GLADSTONE COMMERCIAL CORP - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

GLADSTONE COMMERCIAL CORPORATION

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ .

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of October 31, 2008 was 8,565,264.

 

 

GLADSTONE COMMERCIAL CORPORATION
TABLE OF CONTENTS

		PAGE
PART I   FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007			3
Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			34
PART II OTHER INFORMATION
Item 1. Legal Proceeding			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. Submission of Matters to a Vote of Security Holders			36
Item 5. Other Information			36
Item 6. Exhibits			36
SIGNATURES			38

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		September 30, 2008				December 31, 2007
ASSETS
Real estate, net		$	367,715,344			$	324,761,772
Lease intangibles, net			32,467,191				28,989,556
Mortgage notes receivable			10,000,000				10,000,000
Cash and cash equivalents			3,064,675				1,356,408
Restricted cash			2,637,531				1,914,067
Funds held in escrow			1,988,558				1,401,695
Deferred rent receivable			6,667,829				5,094,799
Deferred financing costs, net			4,752,282				4,405,129
Prepaid expenses and other assets			989,645				979,263
TOTAL ASSETS		$	430,283,055			$	378,902,689
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Mortgage notes payable		$	255,425,225			$	202,120,471
Short-term loan and borrowings under line of credit			30,200,000				24,400,000
Deferred rent liability			3,343,863				3,933,035
Asset retirement obligation liability			2,155,341				1,811,752
Accounts payable and accrued expenses			514,222				778,949
Due to adviser (Refer to Note 2)			1,231,722				784,301
Obligation under capital lease			232,301				—
Rent received in advance, security deposits and funds held in escrow			3,600,768				2,706,113
Total Liabilities			296,703,442				236,534,621
STOCKHOLDERS’ EQUITY
Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding			2,150				2,150
Common stock, $0.001 par value, 47,700,000 shares authorized and 8,565,264 shares issued and outstanding			8,565				8,565
Additional paid in capital			170,640,979				170,640,979
Notes receivable — employees			(2,629,846	)			(2,769,923	)
Distributions in excess of accumulated earnings			(34,442,235	)			(25,513,703	)
Total Stockholders’ Equity			133,579,613				142,368,068
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	430,283,055			$	378,902,689

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the three months ended September 30,								For the nine months ended September 30,
		2008				2007				2008				2007
Operating revenues
Rental income		$	10,157,553			$	8,024,305			$	29,269,036			$	22,834,663
Interest income from mortgage notes receivable			216,446				255,555				673,548				758,333
Tenant recovery revenue			83,144				80,648				253,495				230,851
Total operating revenues			10,457,143				8,360,508				30,196,079				23,823,847
Operating expenses
Depreciation and amortization			3,262,903				2,668,383				9,435,690				7,722,349
Property operating expenses			225,020				204,972				670,442				597,273
Base management fee (Refer to Note 2)			404,108				459,202				1,255,833				1,412,337
Incentive fee (Refer to Note 2)			793,787				677,104				2,300,286				1,896,677
Administration fee (Refer to Note 2)			238,241				175,852				724,978				592,996
Professional fees			117,857				118,371				362,584				442,479
Insurance			43,354				53,943				126,947				171,275
Directors fees			54,702				66,250				161,202				174,750
Stockholder related expenses			42,232				40,991				271,430				215,969
Asset retirement obligation expense			35,157				29,440				98,394				86,542
General and administrative			105,999				17,452				139,151				79,119
Total operating expenses before credit from Adviser			5,323,360				4,511,960				15,546,937				13,391,766
Credit to incentive fee (Refer to Note 2)			(205,876	)			(526,991	)			(941,928	)			(1,746,564	)
Total operating expenses			5,117,484				3,984,969				14,605,009				11,645,202
Other income (expense)
Interest income from temporary investments			4,559				33,105				20,796				325,390
Interest income — employee loans			49,624				52,728				152,620				169,608
Other income			7,500				9,896				56,493				28,127
Interest expense			(4,258,461	)			(2,920,270	)			(12,008,316	)			(8,137,343	)
Total other expense			(4,196,778	)			(2,824,541	)			(11,778,407	)			(7,614,218	)
Income from continuing operations			1,142,881				1,550,998				3,812,663				4,564,427
Discontinued operations
(Loss) income from discontinued operations			(1,322	)			5,975				(34,956	)			471
Net realized income from foreign currency transactions			—				33,487				—				33,550
Taxes refunded on sale of real estate			—				—				—				78,667
Total discontinued operations			(1,322	)			39,462				(34,956	)			112,688
Net income			1,141,559				1,590,460				3,777,707				4,677,115
Dividends attributable to preferred stock			(1,023,437	)			(1,023,438	)			(3,070,312	)			(3,070,312	)
Net income available to common stockholders		$	118,122			$	567,022			$	707,395			$	1,606,803
Earnings per weighted average common share — basic & diluted
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.01			$	0.07			$	0.08			$	0.18
Discontinued operations			0.00				0.00				0.00				0.01
Net income available to common stockholders		$	0.01			$	0.07			$	0.08			$	0.19
Weighted average shares outstanding- basic & diluted			8,565,264				8,565,264				8,565,264				8,565,264

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the nine months ended September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	3,777,707			$	4,677,115
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,435,690				7,722,349
Amortization of deferred financing costs			806,075				509,990
Amortization of deferred rent asset and liability, net			(399,049	)			(399,051	)
Accretion of obligation under capital lease			7,234				—
Asset retirement obligation expense			98,394				86,542
Decrease (increase) in prepaid expenses			(110,382	)			28,815
Increase in deferred rent receivable			(1,763,153	)			(1,247,345	)
Increase in accounts payable, accrued expenses, and amount due adviser			182,694				516,996
Increase in rent received in advance			171,191				137,534
Net cash provided by operating activities			12,206,401				12,032,945
Cash flows from investing activities:
Real estate investments			(48,935,032	)			(85,742,539	)
Receipts from lenders for reserves held in escrow			630,033				1,007,684
Payments to lenders for reserves held in escrow			(1,216,896	)			(1,010,385	)
Increase in restricted cash			(723,464	)			(275,696	)
Deposits on future acquisitions			(1,650,000	)			(1,310,000	)
Deposits applied against real estate investments			1,750,000				1,610,000
Net cash used in investing activities			(50,145,359	)			(85,720,936	)
Cash flows from financing activities:
Borrowings under mortgage notes payable			48,015,000				32,521,691
Principal repayments on mortgage notes payable			(1,171,849	)			(599,328	)
Principal repayments on employee notes receivable from sale of common stock			140,077				400,598
Borrowings from line of credit			62,600,000				24,200,000
Repayments on line of credit			(56,800,000	)			(4,200,000	)
Receipts from tenants from reserves			1,746,804				1,446,577
Payments to tenants from reserves			(1,555,146	)			(1,311,406	)
Increase in security deposits			531,806				140,525
Payments for deferred financing costs			(1,153,228	)			(770,761	)
Dividends paid for common and preferred			(12,706,239	)			(12,320,797	)
Net cash provided by financing activities			39,647,225				39,507,099
Net increase (decrease) in cash and cash equivalents			1,708,267				(34,180,892	)
Cash and cash equivalents, beginning of period			1,356,408				36,005,686
Cash and cash equivalents, end of period		$	3,064,675			$	1,824,794
NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION
Additions to real estate included in accounts payable, accrued expenses, and amount due adviser		$	—			$	409,000
Increase in asset retirement obligation		$	245,195			$	150,523
Fixed rate debt assumed in connection with acquisitions		$	6,461,603			$	4,506,689

The accompanying notes are an integral part of these consolidated financial statements.

