GLADSTONE COMMERCIAL CORP - Quarter Report: 2008 June (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 JUNE 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		(I.R.S. Employer Identification No.)
organization)

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 August 1, 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 June 30, 2008 and December 31, 2007			3
Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007			4
Consolidated Statements of Cash Flows for the six months ended June 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			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			35
PART II  OTHER INFORMATION
Item 1. Legal Proceeding			36
Item 1A. Risk Factors			36
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			37
Item 6. Exhibits			38
SIGNATURES			39

GLADSTONE COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		June 30, 2008				December 31, 2007
ASSETS
Real estate, net of accumulated depreciation of $20,102,084 and $15,738,634, respectively		$	356,463,038			$	324,761,772
Lease intangibles, net of accumulated amortization of $9,370,270 and $7,560,928, respectively			30,253,544				28,989,556
Mortgage notes receivable			10,000,000				10,000,000
Cash and cash equivalents			1,775,274				1,356,408
Restricted cash			2,604,830				1,914,067
Funds held in escrow			1,856,708				1,401,695
Deferred rent receivable			6,121,058				5,094,799
Deferred financing costs, net of accumulated amortization of $2,690,249 and $2,184,492, respectively			3,955,834				4,405,129
Prepaid expenses and other assets			1,215,463				979,263
TOTAL ASSETS		$	414,245,749			$	378,902,689
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Mortgage notes payable		$	201,346,692			$	202,120,471
Short-term loan and borrowings under line of credit			64,550,000				24,400,000
Deferred rent liability			3,540,254				3,933,035
Asset retirement obligation liability			2,120,183				1,811,752
Accounts payable and accrued expenses			944,723				778,949
Due to adviser (Refer to Note 2)			1,321,987				784,301
Obligation under capital lease			229,223				—
Rent received in advance, security deposits and funds held in escrow			3,519,217				2,706,113
Total Liabilities			277,572,279				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, 17,700,000 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			(31,348,378	)			(25,513,703	)
Total Stockholders’ Equity			136,673,470				142,368,068
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	414,245,749			$	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 June 30,								For the six months ended June 30,
		2008				2007				2008				2007
Operating revenues
Rental income		$	9,922,018			$	7,732,322			$	19,111,483			$	14,810,358
Interest income from mortgage notes receivable			218,805				252,778				457,102				502,778
Tenant recovery revenue			84,635				94,468				170,354				150,203
Total operating revenues			10,225,458				8,079,568				19,738,939				15,463,339
Operating expenses
Depreciation and amortization			3,185,017				2,636,154				6,172,777				5,053,966
Property operating expenses			203,858				218,139				445,426				392,301
Base management fee (Refer to Note 2)			419,857				471,091				851,725				953,135
Incentive fee (Refer to Note 2)			801,832				633,805				1,506,499				1,219,573
Administration fee (Refer to Note 2)			274,541				210,126				486,737				417,144
Professional fees			147,065				174,667				244,727				324,108
Insurance			41,797				58,697				83,594				117,332
Directors fees			52,251				54,250				106,500				108,500
Stockholder related expenses			102,775				75,361				229,198				174,978
Asset retirement obligation expense			32,764				28,942				63,232				57,102
General and administrative			18,536				21,314				33,167				61,668
