Edgar Filing: GLADSTONE COMMERCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

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

For the transition period from to

Commission file number 001-33097

GLADSTONE COMMERCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Maryland		02-0681276
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1521 Westbranch Drive, Suite 100 McLean, Virginia		22102
(Address of principal executive offices)		(Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


(Title of each Class)		(Name of each exchange on which registered)
Common Stock, $0.001 par value per share		NASDAQ Global Select Market
7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share		NASDAQ Global Select Market
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.001 per share		NASDAQ Global Select Market
7.125% Series C Cumulative Term Preferred Stock, par value $0.001 per share		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

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 x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act). YES ¨ NO x.

The aggregate market value of the voting common stock held by non-affiliates of the Registrant on June 28, 2013, based on the closing price on that date of $18.64 on the NASDAQ Global Select Market, was $252,114,239. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. There were 15,662,414 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of February 18, 2013.

Documents Incorporated by Reference: Portions of the registrant’s Proxy Statement, to be filed no later than April 30, 2014, relating to the Registrant’s 2014 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K.

GLADSTONE COMMERCIAL CORPORATION

FORM 10-K FOR THE YEAR ENDED

DECEMBER 31, 2013

TABLE OF CONTENTS


		PAGE

PART I

Item 1.	Business.		4

Item 1A.	Risk Factors.		17

Item 1B.	Unresolved Staff Comments.		33

Item 2.	Properties.		34

Item 3.	Legal Proceedings.		39

Item 4.	Mine Safety Disclosures.		39

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.		40

Item 6.	Selected Financial Data.		42

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		44

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.		61

Item 8.	Financial Statements and Supplementary Data.		62

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.		96

Item 9A.	Controls and Procedures.		96

Item 9B.	Other Information.		96

PART III

Item 10.	Directors, Executive Officers and Corporate Governance.		97

Item 11.	Executive Compensation.		97

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.		97

Item 13.	Certain Relationships and Related Transactions, and Director Independence.		97

Item 14.	Principal Accountant Fees and Services.		97

PART IV

Item 15.	Exhibits and Financial Statement Schedules.		98

SIGNATURES			102

Forward-Looking Statements

Our disclosure and analysis in this Annual Report on Form 10-K, or Form 10-K, and the documents that are incorporated by reference herein, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. We intend such forward-looking statement to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Ligation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and funds from operations, or FFO, our strategic plans and objectives, cost management, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated capital expenditures (and access to capital) required to complete projects, amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Statements regarding the following subjects, among others, are forward-looking by their nature:

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our business and financing strategy;

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our ability to implement our business plan;

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pending transactions;

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our projected operating results;

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our ability to obtain future financing arrangements;

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estimates relating to our future distributions;

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our understanding of our competition and our ability to compete effectively;

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market and industry trends;

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interest and insurance rates;

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estimates of our future operating expenses, including payments to our Adviser (as defined herein) under the terms of our Advisory Agreement (as defined herein);

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projected capital expenditures; and

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use of the proceeds of our New Line of Credit (as defined herein), mortgage notes payable, future stock offerings and other future capital resources, if any.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

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general volatility of the capital markets and the market price of our common and preferred stock;

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failure to qualify as a real estate investment trust, or REIT, and risks of changes in laws that affect REITs;

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risks associated with negotiation and consummation of pending and future transactions;

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changes in our business strategy;

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the adequacy of our cash reserves and working capital;

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our failure to successfully integrate and operate acquired properties and operations;

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defaults upon or non-renewal of leases by tenants;

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decreased rental rates or increased vacancy rates;

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the degree and nature of our competition, including with other real estate investment companies;

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availability, terms and deployment of capital, including the ability to maintain and borrow under our New Line of Credit, arrange for long-term mortgages on our properties, secure one or more additional long-term lines of credit and raise equity capital;

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our Adviser’s ability to identify, hire and retain highly-qualified personnel in the future;

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changes in our industry or the general economy;

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changes in real estate and zoning laws and increases in real property tax rates;

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changes in governmental regulations, tax rates and similar matters;

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environmental uncertainties and risks related to natural disasters; and

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the loss of any of our key officers, such as Mr. David Gladstone, our Chairman and Chief Executive Officer, Mr. Terry Lee Brubaker, our Vice Chairman and Chief Operating Officer, or Mr. Robert Cutlip, our President.

This list of risks and uncertainties, however, is only a summary of some of the most important factors to us and is not intended to be exhaustive. You should carefully review the risks set forth herein under the caption “Item 1A. Risk Factors.” New factors may also emerge from time to time that could materially and adversely affect us.

Item 1. Business.

Overview

Gladstone Commercial Corporation (which we refer to as “we,” “us,” or the “Company”) is a REIT that was 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, commercial and retail real property and selectively making long-term industrial and commercial mortgage loans. Our portfolio of real estate 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 generally 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. As of February 18, 2014, we owned a total of 87 properties.

We conduct substantially all of our activities, including the ownership of all of our properties, through Gladstone Commercial Limited Partnership, a Delaware limited partnership, which we refer to as our Operating Partnership. We control our Operating Partnership through our ownership of GCLP Business Trust II, a Massachusetts business trust, which is the general partner of our Operating Partnership, and of GCLP Business Trust I, a Massachusetts business trust, which currently holds all of the limited partnership units of our Operating Partnership. Our Operating Partnership may issue limited partnership units from time to time in exchange for industrial and commercial real property. Limited partners who hold limited partnership units in our Operating Partnership will generally be entitled to redeem these units for cash or, at our election, shares of our common stock on a one-for-one basis.

Our Operating Partnership is also the sole member of Gladstone Commercial Lending, LLC, which we refer to as Gladstone Commercial Lending. Gladstone Commercial Lending is a Delaware limited liability company that was formed to hold any real estate mortgage loans.

Our business is managed by our external adviser, Gladstone Management Corporation, or our Adviser. Administrative services for us are provided by Gladstone Administration, LLC, or our Administrator. Both our Advisor and our Administrator are affiliates of ours and each other.

Our Investment Objectives and Our Strategy

Our principal investment objectives are to generate income from rental properties and, to a much lesser extent, mortgage loans, which we use to fund our continuing operations and to pay out monthly cash distributions to our stockholders. Our primary strategy to achieve our investment objectives is to invest in and own a diversified portfolio of leased industrial, commercial and retail real estate that we believe will produce stable cash flow and increase in value. We may sell some of our real estate assets from time to time when our Adviser determines that doing so would be advantageous to us and our stockholders. We also expect to occasionally make mortgage loans secured by income-producing commercial, industrial or retail real estate, which loans may have some form of equity participation. We currently have no investments in mortgage loans.

We use leverage in order to maximize potential returns to stockholders. We are not limited with respect to the amount of leverage that we may use for the acquisition of any specific property, although we have certain portfolio-level leverage covenants we must comply with under the terms of our unsecured line of credit, or the New Line of Credit. We intend to use non-recourse mortgage financing that will allow us to limit our loss exposure on any property to the amount of equity invested in such property. The market for long-term mortgages continues to improve, they are obtainable and the environment is competitive. The collateralized mortgage backed securities, or CMBS, market has made a comeback, but it is more conservative and restrictive than it was prior to the recent recession and uncertainty with regard to interest rates has made the CMBS market less predictable. Consequently, we continue to look to regional banks, insurance companies and other non-bank lenders, in addition to the CMBS market, to issue mortgages to finance our real estate activities.

In addition to leverage, we were active in the equity markets during 2013 by issuing shares of common stock in three separate follow-on public offerings, issuing shares of our senior common stock and issuing shares under our at-the-market program, or ATM Program, pursuant to an open market sale agreement with Jefferies, LLC, or Jefferies.

Investment Policies

Types of Investments

Overview

We intend that substantially all of our investments will be generated from the ownership of income-producing real property or, to a much lesser extent, mortgage loans secured by real property. We expect that the vast majority of our investments will be structured as net leases, but if a net lease would have an adverse impact on a potential tenant, or would otherwise be inappropriate for us, we may structure our investment as either a gross, or modified gross, lease or as a mortgage loan. Investments are not restricted to geographical areas, but we expect that most of our investments in real estate will continue to be made within the continental United States. Some of our investments may also be made through joint ventures that would permit us to own interests in large properties without restricting the diversity of our portfolio. Our stockholders are not afforded the opportunity to evaluate the economic merits of our investments or the terms of any dispositions of properties and instead rely on the advice of our Adviser. See “Risk Factors —Our success depends on the performance of our Adviser and if our Adviser makes inadvisable investment or management decisions, our operations could be materially adversely impacted.”

We anticipate that we will make substantially all of our investments through our Operating Partnership and Gladstone Commercial Lending. Our Operating Partnership and Gladstone Commercial Lending may acquire interests in real property or mortgage loans in exchange for the issuance of limited partnership units, for cash or through a combination of both. Units issued by our Operating Partnership generally will be redeemable for cash or, at our election, shares of our common stock on a one-for-one basis. However, we may in the future also conduct some of our business and hold some of our interests in real properties or mortgage loans through one or more wholly-owned subsidiaries that are not owned, directly or indirectly, through our Operating Partnership or Gladstone Commercial Lending. We have not issued any limited partnership units to date.

Property Acquisitions and Net Leasing

To date, we have purchased a majority of our properties from owners that have leased their properties to non-affiliated tenants, and while we have engaged in some transactions with tenants who have consummated sale-leaseback transactions, these transactions do not comprise the dominant portion of our portfolio. We expect that some of our sale-leaseback transactions will be in conjunction with acquisitions, recapitalizations or other corporate transactions affecting our tenants. In these transactions, we may act as one of several sources of financing for these transactions by purchasing one or more properties from the tenant and by net leasing it to the tenant or its successor in interest. For a discussion of the risks associated with leasing property to leveraged tenants, see “Risk Factors—Highly leveraged tenants and borrowers may be unable to pay rent or make mortgage payments, which could adversely affect our cash available to make distributions to our stockholders.”

In limited circumstances, we have granted tenants an option to purchase the leased property, and we anticipate granting these options to select tenants in the future. In these cases, we generally seek to fix the option purchase price at the greater of our purchase price for the property and the fair market value of the property at the time the option is exercised.

Our portfolio consists primarily of single-tenant commercial and industrial real property; however, we also own and consider for ownership multi-tenant commercial and industrial properties, as well as retail and medical properties. Generally, we lease properties to tenants that our Adviser deems creditworthy under leases that will be full recourse obligations of our tenants or their affiliates. In most cases, our leases will be “triple net leases” that require the tenant to pay all the operating costs, costs of maintenance, insurance and real estate taxes on the property. We seek to obtain lease terms of approximately 10 to 15 years with built-in rental increases.

Investments in Mortgage Loans

Although we expect to make investments in mortgage loans sparingly, we may elect to structure our investment in a particular property as a mortgage loan secured by the property in situations where a standard net lease transaction would have an adverse tax impact on the seller of a property or would otherwise be inappropriate for us. We anticipate that most of our lending transactions will be loans secured by industrial or commercial property. Our Adviser will attempt to structure mortgage loans in a manner that would provide us with current income substantially similar to that which we could expect to receive had the investment been structured as a net lease transaction.

To the extent that we invest in mortgage loans, we will generally originate those loans. However, we may also purchase mortgage loans from banks, CMBS pools or other lenders if such transactions are consistent with our investment objectives. Our Adviser will service the mortgage loans in our portfolio by monitoring the collection of monthly principal and interest payments on our behalf. We had no mortgage loans outstanding as of December 31, 2013.

Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions

We consider underwriting of the real estate and the tenant for the property (or the borrower in the case of a mortgage loan) to be the most important aspects of making an investment. Evaluating the creditworthiness of the tenant or borrower and its ability to generate sufficient cash flow to make payments to us pursuant to the lease or the mortgage loan is the most important aspect of our underwriting procedures. In analyzing potential acquisitions of properties and leases, our Adviser reviews all aspects of the potential transaction, including tenant and real estate fundamentals, to determine whether potential acquisitions and leases can be structured to satisfy our acquisition criteria. The criteria listed below provide general guideposts that our Adviser may consider when underwriting leases and mortgage loans:

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Credit Evaluation. Our Adviser evaluates each potential tenant for its creditworthiness, considering factors such as the rating by a national credit rating agency, if any, management experience, industry position and fundamentals, operating history and capital structure. Currently, 44% of our tenants are rated by a national credit rating agency. A prospective tenant that is deemed creditworthy does not necessarily mean that we will consider the tenant’s property to be “investment grade.” Our Adviser seeks tenants that range from small businesses, many of which do not have publicly rated debt, to large public companies. Our Adviser’s investment professionals have substantial experience in locating and financing these types of companies. By leasing properties to these tenants, we believe that we will generally be able to charge rent that is higher than the rent charged to tenants with unleveraged balance sheets and recognized credit, thereby enhancing current return from these properties as compared with properties leased to companies whose credit potential has already been recognized by the market. Furthermore, if a tenant’s credit improves, the value of our lease or investment will likely increase (if all other factors affecting value remain unchanged). In evaluating a possible investment, we believe that the creditworthiness of a prospective tenant is normally a more significant factor than the unleased value of the property itself. While our Adviser selects tenants it believes to be creditworthy, tenants are not required to meet any minimum rating established by an independent credit rating agency. Our Adviser’s standards for determining whether a particular tenant is creditworthy vary in accordance with a variety of factors relating to specific prospective tenants. The creditworthiness of a tenant is determined on a tenant-by-tenant and case-by-case basis. Therefore, general standards for creditworthiness cannot be applied.

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Leases with Increasing Rent. Our Adviser seeks to include a clause in each lease that provides for annual rent escalations over the term of the lease. These increases will generally be fixed; however certain of our leases are tied to increases in indices, such as the consumer price index.

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Diversification. Our Adviser attempts to diversify our portfolio to avoid dependence on any one particular tenant, facility type, geographic location or tenant industry. By diversifying our

portfolio, our Adviser intends to reduce the adverse effect of a single under-performing investment or a downturn in any particular industry or geographic region. Please see Item 2 of this Form 10-K for a summary of our portfolio by industry and geographic location.

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Property Valuation. The business prospects and the financial strength of the tenant are important aspects of the evaluation of any sale and leaseback of property, or acquisition of property subject to a net lease, particularly a property that is specifically suited to the needs of the tenant. We generally require quarterly unaudited and annual audited financial statements of the tenant in order to continuously monitor the financial performance of the tenant. Our Adviser evaluates the financial capability of the tenant and its ability to perform per the terms of the lease, including obtaining certificates of insurance and verifying payment of real estate taxes on an annual basis. Our Adviser may also examine the available operating results of prospective investment properties to determine whether or not projected rental levels are likely to be met. As further described below, our Advisor also evaluates the physical characteristics of a prospective property investment and comparable properties as well as the geographic location of the property in the particular market to ensure that the characteristics are favorable for re-leasing the property at approximately the same or higher rental rate should that necessity arise. Our Adviser then computes the value of the property based on historical and projected operating results. In addition, each property that we propose to purchase is appraised by an independent appraiser. These appraisals may take into consideration, among other things, the terms and conditions of the particular lease transaction and the conditions of the credit markets at the time the purchase is negotiated. We generally limit the purchase price of each acquisition to less than 10% of our consolidated total assets.

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Properties Important to Tenant Operations. Our Adviser generally seeks to acquire investment properties that are essential or important to the ongoing operations of the prospective tenant. We believe that these investment properties provide better protection in the event a tenant becomes bankrupt, as leases on properties essential or important to the operations of a bankrupt tenant are typically less likely to be rejected in bankruptcy or otherwise terminated.

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Lease Provisions that Enhance and Protect Value. When appropriate, our Adviser attempts to include provisions in our leases that require our consent to specified tenant activity or require the tenant to satisfy specific operating tests. These provisions may include, for example, operational or financial covenants of the tenant, as well as indemnification of us by the tenant against environmental and other contingent liabilities. We believe that these provisions serve to protect our investments from changes in the operating and financial characteristics of a tenant that may impact its ability to satisfy its obligations to us or that could reduce the value of our properties. Our Adviser generally also seeks covenants requiring tenants to receive our consent prior to any change in control of the tenant.

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Credit Enhancement. Our Adviser may also seek to enhance the likelihood of a tenant’s lease obligations being satisfied through a cross-default with other tenant obligations, a letter of credit or a guaranty of lease obligations from each tenant’s corporate parent. We believe that this type of credit enhancement, if obtained, provides us with additional financial security.

Underwriting of the Real Estate and Due Diligence Process

In addition to underwriting the tenant or borrower, our Adviser also underwrites the real estate to be acquired or secured by one of our mortgages. On our behalf, our Adviser performs a due diligence review with respect to each property, such as evaluating the physical condition of a property, zoning and site requirements to ensure the property is in compliance with all zoning regulations as well as an environmental site assessment, in an attempt to determine potential environmental liabilities associated with a property prior to its acquisition, although there can be no assurance that hazardous substances or wastes (as defined by present or future federal or state laws or regulations) will not be discovered on the property after we acquire it. We could incur significant costs related to government regulation and private litigation over environmental matters. See “Risk Factors – We could be exposed to liability and remedial costs related to environmental matters.”

Our Adviser also reviews the structural soundness of the improvements on the property and may engage a structural engineer to review all aspects of the structures in order to determine the longevity of each building on the property. This review normally also includes the components of each building, such as the roof, the structure and configuration, the electrical wiring, the heating and air-conditioning system, the plumbing, parking lot and various other aspects such as compliance with state and federal building codes.

Our Adviser also physically inspects the real estate and surrounding real estate as part of determining the value of the real estate. All of our Adviser’s due diligence is aimed at arriving at a valuation of the real estate under the assumption that it would not be rented to the existing tenant. As part of this process, our Adviser may consider one or more of the following items:

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The comparable value of similar real estate in the same general area of the prospective property. In this regard, comparable property is difficult to define because each piece of real estate has its own distinct characteristics. But to the extent possible, comparable property in the area that has sold or is for sale will be used to determine if the price to be paid for the property is reasonable. The question of comparable properties’ sale prices is particularly relevant if a property might be sold by us at a later date.

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An assessment of the relative flexibility of the building configuration and its ability to be re-leased to other users in a single or multiple tenant arrangement.

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The comparable real estate rental rates for similar properties in the same area of the prospective property.

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Alternative property uses that may offer higher value.

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The cost of replacing the property at current construction prices if it were to be sold.

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The assessed value as determined by the local real estate taxing authority.

In addition, our Adviser supplements its valuation with an independent real estate appraisal in connection with each investment that we consider. When appropriate, our Adviser may engage experts to undertake some or all of the due diligence efforts described above.

Use of Leverage

We use long-term mortgage borrowings as a financing mechanism in amounts that we believe will maximize the return to our stockholders. Currently, the majority of our long-term mortgage borrowings are structured as non-recourse to us, and we intend to structure any medium-term mortgages in the same manner, with limited exceptions that would trigger recourse to us only upon the occurrence of certain fraud, misconduct, environmental or bankruptcy events. The use of non-recourse financing allows us to limit our

exposure to the amount of equity invested in the properties pledged as collateral for our borrowings. Non-recourse financing generally restricts a lender’s claim on the assets of the borrower, and as a result, the lender generally may look only to the property securing the debt for satisfaction of the debt. We believe that this financing strategy, to the extent available, protects our other assets. However, we can provide no assurance that non-recourse financing will be available on terms acceptable to us, or at all, and there may be circumstances where lenders have recourse to our other assets. To a much lesser extent, we use recourse financing. Of the $422.6 million in long-term mortgages outstanding as of December 31, 2013, only $2.0 million is recourse to the Company.

We believe that, by operating on a leveraged basis, we will have more funds available and, therefore, will make more investments than would otherwise be possible if we operated on a non-leveraged basis. We believe that this creates a more diversified portfolio and maximizes potential returns to our stockholders. We may refinance properties during the term of a loan when we believe it is advantageous.

Conflict of Interest Policy

We have adopted policies to reduce potential conflicts of interest. In addition, our directors are subject to certain provisions of Maryland law that are designed to minimize conflicts. However, we cannot assure you that these policies or provisions of law will reduce or eliminate the influence of these conflicts.

Under our current conflict of interest policy, without the approval of a majority of our independent directors, we will not:

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acquire from or sell to any of our officers, directors or our Adviser’s employees, or any entity in which any of our officers, directors or Adviser’s employees has an interest of more than 5%, any assets or other property;

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borrow from any of our directors, officers or our Adviser’s employees, or any entity, in which any of our officers, directors or our Adviser’s employees has an interest of more than 5%; or

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

Our policy also prohibits us from purchasing any real property owned by or co-investing with our Adviser, any of its affiliates or any business in which our Adviser or any of its subsidiaries have invested, except that we may lease property to existing and prospective portfolio companies of current or future affiliates, such as Gladstone Capital Corporation, Gladstone Land Corporation or Gladstone Investment Corporation and other entities advised by our Adviser, so long as that entity does not control the portfolio company and the transaction is approved by both companies’ Board of Directors. If we decide to change this policy on co-investments with our Adviser or its affiliates, we will seek our stockholders’ approval.

Future Revisions in Policies and Strategies

Our independent directors periodically review our investment policies to evaluate whether they are in the best interests of us and our stockholders. Our investment procedures, objectives and policies may vary as new investment techniques are developed or as regulatory requirements change, and except as otherwise provided in our charter or bylaws, may be altered by a majority of our directors (including a majority of our independent directors) without the approval of our stockholders, to the extent that our Board of Directors determines that such modification is in the best interest of our stockholders. Among other factors, developments in the market which affect the policies and strategies described in this report or which change our assessment of the market may cause our Board of Directors to revise our investment policies and strategies.

Code of Ethics

The Company and its affiliates, Gladstone Capital Corporation, Gladstone Investment Corporation, Gladstone Land Corporation, Gladstone Management Corporation, Gladstone Administration, LLC, and Gladstone Securities, LLC have adopted a code of ethics and business conduct applicable to all personnel of such companies that complies with the guidelines set forth in Item 406 of Regulation S-K of the Securities Act of 1933. This code establishes procedures for personal investments, restricts certain transactions by such personnel and requires the reporting of certain transactions and holdings by such personnel. A copy of this code is available for review, free of charge, at our website at www.GladstoneCommercial.com. We intend to provide any required disclosure of any amendments to or waivers of the provisions of this code by posting information regarding any such amendment or waiver to our website within four days of its effectiveness.

Our Adviser and Administrator

Our business is managed by our Adviser. The officers, directors and employees of our Adviser have significant experience in making investments in and lending to businesses of all sizes, including investing in real estate and making mortgage loans. We have entered into an Investment Advisory Agreement with our Adviser, or the Advisory Agreement, under which our Adviser is responsible for managing our assets and liabilities, for operating our business on a day-to-day basis and for identifying, evaluating, negotiating and consummating investment transactions consistent with our investment policies as determined by our Board of Directors from time to time. Gladstone Administration, LLC, or our Administrator, employs our chief financial officer and treasurer, chief compliance officer, internal counsel and secretary and their respective staffs and provides administrative services for us under the Administration Agreement.

David Gladstone, our chairman and chief executive officer, is also the chairman, chief executive officer and the controlling stockholder of our Adviser and our Administrator. Terry Lee Brubaker, our vice chairman and chief operating officer and a member of our Board of Directors, also serves in the same capacities for our Adviser and our Administrator.

Our Adviser maintains an investment committee that approves each of our investments. This investment committee is currently comprised of Messrs. Gladstone, Cutlip and Brubaker. We believe that the review process of our Adviser’s investment committee gives us a unique competitive advantage over other REITs because of the substantial experience that the members possess and their unique perspective in evaluating the blend of corporate credit, real estate and lease terms that collectively provide an acceptable risk for our investments.

Our Adviser’s board of directors has empowered its investment committee to authorize and approve our investments, subject to the terms of the Advisory Agreement. Before we acquire any property, the transaction is reviewed by our Adviser’s investment committee to ensure that, in its view, the proposed transaction satisfies our investment criteria and is within our investment policies. Approval by our Adviser’s investment committee is generally the final step in the property acquisition approval process, although the separate approval of our Board of Directors is required in certain circumstances described below. For further detail on this process, please see “Investment Policies - Underwriting Criteria, Due Diligence Process and Negotiating Lease Provisions.”

Our Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington D.C., and our Adviser also has offices in several other states.

Advisory and Administration Agreements

Many of the services performed by our Adviser and Administrator in managing our day-to-day activities are summarized below. This summary is provided to illustrate the material functions which our Adviser and Administrator perform for us pursuant to the terms of the Advisory and Administration Agreements, respectively.

