,043
    
    
    
    1,126,538
    
    
    
    
    
    
    
    14,107,999Menomonee Falls, Wisconsin
    
    
    624,700
    
    
    
    6,870,586
    
    
    
    40,030
    
    
    
    138,320
    
    
    
    1,154
    
    
    
    379,284
    
    
    
    
    
    
    
    8,054,074Baytown, Texas
    
    
    221,314
    
    
    
    2,362,986
    
    
    
    80,483
    
    
    
    
    
    
    
    54,277
    
    
    
    100,949
    
    
    
    
    
    
    
    2,820,009Sterling Heights, Michigan
    
    
    2,734,887
    
    
    
    8,606,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,341,077Birmingham, Alabama;Montgomery Alabama;Columbia, Missouri
    
    
    1,005,450
    
    
    
    3,633,086
    
    
    
    39,268
    
    
    
    74,985
    
    
    
    2,900
    
    
    
    209,165
    
    
    
    
    
    
    
    4,964,854$
    14,801,225
    
    
    $
    66,056,870
    
    
    $
    2,431,069
    
    
    $
    4,189,174
    
    
    $
    1,078,319
    
    
    $
    5,749,151
    
    
    $
    (4,696,910
    )
    
    $
    89,608,898
   Year
    
    Lease Payments2007
    
    
    23,723,6082008
    
    
    24,121,1012009
    
    
    23,427,6862010
    
    
    22,704,6782011
    
    
    20,772,193Thereafter
    
    
    75,539,650
  83




---



##### 



6. Discontinued Operations
   For the year endedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Operating revenue
    
    $
    342,629
    
    
    $
    583,830
    
    
    $
    121,073Operating expense
    
    
    (22,732
    )
    
    
    (23,537
    )
    
    
    (24
    )Taxes & Licenses
    
    
    (11,736
    )
    
    
    (6,448
    )
    
    
    Interest expense
    
    
    (143,716
    )
    
    
    (114,309
    )
    
    
    Depreciation expense
    
    
    (52,300
    )
    
    
    (129,991
    )
    
    
    (26,374
    )Gain on sale of real estate
    
    
    1,106,590
    
    
    
    
    
    
    
    Realized and unrealized losses on
foregin currency transactions
    
    
    (202,938
    )
    
    
    (218,557
    )
    
    
    Income from discontinued
operations
    
    $
    1,015,797
    
    
    $
    90,988
    
    
    $
    94,675
 7. Mortgage Note Receivable
   84




---



##### 



8. Mortgage Notes Payable
  Date of Issuance
    
    
    Principal Maturity
    
    
    
    
    
    
    Balance Outstandingof Note
    
    
    Date
    
    
    Interest Rate
    
    
    December 31, 2006
    
    
    December 31, 20053/16/2005
    
    
    
    4/1/2030
    
    
    
    6.3300
    %
    
    $
    3,060,093
    
    
    $
    3,113,1027/19/2005
    
    
    
    8/1/2015
    
    
    
    5.2200
    %
    
    
    
    
    
    
    4,644,8598/25/2005
    
    
    
    9/1/2015
    
    
    
    5.3310
    %
    
    
    21,757,000
    
    
    
    21,757,0009/12/2005
    
    
    
    9/1/2015
    
    
    
    5.2100
    %
    
    
    12,588,000
    
    
    
    12,588,00012/21/2005
    
    
    
    12/8/2015
    
    
    
    5.7107
    %
    
    
    19,456,000
    
    
    
    19,456,0002/21/2006
    
    
    
    12/1/2013
    
    
    
    5.9100
    %
    
    
    9,620,050
    
    
    
    2/21/2006
    
    
    
    6/30/2014
    
    
    
    5.2000
    %
    
    
    20,104,716
    
    
    
    3/29/2006
    
    
    
    4/1/2016
    
    
    
    5.9200
    %
    
    
    17,000,000
    
    
    
    4/27/2006
    
    
    
    5/5/2016
    
    
    
    6.5800
    %
    
    
    14,753,579
    
    
    
    11/22/2006
    
    
    
    12/1/2016
    
    
    
    5.7600
    %
    
    
    14,309,000
    
    
    
    12/22/2006
    
    
    
    1/1/2017
    
    
    
    5.7900
    %
    
    
    21,846,000$
    154,494,438
    
    
    $
    61,558,961
   ScheduledprincipalYear
    
    payments2007
    
    
    868,2132008
    
    
    1,371,5582009
    
    
    2,017,7302010
    
    
    2,137,2202011
    
    
    2,407,409Thereafter
    
    
    145,692,308
  85




---



##### 



9. Stockholders Equity
  86




---



##### 



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
    %Series A Preferred StockFor the year ended December 31, 2006
    
    
    46.99260
    %
    
    
    0.00000
    %
    
    
    53.00740
    %Series B Preferred StockFor the year ended December 31, 2006
    
    
    46.99260
    %
    
    
    0.00000
    %
    
    
    53.00740
    %
 87




---



##### 



10. Segment Information
  As of and for the year ended December 31, 2006Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    24,100,315
    
    
    $
    1,845,231
    
    
    $
    
    
    
    $
    25,945,546Operating expenses
    
    
    (8,619,348
    )
    
    
    
    
    
    
    (5,447,748
    )
    
    
    (14,067,096
    )Other loss
    
    
    
    
    
    
    
    
    