Total operating expenses before credit from Adviser			5,280,293				4,582,546				10,223,582				8,879,807
Credit to incentive fee			(173,697	)			(633,805	)			(736,052	)			(1,219,573	)
Total operating expenses			5,106,596				3,948,741				9,487,530				7,660,234
Other income (expense)
Interest income from temporary investments			6,689				63,269				16,237				292,285
Interest income — employee loans			50,852				56,458				102,996				116,880
Other income			39,697				9,817				48,993				18,231
Interest expense			(3,996,249	)			(2,702,612	)			(7,749,853	)			(5,217,073	)
Total other expense			(3,899,011	)			(2,573,068	)			(7,581,627	)			(4,789,677	)
Income from continuing operations			1,219,851				1,557,759				2,669,782				3,013,428
Discontinued operations
Loss from discontinued operations			(406	)			(1,503	)			(33,634	)			(5,504	)
Net realized income from foreign currency transactions			—				56				—				63
Taxes refunded on sale of real estate			—				—				—				78,667
Total discontinued operations			(406	)			(1,447	)			(33,634	)			73,226
Net income			1,219,445				1,556,312				2,636,148				3,086,654
Dividends attributable to preferred stock			(1,023,437	)			(1,023,437	)			(2,046,875	)			(2,046,874	)
Net income available to common stockholders		$	196,008			$	532,875			$	589,273			$	1,039,780
Earnings per weighted average common share — basic & diluted
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.02			$	0.06			$	0.07			$	0.11
Discontinued operations			0.00				0.00				0.00				0.01
Net income available to common stockholders		$	0.02			$	0.06			$	0.07			$	0.12
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 six months ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	2,636,148			$	3,086,654
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,172,777				5,053,966
Amortization of deferred financing costs			505,757				333,174
Amortization of deferred rent asset and liability			(266,034	)			(266,034	)
Accretion of obligation under capital lease			4,156				—
Asset retirement obligation expense			63,232				57,102
Increase in prepaid expenses and other assets			(286,200	)			(235,916	)
Increase in deferred rent receivable			(1,153,008	)			(796,530	)
Increase in accounts payable, accrued expenses, and amount due adviser			703,460				414,610
Increase in rent received in advance			122,341				90,057
Net cash provided by operating activities			8,502,629				7,737,083
Cash flows from investing activities:
Real estate investments			(38,667,763	)			(53,035,069	)
Net payments to lenders for reserves held in escrow			(1,211,600	)			(868,679	)
Increase in restricted cash			(690,763	)			(244,588	)
Deposits on future acquisitions			(1,650,000	)			(810,000	)
Deposits applied against real estate investments			1,700,000				810,000
Net cash used in investing activities			(40,520,126	)			(54,148,336	)
Cash flows from financing activities:
Borrowings under mortgage notes payable			—				28,015,000
Principal repayments on mortgage notes payable			(773,779	)			(385,070	)
Principal repayments on employee notes receivable from sale of common stock			140,077				400,142
Borrowings from line of credit			45,150,000				4,200,000
Repayments on line of credit			(5,000,000	)			(4,200,000	)
Increase in reserves from tenants			1,035,544				818,745
Increase in security deposits			411,806				140,525
Payments for deferred financing costs			(56,462	)			(688,025	)
Dividends paid for common and preferred			(8,470,823	)			(8,213,865	)
Net cash provided by financing activities			32,436,363				20,087,452
Net increase (decrease) in cash and cash equivalents			418,866				(26,323,801	)
Cash and cash equivalents, beginning of period			1,356,408				36,005,686
Cash and cash equivalents, end of period		$	1,775,274			$	9,681,885
NON-CASH INVESTING ACTIVITIES
Increase in asset retirement obligation		$	245,199			$	121,084