Advisory Agreement

Under the terms of the Advisory Agreement, we are 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. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which 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).

The 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 FFO. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. For each of the years ended December 31, 2013, 2012 and 2011, tenants paid approximately $10,000 in fees to our Adviser, respectively.

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock and senior common stock, but FFO does not include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or the hurdle rate, of total stockholders’ equity, less the recorded value of any preferred stock. We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO quarterly as follows:

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no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized);

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100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized); and

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20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Quarterly Incentive Fee Based on FFO

Pre-incentive fee FFO

(expressed as a percentage of total common stockholders’ equity)

LOGO

Percentage of pre-incentive fee FFO allocated to incentive fee

The incentive fee may be reduced because of our New Line of Credit covenant which limits distributions to our stockholders to 100% of FFO with acquisition-related costs that are required to be expensed under Accounting Standards Codification, or ASC 805, Business Combinations, added back to FFO.

Administration Agreement

Under the terms of the Administration Agreement, we pay separately for our allocable portion of our Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, internal counsel and secretary, and their respective staffs. Our allocable portion of expenses is generally derived by multiplying our Administrator’s total expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all companies managed by our Adviser under similar agreements.

Adviser Duties and Authority under the Advisory Agreement

Under the terms of the Advisory Agreement, our Adviser is required to use its best efforts to present to us investment opportunities consistent with our investment policies and objectives as adopted by our Board of Directors. In performing its duties, our Adviser, either directly or indirectly by engaging an affiliate:

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finds, evaluates and enters into contracts to purchase real estate and make mortgage loans on our behalf in compliance with our investment procedures, objectives and policies, subject to approval of our Board of Directors, where required;

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provides advice to us and acts on our behalf with respect to the negotiation, acquisition, financing, refinancing, holding, leasing and disposition of real estate investments;

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takes the actions and obtains the services necessary to effect the negotiation, acquisition, financing, refinancing, holding, leasing and disposition of real estate investments; and

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provides day-to-day management of our business activities and other administrative services for us as requested by our Board of Directors.

Our Board of Directors has authorized our Adviser to make investments in any property on our behalf without the prior approval of our Board of Directors if the following conditions are satisfied:

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our Adviser has obtained an independent appraisal for the property indicating that the total cost of the property does not exceed its appraised value; and

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our Adviser has concluded that the property, in conjunction with our other investments and proposed investments, is reasonably expected to fulfill our investment objectives and policies as established by our Board of Directors then in effect.

The actual terms and conditions of transactions involving investments in properties and mortgage loans are determined at the sole discretion of our Adviser, subject at all times to compliance with the foregoing requirements. Some types of transactions, however, require the prior approval of our Board of Directors, including a majority of our independent directors, including the following:

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loans not secured or otherwise supported by real property;

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any acquisition or mortgage loan which at the time of investment would have a cost exceeding 20% of our total assets;

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transactions that involve conflicts of interest with our Adviser or other affiliates (other than reimbursement of expenses in accordance with the Advisory Agreement); and

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the lease of assets to our Adviser, its affiliates or any of our officers or directors.

Our Adviser and Administrator also engage in other business ventures and, as a result, their resources are not dedicated exclusively to our business. For example, our Adviser and Administrator also serve as the external adviser or administrator, respectively, to Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly traded business development companies affiliated with us, and Gladstone Land Corporation, a publicly traded agricultural real estate company that is also our affiliate. However, under the Advisory Agreement, our Adviser is required to devote sufficient resources to the administration of our affairs to discharge its obligations under the agreement. The Advisory Agreement is not assignable or transferable by either us or our Adviser without the consent of the other party, except that our Adviser may assign the Advisory Agreement to an affiliate for whom our Adviser agrees to guarantee its obligations to us. Either we or our Adviser may assign or transfer the Advisory Agreement to a successor entity.

Gladstone Securities

Gladstone Securities, LLC, or Gladstone Securities, is a privately held broker dealer registered with The Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is controlled by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

Dealer Manager Agreement

In connection with the offering of our senior common stock, or Senior Common Stock, we entered into a Dealer Manager Agreement, dated March 25, 2011, or the Dealer Manager Agreement, with Gladstone Securities, or the Dealer Manager, pursuant to which the Dealer Manager agreed to act as our exclusive dealer manager in connection with the offering. Pursuant to the terms of the Dealer Manager Agreement, the Dealer Manager is entitled to receive a sales commission in the amount of 7.0% of the gross proceeds of the shares of Senior Common Stock sold, plus a dealer manager fee in the amount of 3.0% of the gross proceeds of the shares of Senior Common Stock sold. In addition, we have agreed to indemnify the Dealer Manager against various liabilities, including certain liabilities arising under the federal securities laws. We made payments of approximately $0.3 million and $0.2 million during the years ended December 31, 2013 and 2012, respectively, to the Dealer Manager pursuant to this agreement, which currently is scheduled to terminate on the earlier of (i) March 28, 2015 or (ii) the date on which 3,000,000 shares of Senior Common Stock are sold pursuant to the Dealer Manager Agreement.

Mortgage Financing Arrangement Agreement

We also entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities may from time to time solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We will pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, will be based on a percentage of the amount of the mortgage, generally ranging from 0.5% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1 million during the year ended December 31, 2013 on total mortgages secured of $76.3 million, or 0.18%. The agreement is scheduled to terminate on August 31, 2014, unless renewed or earlier terminated pursuant to the provisions contained therein.

Employees

We do not currently have any employees and do not expect to have any employees in the foreseeable future. Currently, services necessary for our business are provided by individuals who are employees of our Adviser and our Administrator pursuant to the terms of the Advisory Agreement and the Administration Agreement, respectively. Each of our executive officers is an employee or officer, or both, of our Adviser or our Administrator. No employee of our Adviser or our Administrator will dedicate all of his or her time to us. However, we expect that a total of 15 to 20 full time employees of our Adviser and our Administrator will spend substantial time on our matters during calendar year 2014. To the extent that we acquire more investments, we anticipate that the number of employees of our Adviser and our Administrator who devote time to our matters will increase.

As of December 31, 2013, our Adviser and Administrator collectively had 62 full-time employees. A breakdown of these employees is summarized by functional area in the table below:


Number of Individuals		Functional Area
10		Executive Management

38		Investment Management, Portfolio Management and Due Diligence

14		Administration, Accounting, Compliance, Human Resources, Legal and Treasury

Competition

We compete with a number of other real estate companies and traditional mortgage lenders, many of whom have greater marketing and financial resources than we do. Principal factors of competition in our primary business of investing in and owning leased industrial, commercial and retail real property are the quality of properties, leasing terms, attractiveness and convenience of location. Additionally, our ability to compete depends upon, among other factors, trends of the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants and borrowers, availability and cost of capital, taxes and governmental regulations.

Available Information

Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments, if any, to those reports filed or furnished with the Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge through our website at www.GladstoneCommercial.com. A request for any of

these reports may also be submitted to us by sending a written request addressed to Investor Relations, Gladstone Commercial Corporation, 1521 Westbranch Drive, Suite 100, McLean, VA 22102, or by calling our toll-free investor relations line at 1-866-366-5745. The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Item 1A. Risk Factors.

An investment in our securities involves a number of significant risks and other factors relating to our structure and investment objectives. As a result, we cannot assure you that we will achieve our investment objectives. You should consider carefully the following information before making an investment in our securities.

Risks related to the economy

The failure of U.S. lawmakers to reach an agreement on the national debt ceiling could have a material adverse effect on our business, financial condition and results of operations.

In February 2014, the U.S. Congress passed legislation to increase the debt ceiling through March 2015. Congress will need to pass additional legislation prior to March 2015 to further increase the debt ceiling in order for the government to continue to make payments to its creditors. In the event U.S. lawmakers fail to reach a viable agreement on the national debt ceiling, the U.S. could default on its obligations, which could negatively impact the trading market for U.S. government securities. This may, in turn, negatively affect our ability to obtain financing for our investments. As a result, it may materially adversely affect our business, financial condition and results of operations.

While the U.S. has begun to see improving financial indicators since the 2008 recession, recent events have created more uncertainty in the U.S. economy and capital markets. Therefore, we remain cautious about a long-term economic recovery.

Over the last several years, the U.S. capital markets have experienced significant price volatility and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the lack of availability of certain types of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing at reasonable terms, which may negatively affect our ability to make acquisitions. These disruptions in the financial markets also may have a material adverse effect on the market value of our common and preferred stock and the lease rates we can charge for our properties, as well as other unknown adverse effects on us or the economy in general. In addition, the continued challenging economic conditions could still materially and adversely impact the financial condition of one or more of our tenants and, therefore, could increase the likelihood that a tenant may declare bankruptcy or default upon its payment obligations arising under a related lease.

A further downgrade of the United States credit rating and the ongoing economic crisis in Europe could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. In August 2011, Standard & Poor’s downgraded its long-term sovereign credit rating on the U.S. to AA+ for the first time due to the U.S. Congress’ inability to reach an effective agreement on the national debt ceiling and a budget in a timely manner. The current U.S. debt ceiling and budget deficit concerns have increased the possibility of the credit-rating agencies further downgrading the U.S. credit rating. On October 15, 2013, Fitch Ratings Service placed the U.S. credit rating on negative watch, warning that a failure by the U.S. Government to honor interest or principal payments on U.S. treasury securities would impact its decision on whether to downgrade the U.S. credit rating. Fitch also stated that the manner and duration of an agreement to raise the debt ceiling and resolve the then existing budget impasse, as well as the perceived risk of such events occurring in the future, would weigh on its ratings.

The impact of any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and deteriorating sovereign debt conditions in Europe, is inherently unpredictable and

could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, the decreased credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our stock price. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Inflation may adversely affect our financial condition and results of operations.

Although inflation has not materially impacted our results of operations in the past, increased inflation could have a more pronounced negative impact on our results of operations. During times when inflation is greater than increases in rent, as provided for in our leases, rent increases may not keep up with the rate of inflation. Likewise, even though triple net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent.

Healthcare reform legislation may affect our results of operations and financial condition.

On March 23, 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act of 2010 and on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act, which in part modified the Patient Protection and Affordable Care Act (collectively the “Acts”). Together, the Acts serve as the primary vehicle for comprehensive health care reform in the U.S. and are intended to reduce the number of individuals in the U.S. without health insurance and effect significant other changes to the ways in which health care is organized, delivered and reimbursed. The complexities and ramifications of the new legislation are significant, and have begun being implemented through a phased approach that will conclude in 2018. In January 2014 Moody’s Investors Service downgraded its credit rating outlook for U.S. Healthcare Insurers from stable to negative, citing uncertainty stemming from the unstable and evolving regulatory environment. At this time, the effects of health care reform and its impact on our tenants’ business, results of operations and financial condition and the resulting impact on our operations are not yet known. Accordingly, the Acts could adversely affect the cost of providing healthcare coverage generally and could adversely affect the financial and operational performance of our tenants and their results of operations.

Risks related to our financing

Our New Line of Credit contains various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions to stockholders.

The agreement governing our New Line of Credit requires us to comply with certain financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios, including fixed charge coverage, debt service coverage and a minimum net worth. We are also required to limit our distributions to stockholders to 100% of our FFO, and continued compliance with this covenant may require us to limit our distributions to stockholders. As of December 31, 2013, we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, and could be impacted by current or future economic conditions, and thus there are no assurances that we will continue to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver from the lenders, could accelerate our repayment obligations under the New Line of Credit and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay distributions to stockholders.

Our business strategy relies heavily on external financing, which may expose us to risks associated with leverage such as restrictions on additional borrowing and payment of distributions to stockholders, risks associated with balloon payments, and risk of loss of our equity upon foreclosure.

We use leverage so that we may make more investments than would otherwise be possible in order to maximize potential returns to stockholders. If the income generated by our properties and other assets fails to cover our debt service, we could be forced to reduce or eliminate distributions to our stockholders and may experience losses.

Our ability to achieve our investment objectives will be affected by our ability to borrow money in sufficient amounts and on favorable terms. We expect that we will borrow money that will be secured by our properties and that these financing arrangements will contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Accordingly, we may be unable to obtain the degree of leverage we believe to be optimal, which may cause us to have less cash for distribution to stockholders than we would have with an optimal amount of leverage. Our use of leverage could also make us more vulnerable to a downturn in our business or the economy, as it may become difficult to meet our debt service obligations if our cash flows are reduced due to tenant defaults. There is also a risk that a significant increase in the ratio of our indebtedness to the measures of asset value used by financial analysts may have an adverse effect on the market price of our securities.