    
    (8,521,419
    )
    
    
    (8,521,419
    )Discontinued operations
    
    
    1,015,797
    
    
    
    
    
    
    
    
    
    
    
    1,015,797Net income (loss)
    
    $
    16,496,764
    
    
    $
    1,845,231
    
    
    $
    (13,969,167
    )
    
    $
    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 EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    10,965,711
    
    
    $
    1,915,795
    
    
    $
    
    
    
    $
    12,881,506Operating expenses
    
    
    (3,763,931
    )
    
    
    
    
    
    
    (3,421,109
    )
    
    
    (7,185,040
    )Other loss
    
    
    
    
    
    
    
    
    
    
    (2,185,509
    )
    
    
    (2,185,509
    )Discontinued operations
    
    
    90,988
    
    
    
    
    
    
    
    
    
    
    
    90,988Net income (loss)
    
    $
    7,292,768
    
    
    $
    1,915,795
    
    
    $
    (5,606,618
    )
    
    $
    3,601,945Total Assets
    
    $
    179,848,595
    
    
    $
    21,096,564
    
    
    $
    6,101,795
    
    
    $
    207,046,954
 As of and for the year ended December 31, 2004Real EstateReal Estate Leasing
    
    
    Lending
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    3,210,142
    
    
    $
    981,187
    
    
    $
    
    
    
    $
    4,191,329Operating expenses
    
    
    (960,574
    )
    
    
    
    
    
    
    (2,316,161
    )
    
    
    (3,276,735
    )Other income
    
    
    
    
    
    
    
    
    
    
    614,659
    
    
    
    614,659Discontinued operations
    
    
    94,675
    
    
    
    
    
    
    
    
    
    
    
    94,675Net income (loss)
    
    $
    2,344,243
    
    
    $
    981,187
    
    
    $
    (1,701,502
    )
    
    $
    1,623,928Total Assets
    
    $
    64,889,448
    
    
    $
    11,301,364
    
    
    $
    29,394,282
    
    
    $
    105,585,094
  11. Line of Credit
  88




---



##### 



12. Pro Forma Financial Information (unaudited)
  For the year ended
    
    
    For the year endedDecember 31, 2006
    
    
    December 31, 2005Operating Data:Total operating revenue
    
    $
    29,063,963
    
    
    $
    18,525,558Total operating expenses
    
    
    (15,061,821
    )
    
    
    (10,556,172
    )Other expense
    
    
    (8,521,419
    )
    
    
    (2,185,509
    )Net income
    
    $
    5,480,723
    
    
    $
    5,783,877Dividends attributable to preferred stock
    
    
    (2,186,890
    )
    
    
    Net income available to common stockholders
    
    $
    3,293,833
    
    
    $
    5,783,877Share and Per Share Data:Basic net income
    
    $
    0.42
    
    
    $
    0.75Diluted net income
    
    $
    0.41
    
    
    $
    0.75Weighted average shares outstanding-basic
    
    
    7,827,781
    
    
    
    7,670,219Weighted average shares outstanding-diluted
    
    
    7,986,690
    
    
    
    7,723,220
  89




---



##### 



13. Quarterly Financial Information (unaudited)
  Year ended December 31, 2006Quarter ended
    
    
    Quarter ended
    
    
    Quarter ended
    
    
    Quarter endedMarch 31, 2006
    
    
    June 30, 2006
    
    
    September 30, 2006
    
    
    December 31, 2006Operating revenues
    
    $
    5,425,607
    
    
    $
    6,630,062
    
    
    $
    6,735,976
    
    
    $
    7,153,901Operating expenses
    
    
    3,022,999
    
    
    
    3,523,818
    
    
    
    3,620,149
    
    
    
    3,900,130Other expense
    
    
    (1,605,649
    )
    
    
    (2,112,922
    )
    
    
    (2,450,869
    )
    
    
    (2,351,979
    )Income from continuing operations
    
    
    796,959
    
    
    
    993,322
    
    
    
    664,958
    
    
    
    901,792Discontinued operations
    
    
    49,837
    
    
    
    (140,557
    )
    
    
    1,112,461
    
    
    
    (5,944
    )Net income
    
    
    846,796
    
    
    
    852,765
    
    
    
    1,777,419
    
    
    
    895,848Dividends attributable to preferred stock
    
    
    (344,444
    )
    
    
    (484,375
    )
    
    
    (484,375
    )
    
    
    (873,696
    )Net income available to common stockholders
    
    
    502,352
    
    
    
    368,390
    
    
    
    1,293,044
    
    
    
    22,152Net 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
 Year ended December 31, 2005Quarter ended
    
    
    Quarter ended
    
    
    Quarter ended
    
    
    Quarter endedMarch 31, 2005
    
    
    June 30, 2005
    
    
    September 30, 2005
    
    
    December 31, 2005Operating revenues
    
    $
    2,003,479
    
    
    $
    2,631,176
    
    
    $
    3,889,935
    
    
    $
    4,356,916Operating expenses
    
    
    1,638,505
    
    
    
    1,346,344
    
    
    
    2,018,877
    
    
    
    2,181,314Other income (expense)
    
    
    62,989
    
    
    
    (236,375
    )
    
    
    (849,582
    )
    
    
    (1,162,541
    )Income from continuing operations
    
    
    427,963
    
    
    
    1,048,457
    
    
    
    1,021,476
    
    
    