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

GLADSTONE COMMERCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $4.4 million for the three and six months ended June 30, 2008, respectively, and approximately $1.8 million and $3.4 million for the three and six months ended June 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 $126,748 for the three and six months ended June 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 $392,782 for the three and six months ended June 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 $1.8 million for the three and six months ended June 30, 2008, respectively, and approximately $0.9 million and $1.7 million for the three and six months ended June 30, 2007, respectively.

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

		June 30, 2008								December 31, 2007
						Accumulated								Accumulated
		Lease Intangibles				Amortization				Lease Intangibles				Amortization
In-place leases		$	13,475,625			$	(4,232,147	)		$	12,660,732			$	(3,414,868	)
Leasing costs			9,470,137				(2,553,011	)			9,290,026				(2,114,233	)
Customer relationships			16,678,052				(2,585,112	)			14,599,726				(2,031,827	)
		$	39,623,814			$	(9,370,270	)		$	36,550,484			$	(7,560,928	)

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

		Estimated
Year		Amortization Expense
2008		$	1,854,970
2009			3,582,300
2010			3,493,896
2011			3,303,102
2012			2,901,870

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 commercial paper and money-market funds. All of the Company’s cash and cash equivalents at June 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 $20,528 and $56,462 for deferred financing costs during the three and six months ended June 30, 2008, respectively, and $309,280 and $688,025 for the three and six months ended June 30, 2007, respectively. Total amortization expense related to deferred financing costs was $256,434 and $505,757 for the three and six months ended June 30, 2008, respectively, and $168,712 and $333,174 for the three and six months ended June 30, 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 on a straight-line basis over the non-cancelable term of the lease. Certain of the Company’s leases currently contain rental increases at specified intervals, and straight-line basis accounting requires the Company to record an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. 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 June 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 our 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 $56 and $63 were recorded for the three and six months ended June 30, 2007, respectively. There were no realized foreign currency gains or losses recorded for the three and six months ending June 30, 2008 since the account was closed in December 2007.

Asset retirement obligations

In March 2005, the 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 six months ended June 30, 2008 of $245,199 related to properties acquired during the period. The Company also recorded expense of $32,764 and $63,232 for the three and six months ended June 30, 2008, respectively, and $28,942 and $57,102 for the three and six months ended June 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. The FSP permits companies that have not already issued either interim or annual financial statements reflecting the adoption of SFAS 157 to delay the effective date of SFAS 157 for non-financial assets and non-financial liabilities, expect 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 $0.50 million of transaction costs related to the four acquisitions completed during the six months ended June 30, 2008, or approximately 1.3% of total acquisition costs, which would have resulted in a decrease in funds from operations (“FFO”) of approximately 7.3%. 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. The Company does not believe the adoption of this pronouncement will have a material impact 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 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 six months ended June 30, 2008, the Company recorded a base management fee of $419,857 and $851,725, respectively, and for the three and six months ended June 30, 2007, the Company recorded a base management fee of $471,091 and $953,135, 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 six months ended June 30, 2008, the Company recorded an incentive fee of $801,832 and $1,506,499, respectively, offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser of $173,697 and $736,052, respectively, for a net incentive fee for the three and six months ended June 30, 2008 of $628,135 and $770,447, respectively. For the three and six months ended June 30, 2007, the Company recorded an incentive fee of $633,805 and $1,219,573, respectively, fully offset by a credit related to an unconditional and irrevocable voluntary waiver issued by the Adviser for a net incentive fee for the three and six months ended June 30, 2007 of $0. The board of directors of the Company accepted the Adviser’s offer to waive a portion of the incentive fee for the three and six months ended June 30, 2008, and the offer to waive the entire incentive fee for the three and six months ended June 30, 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 amount of overhead expenses allocated to the Company is determined by calculating the percentage of total assets of the Company to the total assets managed by the Administrator. For the three and six months ended June 30, 2008, the Company recorded an administration fee of $274,541 and $486,737, respectively, and for the three and six months ended June 30, 2007, the Company recorded an administration fee of $210,126 and $417,144, respectively.

3. Earnings per Common Share

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

		For the three months ended June 30,								For the six months ended June 30,
		2008				2007				2008				2007
Net income available to common stockholders		$	196,008			$	532,875			$	589,273			$	1,039,780
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		$	0.02			$	0.06			$	0.07			$	0.12

4. Real Estate

A summary of the 57 properties held by the Company as of June 30, 2008 is as follows:

Date Acquired		Location		Square Footage				Property Description		Net Real Estate
Dec-03		Raleigh, North Carolina			58,926			Office		$	4,559,736
Jan-04		Canton, Ohio			54,018			Office and Warehouse			2,879,949
Apr-04		Akron, Ohio			83,891			Office and Laboratory			8,017,985
Jun-04		Charlotte, North Carolina			64,500			Office			8,340,983
Jul-04		Canton, North Carolina			228,000			Commercial and Manufacturing			4,684,836
Aug-04		Snyder Township, Pennsylvania			290,000			Commercial and Warehouse			6,017,586
Aug-04		Lexington, North Carolina			154,000			Commercial and Warehouse			2,721,041
Sep-04		Austin, Texas			51,933			Flexible Office			6,718,983
Oct-04		Norfolk, Virginia			25,797			Commercial and Manufacturing			875,734
Oct-04		Mt. Pocono, Pennsylvania			223,275			Commercial and Manufacturing			5,623,904
Feb-05		San Antonio, Texas			60,245			Flexible Office			7,511,380
Feb-05		Columbus, Ohio			39,000			Industrial			2,584,965
Apr-05		Big Flats, New York			120,000			Industrial			6,226,902
May-05		Wichita, Kansas			69,287			Office			10,445,767
May-05		Arlington, Texas			64,000			Warehouse and Bakery			4,071,284
Jun-05		Dayton, Ohio			59,894			Office			2,303,106
Jul-05		Eatontown, New Jersey			30,268			Office			4,552,581
Jul-05		Franklin Township, New Jersey			183,000			Office and Warehouse			7,359,724
Jul-05		Duncan, South Carolina			278,020			Office and Manufacturing			15,240,649
Aug-05		Hazelwood, Missouri			51,155			Office and Warehouse			2,919,407
Sep-05		Angola, Indiana			52,080			Industrial			1,102,524
Sep-05		Angola, Indiana			50,000			Industrial			1,102,524
Sep-05		Rock Falls, Illinois			52,000			Industrial			1,102,524
Oct-05		Newburyport, Massachusetts			70,598			Industrial			8,015,028
Oct-05		Clintonville, Wisconsin			291,142			Industrial			4,439,796
Dec-05		Maple Heights, Ohio			347,218			Industrial			10,952,569
Dec-05		Richmond, Virginia			42,213			Office			5,734,291
Dec-05		Toledo, Ohio			23,368			Office			2,895,052
Feb-06		South Hadley, Massachusetts			150,000			Industrial			3,077,540
Feb-06		Champaign, Illinois			108,262			Office			13,721,285
Feb-06		Roseville, Minnesota			359,540			Office			26,012,981
May-06		Burnsville, Minnesota			114,100			Office			11,619,690
Jun-06		Menomonee Falls, Wisconsin			125,692			Industrial			7,175,022
Jul-06		Baytown, Texas			12,000			Office			2,522,334
Sep-06		Sterling Heights, Michigan			532,869			Industrial			10,961,694
Sep-06		Birmingham, Alabama			63,514			Industrial			1,510,932
Sep-06		Montgomery, Alabama			29,472			Industrial			1,510,932
Sep-06		Columbia, Missouri			16,275			Industrial			1,510,932
Jan-07		Mason, Ohio			60,000			Office			6,755,972
Feb-07		Raleigh, North Carolina			115,500			Industrial			6,920,899
Mar-07		Tulsa, Oklahoma			238,310			Manufacturing			13,495,016
Mar-07		Hialeah, Florida			132,337			Industrial			10,008,251
May-07		Tewksbury, Massachusetts			102,200			Industrial			10,010,930
Jul-07		Mason, Ohio			21,264			Retail			6,036,834
Sep-07		Cicero, New York			71,880			Industrial			5,212,246
Sep-07		Grand Rapids, Michigan			63,235			Office			11,905,025
Sep-07		Bolingbrook, Illinois			55,869			Industrial			6,170,920
Dec-07		Decatur, Georgia			26,600			Office			2,849,743
Dec-07		Lawrenceville, Georgia			12,412			Office			2,849,743
Dec-07		Snellville, Georgia			3,800			Office			2,849,743
Dec-07		Covington, Georgia			5,000			Office			2,849,743
Dec-07		Cumming, Georgia			13,919			Office			2,849,743
Dec-07		Conyers, Georgia			6,400			Office			2,849,743
Jan-08		Reading, Pennsylvania			42,900			Industrial			6,625,191
Feb-08		Fridley, Minnesota			74,160			Office			9,318,576
Mar-08		Concord Township, Ohio			273,300			Industrial			14,450,294
Apr-08		Pineville, North Carolina			74,950			Industrial			3,830,277
		Total real estate, net			6,023,588					$	356,463,038