Some of our debt financing arrangements may require us to make lump-sum or “balloon” payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or to sell the financed property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment, which could adversely affect the amount of distributions to our stockholders.

We intend to acquire additional properties by using our New Line of Credit and by continuing to seek long-term financing, where we will borrow all or a portion of the purchase price of a potential acquisition and securing the loan with a mortgage on some or all of our existing real property. The market for long-term mortgages has been limited for some time; however, we have recently seen mid-to-long-term (5 to 10 year) mortgages become more obtainable. The CMBS market has made a comeback over the past year, but it is much more conservative than it was prior to the recession and the pricing in the market remains somewhat volatile. Consequently, we are looking to regional banks, insurance companies and other non-bank lenders, and, to a lesser extent, the CMBS market to issue mortgages to finance our real estate activities. As of December 31, 2013, we had obtained approximately $422.6 million in long-term financing, which we have used to acquire additional properties. If we are unable to make our debt payments as required, a lender could foreclose on the property securing its loan. This could cause us to lose part or all of our investment in such property which in turn could cause the value of our securities or the amount of distributions to our stockholders to be reduced.

A change in the value of our assets could cause us to experience a cash shortfall, be in default of our loan covenants, lose management control or incur a charge for the impairment of assets.

We borrow on an unsecured basis under the New Line of Credit. A significant reduction in value of our pool of unencumbered assets could require us to pay down the balance of the New Line of Credit. Although we believe that we have significant excess collateral and capacity, future asset values are uncertain. If we were unable to meet a request to add collateral to the New Line of Credit, this inability could have a material adverse effect on our liquidity and our ability to meet our loan covenants. We may determine that the value of an individual asset, or group of assets, was impaired, and that we may need to record a charge to write-down the value of the asset to reflect its current estimated value based upon its intended use.

Interest rate fluctuations may adversely affect our results of operations.

We may experience interest rate volatility in connection with mortgage loans on our properties or other variable-rate debt that we may obtain from time to time. Certain of our leases contain escalations based on market interest rates and the interest rate on our New Line of Credit and one of our long-term mortgages is variable. Although we seek to mitigate this risk by structuring such provisions to contain a minimum interest rate or escalation rate, as applicable, these features do not eliminate this risk. We are also exposed to the effects of interest rate changes as a result of holding cash and cash equivalents in short-term, interest-bearing investments. We have entered into an interest rate cap to attempt to manage our exposure to interest rate fluctuations on our only outstanding variable rate mortgage. A significant change in interest rates could have an adverse impact on our results of operations.

Risks related to the real estate industry

We are subject to certain risks associated with real estate ownership and lending which could reduce the value of our investments.

Our investments include net leased industrial, commercial and retail property. Our performance, and the value of our investments, is subject to risks inherent to the ownership and operation of these types of properties, including:

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changes in the general economic climate;

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changes in local conditions such as an oversupply of space or reduction in demand for real estate;

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changes in interest rates and the availability of financing;

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competition from other available space; and

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changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.

The debt obligations of our tenants are dependent upon certain factors, which neither we nor our tenants or borrowers control, such as national, local and regional business and economic conditions, government economic policies, and the level of interest rates. As discussed in “Risks related to the economy” above, the credit markets have tightened resulting in a significant contraction in available liquidity. Accordingly, the credit market constraints and recession may increase the operating expenses of our tenants and decrease their ability to make lease payments, and thereby adversely affect our liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.

Competition for the acquisition of real estate may impede our ability to make acquisitions or increase the cost of these acquisitions.

We compete with many other entities to acquire properties, including financial institutions, institutional pension funds, other REITs, foreign real estate investors, other public and private real estate companies and private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for real estate. Our competitors may have greater resources than we do, and may be willing to pay more for certain assets or may have a more compatible operating philosophy with our acquisition targets. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties.

Our ownership of properties through ground leases exposes us to risks which are different than those resulting from our ownership of fee title to other properties.

We have acquired an interest in certain of our properties by acquiring a leasehold interest in the land underlying the property, and we may acquire additional properties in the future that are subject to similar ground leases. In this situation, we have no economic interest in the land underlying the property and do not control this land. We do not control the underlying land and this type of ownership interest poses potential risks for our business because (i) if the ground lease terminates for any reason, we will lose our interest in the property, including any investment that we made in the property, (ii) if our tenant defaults under the previously existing lease, we will continue to be obligated to meet the terms and conditions of the ground lease without the annual amount of ground lease payments reimbursable to us by the tenant, and (iii) if the third party owning the land under the ground lease disrupts our use either permanently or for a significant period of time, then the value of our assets could be impaired and our results of operations could be adversely affected.

Risks related to our tenants, borrowers and properties

Highly leveraged tenants and borrowers may be unable to pay rent or make mortgage payments, which could adversely affect our cash available to make distributions to our stockholders.

Some of our tenants and borrowers may have recently been either restructured using leverage, or acquired in a leveraged transaction. Tenants and borrowers that are subject to significant debt obligations may be unable to make their rent or mortgage payments if there are adverse changes to their businesses or because of the impact of the recent recession discussed in “Risks related to the economy.” Tenants that have experienced leveraged restructurings or acquisitions will generally have substantially greater debt and substantially lower net worth than they had prior to the leveraged transaction. In addition, the payment of rent and debt service may reduce the working capital available to leveraged entities and prevent them from devoting the resources necessary to remain competitive in their industries.

In situations where management of the tenant or borrower will change after a transaction, it may be difficult for our Adviser to determine with reasonable certainty the likelihood of the tenant’s or borrower’s business success and of its ability to pay rent or make mortgage payments throughout the lease or loan term. These companies generally are more vulnerable to adverse economic and business conditions, and increases in interest rates.

Leveraged tenants and borrowers are more susceptible to bankruptcy than unleveraged tenants. Bankruptcy of a tenant or borrower could cause:

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the loss of lease or mortgage payments to us;

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an increase in the costs we incur to carry the property occupied by such tenant;

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a reduction in the value of our securities; or

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a decrease in distributions to our stockholders.

Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing or terminating any unexpired lease. If a bankrupt tenant terminates a lease with us, any claim we might have for breach of the lease (excluding a claim against collateral securing the claim) will be treated as a general unsecured claim. Our claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year’s lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years’ lease payments). In addition, due to the long-term nature of our leases and terms providing for the repurchase of a property by the tenant, a bankruptcy court could re-characterize a net lease transaction as a secured lending transaction. If that were to occur, we would not be treated as the owner of the property, but might have additional rights as a secured creditor.

Net leases may not result in fair market lease rates over time, thereby failing to maximize income and distributions to our stockholders.

We expect a large portion of our rental income to come from net leases, which frequently provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to sublease the property, subject to our approval, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Further, net leases are typically for longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.

Many of our tenants are small and medium sized businesses, which exposes us to additional risks unique to these entities.

Leasing real property or making mortgage loans to small and medium-sized businesses exposes us to a number of unique risks related to these entities, including the following:

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Small and medium-sized businesses may have limited financial resources and may not be able to make their lease or mortgage payments on a timely basis, or at all. A small or medium-sized tenant or borrower may be more likely to have difficulty making its lease or mortgage payments when it experiences adverse events, such as the failure to meet its business plan, a downturn in its industry or negative economic conditions because its financial resources may be more limited. In addition, because of the lack of available credit in the current marketplace for small and medium-sized businesses, as discussed in “Risks related to the economy” above, our tenants might not be able to obtain the financing necessary to fund their working capital, which could hinder their ability to make their lease or mortgage payment on a timely basis, or at all.

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Small and medium-sized businesses typically have narrower product lines and smaller market shares than large businesses. Because our target tenants and borrowers are typically smaller businesses that may have narrower product lines and smaller market share, they will tend to be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, our target tenants and borrowers may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger number of qualified managerial and technical personnel.

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There is generally little or no publicly available information about our target tenants and borrowers. Many of our tenants and borrowers are likely to be privately owned businesses, about which there is generally little or no publicly available operating and financial information. As a result, we will rely on our Adviser to perform due diligence investigations of these tenants and borrowers, their operations and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations.

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Small and medium-sized businesses generally have less predictable operating results. We expect that many of our tenants and borrowers may experience significant fluctuations in their operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive positions, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our tenants and borrowers may not meet net income, cash flow and other coverage tests typically imposed by their senior lenders. The failure of a tenant or borrower to satisfy financial or operating covenants imposed by senior lenders could lead to defaults and, potentially, foreclosure on credit facilities, which could additionally trigger cross-defaults in other agreements. If this were to occur, it is possible that the ability of the tenant or borrower to make required payments to us would be jeopardized.

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Small and medium-sized businesses are more likely to be dependent on one or two persons. Typically, the success of a small or medium-sized business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our tenant or borrower and, in turn, on us.

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Small and medium-sized businesses may have limited operating histories. While we intend to target as tenants and borrowers stable companies with proven track records, we may lease properties or lend money to new companies that meet our other investment criteria. Many of these new companies may be small and medium-sized businesses. Tenants or borrowers with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

We may not have funding for future tenant improvements, which may be required to secure tenants for vacant space.

When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to re-lease the vacated space. We cannot assure you that we will have sufficient sources of funding available to us for such purposes in the future and therefore may have difficulty in securing a replacement tenant.

Illiquidity of real estate investments may make it difficult for us to sell properties in response to market conditions and could harm our financial condition and ability to make distributions to our stockholders.

To the extent the properties are not subject to triple-net leases, some significant expenditures, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should these events occur, our income and funds available for distribution could be adversely affected. In addition, as a REIT, we may be subject to a 100% tax on net income derived from the sale of property considered to be held primarily for sale to customers in the ordinary course of our business. We may seek to avoid this tax by complying with certain safe harbor rules that generally limit the number of properties we may sell in a given year, the aggregate expenditures made on such properties prior to their disposition, and how long we retain such properties before disposing of them. However, we can provide no assurance that we will always be able to comply with these safe harbors. If compliance is possible, the safe harbor rules may restrict our ability to sell assets in the future and achieve liquidity that may be necessary to fund distributions.

Our real estate investments may include special use and single or multi-tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.

We focus our investments on commercial, industrial and retail properties, a number of which include manufacturing facilities, special use storage or warehouse facilities and special use single or multi-tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed.

These and other limitations may affect our ability to sell or re-lease properties without adversely affecting returns to our stockholders.

Our real estate investments have a limited number of tenants and are concentrated in a limited number of industries, which subjects us to an increased risk of significant loss if any one of these tenants is unable to pay or if particular industries experience downturns.

As of December 31, 2013, we owned 87 properties and had 73 tenants in these properties, and our 5 largest tenants accounted for approximately 17.1% of our total rental income. A consequence of a limited number of tenants is that the aggregate returns we realize may be materially adversely affected by the unfavorable performance of a small number of tenants. We do not have fixed guidelines for industry concentration and our investments could potentially be concentrated in relatively few industries. As of December 31, 2013, 17.0% of our total rental income was earned from tenants in the telecommunications industry, 12.5% was earned from tenants in the healthcare industry, and 9.4% was earned from tenants in the automobile industry. As a result, a downturn in an industry in which we have invested a significant portion of our total assets could have a material adverse effect on us.

The inability of a tenant in a single tenant property to pay rent will reduce our revenues and increase our carrying costs of the building.

Since most of our properties are occupied by a single tenant, the success of our investments will be materially dependent on the financial stability of these tenants. If a tenant defaults, our rental revenues would be reduced and our expenses associated with carrying the property would increase, as we would be responsible for payments such as taxes and insurance. Lease payment defaults by these tenants could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders. In the event of a default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire, which could adversely affect our business and our ability to make distributions to our stockholders.

If we cannot renew leases, we may be unable to re-lease our properties to other tenants at rates equal to or above the current market rate. Even if we can renew leases, tenants may be able to negotiate lower rates as a result of market conditions. Market conditions may also hinder our ability to lease vacant space in newly developed or redeveloped properties. In addition, we may enter into or acquire leases for properties that are specially suited to the needs of a particular tenant. Such properties may require renovations, tenant improvements or other concessions in order to lease them to other tenants if the initial leases terminate. Any of these factors could adversely impact our financial condition, results of operations, cash flow or our ability to pay distributions to our stockholders.