    1,013,061Discontinued operations
    
    
    107,221
    
    
    
    101,074
    
    
    
    (154,065
    )
    
    
    36,758Net income
    
    
    535,184
    
    
    
    1,149,531
    
    
    
    867,411
    
    
    
    1,049,819Dividends attributable to preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    
    535,184
    
    
    
    1,149,531
    
    
    
    867,411
    
    
    
    1,049,819Net income available to common stockholders  basic
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.14Net income available to common stockholders  diluted
    
    
    0.07
    
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.14Weighted average shares outstanding  basic
    
    
    7,667,000
    
    
    
    7,669,802
    
    
    
    7,672,000
    
    
    
    7,672,000Weighted average shares outstanding  diluted
    
    
    7,733,335
    
    
    
    7,692,639
    
    
    
    7,725,667
    
    
    
    7,737,297
 90




---



##### 



14. Subsequent Events
        91




---



##### 



LADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
 Initial Cost
    
    
    
    
    
    Total CostCosts CapitalizedBuildings &
    
    Subsequent to
    
    
    
    
    
    Buildings &
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    Land
    
    Improvements
    
    Acquisition
    
    Land
    
    Improvements
    
    Total
    
    Depreciation(1)
    
    Net Real Estate
    
    Date AcquiredRaleigh, North Carolina, Office Building
    
    $
    
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    
    
    
    $
    960,000
    
    
    $
    4,480,772
    
    
    $
    5,440,772
    
    
    $
    628,142
    
    
    $
    4,812,630
    
    
    
    12/23/2003Canton, Ohio, Office & Warehouse Building
    
    
    2,950,000
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    
    
    
    
    186,739
    
    
    
    3,082,007
    
    
    
    3,268,746
    
    
    
    256,757
    
    
    
    3,011,989
    
    
    
    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
    
    
    
    481,210
    
    
    
    8,282,137
    
    
    
    4/29/2004Charlotte, North Carolina, Office Building
    
    
    7,125,000
    
    
    
    741,296
    
    
    
    8,423,389
    
    
    
    59,190
    
    
    
    741,296
    
    
    
    8,482,579
    
    
    
    9,223,875
    
    
    
    551,807
    
    
    
    8,672,068
    
    
    
    6/30/2004Canton, North Carolina, Commercial & Manufacturing Building
    
    
    3,060,094
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    
    
    
    
    150,000
    
    
    
    5,050,000
    
    
    
    5,200,000
    
    
    
    320,933
    
    
    
    4,879,067
    
    
    
    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
    
    
    
    408,968
    
    
    
    6,271,841
    
    
    
    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
    
    
    
    130,910
    
    
    
    2,832,572
    
    
    
    8/5/2004Austin, Texas, Office Building
    
    
    
    
    
    
    1,000,000
    
    
    
    6,295,794
    
    
    
    46,095
    
    
    
    1,000,000
    
    
    
    6,341,889
    
    
    
    7,341,889
    
    
    
    368,334
    
    
    
    6,973,555
    
    
    
    9/16/2004Norfolk, Virginia, Commercial & Manufacturing Building
    
    
    
    
    
    
    190,000
    
    
    
    739,521
    
    
    
    18,190
    
    
    
    190,000
    
    
    
    757,711
    
    
    
    947,711
    
    
    
    42,854
    
    
    
    904,857
    
    
    
    10/15/2004Mt. Pocono, Pennsylvania, Commercial & Manufacturing Building
    
    
    
    
    
    
    350,000
    
    
    
    5,818,703
    
    
    
    18,430
    
    
    
    350,000
    
    
    
    5,837,133
    
    
    
    6,187,133
    
    
    
    335,391
    
    
    
    5,851,742
    
    
    
    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
    
    
    
    486,866
    
    
    
    7,892,557
    
    
    
    2/10/2005Columbus, Ohio, Industrial Building
    
    
    2,800,000
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    
    
    
    
    410,000
    
    
    
    2,385,108
    
    
    
    2,795,108
    
    
    
    117,885
    
    
    
    2,677,223
    
    
    
    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
    
    
    
    291,352
    
    
    
    6,476,632
    
    
    
    4/15/2005Wichita, Kansas, Office Building
    
    
    8,943,520
    
    
    
    1,525,000
    
    
    
    9,702,731
    
    
    
    51,453
    
    
    
    1,525,000
    
    
    
    9,754,184
    
    
    
    11,279,184
    
    
    
    438,616
    
    
    
    10,840,568
    
    
    
    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
    
    
    
    151,885
    
    
    
    3,952,990
    
    
    
    5/26/2005Dayton, Ohio, Office Building
    
    
    2,078,000
    
    
    
    525,000
    
    
    
    1,877,727
    
    
    
    96,697
    
    
    
    525,000
    
    
    
    1,974,424
    
    
    
    2,499,424
    
    
    
    108,459
    
    
    
    2,390,966
    
    
    
    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
    
    
    
    162,294
    
    
    
    4,715,079
    
    
    
    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
    
    
    
    231,010
    
    
    
    7,600,373
    
    
    
    7/11/2005Duncan, South Carolina, Office & Manufacturing Building
    
    
    14,632,000
    
    
    
    977,898
    
    
    
    14,516,825
    
    
    
    39,935
    
    
    
    977,898
    
    
    
    14,556,760
    
    
    
    15,534,658
    
    
    
    559,648
    
    
    