The following table sets forth the components of the Company’s investments in real estate, including capitalized leases:

		June 30, 2008				December 31, 2007
Real estate:
Land		$	53,398,865			$	48,867,482
Building			313,615,129				283,829,987
Tenant improvements			9,551,128				7,802,937
Accumulated depreciation			(20,102,084	)			(15,738,634	)
Real estate, net		$	356,463,038			$	324,761,772

Included in investments in real estate is land held under a capital lease valued at approximately $1.1 million.

On January 29, 2008, the Company acquired a 42,900 square foot industrial building in Reading, Pennsylvania for approximately $7.2 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has four options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.72 million.

On February 26, 2008, the Company acquired a 74,160 square foot office building in Fridley, Minnesota for approximately $10.6 million, including transaction costs. At closing, the Company was assigned the previously existing triple net lease with the sole tenant, which had a remaining term of approximately five years. The tenant has two options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.95 million. The Company was also assigned a ground lease on the parking lot at the time of closing, which has a remaining term of approximately six years. At the end of the term, the Company is required to purchase the land. The rent due under the ground lease had been prepaid by the previous owner through the end of the term.

On March 31, 2008, the Company acquired a 273,300 square foot industrial building in Concord Township, Ohio for approximately $15.3 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has three options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.72 million.

On April 30, 2008, the Company acquired a 74,950 square foot industrial building in Pineville, North Carolina for approximately $3.9 million, including transaction costs. At closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant has three options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.43 million.

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

										Tenant												Customer				Capital Lease				Total Purchase
		Land				Building				Improvements				In-place leases				Leasing Costs				relationships				Obligations				Price
Reading, Pennsylvania		$	490,646			$	6,188,032			$	14,208			$	362,479			$	1,786			$	141,232			$	—			$	7,198,383
Fridley, Minnesota			1,354,233				7,454,098				619,428				452,414				171,005				807,950				(225,067	)			10,634,061
Concord Township, Ohio			2,020,982				11,258,232				1,012,613				—				5,102				1,032,347				—				15,329,276
Pineville, North Carolina			695,762				3,046,673				101,942				—				2,218				96,800				—				3,943,395
		$	4,561,623			$	27,947,035			$	1,748,191			$	814,893			$	180,111			$	2,078,329			$	(225,067	)		$	37,105,115

The weighted average amortization period, for properties acquired during the six months ended June 30, 2008, for in-place leases was approximately 17.0 years, for leasing costs was approximately 18.9 years, for customer relationships was approximately 24.5 years, and for all intangible assets was approximately 16.7 years. There were no allocations to above or below market lease intangibles for the four acquisitions during the six months ended June 30, 2008.

Future operating lease payments under non-cancelable leases, excluding customer reimbursement of expenses, in effect at June 30, 2008, were as follows:

Year		Lease Payments
2008		$	18,642,900
2009			36,157,325
2010			35,887,918
2011			35,460,118
2012			34,749,047
Thereafter			195,972,278

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 June 30, 2008 were approximately $5.4 million, and the total annual ground lease payments on the Tulsa, Oklahoma property were approximately $134,000.