Liability for uninsured losses could adversely affect our financial condition.

Losses from disaster-type occurrences (such as wars, floods or earthquakes) may be either uninsurable or not insurable on economically viable terms. Should such a loss occur, we could lose our capital investment or anticipated profits and cash flow from one or more properties.

We could incur significant costs related to government regulation and private litigation over environmental matters.

Under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, a current or previous owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property, and an entity that arranges for the disposal or treatment of a hazardous or toxic substance or petroleum at another property may be held jointly and severally liable for the cost to investigate and clean up such property or other affected property. Such parties are known as potentially responsible parties, or PRPs. Environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the costs of any required investigation or cleanup of these substances can be substantial. PRPs are liable to the government

as well as to other PRPs who may have claims for contribution. The liability is generally not limited under such laws and could exceed the property’s value and the aggregate assets of the liable party. The presence of contamination or the failure to remediate contamination at our properties also may expose us to third-party liability for personal injury or property damage, or adversely affect our ability to sell, lease or develop the real property or to borrow using the real property as collateral.

Environmental laws also impose ongoing compliance requirements on owners and operators of real property. Environmental laws potentially affecting us address a wide variety of matters, including, but not limited to, asbestos-containing building materials, storage tanks, storm water and wastewater discharges, lead-based paint, wetlands and hazardous wastes. Failure to comply with these laws could result in fines and penalties and/or expose us to third-party liability. Some of our properties may have conditions that are subject to these requirements, and we could be liable for such fines or penalties and/or liable to third parties for those conditions.

We could be exposed to liability and remedial costs related to environmental matters.

Certain of our properties may contain, or may have contained, asbestos-containing building materials, or ACBMs. Environmental laws require that ACBMs be properly managed and maintained and may impose fines and penalties on building owners and operators for failure to comply with these requirements. Also, certain of our properties may contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Certain of our properties may contain, or may have contained, elevated radon levels. Third parties may be permitted by law to seek recovery from owners or operators for property damage and/or personal injury associated with exposure to contaminants, including, but not limited to, petroleum products, hazardous or toxic substances and asbestos fibers. Also, certain of our properties may contain regulated wetlands that can delay or impede development or require costs to be incurred to mitigate the impact of any disturbance. Absent appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines and penalties.

Certain of our properties may contain, or may have contained, microbial matter such as mold and mildew. The presence of microbial matter could adversely affect our results of operations. In addition, if any of our property is not properly connected to a water or sewer system, or if the integrity of such systems are breached, or if water intrusion into our buildings otherwise occurs, microbial matter or other contamination can develop. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. If this were to occur, we could incur significant remedial costs and we may also be subject to material private damage claims and awards. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. If we become subject to claims in this regard, it could materially and adversely affect us and our future insurability for such matters.

Independent environmental consultants conduct Phase I environmental site assessments on all of our acquisitions. Phase I environmental site assessments are intended to evaluate information regarding the environmental condition of the surveyed property and surrounding properties based generally on visual observations, interviews and certain publicly available databases. These assessments do not typically take into account all environmental issues including, but not limited to, testing of soil or groundwater or the possible presence of asbestos, lead-based paint, radon, wetlands or mold. The results of these assessments are addressed and could result in either a cancellation of the purchase, the requirement of the seller to remediate issues, or additional costs on our part to remediate the issue.

None of the previous site assessments revealed any past or present environmental liability that we believe would be material to us. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the assessments were conducted or may arise in the future, and future laws, ordinances or regulations may impose material additional environmental liability. We cannot assure you that costs of future environmental compliance will not affect our ability to make distributions or that such costs or other remedial measures will not be material to us.

If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.

We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, we could be treated as a co-venturer with our lessee with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and our ability to pay distributions to stockholders.

Our properties may be subject to impairment charges, which could adversely affect our results of operations.

We are required to periodically evaluate our properties for impairment indicators. A property’s value is considered impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property, based upon its intended use, is less than the carrying value of the property. These estimates of cash flows are based upon factors such as expected future operating income, trends and prospects, as well as the effects of interest and capitalization rates, demand and occupancy, competition and other factors. Ongoing adverse market and economic conditions and market volatility make it difficult to value our properties. These factors may result in uncertainty in valuation estimates and instability in the estimated value of our properties which, in turn, could result in a substantial decrease in the value of the properties and significant impairment charges.

We continually assess our properties to determine if any impairments are necessary or appropriate. No assurance can be given that we will be able to recover the current carrying amount of our properties in the future. Our failure to do so would require us to recognize additional impairment charges for the period in which we reached that conclusion, which could materially and adversely affect us and our results of operations.

If we invest in mortgage loans, such investments may be affected by unfavorable real estate market conditions, including interest rate fluctuations, which could decrease the value of those loans and our results of operations.

If we invest in mortgage loans, we will be at risk of defaults by the borrowers on those mortgage loans as well as interest rate risks. To the extent we incur delays in liquidating such defaulted mortgage loans, we may not be able to obtain sufficient proceeds to repay all amounts due to us under the mortgage loans. Further, we will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties fall, our risk will increase because of the lower value of the security associated with such loans.

Risks related to our Adviser

We are dependent upon our key personnel, who are employed by our Adviser, for our future success, particularly David Gladstone, Terry Lee Brubaker and Robert Cutlip.

We are dependent on our senior management and other key management members to carry out our business and investment strategies. Our future success depends to a significant extent on the continued service and coordination of our senior management team, particularly David Gladstone, our chairman and chief executive officer, Terry Lee Brubaker, our vice chairman and chief operating officer, and Robert Cutlip, our president. The departure of any of our executive officers or key personnel employed by our Adviser could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.

Our success depends on the performance of our Adviser and if our Adviser makes inadvisable investment or management decisions, our operations could be materially adversely impacted.

Our ability to achieve our investment objectives and to pay distributions to our stockholders is dependent upon the performance of our Adviser in evaluating potential investments, selecting and negotiating property purchases and dispositions and mortgage loans, selecting tenants and borrowers, setting lease or mortgage loan terms and determining financing arrangements. Accomplishing these objectives on a cost-effective basis is largely a function of our Adviser’s marketing capabilities, management of the investment process, ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. Our stockholders have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments and must rely entirely on the analytical and management abilities of our Adviser and the oversight of our Board of Directors. If our Adviser or our Board of Directors makes inadvisable investment or management decisions, our operations could be materially adversely impacted. As we grow, our Adviser may be required to hire, train, supervise and manage new employees. Our Adviser’s failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.

We may have conflicts of interest with our Adviser and other affiliates.

Our Adviser manages our business and locates, evaluates, recommends and negotiates the acquisition of our real estate investments. At the same time, our advisory agreement permits our Adviser to conduct other commercial activities and provide management and advisory services to other entities, including, but not limited to, Gladstone Capital Corporation, or Gladstone Capital, Gladstone Investment Corporation, or Gladstone Investment, and Gladstone Land Corporation, or Gladstone Land. Moreover, with the exception of our chief financial officer and treasurer, and president, all of our officers and directors are also officers and directors of Gladstone Capital and Gladstone Investment, which actively make loans to and invest in small and medium-sized companies. In addition, with the exception of our president, all of our officers and eight of our nine directors are also officers and directors of Gladstone Land. As a result, we may from time to time have conflicts of interest with our Adviser in its management of our business and with Gladstone Capital, Gladstone Investment and Gladstone Land, which may arise primarily from the involvement of our Adviser, Gladstone Capital, Gladstone Investment, Gladstone Land and their affiliates in other activities that may conflict with our business.

Examples of these potential conflicts include:

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our Adviser may realize substantial compensation on account of its activities on our behalf, and may, therefore, be motivated to approve acquisitions solely on the basis of increasing compensation to itself;

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we may experience competition with our affiliates for financing transactions;

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our Adviser may earn fee income from our borrowers or tenants; and

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our Adviser and other affiliates such as Gladstone Capital, Gladstone Investment and Gladstone Land could compete for the time and services of our officers and directors.

These and other conflicts of interest between us and our Adviser and other affiliates could have a material adverse effect on the operation of our business and the selection or management of our real estate investments.

Our Adviser is not obligated to provide a waiver of the incentive fee, which could negatively impact our earnings and our ability to maintain our current level of, or increase, distributions to our stockholders.

The Advisory Agreement contemplates a quarterly incentive fee based on our funds from operations. Our Adviser has the ability to issue a full or partial waiver of the incentive fee for current and future periods; however, our Adviser is not required to issue any waiver. Any waiver issued by our Adviser is an unconditional and irrevocable waiver. For the years ended December 31, 2013, 2012 and 2011, an unconditional and irrevocable voluntary waiver was issued by our Adviser for approximately $3.5 million, $2.2 million and $2.1 million, respectively. If our Adviser does not issue this waiver in future quarters, it could negatively impact our earnings and may compromise our ability to maintain our current level of, or increase, distributions to our stockholders, which could have a material adverse impact on the market price of our securities.

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

The Advisory Agreement entitles our Adviser to incentive compensation based on our FFO, which rewards the Adviser if our quarterly FFO (before giving effect to any incentive fee) exceeds 1.75% (7% annualized) of our total stockholders’ equity (less the recorded value of any preferred stock). Our pre-incentive fee FFO for incentive compensation purposes excludes the effect of any unrealized gains, losses or other items that do not affect realized net income that we may incur in the fiscal quarter, even if such losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our Adviser incentive compensation for a fiscal quarter even if we incur a net loss for that quarter.

Risks Related to Qualification and Operation as a REIT

If we fail to qualify as a REIT, our operations and dividends to stockholders would be adversely impacted.

We intend to continue to be organized and to operate so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its stockholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or the federal income tax consequences of such qualification.

If we were to fail to qualify as a REIT in any taxable year:

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we would not be allowed to deduct our distributions to stockholders when computing our taxable income;

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we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

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we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;

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our cash available for dividends to stockholders would be reduced; and

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we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations that we may incur as a result of our disqualification.

We may need to incur additional borrowings to meet the REIT minimum distribution requirement and to avoid excise tax.

In order to maintain our qualification as a REIT, we are required to distribute to our stockholders at least 90% of our annual real estate investment trust taxable income (excluding any net capital gain and before application of the dividends paid deduction). To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our net capital gain for that year and (iii) 100% of our undistributed taxable income from prior years. In order to meet the 90% distribution requirement and to avoid the 4% excise tax, we may need to incur additional borrowings. Although we intend to pay dividends to our stockholders in a manner that allows us to meet the 90% distribution requirement and avoid this 4% excise tax, we cannot assure you that we will always be able to do so.

Complying with the REIT requirements may cause us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the nature of our assets, the sources of our gross income, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of taxable REIT subsidiaries (each, a taxable REIT subsidiary, or TRS) and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more TRSs.

We also must ensure that (i) at least 75% of our gross income for each taxable year consists of certain types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or qualified temporary investment income and (ii) at least 95% of our gross income for each taxable year consists of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these.

In addition, we may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. If we fail to comply with these requirements at the end of any calendar quarter, we must qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the asset and gross income requirements for qualifying as a REIT. These actions could have the effect of reducing our income and the amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of certain attractive investments.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law,

regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum federal income tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates was reduced by legislation to 15% (or 20% for those taxpayers who earn above a certain income threshold). Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.

Complying with the REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction that we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the gross income requirements. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through TRSs. This could increase the cost of our hedging activities because any TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses incurred by a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income earned by the TRS.

To the extent that our distributions represent a return of capital for tax purposes, you could recognize an increased capital gain upon a subsequent sale of your stock.

Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a U.S. stockholder to the extent such distributions do not exceed the stockholder’s adjusted tax basis in its shares of our stock but instead will constitute a return of capital and will reduce the stockholder’s adjusted tax basis in its shares of our stock. If our distributions result in a reduction of a stockholder’s adjusted basis in its shares of our stock, subsequent sales by such stockholder of its shares of our stock potentially will result in recognition of an increased capital gain or reduced capital loss due to the reduction in such stockholder’s adjusted basis in its shares of our stock.

If our Operating Partnership fails to maintain its status as a disregarded entity or partnership for federal income tax purposes, its income may be subject to taxation.

As we hold all of the ownership interests in our Operating Partnership, it is currently disregarded for income tax purposes. We intend that our Operating Partnership will qualify as a partnership for income tax purposes upon the admission of additional partners; however, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This could also result in our losing REIT status and becoming subject to corporate level tax on our income. This would substantially reduce our cash available to pay distributions and the return on your investment. In addition, if any of the entities through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a disregarded entity or a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a re-characterization of an underlying property owner could also threaten our ability to maintain REIT status.