    14,975,010
    
    
    
    7/14/2005Hazelwood, Missouri, Office & Warehouse Building
    
    
    
    
    
    
    763,178
    
    
    
    2,309,058
    
    
    
    29,962
    
    
    
    763,178
    
    
    
    2,339,020
    
    
    
    3,102,198
    
    
    
    88,751
    
    
    
    3,013,447
    
    
    
    8/5/2005
 92




---



##### 



LADSTONE COMMERCIAL CORPORATION
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2006
 Initial Cost
    
    
    
    
    
    
    Total CostCosts CapitalizedBuildings &
    
    
    Subsequent to
    
    
    
    
    
    
    Buildings &
    
    
    
    
    
    
    AccumulatedLocation of Property
    
    Encumbrances
    
    
    Land
    
    
    Improvements
    
    
    Acquisition
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    

Depreciation (1)
    
    
    Net Real Estate
    
    
    Date AcquiredAngola, Indiana,
Industrial Building
    
    
    739,926
    
    
    
    65,780
    
    
    
    1,074,758
    
    
    
    
    
    
    
    65,780
    
    
    
    1,074,758
    
    
    
    1,140,538
    
    
    
    37,613
    
    
    
    1,145,851
    
    
    
    9/2/2005Angola, Indiana,
Industrial Building
    
    
    739,927
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    
    
    
    
    131,559
    
    
    
    1,129,874
    
    
    
    1,261,433
    
    
    
    37,613
    
    
    
    1,145,852
    
    
    
    9/2/2005Rock Falls, Illinois,
Industrial Building
    
    
    739,927
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    
    
    
    
    35,082
    
    
    
    1,113,340
    
    
    
    1,148,422
    
    
    
    37,613
    
    
    
    1,145,852
    
    
    
    9/2/2005Newburyport,
Massachusetts, Industrial
Building
    
    
    6,846,000
    
    
    
    628,690
    
    
    
    6,504,056
    
    
    
    42,895
    
    
    
    628,690
    
    
    
    6,546,951
    
    
    
    7,175,641
    
    
    
    209,505
    
    
    
    6,966,136
    
    
    
    10/17/2005Clintonville, Wisconsin,
Industrial Manufacturing
Building
    
    
    3,590,278
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    
    
    
    
    54,674
    
    
    
    4,717,090
    
    
    
    4,771,764
    
    
    
    145,236
    
    
    
    4,626,528
    
    
    
    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
    
    
    
    318,281
    
    
    
    11,394,039
    
    
    
    12/21/2005Richmond, Virginia
Industrial Building
    
    
    
    
    
    
    735,820
    
    
    
    5,335,863
    
    
    
    36,437
    
    
    
    735,820
    
    
    
    5,372,300
    
    
    
    6,108,120
    
    
    
    149,407
    
    
    
    5,958,713
    
    
    
    12/30/2005Toledo, Oho Industrial
Building
    
    
    3,000,000
    
    
    
    263,068
    
    
    
    2,811,801
    
    
    
    39,916
    
    
    
    263,068
    
    
    
    2,851,717
    
    
    
    3,114,785
    
    
    
    87,811
    
    
    
    3,026,974
    
    
    
    12/30/2005South Hadley,
Massachusetts Industrial
Building
    
    
    
    
    
    
    470,636
    
    
    
    2,765,376
    
    
    
    
    
    
    
    470,636
    
    
    
    2,765,376
    
    
    
    3,236,012
    
    
    
    62,139
    
    
    
    3,173,873
    
    
    
    2/15/2006Champaign, Illinois
Office Building
    
    
    9,620,050
    
    
    
    3,645,770
    
    
    
    10,803,824
    
    
    
    10,546
    
    
    
    3,645,770
    
    
    
    10,814,370
    
    
    
    14,460,140
    
    
    
    268,613
    
    
    
    14,191,527
    
    
    
    2/21/2006Roseville, Minnesota
Office Building
    
    
    20,104,716
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    
    
    
    
    2,587,757
    
    
    
    25,290,127
    
    
    
    27,877,884
    
    
    
    678,618
    
    
    
    27,199,265
    
    
    
    2/21/2006Burnsville,
Minnesota Office Building
    
    
    12,000,000
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    
    
    
    
    3,510,711
    
    
    
    8,746,407
    
    
    
    12,257,118
    
    
    
    191,356
    
    
    
    12,065,762
    
    
    
    5/10/2006Menomonee Falls,
Wisconsin Industrial
Building
    
    
    
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    
    
    
    
    624,700
    
    
    
    6,910,616
    
    
    
    7,535,316
    
    
    
    90,042
    
    
    
    7,445,274
    
    
    
    6/30/2006Baytown, Texas
Office Building
    
    
    
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    
    
    
    
    221,314
    
    
    
    2,443,469
    
    
    
    2,664,783
    
    
    
    33,819
    
    
    
    2,630,964
    
    
    
    7/11/2006Sterling Heights,
Michigan Industrial
Building
    
    
    
    
    
    
    2,734,887
    
    
    
    8,606,190
    
    
    
    
    
    
    
    2,734,887
    
    
    
    8,606,190
    
    
    
    11,341,077
    
    
    
    60,645
    
    
    
    11,280,432
    
    
    
    9/22/2006Birmingham, Alabama
Industrial Building
    
    
    
    
    
    
    335,150
    
    
    
    1,237,789
    
    
    