GLADSTONE COMMERCIAL CORPORATION

1. Organization and Significant Accounting Policies

Gladstone Commercial Corporation (the “Company”) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and was incorporated on February 14, 2003 under the General Corporation Law of Maryland, primarily for the purpose of engaging in the business of investing in real estate properties net leased to creditworthy entities and making mortgage loans to creditworthy entities. Subject to certain restrictions and limitations, the business of the Company is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”).

Subsidiaries

The Company conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership, (the “Operating Partnership”). As the Company currently owns all of the general and limited partnership interests of the Operating Partnership through GCLP Business Trust I and II as disclosed below, the financial position and results of operations of the Operating Partnership are consolidated with those of the Company.

Gladstone Commercial Partners, LLC, a Delaware limited liability company (“Commercial Partners”) and a subsidiary of the Company, was organized to engage in any lawful act or activity for which a limited liability company may be organized in Delaware. Commercial Partners has the power to make and perform all contracts and to engage in all activities to carry out the purposes of the Company, and all other powers available to it as a limited liability company. As the Company currently owns all of the membership interests of Commercial Partners, the financial position and results of operations of Commercial Partners are consolidated with those of the Company.

Gladstone Lending, LLC, a Delaware limited liability company (“Gladstone Lending”), and a subsidiary of the Company, was created to conduct all operations related to real estate mortgage loans of the Company. As the Operating Partnership currently owns all of the membership interests of Gladstone Lending, the financial position and results of operations of Gladstone Lending are consolidated with those of the Company.

Gladstone Commercial Advisers, Inc., a Delaware corporation (“Commercial Advisers”) and a subsidiary of the Company, is a taxable REIT subsidiary (“TRS”), which was created to collect all non-qualifying income related to the Company’s real estate portfolio. It is currently anticipated that this income will predominately consist of fees received by the Company related to the leasing of real estate. There have been no such fees earned to date. Since the Company owns 100% of the voting securities of Commercial Advisers, the financial position and results of operations of Commercial Advisers are consolidated with those of the Company.

GCLP Business Trust I and GCLP Business Trust II, subsidiaries of the Company, each are business trusts formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. The Company transferred its 99% limited partnership interest in the Operating Partnership to GCLP Business Trust I in exchange for 100 trust shares. Commercial Partners transferred its 1% general partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100 trust shares.

Interim financial information

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period have been included.

Investments in real estate

The Company records investments in real estate at cost and capitalizes improvements and replacements when they extend the useful life or improve the efficiency of the asset. The Company expenses costs of repairs and maintenance as incurred. The Company computes depreciation using the straight-line method over the estimated useful life of 39 years for buildings and improvements, five to seven years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

The Company accounts for its acquisitions of real estate in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” which requires the purchase price of real estate to be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from nine to eighteen months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

The Company allocates purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, building, and tenant improvements based on management’s determination of the relative fair values of these assets. Real estate depreciation expense on these tangible assets was approximately $2.3 million and $6.7 million for the three and nine months ended September 30, 2008, respectively, and approximately $1.8 million and $5.2 million for the three and nine months ended September 30, 2007, respectively.

Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values, included in the accompanying balance sheet as part of deferred rent receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to above-market lease values was $63,374 and $190,123 for the three and nine months ended September 30, 2008 and 2007, respectively. The capitalized below-market lease values, included in the accompanying balance sheet as deferred rent liability, are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases. Total amortization related to below-market lease values was $196,391 and $589,173 for the three and nine months ended September 30, 2008 and 2007, respectively.

The total amount of the remaining intangible assets acquired, which consist of in-place lease values, unamortized lease origination costs, and customer relationship intangible values, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which generally range from 10 to 15 years. The value of customer relationship intangibles, which is the benefit to the Company resulting from the likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining term and any anticipated renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the above-market and below-market lease values, in-place lease values, unamortized lease origination costs and customer relationship intangibles will be charged to expense. Total amortization expense related to these intangible assets was approximately $0.9 million and $2.8 million for the three and nine months ended September 30, 2008, respectively, and approximately $0.8 million and $2.5 million for the three and nine months ended September 30, 2007, respectively.

Impairment

Investments in Real Estate

The Company accounts for the impairment of real estate in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that the Company periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. There have been no impairments recognized on real estate assets in the Company’s history.

Provision for Loan Losses

The Company’s accounting policies require that it reflect in its financial statements an allowance for estimated credit losses with respect to mortgage loans it has made based upon its evaluation of known and inherent risks associated with its private lending assets. Management reflects provisions for loan losses based upon its assessment of general market conditions, its internal risk management policies and credit risk rating system, industry loss experience, its assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Actual losses, if any, could ultimately differ from these estimates. There have been no provisions for loan losses in the Company’s history.

Cash and cash equivalents

The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents; except that any such investments purchased with funds held in escrow or similar accounts are classified as restricted cash. Items classified as cash equivalents include money-market deposit accounts. All of the Company’s cash and cash equivalents at September 30, 2008 were held in the custody of one financial institution, and the Company’s balance at times may exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions.

Restricted cash

Restricted cash consists of security deposits and funds held in escrow for certain tenants. The funds held in escrow are for capital improvements, taxes, insurance and other replacement reserves for certain of our tenants. These funds will be released to the tenants upon completion of agreed upon tasks as specified in the lease agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the Company.

Funds held in escrow

Funds held in escrow consist of funds held by certain of the Company’s lenders for properties held as collateral by these lenders. These funds consist of replacement reserves for capital improvements, repairs and maintenance, insurance and taxes. These funds will be released to the Company upon completion of agreed upon tasks as specified in the mortgage agreements, mainly consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax payments has been submitted to the lenders.

Deferred financing costs

Deferred financing costs consist of costs incurred to obtain financing, including legal fees, origination fees, and administrative fees. The costs are deferred and amortized using the straight-line method, which approximates the effective interest method over the term of the financing secured. The Company made payments of $1,096,766 and $1,153,228 for deferred financing costs during the three and nine months ended September 30, 2008, respectively, and $82,736 and $770,761 for the three and nine months ended September 30, 2007, respectively. Total amortization expense related to deferred financing costs was $300,318 and $806,075 for the three and nine months ended September 30, 2008, respectively, and $176,817 and $509,990 for the three and nine months ended September 30, 2007, respectively. Accumulated amortization was $2,990,567 and $2,184,492 as of September 30, 2008 and December 31, 2007, respectively.