Other risks

We are subject to restrictions that may discourage a change of control. Certain provisions contained in our articles of incorporation and Maryland law may prohibit or restrict a change of control.

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Our articles of incorporation prohibit ownership of more than 9.8% of the outstanding shares of our capital stock by one person. This restriction may discourage a change of control and may deter individuals or entities from making tender offers for our capital stock, which offers might otherwise be financially attractive to our stockholders or which might cause a change in our management.

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Our Board of Directors is divided into three classes, with the term of the directors in each class expiring every third year. At each annual meeting of stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. After election, a director may only be removed by our stockholders for cause. Election of directors for staggered terms with limited rights to remove directors makes it more difficult for a hostile bidder to acquire control of us. The existence of this provision may negatively impact the price of our securities and may discourage third-party bids to acquire our securities. This provision may reduce any premiums paid to stockholders in a change in control transaction.

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Certain provisions of Maryland law applicable to us prohibit business combinations with:

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any person who beneficially owns 10% or more of the voting power of our common stock, referred to as an “interested stockholder;”

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an affiliate of ours who, at any time within the two-year period prior to the date in question, was an interested stockholder; or

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an affiliate of an interested stockholder.

These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder must be recommended by our Board of Directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of common stock and two-thirds of the votes entitled to be cast by holders of our common stock other than shares held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our Board of Directors prior to the time that someone becomes an interested stockholder.

Market conditions could adversely affect the market price and trading volume of our securities.

The market price of our common and preferred stock may be highly volatile and subject to wide fluctuations, and the trading volume in our common and preferred stock may fluctuate and cause significant price variations to occur. We cannot assure investors that the market price of our common and preferred stock will not fluctuate or decline further in the future. Some market conditions that could negatively affect our share price or result in fluctuations in the price or trading volume of our securities include, but are not limited to:

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price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;

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significant volatility in the market price and trading volume of shares of REITs, real estate companies or other companies in our sector, which is not necessarily related to the performance of those companies;

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price and volume fluctuations in the stock market as a result of terrorist attacks, or speculation regarding future terrorist attacks, in the United States or abroad;

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actual or anticipated variations in our quarterly operating results or distributions to stockholders;

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changes in our funds from operations or earnings estimates or the publication of research reports about us or the real estate industry generally;

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actions by institutional stockholders;

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speculation in the press or investment community;

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changes in regulatory policies or tax guidelines, particularly with respect to REITs; and

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investor confidence in the stock market.

Shares of common stock eligible for future sale may have adverse effects on our share price.

We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock (including shares of common stock issuable upon the conversion of units of our operating partnership that we may issue from time to time or issuable upon conversion of our senior common stock), or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

Legislative or regulatory action could adversely affect investors.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal and state income tax laws applicable to investments in stock of REITs. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure you that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our properties.

Compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial cost.

The Americans with Disabilities Act, or ADA, and other federal, state and local laws generally require public accommodations be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the government or the award of damages to private litigants. These laws may require us to modify our existing properties. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require us to add other structural features which increase our construction costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons. We may incur unanticipated expenses that may be material to our financial condition or results of operations to comply with ADA and other federal, state and local laws, or in connection with lawsuits brought by private litigants.

Our Board of Directors may change our investment policy without stockholders’ approval.

Subject to our co-investment policy, our Board of Directors will determine our investment and financing policies, growth strategy and our debt, capitalization, distribution, acquisition, disposition and operating policies. Our Board of Directors may revise or amend these strategies and policies at any time without a vote by stockholders. Accordingly, stockholders’ control over changes in our strategies and policies is limited to the election of directors, and changes made by our Board of Directors may not serve the interests of stockholders and could adversely affect our financial condition or results of operations, including our ability to distribute cash to stockholders or qualify as a REIT.

Our failure to redeem our Series C Term Preferred Stock on its Mandatory Redemption Date could trigger a change of control in our Board of Directors.

If we fail to redeem or call for redemption the Series C Term Preferred Stock pursuant to the mandatory redemption required on January 31, 2017, the number of directors constituting our Board of Directors will be increased by the minimum number of directors, that when added to our Board of Directors, will constitute a majority, and the holders of our Series C Term Preferred Stock will be entitled, voting as a

separate class (to the exclusion of the holders of all other classes or series of our stock), to elect such number of additional directors. Therefore, a change of control in our Board of Directors could occur, which could jeopardize the stability of our Company.

Joint venture investments could be adversely affected by our lack of sole decision making authority, our reliance on co-venturers’ financial condition and disputes between our co-venturers and us.

We may invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we will not have sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers may become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers also may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our preferences, policies or objectives. Such investments also will have the potential risk of our reaching impasses with our partners or co-venturers on key decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our management team from focusing its time and effort exclusively on our business. In addition, we may in some circumstances be liable for the actions of our third-party partners or co-venturers.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be advisable and in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter (i) eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and that is material to the cause of action and (ii) requires us to indemnify directors and officers for liability resulting from actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, our stockholders and we may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

Our ability to pay dividends is limited by the requirements of Maryland law.

Our ability to pay dividends on our stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter permits otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of stock then outstanding, if any, with preferences upon dissolution senior to those of such class of stock with respect to which the distribution would be made.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

The following table provides certain summary information about our 87, wholly-owned, properties as of December 31, 2013 (dollars in thousands, except per square foot information).


Property	Year Built/ Improvements		Date of Purchase		Rentable Square Feet		Occupancy			Year of Lease Expiration		Total Rental Income for the year ended December 31, 2013 ⁽⁴⁾		Total Rental Income per Occupied Square Foot			Encumbrances

208 South Rogers Lane (Raleigh NC)		1997		12/23/2003		58,926		100	%		2015	$	624	$	10.59		$	4,856

3874 Highland Park NW (Canton, OH)		1994		1/30/2004		54,018		100	%		2024		292		5.41			2,717

260 Springside Drive (Akron, OH) ⁽¹⁾		1968/1999		4/29/2004		83,891		100	%		2015		1,027		12.24			6,962

5815 Westpark Drive (Charlotte, NC)		1984/1995		6/30/2004		64,500		100	%		2019		1,072		16.62			6,440

171 Great Oak Drive (Canton, NC)		1998		7/6/2004		228,000		100	%		2024		606		2.66			3,722

Rt. 219, Tax Parcel No. 33-251-0246, (Crenshaw, PA)		1991		8/5/2004		290,000		100	%		2026		788		2.72			5,274

9698 Old US Hwy. 52 (Lexington, NC)		1986		8/5/2004		154,000		100	%		2026		395		2.56			2,683

9100 Highway 290 East (Austin, TX)		2001		9/16/2004		51,933		100	%		2015		751		14.46			6,500

13 Industrial Park Drive (Mt. Pocono, PA)		1995-1999		10/15/2004		223,275		100	%		2021		633		2.84			4,969

6550 First Park Ten Boulevard (San Antonio, TX)		1999		2/10/2005		60,245		100	%		2021		785		13.03			6,760

4630 Journal Street (Columbus, OH)		1995		2/10/2005		39,000		100	%		2015		308		7.90			2,565

199 Sing Sing Road (Big Flats, NY)		2001		4/15/2005		120,000		100	%		2023		494		4.12			5,442

2525 North Woodlawn Avenue (Wichita, KS)		2000		5/18/2005		69,287		100	%		2017		781		11.27			7,696

725 & 737 Great Southwest Pkwy (Arlington, TX)		1966		5/26/2005		64,000		100	%		2018		706		11.03			3,881

4032 Linden Avenue (Dayton, OH)		1956		6/30/2005		59,894		100	%		2015		268		4.47			1,914

81 Corbett Way (Eatontown, NJ)		1991		7/7/2005		30,268		100	%		2024		537		17.74			4,427

17 & 20 Veronica Avenue (Franklin Township, NJ)		1978		7/11/2005		183,000		100	%		2020		988		5.40			6,564

150 Ridgeview Center Drive (Duncan, SC)		1984/2001/2007		7/14/2005		222,670		100	%		2020		1,539		6.91			10,592

170 Ridgeview Center Drive (Duncan, SC)		1984/2001/2007		7/14/2005		55,350		100	%		2020		383		6.92			2,633

5656 Campus Parkway (Hazelwood, MO)		1977		8/5/2005		51,155		100	%		2023		83		3.89	⁽²⁾		2,320

914 Wohlert Street (Angola, IN)		1982		9/2/2005		52,080		100	%		2023		127		2.44			646

800 Growth Parkway (Angola, IN)		1998		9/2/2005		50,000		100	%		2023		127		2.54			620

802 East 11th Street (Rock Falls, IL)		1988		9/2/2005		52,000		100	%		2023		127		2.44			644

2 Opportunity Way (Newburyport, MA)		1994		10/17/2005		86,308		100	%		2015		891		10.32			6,385

255 Spring Street (Clintonville, WI)		1992/2013		10/31/2005		521,400		100	%		2028		865		1.66			3,090

5700 Lee Road (Maple Heights, OH)		1974		12/21/2005		347,218		100	%		2015		1,275		3.67			9,977

Item 2.

Properties (Continued)


Property	Year Built/ Improvements		Date of Purchase		Rentable Square Feet		Occupancy			Year of Lease Expiration		Total Rental Income for the year ended December 31, 2013 ⁽⁴⁾		Total Rental Income per Occupied Square Foot		Encumbrances

7545 Midlothian Turnpike (Richmond, VA)		1972		12/30/2005		42,213		0	%		2010	$	—	$	—	$	5,275

3930 Sunforest Court (Toledo, OH)		1979		12/30/2005		23,368		100	%		2020		276		11.81		2,798

75 Canal Street (South Hadley, MA)		1978		2/15/2006		150,000		100	%		2015		260		1.73		—

2101 Fox Drive (Champaign, IL)		1996		2/21/2006		20,400		100	%		2024		263		12.89		1,545

2109 Fox Drive (Champaign, IL)		1996		2/21/2006		40,000		100	%		2024		517		12.93		3,030

2215 Fox Drive (Champaign, IL)		1996		2/21/2006		25,000		100	%		2024		323		12.92		1,894

2301 Fox Drive (Champaign, IL)		1996		2/21/2006		22,862		100	%		2024		295		12.90		1,731

2470 Highcrest Road (Roseville, MN)		1964		2/21/2006		359,540		33	%		2017		1,196		3.33		17,455

12000 Portland Avenue South (Burnsville, MN)		1984		5/10/2006		114,100		100	%		2015		1,235		10.82		11,193

14701 Anthony Avenue (Menomonee Falls, WI)		1986/2000		6/30/2006		125,692		100	%		2016		786		6.25		6,823

1025 Birdsong Drive (Baytown, TX)		1997		7/11/2006		12,000		0	%		2013		85		7.08		2,000

42400 Merrill Road (Sterling Heights, MI)		1979/1989		9/22/2006		532,869		100	%		2016		1,167		2.19		—

2150, 2200 Pinson Valley Parkway (Birmingham, AL)		1961/1980		9/29/2006		63,514		100	%		2016		271		4.27		—

2325 West Fairview Avenue (Montgomery, AL)		1962/1989		9/29/2006		29,472		100	%		2016		126		4.28		—

5221 N Highway 763 (Columbia, MO)		1978		9/29/2006		16,275		100	%		2016		69		4.24		—

4690 Parkway Drive (Mason, OH)		2002		1/5/2007		60,000		100	%		2020		554		9.23		4,346

201 South Rogers Lane (Raleigh, NC)		1994		2/16/2007		115,500		100	%		2015		717		6.21		5,249

1110 West Tenkiller (Tulsa, OK) ⁽³⁾		2004		3/1/2007		238,310		100	%		2019		1,566		6.57		8,031

3725 East 10th Court (Hialeah, FL)		1956/1992		3/9/2007		132,337		100	%		2027		1,109		8.38		—

554 Clark Road (Tewksbury, MA)		1985/1989		5/17/2007		102,200		100	%		2017		923		9.03		—

5324 Natorp Boulevard (Mason, OH)		2007		7/1/2007		21,264		100	%		2027		583		27.42		4,630

7282 Willam Barry Boulevard (Cicero, NY)		2005		9/6/2007		71,880		100	%		2020		530		7.37		4,052

1515 Arboretum Drive SE (Grand Rapids, MI)		2001		9/28/2007		63,235		100	%		2025		1,088		17.21		5,964

4 Territorial Court (Bollingbrook, IL)		2002		9/28/2007		55,869		100	%		2014		619		11.08		—

2349 Lawrenceville Highway (Decatur, GA)		1989		12/13/2007		16,740		100	%		2031		516		30.82		—

2341 Lawrenceville Highway (Decatur, GA)		1989		12/13/2007		4,372		100	%		2031		135		30.88		—

2339 Lawrenceville Highway (Decatur, GA)		1989		12/13/2007		5,488		100	%		2031		169		30.79		—

Item 2.