    
    
    
    
    335,150
    
    
    
    1,237,789
    
    
    
    1,572,939
    
    
    
    8,345
    
    
    
    1,564,592
    
    
    
    9/29/2006Montgomery, Alabama
Industrial Building
    
    
    
    
    
    
    335,150
    
    
    
    1,237,788
    
    
    
    
    
    
    
    335,150
    
    
    
    1,237,788
    
    
    
    1,572,938
    
    
    
    8,345
    
    
    
    1,564,593
    
    
    
    9/29/2006Columbia, Missouri
Industrial Building
    
    
    
    
    
    
    335,150
    
    
    
    1,237,788
    
    
    
    
    
    
    
    335,150
    
    
    
    1,237,788
    
    
    
    1,572,938
    
    
    
    8,345
    
    
    
    1,564,593
    
    
    
    9/29/2006$
    154,494,438
    
    
    $
    33,764,113
    
    
    $
    209,287,864
    
    
    $
    661,565
    
    
    $
    33,764,113
    
    
    $
    209,949,429
    
    
    $
    243,713,542
    
    
    $
    8,595,419
    
    
    $
    235,118,123
 
 (1)
    
    Depreciable life of all buildings is 39 years. Depreciable life of all
improvements is the life of the respective leases on each building, which range from 5-20 years. 93




---



##### 



2006
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    165,043,640
    
    
    $
    61,251,455
    
    
    $
    5,440,772Additions during period
    
    
    83,649,860
    
    
    
    103,792,185
    
    
    
    55,810,683Dispositions during period
    
    
    (4,979,958
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    243,713,542
    
    
    $
    165,043,640
    
    
    $
    61,251,455
  Accumulated Depreciation
 2006
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    3,408,879
    
    
    $
    785,125
    
    
    $
    4,619Additions during period
    
    
    5,351,414
    
    
    
    2,623,754
    
    
    
    780,506Dispositions during period
    
    
    (164,874
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    8,595,419
    
    
    $
    3,408,879
    
    
    $
    785,125
 94




---



##### 



GLADSTONE COMMERCIAL CORPORATION
SCHEDULE IV  MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2006
 Final
    
    
    
    
    
    
    
    
    
    Carrying
    
    Principal Amount of LoansMaturity
    
    
    
    
    
    Face Amount
    
    Amount of
    
    Subject to DelinquentLocation of Real Estate
    
    Type of Loan
    
    Interest Rate
    
    Date
    
    Periodic Payment Term
    
    Prior Lien
    
    of Mortgage
    
    Mortgage
    
    Principal or InterestMcLean, Virginia
    
    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 variates based
on LIBOR, with a
floor of 7.5% and a
ceiling of 10%.
Balloon payment at
maturity is
$8,488,577.88.
    
    
    
    $
    10,000,000
    
    
    $
    10,000,000
    
    

$       $
    10,000,000
    
    
    $
    10,000,000
  December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Balance at beginning of period
    
    $
    21,025,815
    
    
    $
    11,107,717
    
    
    $
    New mortgage loans
    
    
    
    
    
    
    10,000,000
    
    
    
    11,170,000Collections of principal
    
    
    (44,742
    )
    
    
    (81,902
    )
    
    
    (62,283
    )Satisfaction of mortgage loan receivable
    
    
    (10,981,073
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    10,000,000
    
    
    $
    21,025,815
    
    
    $
    11,107,717
 95




---



##### 



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




---



##### 



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




---



##### 



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 a.
    
    DOCUMENTS FILED AS PART OF THIS REPORT
 1.
    
    The following financial statements are filed herewith:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2006 and December 31, 2005Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005 and 2004Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004Notes to Financial Statements2.
    
    Financial statement schedulesSchedule 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.
    
    ExhibitsThe following exhibits are filed as part of this report or hereby incorporated by reference to
exhibits previously filed with the Securities and Exchange Commission:
 98




---



##### 



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
    
    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, 2006.3.4
    
    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, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone
Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed January 19, 2006.4.2
    
    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, 2006.10.1
    
    Amended and Restated Advisory Agreement between Gladstone Commercial Corporation and Gladstone
Management Corporation, dated August 7, 2003, incorporated by reference to Exhibit 10.1 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (File No. 333-106024),
filed August 8, 2003.10.2*
    
    2003 Equity Incentive Plan, as amended, incorporated by reference to Exhibit 10.2 to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-11 (File No. 333-106024), filed July 22,
2003.10.3
    
    Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, dated July 17, 2003,
incorporated by reference to Exhibit 10.3 to Pre -Effective Amendment No. 1 to the Registration
Statement on Form S -11 (File No. 333-106024), filed July 22, 2003.10.4
    
    Real Property Purchase and Sale Agreement between 3058348 Nova Scotia Company, 3058349 Nova Scotia
Company and Gladstone Commercial Limited Partnership, dated August 11, 2004, incorporated by
reference to Exhibit 10.4 to the Form 10-K (File No. 000-50363), filed March 8, 2005.10.5
    
    Real Property Purchase and Sale Agreement between PBC  Pocono, L.L.C., PBC Norfolk, L.L.C. and
Gladstone Commercial Limited Partnership, dated August 11, 2004, incorporated by reference to
Exhibit 10.5 to the Form 10-K (File No. 000-50363), filed March 8, 2005.10.6
    