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 six months ended June 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 from discontinued operations:

		For the three months ended June 30,								For the six months ended June 30,
		2008				2007				2008				2007
Operating expense		$	(406	)		$	(1,503	)		$	(33,634	)		$	(5,504	)
Taxes & licenses			—				—				—				78,667
Realized gain on foreign currency transactions			—				56				—				63
Income from discontinued operations		$	(406	)		$	(1,447	)		$	(33,634	)		$	73,226

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.

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 June 30, 2008 and December 31, 2007 are summarized below:

						Principal Maturity				Stated Interest Rate at				Principal Balance Outstanding
		Date of Issuance				Date				June 30, 2008 (1)				June 30, 2008				December 31, 2007
Fixed-Rate Mortgage Notes Payable:
			3/16/2005				4/1/2030				6.33	%		$	2,973,691			$	3,003,582
			8/25/2005				9/1/2015				5.33	%			21,519,316				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	%			19,337,950				19,456,000
			2/21/2006				12/1/2013				5.91	%			9,406,130				9,480,063
			2/21/2006				6/30/2014				5.20	%			19,613,214				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	%			14,387,175				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	%			4,457,247				4,487,205
			10/15/2007				11/8/2017				6.63	%			15,893,969				15,974,661
Total Fixed-Rate Mortgage Notes Payable:															201,346,692				202,120,471
Variable-Rate Line of Credit:			12/29/2006				12/29/2009	(2)		LIBOR + 1.9%					44,550,000				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														$	265,896,692			$	226,520,471

As of June 30, 2008 the Company had 14 fixed-rate mortgage notes payable, collateralized by a total of 33 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 June 30, 2008 was approximately 5.8%.

The fair market value of all fixed-rate mortgage notes payable outstanding as of June 30, 2008 was approximately $178.2 million, as compared to the carrying value stated above of approximately $201.3 million. The fair market value is calculated based on a discounted cash flow analysis, using interest rates currently available in the long-term financing markets on long term debt with comparable terms.

Scheduled principal payments of mortgage notes payable are as follows:

		Scheduled principal
Year		payments
2008		$	820,613
2009			2,254,470
2010			2,389,806
2011			2,676,907
2012			2,953,229
Thereafter			190,251,667
		$	201,346,692

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, 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 Company may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments. As of June 30, 2008, there was approximately $44.6 million outstanding under the line of credit at an interest rate of approximately 4.4%. At June 30, 2008, the remaining borrowing capacity available under the line of credit was $46.7 million.

On December 21, 2007, the Company entered into a $20 million unsecured term loan with KeyBank National Association, 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 June 30, 2008, the interest rate on the short-term loan was approximately 5.3%.

8. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity for the six months ended June 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			—				—				—				—				(8,470,823	)			(8,470,823	)
Net income			—				—				—				—				2,636,148				2,636,148
Balance at June 30, 2008		$	8,565			$	2,150			$	170,640,979			$	(2,629,846	)		$	(31,348,378	)		$	136,673,470

Dividends paid per common share for the three and six months ended June 30, 2008 were $0.375 and $0.75 per share, respectively, and for the three and six months ended June 30, 2007 were $0.36 and $0.72, respectively. Dividends paid per share of Series A Preferred Stock for both the three and six months ended June 30, 2008 and 2007 were approximately $0.48 and $0.97 per share, respectively. Dividends paid per share of Series B Preferred Stock for both the three and six months ended June 30, 2008 and 2007 were approximately $0.47 and $0.94 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 6/30/08				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 June 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 six months ended June 30, 2008 and 2007:

		As of and for the three months ended June 30, 2008																As of and for the six months ended June 30, 2008
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	10,006,653			$	218,805			$	—			$	10,225,458			$	19,281,837			$	457,102			$	—			$	19,738,939
Operating expenses			(3,421,639	)			—				(1,684,957	)			(5,106,596	)			(6,681,435	)			—				(2,806,095	)			(9,487,530	)
Other expense			—				—				(3,899,011	)			(3,899,011	)			—				—				(7,581,627	)			(7,581,627	)
Discontinued operations			(406	)			—				—				(406	)			(33,634	)			—				—				(33,634	)
Net income		$	6,584,608			$	218,805			$	(5,583,968	)		$	1,219,445			$	12,566,768			$	457,102			$	(10,387,722	)		$	2,636,148
Total Assets		$	395,292,545			$	10,070,479			$	8,882,725			$	414,245,749			$	395,292,545			$	10,070,479			$	8,882,725			$	414,245,749