Properties (Continued)


Property	Year Built/ Improvements		Date of Purchase		Rentable Square Feet		Occupancy			Year of Lease Expiration		Total Rental Income for the year ended December 31, 2013 ⁽⁴⁾		Total Rental Income per Occupied Square Foot		Encumbrances

311 Phillip Boulevard (Lawrenceville, GA)		2005		12/13/2007		12,412		100	%		2031	$	447	$	36.01	$	—

2096 McGee Road (Snellville, GA)		1986		12/13/2007		3,800		100	%		2031		116		30.53		—

7174 Wheat Street (Covington, GA)		2000		12/13/2007		5,000		100	%		2031		153		30.60		—

1055 Haw Creek Parkway (Cumming, GA)		2004		12/13/2007		13,919		100	%		2026		486		34.92		3,216

1293 Wellbrook Circle (Conyers, GA)		1994		12/13/2007		6,400		100	%		2031		195		30.47		—

425 Gateway Drive (Reading, PA)		2007		1/29/2008		42,900		100	%		2028		717		16.71		4,073

6499 University Avenue NE (Fridley, MN)		1985/2006		2/26/2008		74,160		100	%		2020		812		10.95		5,220

7528 Auburn Road (Concord Township, OH)		1957/2008		3/31/2008		273,300		100	%		2034		1,727		6.32		—

10021 Rodney Street (Pineville, NC)		1985		4/30/2008		74,950		100	%		2028		431		5.75		2,368

28305 State Route 7 (Marietta, OH)		1992/2007		8/29/2008		223,458		100	%		2028		909		4.07		5,779

400 Highpoint Drive (Chalfont, PA)		1987		8/29/2008		67,200		100	%		2016		758		11.28		5,687

1520 Albany Place SE (Orange City, Iowa)		1990		12/15/2010		487,121		100	%		2026		1,214		2.49		9,496

2415 Century Place SE (Hickory, North Carolina)		2008		4/4/2011		60,000		100	%		2020		936		15.60		6,827

2645 North Airport Plaza Avenue, Lot 2 (Springfield, MO)		2006		6/20/2011		78,421		100	%		2021		1,422		18.13		11,164

124 East Hines Road (Boston Heights, OH)		2011		10/20/2011		25,000		100	%		2021		377		15.08		2,697

9 Sylvan Way (Parsippany, NJ)		1984		10/28/2011		60,111		100	%		2026		1,156		19.23		6,938

495 State Road (Dartmouth, MA) ^(3) (5)		2011		11/18/2011		16,340		100	%		2086		625		38.25		4,155

1955 South National Avenue (Springfield, MO) ^(3) (6)		2005		12/13/2011		14,560		100	%		2080		315		21.63		1,905

810 Parish Street (Pittsburgh, PA)		1968		12/28/2011		26,080		100	%		2026		401		15.38		2,829

Item 2.

Properties (Continued)


Property	Year Built/ Improvements		Date of Purchase		Rentable Square Feet		Occupancy			Year of Lease Expiration			Total Rental Income for the year ended December 31, 2013 ⁽⁴⁾		Total Rental Income per Occupied Square Foot			Encumbrances

44426 Atwater Place (Ashburn, VA)		2002		1/25/2012		52,130		100	%		2027		$	989	$	18.97		$	7,388

14955 6th Street (Ottumwa, IO)		1970		5/30/2012		352,860		100	%		2023			693		1.96			4,653

7800 Walton Parkway (New Albany, OH)		2007		6/5/2012		89,000		100	%		2023			1,357		15.25			9,361

7200 North Lake Drive (Columbus, GA)		2012		6/21/2012		32,000		100	%		2023			656		20.50			4,608

3592 Corporate Drive (Columbus, OH)		1981		6/28/2012		31,293		100	%		2022			331		10.58			2,911

1395 University Boulevard (Jupiter, FL)		2011		9/26/2012		60,000		100	%		2023			1,372		22.87			10,478

1400 John Burgess Drive (Fort Worth, TX)		2005		11/8/2012		208,234		100	%		2026			1,628		7.82			13,864

565 Spears Creek Church Road (Columbia, SC)		2010		11/21/2012		146,483		100	%		2022			2,541		17.35			18,525

6725 Delilah Road (Egg Harbor Township, NJ)		1985		3/28/2013		29,257		100	%		2023			373		16.74	⁽²⁾		3,638

17499 Brookwood Parkway (Vance, AL)		2013		5/9/2013		170,000		100	%		2023			757		6.90	⁽²⁾		—

3785 Pheasant Ridge Drive NE (Blaine, MN)		2009		5/10/2013		92,275		100	%		2020			947		15.98	⁽²⁾		8,163

717 E. Parmer Lane (Austin, TX)		1999		7/9/2013		320,000		100	%		2020			2,299		14.50	⁽²⁾		35,093

805 Central Expressway South (Allen, TX)		1998		7/10/2013		115,200		100	%		2021/2022	⁽⁷⁾		685		12.83	⁽²⁾		8,852

349 Inverness Drive South (Englewood, CO)		2008		12/11/2013		99,797		100	%		2021			85		15.00	⁽²⁾		11,315

43700 Gen-Mar Drive (Novi, MI)		1988		12/27/2013		156,200		100	%		2024			9		4.38	⁽²⁾		4,380


Totals						9,256,779							$	59,769				$	421,878

⁽¹⁾	Two tenants occupy this building, each with separate leases ending in the same year.

⁽²⁾	Rental income per occupied square foot is annualized, as if the building were held for all of 2013.

⁽³⁾	Property subject to a ground lease.

⁽⁴⁾	Total rental income included in this table is straight-line rental income calculated in accordance with Generally Accepted Accounting Principles in the United States.

⁽⁵⁾	Tenant has the option to terminate the lease in years 26-75.

⁽⁶⁾	Tenant has the option to terminate the lease in years 19-62.

⁽⁷⁾	Two tenants occupy this building each with separate leases ending in different years. The tenant occupying 73% of the building has their lease expire in 2022. The tenant occupying the remaining space has their lease expire in 2021

The following table summarizes the lease expirations by year for our properties for leases in place as of December 31, 2013 (dollars in thousands):


Year of Lease Expiration	Square Feet ⁽¹⁾		Number of Expiring Leases		Rental Revenue for the year ended December 31, 2013 ⁽²⁾		% of Annualized Base Rent

2014		55,869		1	$	619		1.0	%
2015		1,106,770		11		7,356		12.3
2016		835,022		4		3,177		5.3
2017		291,334		3		2,900		4.9
2018		64,000		1		706		1.2
2019		302,810		2		2,638		4.4
2020		1,162,703		9		9,264		15.6
2021+		5,144,365		42		33,024		55.3


Total		8,962,873		73	$	59,684		100	%

⁽¹⁾	Our two fully vacant, and one partially vacant buildings total 293,906 square feet.

⁽²⁾	Rental revenue for the year ended December 31, 2013 for our property in Baytown, TX, whose lease expired during 2013, was $85.

The following table summarizes the geographic locations of our properties for leases in place as of December 31, 2013 (dollars in thousands):


State	Number of Leases for the year ended December 31, 2013		Rental Revenue for the year ended December 31, 2013		% of Base Rent
Ohio		14	$	9,284		15.5	%
Texas		7		6,939		11.6
North Carolina		7		4,781		8.0
South Carolina		2		4,463		7.5
Minnesota		4		4,190		7.0
All Other States		39		30,112		50.4


Total		73	$	59,769		100	%

The following table summarizes rental income by tenant industries for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):


	For the year ended December 31,
	2013					2012					2011
Industry Classification	Rental Income		Percentage of Rental Income			Rental Income		Percentage of Rental Income			Rental Income		Percentage of Rental Income
Telecommunications	$	10,102		17.0	%	$	7,351		14.4	%	$	6,206		14.1	%
Healthcare		7,486		12.5			5,228		10.3			4,108		9.4
Automobile		5,589		9.4			1,944		3.8			1,168		2.7
Personal, Food & Miscellaneous Services		5,231		8.8			2,479		4.9			649		1.5
Electronics		4,982		8.3			6,189		12.3			6,046		13.9
Diversified/Conglomerate Manufacturing		3,665		6.1			3,664		7.2			3,664		8.4
Chemicals, Plastics & Rubber		3,236		5.4			3,153		6.2			3,146		7.2
Beverage, Food & Tobacco		3,007		5.0			2,844		5.6			2,271		5.2
Personal & Non-Durable Consumer Products		2,583		4.3			2,507		4.9			2,316		5.3
Machinery		2,265		3.8			2,259		4.4			2,256		5.2
Containers, Packaging & Glass		2,171		3.6			2,344		4.6			2,339		5.4
Buildings and Real Estate		2,160		3.6			2,144		4.2			2,120		4.9
Printing & Publishing		1,848		3.1			1,894		3.7			1,979		4.5
Oil & Gas		1,275		2.1			1,271		2.5			1,271		2.9
Diversified/Conglomerate Services		1,244		2.1			1,244		2.4			1,001		2.3
Banking		1,156		1.9			1,149		2.3			204		0.5
Education		656		1.1			2,138		4.2			1,775		4.1
Childcare		583		1.0			583		1.1			583		1.3
Home & Office Furnishings		530		0.9			530		1.0			530		1.2

	$	59,769		100.0	%	$	50,915		100.0	%	$	43,632		100.0	%

Item 3.

Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Global Select Market, or NASDAQ, under the symbol “GOOD.” The following table reflects the range of the high and low sale prices of our common stock on NASDAQ and the distributions per common share for the years ended December 31, 2013 and 2012. Distributions to common stockholders are declared quarterly and paid monthly. Amounts presented represent the cumulative amount of the monthly common stock distributions declared during such quarter.


	Price Range
	High		Low		Distributions Per Common Share
2012
3/31/2012	$	18.92	$	16.80	$	0.375
6/30/2012		17.66		15.56		0.375
9/30/2012		19.47		16.52		0.375
12/31/2012		18.93		16.15		0.375

2013
3/31/2013	$	19.51	$	17.98	$	0.375
6/30/2013		21.33		17.89		0.375
9/30/2013		19.16		17.25		0.375
12/31/2013		19.09		17.25		0.375

Since inception in 2003, we have never reduced our per-share distributions nor have we missed payment of a scheduled distribution to our common stockholders. Our Board of Directors regularly evaluates our per share distribution payments as they monitor the capital markets and the impact that the economy has upon us. The decision as to whether to authorize and pay distributions on shares of our common stock in the future, as well as the timing, amount and composition of any such future distributions, will be at the sole and absolute discretion of our Board of Directors in light of conditions then existing, including our earnings, taxable income, FFO, financial condition, liquidity, capital requirements, debt maturities, the availability of capital, contractual prohibitions or other restrictions, applicable REIT and legal restrictions and general overall economic conditions and other factors. While the statements above concerning our distribution policy represent our current expectations, any actual distribution payable will be determined by our Board of Directors based upon the circumstances at the time of declaration and the actual number of common shares then outstanding, and any common distribution payable may vary from such expected amounts.

To qualify as a REIT, we are required to make ordinary dividend distributions to our common stockholders. The amount of these distributions must equal at least:

•

the sum of (A) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and capital gain) and (B) 90% of the net income (after tax), if any, from foreclosure property, less

•

the sum of certain non-cash items.

For federal income tax purposes, our common distributions generally consist of ordinary income, capital gains, nontaxable return of capital or a combination of those items. Distributions that exceed our current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital rather than

a dividend, which reduces a stockholder’s basis in its shares of stock and will not be taxable to the extent of the stockholder’s basis in its shares of our stock. To the extent a distribution exceeds the stockholder’s share of both our current and accumulated earnings and profits and the stockholder’s basis in its shares of our stock, that distribution will be treated as a gain from the sale or exchange of that stockholder’s shares of our stock. Every year, we notify stockholders of the taxability of distributions paid to stockholders during the preceding year.