    Trademark License Agreement, dated December 20, 2004, between Gladstone Commercial Corporation and
Gladstone Management Corporation, incorporated by reference to Exhibit 10.6 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.
 99




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##### 



Exhibit
    
    Description of Document10.7
    
    Amendment No. 2 to the 2003 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 to
the Form 10-K (File No. 000-50363), filed March 8, 2005.10.8
    
    First Amendment to Agreement of Limited Partnership of Gladstone Commercial Limited Partnership,
dated September 1, 2004, incorporated by reference to Exhibit 10.8 to the Form 10-K (File No.
000-50363), filed March 8, 2005.10.9
    
    Credit Agreement by and among Gladstone Commercial Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust Company and certain other parties, dated as of February 28,
2005, incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K (File No.
000-50363), filed March 1, 2005.10.10
    
    Promissory Note between Key Bank National Association and CMI04 Canton NC LLC, dated March 14,
2005, incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 (File No. 000-50363), filed May 4, 2005.10.11
    
    First Amendment to Credit Agreement and Waiver by and among Gladstone Commercial Corporation,
Gladstone Commercial Limited Partnership, Branch Banking and Trust Company and certain other
parties, dated as of April 21, 2005, incorporated by reference to Exhibit 10.2 of the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50363), filed May 4, 2005.10.12
    
    Second Amendment to Credit Agreement and Loan Documents by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of July 6, 2005, incorporated by reference to Exhibit 10.3 of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-50363), filed
August 2, 2005.10.13
    
    Loan Agreement between AFL05 Duncan SC LLC and Little Arch Charlotte NC LLC and Bank of America,
N.A., dated as of August 25, 2005, incorporated by reference to Exhibit 10.4 of the Current Report
on Form 8-K (File No. 000-50363), filed August 29, 2005.10.14
    
    Promissory Note between AFL05 Duncan SC LLC and Little Arch Charlotte NC LLC and Bank of America,
N.A., dated as of August 25, 2005, incorporated by reference to Exhibit 10.5 of the Current Report
on Form 8-K (File No. 000-50363), filed August 29, 2005.10.15
    
    Mortgage and Security Agreement between 260 Springside Drive, Akron OH LLC and JP Morgan Chase
Bank, N.A., dated as of September 12, 2005, incorporated by reference to Exhibit 10.6 of the
Current Report on Form 8-K (File No. 000-50363), filed September 13, 2005.10.16
    
    Fixed Rate Note between 260 Springside Drive, Akron OH LLC and JP Morgan Chase Bank, N.A., dated
as of September 12, 2005, incorporated by reference to Exhibit 10.7 of the Current Report on Form
8-K (File No. 000-50363), filed September 13, 2005.10.17
    
    Loan Agreement between PZ05 Maple Heights OH LLC, WMI05 Columbus OH LLC, and OB Crenshaw GCC, LP,
and Countrywide Commercial Real Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.8 of the Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005.10.18
    
    Promissory Note between PZ05 Maple Heights OH LLC, WMI05 Columbus OH LLC, and OB Crenshaw GCC, LP,
and Countrywide Commercial Real Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.9 of the Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005.
 100




---



##### 



Exhibit
    
    Description of Document10.19
    
    First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited
Partnership, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No.
000-50363), filed February 1, 2006.10.20
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference to Exhibit 10.20 of the Current Report on
Form 8-K (File No. 000-50363), filed February 24, 2006.10.21
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06 Champaign IL LLC, Gladstone
Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report on Form 8-K (File No. 000-50363),
filed February 24, 2006.10.22
    
    Promissory note between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed February 24, 2006.10.23
    
    Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited
Partnership, dated as of November 23, 2005, as the same has been modified by that certain
Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase
Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6,
2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment
to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement
dated January 20, 2006., incorporated by reference to Exhibit 10.23 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.24
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich Capital Financial Products, Inc,
dated as of May 12, 2004, incorporated by reference to Exhibit 10.24 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.25
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and UC06 Roseville MN LLC, Gladstone
Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report on Form 8-K (File No. 000-50363),
filed February 24, 2006.10.26
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich Capital Financial Products, Inc,
dated as of May 12, 2004, incorporated by reference to Exhibit 10.26 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.27
    
    Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited
Partnership, dated as of November 23, 2005, as the same has been modified by that certain
Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase
Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6,
2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment
to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement
dated January 20, 2006, incorporated by reference to Exhibit 10.27 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.28
    
    Amended and Restated Credit
Agreement among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of March 17, 2006, incorporated by reference to Exhibit 10.28 of
the Current Report on Form 8-K (File No. 000-50363), filed March 22, 2006.
 101




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##### 



Exhibit
    
    Description of Document10.29
    
    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, 2006.10.30
    
    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, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of June 29, 2006, incorporated by reference to Exhibit 10.31 of
the Current Report on Form 8-K (File No. 000-50363), filed June 30, 2006.10.32*
    
    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,
2006.10.33
    
    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, 2006.10.34
    
    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, 2006.10.35
    
    Deed of Trust, Assignment of Leases and Rents and Security Agreement between SLEE Grand Prairie,
L.P. and CIBC Inc., dated as of November 22, 2006, incorporated by reference to Exhibit 10.2 of
the Current Report on Form 8-K (File No. 000-50363), filed November 28, 2006.10.36
    