		As of and for the three months ended June 30, 2007																As of and for the six months ended June 30, 2007
		Real Estate				Real Estate												Real Estate				Real Estate
		Leasing				Lending				Other				Total				Leasing				Lending				Other				Total
Operating revenues		$	7,826,790			$	252,778			$	—			$	8,079,568			$	14,960,561			$	502,778			$	—			$	15,463,339
Operating expenses			(2,883,235	)			—				(1,065,506	)			(3,948,741	)			(5,503,369	)			—				(2,156,865	)			(7,660,234	)
Other expense			—				—				(2,573,068	)			(2,573,068	)			—				—				(4,789,677	)			(4,789,677	)
Discontinued operations			(1,447	)			—				—				(1,447	)			73,226				—				—				73,226
Net income		$	4,942,108			$	252,778			$	(3,638,574	)		$	1,556,312			$	9,530,418			$	502,778			$	(6,946,542	)		$	3,086,654
Total Assets		$	313,272,218			$	10,000,000			$	15,874,221			$	339,146,439			$	313,272,218			$	10,000,000			$	15,874,221			$	339,146,439

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, and operating expenses that were not specifically derived from either operating segment

10. Pro Forma Financial Information

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

		For the three months ended June 30,								For the six months ended June 30,
		2008				2007				2008				2007
Operating Data:
Total operating revenue		$	10,262,573			$	9,040,747			$	20,510,506			$	17,376,698
Total operating expenses			(5,118,465	)			(4,354,643	)			(9,798,787	)			(8,476,116	)
Other expense			(3,913,799	)			(2,990,500	)			(7,909,126	)			(5,624,540	)
Income from continuing operations			1,230,309				1,695,604				2,802,593				3,276,042
Dividends attributable to preferred stock			(1,023,437	)			(1,023,437	)			(2,046,875	)			(2,046,874	)
Net income from continuing operations available to common stockholders		$	206,872			$	672,167			$	755,718			$	1,229,168
Share and Per Share Data:
Basic & diluted net income from continuing operations		$	0.02			$	0.08			$	0.09			$	0.14
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. Subsequent Events

On July 9, 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 July, August and September of 2008. Monthly dividends will be payable on July 31, 2008, August 29, 2008 and September 30, 2008, to those stockholders of record as of the close of business for the dates of July 23, 2008, August 21, 2008 and September 22, 2008, respectively.

On July 9, 2008, the Company’s Board of Directors approved the renewal of the Amended Advisory Agreement with its Adviser, and the Administration Agreement with its Administrator, through August 31, 2009.

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

Our Investment Strategy

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. At June 30, 2008, we owned 57 properties totaling approximately 6.0 million square feet, and had one mortgage loan outstanding. All of our properties are fully leased and all tenants and our borrower are current and paying in accordance with their leases and loan, respectively. The total gross investment in these acquisitions, including the mortgage loan investment, was approximately $426.2 million at June 30, 2008.

Recent Events

Investment Activities: During the six months ended June 30, 2008, we acquired four properties totaling approximately 465,000 square feet, for a total gross investment of approximately $37.1 million.

Financing Activities: During the six months ended June 30, 2008, we had net borrowings under our line of credit of approximately $40.2 million with approximately $44.6 million outstanding at June 30, 2008. The proceeds from the line of credit were used to fund the four acquisitions during the six-month period and to fund the expansion of our property located in Newburyport, Massachusetts.

Our Investment Adviser and Administrator