Prepaid expenses and other assets

Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid assets and deposits on real estate.

Obligation under capital lease

In conjunction with the Company’s acquisition of a building in Fridley, Minnesota on February 26, 2008, it was assigned a ground lease on the parking lot of the building at the time of closing, which had a purchase obligation to acquire the land under the ground lease at the end of the term, April 1, 2014. In accordance with SFAS No. 13 “Accounting for Leases,” the Company accounted for the ground lease as a capital lease and recorded the corresponding obligation under the capital lease.

Revenue recognition

Rental revenue includes rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease. Certain of the Company’s leases currently contain rental increases at specified intervals. We recognize such revenues on a straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred rent receivable in the accompanying balance sheet includes the cumulative difference between rental revenue as recorded on a straight line basis and rents received from the tenants in accordance with the lease terms, along with the capitalized above-market lease values of certain acquired properties. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews deferred rent receivable, as it relates to straight line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectibility of deferred rent with respect to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible accounts or records a direct write-off of the specific rent receivable, which would have an adverse effect on the net income for the year in which the reserve is increased or the direct write-off is recorded and would decrease total assets and stockholders’ equity. No such reserves have been recorded as of September 30, 2008.

Management considers its loans and other lending investments to be held-for-investment. The Company reflects held-for-investment investments at amortized cost, less allowance for loan losses, acquisition premiums or discounts, and deferred loan fees. On occasion, the Company may acquire loans at small premiums or discounts based on the credit characteristics of such loans. These premiums or discounts are recognized as yield adjustments over the lives of the related loans. Loan origination fees, as well as direct loan origination costs, are also deferred and recognized over the lives of the related loans as yield adjustments. If loans with premiums, discounts, or loan origination fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis. Prepayment penalties or yield maintenance payments from borrowers are recognized as additional income when received.

Certain of the Company’s mortgage loans and leases have embedded derivatives in the form of interest rate floors and ceilings. These embedded derivatives do not require separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Income taxes

The Company has operated and intends to continue to operate in a manner that will allow it to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and accordingly will not be subject to federal income taxes on amounts distributed to stockholders (except income from foreclosure property), provided it distributes at least 90% of its REIT taxable income to its stockholders and meets certain other conditions. To the extent that the Company satisfies the distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to federal corporate income tax on its undistributed income.

Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though Commercial Advisers has had no activity to date, the Company would account for any future income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Segment information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” provides standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker or decision making group in determining how to allocate resources and in assessing performance. Company management is the chief decision making group. As discussed in Note 9, the Company’s operations are derived from two operating segments, one segment purchases real estate (land, buildings and other improvements), which is simultaneously leased to existing users, and the other segment originates mortgage loans and collects principal and interest payments.

Foreign currency transactions

The Company purchased two properties in Canada in October 2004. These properties were classified as held for sale as of June 30, 2006, and were sold in July 2006. All gains and losses from foreign currency transactions are reflected in discontinued operations in the Company’s consolidated financial statements. The Company had a bank account in Canada, which was closed in December 2007. The cash account was re-valued at each balance sheet date to reflect the then current exchange rate. The gains or losses from the valuation of the cash were recorded on the income statement as a realized gain or loss. Realized foreign currency gains of $33,487 and $33,550 were recorded for the three and nine months ended September 30, 2007, respectively. There were no realized foreign currency gains or losses recorded for the three and nine months ended September 30, 2008 since the account was closed in December 2007.

Asset retirement obligations

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”).  FIN 47 requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated.  FIN 47 clarifies that the term “Conditional Asset Retirement Obligation” refers to a legal obligation (pursuant to existing laws or by contract) to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.  FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company has accrued a liability and corresponding increase to the cost of the related properties for disposal related to all properties constructed prior to 1985 that have, or may have, asbestos present in the building. The Company accrued a liability during the nine months ended September 30, 2008 of $245,195 related to properties acquired during the period. The Company also recorded expense of $35,157 and $98,394 for the three and nine months ended September 30, 2008, respectively, and $29,440 and $86,542 for the three and nine months ended September 30, 2007, respectively, related to the cumulative accretion of the obligation.

Real estate held for sale and discontinued operations

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that the results of operations of any properties which have been sold, or are held for sale, be presented as discontinued operations in the Company’s consolidated financial statements in both current and prior periods presented. Income items related to held for sale properties are listed separately on the Company’s consolidated income statement. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value, less the cost to sell, and are listed separately on the Company’s consolidated balance sheet. Once properties are listed as held for sale, no further depreciation is recorded.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company has only partially adopted the provisions of SFAS 157 because of the issuance of FSP SFAS 157-2 (the “FSP”), which allows companies to delay the effective date of SFAS 157 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The partial adoption had no impact on the Company’s results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 effective for the fiscal year beginning January 1, 2008, and the adoption had no impact on the Company’s results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” SFAS No. 141(R), which replaces SFAS No. 141, “Business Combinations” (“SFAS 141R”). SFAS 141R significantly changes the accounting for acquisitions involving business combinations, as it requires that the assets and liabilities of all business combinations be recorded at fair value, with limited exceptions. SFAS 141R also requires that all expenses related to the acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition as had been the previous accounting under SFAS No. 141. SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008.  If SFAS 141R had been in effect as of January 1, 2008, the Company would have expensed approximately $0.73 million of transaction costs related to the six acquisitions completed during the nine months ended September 30, 2008, or approximately 1.4% of the total purchase price of the acquired properties, which would have resulted in a decrease in funds from operations (“FFO”) of approximately 7.2%. The impact on the Company’s results of operations could differ significantly when the pronouncement is adopted on January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not believe the adoption of this pronouncement will have a material impact on its results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), which is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP SFAS No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years, and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the impact the adoption of the pronouncement will have on its results of operations.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts from prior years’ financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income or stockholders’ equity.

2. Management Advisory Fee

The Company has been externally managed pursuant to a contractual investment advisory arrangement with its Adviser, under which its Adviser has directly employed all of the Company’s personnel and paid its payroll, benefits, and general expenses directly. The Company’s initial investment advisory agreement with its Adviser was in place from August 12, 2003 through December 31, 2006 (the “Initial Advisory Agreement”). On January 1, 2007, the Company entered into an amended and restated investment advisory agreement with its Adviser (the “Amended Advisory Agreement”) and an administration agreement (the “Administration Agreement”) with a wholly-owned subsidiary of the Adviser, Gladstone Administration, LLC (the “Administrator”). The management services and fees in effect under the Amended Advisory and Administration Agreements are described below.

Amended Advisory Agreement

The Amended Advisory Agreement provides for an annual base management fee equal to 2% of the Company’s total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on FFO. For the three and nine months ended September 30, 2008, the Company recorded a base management fee of $404,108 and $1,255,833, respectively, and for the three and nine months ended September 30, 2007, the Company recorded a base management fee of $459,202 and $1,412,337, respectively. For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any dividends paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee rewards the Adviser if the Company’s quarterly FFO, before giving effect to any incentive fee (“pre-incentive fee FFO”), exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. The Adviser receives 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of the Company’s pre-incentive fee FFO. The Adviser also receives an incentive fee of 20% of the amount of the Company’s pre-incentive fee FFO that exceeds 2.1875%.