    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, 2006.10.37
    
    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, 2006.10.38
    
    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, 2006.10.39
    
    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, 2006.10.40
    
    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.
 102




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##### 



Exhibit
    
    Description of Document10.41
    
    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, 2006.10.42
    
    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, 2007.10.43
    
    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, 2007.10.44
    
    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, 2007.11
    
    Computation of Per Share Earnings from Operations (included in the notes to the audited financial
statements contained in this report)14
    
    Code of Business Conduct and Ethics, dated October 11, 2005, incorporated by reference to Exhibit
14.1 to Current Report on Form 8-K (File No. 000-50363), filed October 12, 2005.21
    
    Subsidiaries of Gladstone Commercial Corporation.23
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.31 .2
    
    Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.32 .1
    
    Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.32 .2
    
    Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
    
    Incorporated by reference.*
    
    Denotes management contract, compensation plan, contract or other arrangement. 103




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##### 



Gladstone Commercial CorporationDate: February 27, 2007
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer  Date: February 27, 2007
    By:
    /s/ David GladstoneDavid GladstoneChief Executive Officer and Chairman of the Board of Directors

(principal executive officer)Date: February 27, 2007
    By:
    /s/ Terry Lee BrubakerTerry Lee BrubakerPresident, Chief Operating Officer and DirectorDate: February 27, 2007
    By:
    /s/ Harry BrillHarry BrillChief Financial Officer
(principal financial and accounting officer)Date: February 27, 2007
    By:
    /s/ David A.R. DullumDavid A.R. DullumDirectorDate: February 27, 2007
    By:
    /s/ Anthony W. ParkerAnthony W. ParkerDirectorDate: February 27, 2007
    By:
    /s/ Michela A. EnglishMichela A. EnglishDirector 104




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##### 



Date: February 27, 2007
    By:
    /s/ Paul AdelgrenPaul AdelgrenDirectorDate: February 27, 2007
    By:
    /s/ Maurice CoulonMaurice CoulonDirectorDate: February 27, 2007
    By:
    /s/ John OutlandJohn OutlandDirectorDate: February 27, 2007
    By:
    /s/ Gerard MeadGerard MeadDirector 105




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##### 



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
    
    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, 2006.3.4
    
    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, 2006.4.1
    
    Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone
Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed January 19, 2006.4.2
    
    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, 2006.10.1
    
    Amended and Restated Advisory Agreement between Gladstone Commercial Corporation and Gladstone
Management Corporation, dated August 7, 2003, incorporated by reference to Exhibit 10.1 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (File No. 333-106024),
filed August 8, 2003.10.2*
    
    2003 Equity Incentive Plan, as amended, incorporated by reference to Exhibit 10.2 to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-11 (File No. 333-106024), filed July 22,
2003.10.3
    
    Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, dated July 17, 2003,
incorporated by reference to Exhibit 10.3 to Pre -Effective Amendment No. 1 to the Registration
Statement on Form S -11 (File No. 333-106024), filed July 22, 2003.10.4
    
    Real Property Purchase and Sale Agreement between 3058348 Nova Scotia Company, 3058349 Nova Scotia
Company and Gladstone Commercial Limited Partnership, dated August 11, 2004, incorporated by
reference to Exhibit 10.4 to the Form 10-K (File No. 000-50363), filed March 8, 2005.10.5
    
    Real Property Purchase and Sale Agreement between PBC  Pocono, L.L.C., PBC Norfolk, L.L.C. and
Gladstone Commercial Limited Partnership, dated August 11, 2004, incorporated by reference to
Exhibit 10.5 to the Form 10-K (File No. 000-50363), filed March 8, 2005.10.6
    
    Trademark License Agreement, dated December 20, 2004, between Gladstone Commercial Corporation and
Gladstone Management Corporation, incorporated by reference to Exhibit 10.6 to the Form 10-K (File
No. 000-50363), filed March 8, 2005.
 106




---



##### 



Exhibit
    
    Description of Document10.7
    
    Amendment No. 2 to the 2003 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 to
the Form 10-K (File No. 000-50363), filed March 8, 2005.10.8
    
    First Amendment to Agreement of Limited Partnership of Gladstone Commercial Limited Partnership,
dated September 1, 2004, incorporated by reference to Exhibit 10.8 to the Form 10-K (File No.
000-50363), filed March 8, 2005.10.9
    
    Credit Agreement by and among Gladstone Commercial Corporation, Gladstone Commercial Limited
Partnership, Branch Banking and Trust Company and certain other parties, dated as of February 28,
2005, incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K (File No.
000-50363), filed March 1, 2005.10.10
    
    Promissory Note between Key Bank National Association and CMI04 Canton NC LLC, dated March 14,
2005, incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 (File No. 000-50363), filed May 4, 2005.10.11
    
    First Amendment to Credit Agreement and Waiver by and among Gladstone Commercial Corporation,
Gladstone Commercial Limited Partnership, Branch Banking and Trust Company and certain other
parties, dated as of April 21, 2005, incorporated by reference to Exhibit 10.2 of the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50363), filed May 4, 2005.10.12
    
    Second Amendment to Credit Agreement and Loan Documents by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of July 6, 2005, incorporated by reference to Exhibit 10.3 of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-50363), filed
August 2, 2005.10.13
    
    Loan Agreement between AFL05 Duncan SC LLC and Little Arch Charlotte NC LLC and Bank of America,
N.A., dated as of August 25, 2005, incorporated by reference to Exhibit 10.4 of the Current Report
on Form 8-K (File No. 000-50363), filed August 29, 2005.10.14
    