For the three and nine months ended September 30, 2008, the Company recorded an incentive fee of $793,787 and $2,300,286, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of $205,876 and $941,928, respectively, for a net incentive fee for the three and nine months ended September 30, 2008 of $587,911 and $1,358,358, respectively. For the three and nine months ended September 30, 2007, the Company recorded an incentive fee of $677,104 and $1,896,677, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of $526,991 and $1,746,564, respectively, for a net incentive fee for the three and nine months ended September 30, 2007 of $150,113. The board of directors of the Company accepted the Adviser’s offer to unconditionally, irrevocably and voluntarily waive a portion of the incentive fee for the three and nine months ended September 30, 2008 and 2007, in order to maintain the current level of distributions to the Company’s stockholders.

Administration Agreement

Under the Administration Agreement, the Company pays separately for its allocable portion of the Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of the Administrator, and its allocable portion of the salaries and benefits expenses of its chief financial officer, chief compliance officer, controller, treasurer and their respective staffs. The Company’s allocable portion of expenses is derived by multiplying the Administrator’s total allocable expenses by the percentage of the Company’s average total assets (the total assets at the beginning and end of each quarter) in comparison to the average total assets of all companies managed by the Adviser under similar agreements. For the three and nine months ended September 30, 2008, the Company recorded an administration fee of $238,241 and $724,978, respectively, and for the three and nine months ended September 30, 2007, the Company recorded an administration fee of $175,852 and $592,996, respectively.

3. Earnings per Common Share

The following tables set forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2008 and 2007:

		For the three months ended September 30,								For the nine months ended September 30,
		2008				2007				2008				2007
Net income available to common stockholders		$	118,122			$	567,022			$	707,395			$	1,606,803
Denominator for basic & diluted weighted average shares			8,565,264				8,565,264				8,565,264				8,565,264
Basic & diluted earnings per common share		$	0.01			$	0.07			$	0.08			$	0.19

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of the Company’s investments in real estate, including capitalized leases, as of September 30, 2008 and December 31, 2007:

		September 30, 2008				December 31, 2007
Real estate:
Land		$	55,226,042	(1)		$	48,867,482
Building			325,090,570				283,829,987
Tenant improvements			9,820,706				7,802,937
Accumulated depreciation			(22,421,974	)			(15,738,634	)
Real estate, net		$	367,715,344			$	324,761,772

In accordance with SFAS No. 141, “Business Combinations,” the Company allocated the purchase price of the properties acquired during the nine months ended September 30, 2008 as follows:

										Tenant												Customer								Total Purchase
		Land				Building				Improvements				In-place Leases				Leasing Costs				Relationships				Obligations				Price
Reading, Pennsylvania		$	490,646			$	6,188,168			$	14,208			$	362,479			$	1,786			$	141,232			$	—			$	7,198,519
Fridley, Minnesota			1,354,233				7,454,098				619,428				452,414				171,005				807,950				(225,067	)			10,634,061
Concord Township, Ohio			1,796,467				10,254,003				900,120				1,702,792				5,102				917,661				(245,198	)			15,330,947
Pineville, North Carolina			669,025				2,930,295				98,025				151,426				2,218				93,080				—				3,944,069
Marietta, Ohio			829,014				6,537,796				69,469				479,124				3,268				179,014				—				8,097,685
Chalfont, Pennsylvania			1,249,415				6,105,819				316,519				172,278				189,326				397,841				—				8,431,198
		$	6,388,800			$	39,470,179			$	2,017,769			$	3,320,513			$	372,705			$	2,536,778			$	(470,265	)		$	53,636,479

Intangible Assets

The weighted average amortization period for the intangible assets acquired during the nine months ended September 30, 2008, were as follows:

Intangible assets		Years
In-place leases			16.8
Leasing costs			18.2
Customer relationships			22.7
All intangible assets			16.7

There were no allocations to above or below market lease intangibles for the six acquisitions during the nine months ended September 30, 2008.

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, in effect at September 30, 2008, were as follows:

		Tenant
		Lease Payments
Three months ending December 31, 2008		$	9,922,367
Year ending December 31, 2009			38,749,365
2010			38,743,925
2011			38,352,963
2012			38,056,061
2013			32,691,790
Thereafter			184,282,955

In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, the Company would be required to pay property taxes on the respective properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the tenant fails to pay them. The total annualized property taxes for all properties held by the Company at September 30, 2008 was approximately $5.5 million, and the total annual ground lease payments on the Tulsa, Oklahoma property was approximately $134,000.

The following table summarizes the net value of other intangible assets and the accumulated amortization for each intangible asset class:

		September 30, 2008								December 31, 2007
						Accumulated								Accumulated
		Lease Intangibles				Amortization				Lease Intangibles				Amortization
In-place leases		$	15,981,245			$	(4,661,864	)		$	12,660,732			$	(3,414,868	)
Leasing costs			9,662,731				(2,769,660	)			9,290,026				(2,114,233	)
Customer relationships			17,136,501				(2,881,762	)			14,599,726				(2,031,827	)
		$	42,780,477			$	(10,313,286	)		$	36,550,484			$	(7,560,928	)

The estimated aggregate amortization expense for the remainder of the current and each of the five succeeding fiscal years is as follows:

		Estimated Aggregate
		Amortization Expense
Three months ending December 31, 2008		$	688,090
Year ending December 31, 2009			2,687,299
2010			2,623,713
2011			2,480,618
2012			2,190,906
2013			1,312,252
Thereafter			6,319,267

5. Discontinued Operations

On July 21, 2006, the Company sold its two Canadian properties for approximately $6.9 million, for a gain on the sale of approximately $1.4 million. The Company incurred approximately $315,000 in taxes related to the gain on the sale in 2006. The 2006 tax returns were subsequently filed in March of 2007, and the amount owed was approximately $236,000. The Company received a refund in 2007 in the amount of approximately $79,000, which is reflected in the accompanying statement of operations in discontinued operations under taxes refunded on sale of real estate. The operating expenses recorded during the three and nine months ended September 30, 2008 are legal fees related to the Canadian entities which have been dissolved.

The Company classified its two Canadian properties as discontinued operations, in accordance with the provisions of SFAS 144. The table below summarizes the components of income (loss) from discontinued operations:

		For the three months ended September 30,								For the nine months ended September 30,
		2008				2007				2008				2007
Operating (expense) income		$	(1,322	)		$	5,975			$	(34,956	)		$	471
Net realized income from foreign currency transactions			—				33,487				—				33,550
Taxes refunded on sale of real estate			—				—				—				78,667
(Loss) income from discontinued operations		$	(1,322	)		$	39,462			$	(34,956	)		$	112,688

6. Mortgage Note Receivable

On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million, collateralized by an office building in McLean, Virginia, where the Company’s Adviser and Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the greater of 7.5% per year or the one month London Interbank Offered Rate (“LIBOR”) rate plus 6.0% per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of the term, with payments of principal commencing after the initial period. The balance of the principal and all interest remaining is due at the end of the 12 year term. At September 30, 2008, the interest rate was 8.5%.