    Promissory Note between AFL05 Duncan SC LLC and Little Arch Charlotte NC LLC and Bank of America,
N.A., dated as of August 25, 2005, incorporated by reference to Exhibit 10.5 of the Current Report
on Form 8-K (File No. 000-50363), filed August 29, 2005.10.15
    
    Mortgage and Security Agreement between 260 Springside Drive, Akron OH LLC and JP Morgan Chase
Bank, N.A., dated as of September 12, 2005, incorporated by reference to Exhibit 10.6 of the
Current Report on Form 8-K (File No. 000-50363), filed September 13, 2005.10.16
    
    Fixed Rate Note between 260 Springside Drive, Akron OH LLC and JP Morgan Chase Bank, N.A., dated
as of September 12, 2005, incorporated by reference to Exhibit 10.7 of the Current Report on Form
8-K (File No. 000-50363), filed September 13, 2005.10.17
    
    Loan Agreement between PZ05 Maple Heights OH LLC, WMI05 Columbus OH LLC, and OB Crenshaw GCC, LP,
and Countrywide Commercial Real Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.8 of the Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005.10.18
    
    Promissory Note between PZ05 Maple Heights OH LLC, WMI05 Columbus OH LLC, and OB Crenshaw GCC, LP,
and Countrywide Commercial Real Estate Finance, Inc., dated as of December 21, 2005, incorporated
by reference to Exhibit 10.9 of the Current Report on Form 8-K (File No. 000-50363), filed
December 22, 2005.10.19
    
    First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited
Partnership, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No.
000-50363), filed February 1, 2006.
 107




---



##### 



Exhibit
    
    Description of Document10.20
    
    Loan agreement between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference to Exhibit 10.20 of the Current Report on
Form 8-K (File No. 000-50363), filed February 24, 2006.10.21
    
    Assumption agreement between Stonewater Dox Funding LLC, ACI06 Champaign IL LLC, Gladstone
Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.21 of the Current Report on Form 8-K (File No. 000-50363),
filed February 24, 2006.10.22
    
    Promissory note between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association,
dated as of November 21, 2003, incorporated by reference to Exhibit 10.22 of the Current Report
on Form 8-K (File No. 000-50363), filed February 24, 2006.10.23
    
    Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited
Partnership, dated as of November 23, 2005, as the same has been modified by that certain
Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase
Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6,
2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment
to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement
dated January 20, 2006., incorporated by reference to Exhibit 10.23 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.24
    
    Loan agreement between Stonewater Dox Funding LLC and Greenwich Capital Financial Products, Inc,
dated as of May 12, 2004, incorporated by reference to Exhibit 10.24 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.25
    
    Loan assumption agreement between Stonewater UIS Funding LLC, and UC06 Roseville MN LLC, Gladstone
Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006,
incorporated by reference to Exhibit 10.25 of the Current Report on Form 8-K (File No. 000-50363),
filed February 24, 2006.10.26
    
    Promissory note between Stonewater UIS Funding LLC and Greenwich Capital Financial Products, Inc,
dated as of May 12, 2004, incorporated by reference to Exhibit 10.26 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.27
    
    Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited
Partnership, dated as of November 23, 2005, as the same has been modified by that certain
Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase
Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6,
2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment
to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement
dated January 20, 2006, incorporated by reference to Exhibit 10.27 of the Current Report on Form
8-K (File No. 000-50363), filed February 24, 2006.10.28
    
    Amended and Restated Credit
Agreement among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of March 17, 2006, incorporated by reference to Exhibit 10.28 of
the Current Report on Form 8-K (File No. 000-50363), filed March 22, 2006.10.29
    
    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.
 108




---



##### 



Exhibit
    
    Description of Document10.30
    
    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, 2006.10.31
    
    First Amendment to Amended and Restated Credit Agreement by and among Gladstone Commercial
Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of June 29, 2006, incorporated by reference to Exhibit 10.31 of
the Current Report on Form 8-K (File No. 000-50363), filed June 30, 2006.10.32*
    
    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,
2006.10.33
    
    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, 2006.10.34
    
    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, 2006.10.35
    
    Deed of Trust, Assignment of Leases and Rents and Security Agreement between SLEE Grand Prairie,
L.P. and CIBC Inc., dated as of November 22, 2006, incorporated by reference to Exhibit 10.2 of
the Current Report on Form 8-K (File No. 000-50363), filed November 28, 2006.10.36
    
    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, 2006.10.37
    
    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, 2006.10.38
    
    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, 2006.10.39
    
    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, 2006.10.40
    
    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.
 109




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##### 



Exhibit
    
    Description of Document10.41
    
    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, 2006.10.42
    
    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, 2007.10.43
    
    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, 2007.10.44
    
    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, 2007.11
    
    Computation of Per Share Earnings from Operations (included in the notes to the audited financial
statements contained in this report)14
    
    Code of Business Conduct and Ethics, dated October 11, 2005, incorporated by reference to Exhibit
14.1 to Current Report on Form 8-K (File No. 000-50363), filed October 12, 2005.21
    
    Subsidiaries of Gladstone Commercial Corporation.23
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.31 .2
    
    Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.32 .1
    
    Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.32 .2
    
    Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
    
    Incorporated by reference.*
    
    Denotes management contract, compensation plan, contract or other arrangement. 110