7. Mortgage Notes Payable, Line of Credit and Short-Term Loan

The Company’s mortgage notes payable, line of credit and short-term loan as of September 30, 2008 and December 31, 2007 are summarized below:

		Date of Issuance/				Principal Maturity				Stated Interest Rate at				Principal Balance Outstanding
		Assumption				Date				September 30, 2008 (1)				September 30, 2008				December 31, 2007
Fixed-Rate Mortgage Notes Payable:
			3/16/2005				4/1/2030				6.33	%		$	2,958,913			$	3,003,582
			8/25/2005				9/1/2015				5.33	%			21,448,474				21,664,476
			9/12/2005				9/1/2015				5.21	%			12,588,000				12,588,000
			12/21/2005				12/8/2015				5.71	%			19,280,744				19,456,000
			2/21/2006				12/1/2013				5.91	%			9,369,889				9,480,063
			2/21/2006				6/30/2014				5.20	%			19,529,866				19,782,270
			3/29/2006				4/1/2016				5.92	%			17,000,000				17,000,000
			4/27/2006				5/5/2016				6.58	%			14,324,718				14,514,214
			11/22/2006				12/1/2016				5.76	%			14,309,000				14,309,000
			12/22/2006				1/1/2017				5.79	%			21,846,000				21,846,000
			2/8/2007				3/1/2017				6.00	%			13,775,000				13,775,000
			6/5/2007				6/8/2017				6.11	%			14,240,000				14,240,000
			9/6/2007				12/11/2015				5.81	%			4,442,289				4,487,205
			10/15/2007				11/8/2017				6.63	%			15,855,560				15,974,661
			8/29/2008				6/1/2016				6.80	%			6,441,772				—
			9/15/2008				10/1/2010				6.85	%			48,015,000				—
Total Fixed-Rate Mortgage Notes Payable:															255,425,225				202,120,471
Variable-Rate Line of Credit:			12/29/2006				12/29/2009	(2)		LIBOR + 1.9		%			10,200,000				4,400,000
Variable-Rate Short-Term Loan:			12/21/2007				12/21/2008	(3)		LIBOR + 2.75		%			20,000,000				20,000,000
Total Mortgage Notes Payable, Line of Credit and Short-Term Loan														$	285,625,225			$	226,520,471

Mortgage Notes Payable

As of September 30, 2008 the Company had 16 fixed-rate mortgage notes payable, collateralized by a total of 55 properties. The obligor under each of these notes is a wholly-owned separate borrowing entity, which owns the real estate collateral. The Company is not a co-borrower but has limited recourse liabilities that could result from: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, and physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct.  The Company also indemnifies lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property.  The weighted-average interest rate on the mortgage notes payable as of September 30, 2008 was approximately 6.0%.

The fair market value of all fixed-rate mortgage notes payable outstanding as of September 30, 2008 was approximately $231.4 million, as compared to the carrying value stated above of approximately $255.4 million. The fair market value is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimate of interest rates on long-term debt with comparable terms.

On August 29, 2008, the Company assumed approximately $6.4 million of indebtedness pursuant to a long-term note payable from GE Commercial Mortgage Financial Corporation (“GE”), in connection with the Company’s acquisition, on the same date, of a property located in Chalfont, Pennsylvania. The note accrues interest at a rate of 6.8% per year, and the Company may not repay this note prior to maturity, or the Company may be subject to a substantial prepayment penalty. The note matures on June 1, 2016.

On September 15, 2008, through wholly-owned subsidiaries, the Company borrowed approximately $48.0 million pursuant to a long-term note payable from GE, which is collateralized by security interests in 15 properties. The note accrues interest at a rate of 6.85% per year and the Company may not repay this note prior to maturity, or the Company would be subject to a substantial prepayment penalty. The note has a maturity date of October 1, 2010, with three annual extension options through October 1, 2013. The Company used the proceeds from the note to pay down the outstanding balance on the line of credit.

Scheduled principal payments of mortgage notes payable are as follows:

		Scheduled principal
		payments
Three months ending December 31, 2008		$	467,668
Year ending December 31, 2009			2,380,065
2010			50,539,216
2011			2,820,750
2012			3,107,172
2013			11,837,278
Thereafter			184,273,076
		$	255,425,225

Line of Credit

On December 29, 2006, the Company entered into a $75 million senior revolving credit agreement with a syndicate of banks led by KeyBank National Association (“KeyBank”), which matures on December 29, 2009 with an option to extend for an additional year. The Company subsequently increased the availability under the line of credit to $95 million in November 2007. The interest rate charged on the advances under the facility is based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee of 0.15% per year. The Company’s ability to access this funding source is subject to the Company continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires the Company to limit its distributions to stockholders to 95% of its FFO, beginning with the quarter ended December 31, 2007. In addition, the maximum amount the Company may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards. As the Company arranges for long-term mortgages for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the removed property. Conversely, as the Company purchases new properties meeting the eligibility standards, the Company may pledge these new properties to obtain additional advances under this agreement. The availability under the line of credit may also be reduced by letters of credit used in the ordinary course of business. The Company may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of September 30, 2008, there was approximately $10.2 million outstanding under the line of credit at an interest rate of approximately 5.7%, and approximately $5.1 million outstanding under letters of credit at a weighted average interest rate of approximately 2.0%. At September 30, 2008, the remaining borrowing capacity available under the line of credit was $79.7 million, and the Company was in compliance with all covenants under the line of credit.

Short-Term Loan

On December 21, 2007, the Company entered into a $20 million unsecured term loan with KeyBank, which matures on December 21, 2008 with an option to extend for an additional six months. The Company can exercise the option to extend the term as long as it is in compliance with all covenants under the loan at the time it exercises its option. The interest rate charged on the loan is based on the LIBOR, the prime rate or the federal funds rate, depending on market conditions, and adjusts periodically. The Company’s ability to maintain this funding source is subject to it continuing to meet customary lending requirements such as compliance with financial and operating covenants and meeting certain lending limits. One such covenant requires the Company to limit distributions to its stockholders to 95% of its FFO beginning with the quarter ended December 31, 2007. As of September 30, 2008, the interest rate on the short-term loan was approximately 5.2%, and the Company was in compliance with all covenants under the short-term loan.

8. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity for the nine months ended September 30, 2008:

														Notes				Distributions in
										Capital in				Receivable				Excess of				Total
		Common				Preferred				Excess of				From Sale of				Accumulated				Stockholders’
		Stock				Stock				Par Value				Common Stock				Earnings				Equity
Balance at December 31, 2007		$	8,565			$	2,150			$	170,640,979			$	(2,769,923	)		$	(25,513,703	)		$	142,368,068
Repayment of Principal on Notes Receivable			—				—				—				140,077				—				140,077
Distributions Declared to Common and Preferred Stockholders			—				—				—				—				(12,706,239	)			(12,706,239	)
Net income			—				—				—				—				3,777,707				3,777,707
Balance at September 30, 2008		$	8,565			$	2,150			$	170,640,979			$	(2,629,846	)		$	(34,442,235	)		$	133,579,613

Dividends paid per common share for the three and nine months ended September 30, 2008 were $0.375 and $1.125 per share, respectively, and for the three and nine months ended September 30, 2007 were $0.36 and $1.08, respectively. Dividends paid per share of Series A Preferred Stock for both the three and nine months ended September 30, 2008 and 2007 were approximately $0.48 and $1.45 per share, respectively. Dividends paid per share of Series B Preferred Stock for both the three and nine months ended September 30, 2008 and 2007 were approximately $0.47 and $1.41 per share, respectively.

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options:

														Outstanding
		Number of				Strike Price of				Amount of				Balance of
		Options				Options				Promissory Note				Employee Loans								Interest Rate
Date Issued		Exercised				Exercised				Issued to Employees				at 9/30/08				Term of Note				on Note
Sep-04			25,000			$	15.00			$	375,000			$	366,348			9 years					5.00	%
Apr-06			12,422				16.10				199,994				199,994			9 years					7.77	%
May-06			50,000				16.85				842,500				842,500			10 years					7.87	%
May-06			15,000				16.10				241,500				241,500			10 years					7.87	%
May-06			2,500				16.01				40,000				38,544			10 years					7.87	%
May-06			2,000				16.10				32,200				32,200			10 years					7.87	%
May-06			2,000				16.10				32,200				32,200			10 years					7.87	%
May-06			2,000				16.68				33,360				33,360			10 years					7.87	%
May-06			2,000				15.00				30,000				30,000			10 years					7.87	%
Oct-06			12,000				16.10				193,200				193,200			9 years					8.17	%
Nov-06			25,000				15.00				375,000				245,000			9 years					8.15	%
Dec-06			25,000				15.00				375,000				375,000			10 years					8.12	%
			174,922							$	2,769,954			$	2,629,846

In accordance with the note agreements with each employee, they are required to remit interest payments to the Company on their outstanding loan balance quarterly in arrears. In accordance with Emerging Issues Task Force No. 85-1, “Classifying Notes Received for Sale of Stock,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, these notes were recorded as loans to employees and are included in the equity section of the accompanying consolidated balance sheets.

9. Segment Information

As of September 30, 2008, the Company’s operations were derived from two operating segments. One segment purchases real estate (land, buildings and other improvements), which is simultaneously leased to existing users and the other segment extends mortgage loans and collects principal and interest payments. The following table summarizes the Company’s consolidated operating results and total assets by segment as of and for the three and nine months ended September 30, 2008 and 2007:

		As of and for the three months ended September 30, 2008																As of and for the nine months ended September 30, 2008
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	10,240,697			$	216,446			$	—			$	10,457,143			$	29,522,531			$	673,548			$	—			$	30,196,079
Operating expenses			(3,523,080	)			—				(1,594,404	)			(5,117,484	)			(10,204,526	)			—				(4,400,483	)			(14,605,009	)
Other expense			(3,183,823	)			—				(1,012,955	)			(4,196,778	)			(9,128,081	)			—				(2,650,326	)			(11,778,407	)
Discontinued operations			(1,322	)			—				—				(1,322	)			(34,956	)			—				—				(34,956	)
Net income		$	3,532,472			$	216,446			$	(2,607,359	)		$	1,141,559			$	10,154,968			$	673,548			$	(7,050,809	)		$	3,777,707
Total Assets		$	409,461,178			$	10,070,714			$	10,751,163			$	430,283,055			$	409,461,178			$	10,070,714			$	10,751,163			$	430,283,055

		As of and for the three months ended September 30, 2007																As of and for the nine months ended September 30, 2007
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	8,104,953			$	255,555			$	—			$	8,360,508			$	23,065,514			$	758,333			$	—			$	23,823,847
Operating expenses			(2,902,795	)			—				(1,082,174	)			(3,984,969	)			(8,406,164	)			—				(3,239,038	)			(11,645,202	)
Other expense			(2,693,509	)			—				(131,032	)			(2,824,541	)			(7,502,386	)			—				(111,832	)			(7,614,218	)
Discontinued operations			39,462				—				—				39,462				112,688				—				—				112,688
Net income		$	2,548,111			$	255,555			$	(1,213,206	)		$	1,590,460			$	7,269,652			$	758,333			$	(3,350,870	)		$	4,677,115
Total Assets		$	343,702,960			$	10,083,333			$	7,559,584			$	361,345,877			$	343,702,960			$	10,083,333			$	7,559,584			$	361,345,877

The amounts included under the other column in the tables above include other income, which consists of interest income and any other miscellaneous income earned, operating expenses that were not specifically derived from either operating segment, and other expense that is not specifically related to either operating segment.

10. Pro Forma Financial Information

The Company acquired six properties during the nine months ended September 30, 2008. The following table reflects pro-forma condensed consolidated income statements as if the six properties were acquired as of the beginning of the periods presented:

		For the three months ended September 30,								For the nine months ended September 30,
		2008				2007				2008				2007
Operating Data:
Total operating revenue		$	10,719,521			$	9,730,400			$	32,138,406			$	27,933,522
Total operating expenses			(5,313,745	)			(4,720,207	)			(15,810,891	)			(13,998,829	)
Other expense			(4,320,745	)			(3,427,951	)			(11,984,983	)			(8,217,628	)
Income from continuing operations			1,085,031				1,582,242				4,342,532				5,717,065
Dividends attributable to preferred stock			(1,023,437	)			(1,023,438	)			(3,070,312	)			(3,070,312	)
Net income from continuing operations available to common stockholders		$	61,594			$	558,804			$	1,272,220			$	2,646,753
Share and Per Share Data:
Basic & diluted net income from continuing operations		$	0.01			$	0.07			$	0.15			$	0.31
Weighted average shares outstanding-basic & diluted			8,565,264				8,565,264				8,565,264				8,565,264

These pro-forma condensed consolidated income statements are not necessarily indicative of what actual results would have been had the Company acquired the specified properties as of the beginning of the periods presented.

11. Commitments and Contingencies

The Company is required to pay ground lease payments on its Tulsa, Oklahoma property. The lease expires in June 2021. Future operating lease payments under the non-cancelable lease, in effect at September 30, 2008 were as follows:

		Lease Payments
Three months ending December 31, 2008		$	33,600
Year ending December 31, 2009			134,400
2010			134,400
2011			134,400
2012			134,400
2013			134,400
Thereafter			1,008,000

12. Subsequent Events

On October 7, 2008, the Company’s Board of Directors declared cash dividends of $0.125 per common share, $0.1614583 per share of the Series A Preferred Stock, and $0.15625 per share of the Series B Preferred Stock for each of the months of October, November and December 2008. Monthly dividends will be payable on October 31, 2008, November 28, 2008 and December 31, 2008, to those stockholders of record as of the close of business for the dates of October 23, 2008, November 19, 2008 and December 22, 2008, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

OVERVIEW

General

We were incorporated under the General Corporation Laws of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial and commercial real property and selectively making long-term industrial and commercial mortgage loans. Most of the portfolio of real estate we currently own is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which are corporations that do not have publicly rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having triple net leases with terms of approximately 10 to 15 years and built in rental increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We are actively communicating with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio.

Business Environment

Conditions within the U.S. credit markets in general and the U.S. real estate credit markets in particular continue to experience historical levels of dislocation and stress that began in the summer of 2007. These conditions continue to impact us in a variety of ways, including making it difficult for us to price and finance new investment opportunities on attractive terms. We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will affect us. If market instability persists or intensifies, we may experience challenges in raising additional capital. Continued weak economic conditions could adversely impact the financial condition of one or more of our tenants and therefore, could make a tenant bankruptcy and payment default on the related lease more likely. Currently, all of our properties are fully leased and all but one of our tenants and our borrower are current and paying in accordance with their leases and loan, respectively.

At September 30, 2008, we owned 65 properties totaling approximately 6.3 million square feet, and had one mortgage loan outstanding. The total gross investment in these acquisitions, including the mortgage loan investment, was approximately $442.9 million at September 30, 2008. Prior to September 30, 2008, we reported the aggregate number of properties we own based on the appraisals obtained in connection with the acquisition of our properties, which occasionally grouped two or more buildings together. At September 30, 2008 we are reporting, and in future periods we will report, our aggregate number of properties based on the number of individual buildings. Below is a summary of the properties we owned as of the respective periods, using the new methodology:

As of:		Total properties owned
December 31, 2006			42
March 31, 2007			46
June 30, 2007			47
September 30, 2007			51
December 31, 2007			59
March 31, 2008			62
June 30, 2008			63
September 30, 2008			65

Recent Events

Investment Activities: During the nine months ended September 30, 2008, we acquired six properties totaling approximately 756,000 square feet for approximately $53.6 million, and made capital improvements to our properties located in Newburyport, Massachusetts and Arlington, Texas for approximately $1.8 million, resulting in a total investment of approximately $55.4 million. Of the total investment, $48.9 million was funded under our line of credit and the remaining $6.5 million was funded under a long-term note payable with GE Commercial Mortgage Financial Corporation or GE, assumed in connection with an acquisition.

Financing Activities: During the nine months ended September 30, 2008, we had net borrowings under our line of credit of approximately $5.8 million with approximately $10.2 million outstanding at September 30, 2008. The proceeds from the line of credit were used to fund the six acquisitions during the nine-month period and to fund capital improvements to our properties located in Newburyport, Massachusetts and Arlington, Texas. In September 2008, we borrowed approximately $48.0 million pursuant to a long-term note payable with GE, collateralized by security interests in 15 of our properties. The proceeds from the long-term note payable were used to pay down the line of credit.

Our Investment Adviser and Administrator

Gladstone Management Corporation, or our Adviser, is led by a management team which has extensive experience in our lines of business. Our Adviser also has a wholly-owned subsidiary, Gladstone Administration, LLC, or the Administrator, which employs our chief financial officer, chief compliance officer, controller, treasurer and their respective staffs. All of our executive officers are officers or directors, or both, of our Adviser and our Administrator.
 

Our Adviser and Administrator also provide investment advisory and administrative services to our affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly traded business development companies, as well as Gladstone Land Corporation, a private agricultural real estate company. All of our directors and executive officers serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In the future, our Adviser may provide investment advisory and administrative services to other funds, both public and private, of which it is the sponsor.
 

Our Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Our Adviser is headquartered in McLean, Virginia, a suburb of Washington D.C., and also has offices in New York, New Jersey, Pennsylvania, Illinois, Texas, Georgia and Washington.

Investment Advisory and Administration Agreements

We have been externally managed pursuant to a contractual investment advisory arrangement with our Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll, benefits, and general expenses directly. Our initial investment advisory agreement with our Adviser, which we refer to as the Initial Advisory Agreement, was in place from August 12, 2003 through December 31, 2006. On January 1, 2007, we entered into an amended and restated investment advisory agreement with our Adviser, which we refer to as the Amended Advisory Agreement, and an administration agreement, which we refer to as the Administration Agreement, with our Administrator.

Under the terms of the Initial Advisory Agreement and the Amended Advisory Agreement, we were and remain responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest on short-term debt and mortgages, tax preparation, directors and officers insurance, stock transfer services, stockholder related fees, consulting and related fees. During the three and nine months ended September 30, 2008, the total amount of these expenses that we incurred was approximately $4.8 million and $13.8 million, respectively. During the three and nine months ended September 30, 2007, the total amount of these expenses that we incurred was approximately $3.4 million and $9.8 million, respectively. All of these charges are incurred directly by us rather than by our Adviser for our benefit. Accordingly, we did not make any reimbursements to our Adviser for these amounts.

In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which may include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers). During the three and nine months ended September 30, 2008 and 2007, none of these expenses were incurred by us directly. The actual amount of such fees that we incur in the future will depend largely upon the aggregate costs of the properties we acquire, the aggregate amount of mortgage loans we make, and the extent to which we are able to shift the burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the future is not determinable at this time.

Management Services and Fees under the Amended Advisory Agreement

The Amended Advisory Agreement provides for an annual base management fee equal to 2.0% of our total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations, or FFO. For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any dividends paid on preferred stock, but FFO does not include any unrealized capital gains or losses. The incentive fee will reward our Adviser if our quarterly FFO, before giving effect to any incentive fee (“pre-incentive fee FFO”), exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. Our Adviser will receive 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of our pre-incentive fee FFO. Our Adviser will also receive an incentive fee of 20% of the amount of our pre-incentive fee FFO that exceeds 2.1875%. The incentive fee may be reduced because of our line of credit covenant which limits distributions to our stockholders to 95% of FFO.

For the three and nine months ended September 30, 2008, the base management fee was $404,108 and $1,255,833, respectively. For the three and nine months ended September 30, 2007, the base management fee was $459,202 and $1,412,337, respectively. For the three and nine months ended September 30, 2008, we recorded an incentive fee of $793,787 and $2,300,286, respectively, offset by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of $205,876 and $941,928, respectively, for a net incentive fee for the three and nine months ended September 30, 2008 of $587,911 and $1,358,358, respectively. For the three and nine months ended September 30, 2007, we recorded an incentive fee of $677,104 and $1,896,677, respectively, offset by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of $526,991 and $1,746,564, respectively, for a net incentive fee for both the three and nine months ended September 30, 2007 of $150,113. Our Board of Directors accepted our Adviser’s offer to waive a portion of the incentive fee for the three and nine months ended September 30, 2008 and 2007, in order to maintain the current level of distributions to our stockholders. Our Adviser has indicated that it intends to continue to waive all or a portion of the incentive fee in order to support the current level of distributions to our stockholders, however, our Adviser is not required to issue any waiver, in whole or in part.

Administration Agreement

Under the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations including, but not limited to, rent for employees of our Administrator, and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, controller, treasurer and their respective staffs. For the three and nine months ended September 30, 2008, we incurred $238,241 and $724,978, respectively, for the administration fee. For the three and nine months ended September 30, 2007, we incurred $175,852 and $592,996, respectively, for the administration fee.

Critical Accounting Policies

The preparation of our financial statements in accordance with generally accepted accounting principles in the United States of America, or GAAP, requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Management relies on its experience, collects historical data and current market data, and analyzes this information in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements included elsewhere in this report. Below is a summary of accounting polices involving estimates and assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.

Allocation of Purchase Price

When we acquire real estate, we allocate the purchase price to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs, the value of tenant relationships and the value of capital lease obligations, based in each case on their fair values.

Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from 9 to 18 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. Management also considers the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. A change in any of the assumptions above, which are very subjective, could have a material impact on our results of operations.

The allocation of the purchase price directly affects the following in our consolidated financial statements:

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

Asset Impairment Evaluation

We periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination if impairment is deemed to have occurred and the amount of impairment loss we would recognize.

Provision for Loan Losses

Our accounting policies require that we reflect in our financial statements an allowance for estimated credit losses with respect to mortgage loans we have made based upon our evaluation of known and inherent risks associated with our private lending assets. Management reflects provisions for loan losses based upon our assessment of general market conditions, our internal risk management policies and credit risk rating system, industry loss experience, our assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying our investments. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations.

Recently Issued Accounting Pronouncements

Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently issued accounting pronouncements.

Results of Operations

Our weighted-average yield on the portfolio as of September 30, 2008 was approximately 9.53%. Our weighted-average yields on the six properties acquired during the nine months ended September 30, 2008 were as follows:

Date Acquired		Property Location		Weighted-Average Yield
1/29/08		Reading, Pennsylvania		9.95%
2/26/08		Fridley, Minnesota		8.93%
3/31/08		Concord Township, Ohio		11.27%
4/30/08		Pineville, North Carolina		11.06%
8/29/08		Marietta, Ohio		11.07%
8/29/08		Chalfont, Pennsylvania		9.01%

The weighted-average yield on our portfolio is calculated by taking the annualized straight-line rent, reflected as rental income on our consolidated statements of operations, or mortgage interest payments, reflected as interest income from mortgage notes receivable on our consolidated statements of operations, of each acquisition or mortgage loan as a percentage of the acquisition or loan price, as applicable. The weighted-average yield does not take into account the interest expense incurred on the financings placed on our properties.

A comparison of our operating results for the three and nine months ended September 30, 2008 and 2007 is below:

		For the three months ended September 30,																For the nine months ended September 30,
		2008				2007				$ Change				% Change				2008				2007				$ Change				% Change
Operating revenues
Rental income		$	10,157,553			$	8,024,305			$	2,133,248				27	%		$	29,269,036			$	22,834,663			$	6,434,373				28	%
Interest income from mortgage notes receivable			216,446				255,555				(39,109	)			-15	%			673,548				758,333				(84,785	)			-11	%
Tenant recovery revenue			83,144				80,648				2,496				3	%			253,495				230,851				22,644				10	%
Total operating revenues			10,457,143				8,360,508				2,096,635				25	%			30,196,079				23,823,847				6,372,232				27	%
Operating expenses
Depreciation and amortization			3,262,903				2,668,383				594,520				22	%			9,435,690				7,722,349				1,713,341				22	%
Property operating expenses			225,020				204,972				20,048				10	%			670,442				597,273				73,169				12	%
Base management fee			404,108				459,202				(55,094	)			-12	%			1,255,833				1,412,337				(156,504	)			-11	%
Incentive fee			793,787				677,104				116,683				17	%			2,300,286				1,896,677				403,609				21	%
Administration fee			238,241				175,852				62,389				35	%			724,978				592,996				131,982				22	%
Professional fees			117,857				118,371				(514	)			0	%			362,584				442,479				(79,895	)			-18	%
Insurance			43,354				53,943				(10,589	)			-20	%			126,947				171,275				(44,328	)			-26	%
Directors fees			54,702				66,250				(11,548	)			-17	%			161,202				174,750				(13,548	)			-8	%
Stockholder related expense			42,232				40,991				1,241				3	%			271,430				215,969				55,461				26	%
Asset retirement obligation expense			35,157				29,440				5,717				19	%			98,394				86,542				11,852				14	%
General and administrative			105,999				17,452				88,547				507	%			139,151				79,119				60,032				76	%
Total operating expenses before credit from Adviser			5,323,360				4,511,960				811,400				18	%			15,546,937				13,391,766				2,155,171				16	%
Credit to incentive fee			(205,876	)			(526,991	)			321,115				-61	%			(941,928	)			(1,746,564	)			804,636				-46	%
Total operating expenses			5,117,484				3,984,969				1,132,515				28	%			14,605,009				11,645,202				2,959,807				25	%
Other income (expense)
Interest income from temporary investments			4,559				33,105				(28,546	)			-86	%			20,796				325,390				(304,594	)			-94	%
Interest income — employee loans			49,624				52,728				(3,104	)			-6	%			152,620				169,608				(16,988	)			-10	%
Other income			7,500				9,896				(2,396	)			-24	%			56,493				28,127				28,366				101	%
Interest expense			(4,258,461	)			(2,920,270	)			(1,338,191	)			46	%			(12,008,316	)			(8,137,343	)			(3,870,973	)			48	%
Total other expense			(4,196,778	)			(2,824,541	)			(1,372,237	)			49	%			(11,778,407	)			(7,614,218	)			(4,164,189	)			55	%
Income from continuing operations			1,142,881				1,550,998				(408,117	)			-26	%			3,812,663				4,564,427				(751,764	)			-16	%
Discontinued operations
Loss from discontinued operations			(1,322	)			5,975				(7,297	)			-122	%			(34,956	)			471				(35,427	)			-7522	%
Net realized income from foreign currency transactions			—				33,487				(33,487	)			-100	%			—				33,550				(33,550	)			-100	%
Taxes refunded on sale of real estate			—				—				—				0	%			—				78,667				(78,667	)			-100	%
Total discontinued operations			(1,322	)			39,462				(40,784	)			-103	%			(34,956	)			112,688				(147,644	)			-131	%
Net income			1,141,559				1,590,460				(448,901	)			-28	%			3,777,707				4,677,115				(899,408	)			-19	%
Dividends attributable to preferred stock			(1,023,437	)			(1,023,438	)			1				0	%			(3,070,312	)			(3,070,312	)			—				0	%
Net income available to common stockholders		$	118,122			$	567,022			$	(448,900	)			-79	%		$	707,395			$	1,606,803			$	(899,408	)			-56	%