A covenant in the agreement governing our New Line of Credit requires us to, among other things, limit our distributions to stockholders to 100% of our FFO, and continued compliance with this covenant may require us to limit our distributions to stockholders in the future. For a discussion of our New Line of Credit, including the financial and operating covenants required for us to access this source of financing, see “Risk Factors – Our New Line of Credit contains various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions to stockholders” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Line of Credit” herein.

As of February 4, 2014, there were 13,267 beneficial owners of our common stock.

The Company pays distributions on shares of senior common stock in an amount equal to $1.05 per share per annum, declared daily and paid at the rate of $0.0875 per share per month. The Company’s senior common stock is not traded on any exchange or automated quotation system.

As of February 4, 2014, there were 168 beneficial owners of our senior common stock.

Item 6.

Selected Financial Data.

The following selected financial data for the fiscal years ended December 31, 2013, 2012, 2011, 2010 and 2009 is derived from our audited consolidated financial statements. Certain amounts from prior years’ financial statements have been reclassified to discontinued operations and these reclassifications had no effect on previously reported net income or stockholders’ equity. The data should be read in conjunction with our consolidated financial statements and notes thereto, included elsewhere in this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report.


	For the year ended December 31, (Dollars in Thousands, Except Per Share Amounts)
	2013			2012			2011			2010			2009
Operating Data:
Total operating revenue	$	61,343		$	51,270		$	43,976		$	41,928		$	42,609
Total operating expenses		(32,823	)		(24,895	)		(21,270	)		(23,414	)		(20,541	)
Other expense		(26,993	)		(22,614	)		(16,992	)		(13,586	)		(17,668	)

Income from continuing operations		1,527			3,761			5,714			4,928			4,400
Discontinued operations		—			—			—			—			203

Net income	$	1,527		$	3,761		$	5,714		$	4,928		$	4,603
Dividends attributable to preferred stock		(4,094	)		(4,093	)		(4,094	)		(4,094	)		(4,094	)
Dividends attributable to senior common stock		(300	)		(113	)		(62	)		(20	)		—

Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558		$	814		$	509


Share and Per Share Data:
(Loss) earnings per weighted average common share - basic & diluted
(Loss) income from continuing operations (net of dividends attributable to preferred stock)	$	(0.22	)	$	(0.04	)	$	0.15		$	0.09		$	0.04
Discontinued operations		—			—			—			—			0.02

Net (loss) income available to common stockholders	$	(0.22	)	$	(0.04	)	$	0.15		$	0.09		$	0.06


Weighted average common shares outstanding-basic		13,164,244			10,953,325			10,236,859			8,576,303			8,563,264
Weighted average common shares outstanding-diluted		13,164,244			10,953,325			10,288,711			8,601,153			8,563,264
Cash dividends declared per common share	$	1.50		$	1.50		$	1.50		$	1.50		$	1.50

Supplemental Data:
Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558		$	814		$	509
Real estate depreciation and amortization, including discontinued operations		22,827			16,831			14,149			13,264			13,172

Less: Gain on sale of real estate, net of taxes paid		—			—			—			—			(160	)

Funds from operations available to common stockholders ⁽¹⁾	$	19,960		$	16,386		$	15,707		$	14,078		$	13,521


Balance Sheet Data:

Real estate, before accumulated depreciation	$	642,353		$	533,753		$	442,521		$	401,017		$	390,754
Total assets		690,525			564,779			453,147			410,609			416,865
Mortgage notes payable, term loan, term preferred stock and borrowings under the line of credit		485,502			422,685			304,050			286,595			285,962
Total stockholders’ equity		183,146			122,365			135,314			111,375			118,451
Total common shares outstanding		15,662,414			11,083,584			10,945,379			8,724,613			8,563,264

(1)

FFO was developed by The National Association of Real Estate Investment Trusts, or NAREIT, as a relative non- Generally Accepted Accounting Principles in the United States, or GAAP, supplemental measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and excluding any impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to either net income (loss) as an indication of our performance or to cash flow from operations as a measure of liquidity or ability to make distributions to stockholders. Comparison of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

FFO available to common stockholders is FFO adjusted to subtract preferred share and senior common share distributions. We believe that net (loss) income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders.

Basic funds from operations per share, or Basic FFO per share, is calculated as FFO available to common stockholders divided by the weighted average common shares outstanding. Diluted funds from operations per share, or Diluted FFO per share, is calculated as FFO available to common stockholders, adjusted as applicable for the assumed issuance of additional shares of our convertible senior common stock, divided by the weighted average common shares outstanding adjusted for additional shares of common stock, related to our convertible senior common stock, that would have been

outstanding if dilutive potential shares of common stock had been issued. We believe that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share, or EPS, in evaluating net income available to common stockholders. In addition, since most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures for comparing us to other REITs. We believe that net (loss) income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share.

The following table provides a reconciliation of our FFO for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 to the most directly comparable GAAP measure, net (loss) income, and a computation of basic and diluted FFO per weighted average common share:


	For the year ended December 31, (Dollars in Thousands, Except Per Share Amounts)
	2013			2012			2011			2010			2009

Net income	$	1,527		$	3,761		$	5,714		$	4,928		$	4,603
Less: Distributions attributable to preferred and senior common stock		(4,394	)		(4,206	)		(4,156	)		(4,114	)		(4,094	)

Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558		$	814		$	509

Add: Real estate depreciation and amortization		22,827			16,831			14,149			13,264			13,172
Less: Gain on sale of real estate		—			—			—			—			(160	)

FFO available to common stockholders	$	19,960		$	16,386		$	15,707		$	14,078		$	13,521

Weighted average common shares outstanding - basic		13,164,244			10,953,325			10,236,859			8,576,303			8,563,264
Weighted average common shares outstanding - diluted		13,402,370			11,075,216			10,288,711			8,601,153			8,563,264

Basic FFO per weighted average share of common stock	$	1.52		$	1.50		$	1.53		$	1.64		$	1.58

Diluted FFO per weighted average share of common stock	$	1.49		$	1.48		$	1.53		$	1.64		$	1.58


Distributions declared per share of common stock	$	1.50		$	1.50		$	1.50		$	1.50		$	1.50

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this Form 10-K.

General

We are an externally-advised real estate investment trust, or REIT, that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003, primarily for the purpose of investing in and owning net leased industrial, commercial and retail real property and selectively making long-term industrial and commercial mortgage loans. Our portfolio of real estate 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 historically 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 rate 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 actively communicate 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. We currently own 87 properties totaling 9.3 million square feet, which have a total gross and net carrying value, including intangible assets, of $756.9 million and $640.7 million, respectively. We do not currently have any mortgage loan receivables outstanding.

Business Environment

The United States, or U.S., has been seeing long-term signs of recovery as the unemployment rate continues to decline, housing starts and building permits have increased, and prices for single-family homes increased across 20 U.S. cities because of a dwindling surplus in the housing market. However, various signs of weakness are still present in the U.S economy. Vacancy rates in certain markets are still higher than pre-recessionary levels as job growth has yet to return to all areas of the country. Although interest rates have risen significantly since the beginning of the year, they still remain near their historic lows. This continued low interest rate environment is leading to increasing competition for new acquisitions and cap rate compression. However; recent U.S. budget deficit concerns and the budget impasse that resulted in the partial shutdown of the U.S. government in October 2013, have increased the possibility of credit-rating downgrades of the U.S. and economic slowdowns. The continued uncertainty surrounding the outcome of the U.S. government to raise the federal debt ceiling could cause the ratings agencies to lower the long-term sovereign credit rating on the U.S. again. The sovereign credit rating was previously lowered from “AAA” to “AA+” by Standard and Poor’s in August 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access both the debt and equity markets on favorable terms. In addition, a further decrease to the U.S. credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our stock price. Continued adverse economic conditions could have a material adverse effect on one or more of our tenants, or our business, financial condition and results of operations.

We continue to focus on increasing our funds from operations, or FFO, by re-leasing vacant space in our portfolio and acquiring additional properties. As of December 31, 2013, we had two fully vacant buildings and one partially vacant building. Our fully vacant buildings are located in Baytown, Texas and Richmond, Virginia. Our building located in Roseville, Minnesota remains partially vacant. The leases on these three vacancies comprised 3.2% of our total square footage as of December 31, 2013 and the annual carrying costs are approximately $1.1 million. We continue to actively seek new tenants for our Richmond, Virginia, Baytown, Texas and Roseville, Minnesota buildings.

Our ability to make new investments is highly dependent upon our ability to procure external financing. Our principal sources of external financing generally include the issuance of equity securities, long-term

mortgage loans secured by properties and borrowings under our line of credit, or the New Line of Credit. The market for long-term mortgages continues to improve and long-term mortgages have become more obtainable. The collateralized mortgage backed securities, or CMBS, market has made a comeback, but it is more conservative and restrictive than it was prior to the recession and uncertainty with regard to interest rates has made the CMBS market less predictable. Consequently, we continue to look to regional banks, insurance companies and other non-bank lenders, in addition to the CMBS market to issue mortgages to finance our real estate activities.

In addition to leverage, we were active in the equity markets during 2013 by issuing shares of common stock in three separate follow-on public offerings, issuing shares of our senior common stock and issuing shares of common stock under our at-the-market program, or ATM Program, pursuant to an open market sale agreement with Jefferies, LLC, or Jefferies, discussed in more detail below.

Recent Developments

2013 Investment Activities

The following is a summary of our recent acquisitions:

Egg Harbor Township, New Jersey: On March 28, 2013, we acquired a 29,257 square foot office building located in Egg Harbor Township, New Jersey for $5.7 million, excluding related acquisition expenses of $0.15 million. We funded this acquisition with existing cash on hand and the issuance of $3.7 million of mortgage debt on the property. The tenant has leased the property for 10 years and has 1 option to renew the lease for an additional period of 5 years. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.5 million.

Clintonville, Wisconsin: On April 11, 2013, we funded a $3.3 million, 102,400 square foot expansion of our property located in Clintonville, Wisconsin. In connection with the expansion of the property, we executed a lease amendment to extend the lease for an additional eight years, through October 2028. The lease was originally set to expire in October 2020. The lease was also amended to provide for an increase to the rental income over the life of the lease, with annualized straight line rents of approximately $1.0 million, up from $0.6 million today.

Vance, Alabama: On May 9, 2013, we acquired a 170,000 square foot industrial building located in Vance, Alabama for $13.4 million, excluding related acquisition expenses of $0.19 million. We funded this acquisition with existing cash on hand. The tenant has leased the property for 10 years and has 2 options to renew the lease for additional periods of 5-years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1.2 million.

Blaine, Minnesota: On May 10, 2013, we acquired a 92,275 square foot office building located in Blaine, Minnesota for $14.4 million, excluding related acquisition expenses of $0.08 million. We funded this acquisition with existing cash on hand. The tenant has seven years remaining on the lease and has two options to renew 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 $1.5 million.

Austin, Texas: On July 9, 2013, we acquired a 320,000 square foot office building located in Austin, Texas for $57.0 million, excluding related acquisition expenses of $0.16 million. We funded this acquisition with cash on hand and the issuance of $35.3 million of mortgage debt on the property. The tenant has seven years remaining on the lease and has three options to renew the lease for additional periods of three years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $4.7 million.

Allen, Texas: On July 10, 2013, we acquired an 115,200 square foot office building located in Allen, Texas for $15.2 million, excluding related acquisition expenses of $0.08 million. We funded this

acquisition with existing cash on hand and the issuance of $8.9 million of mortgage debt on the property. There are two tenants in this property, the largest of which occupies 73% of the space and has nine years remaining on the lease and has two options to renew the lease for additional periods of five years each. The other tenant has eight years remaining on the lease and also has two options to renew the lease for additional periods of five years each. These two leases provide for prescribed rent escalations over the life of the leases, with annualized straight line rents of $1.5 million.

Englewood, Colorado: On December 11, 2013, we acquired a 99,797 square foot office building located in Englewood, Colorado for $18.3 million, excluding related acquisition expenses of $0.07 million. We funded this acquisition with existing cash on hand, and subsequently closed on $11.3 million of mortgage debt on the property. The tenant has eight years remaining on the lease and has two options to renew 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 $1.5 million.

Novi, Michigan: On December 27, 2013, we acquired an 156,200 square foot office building located in Novi, Michigan for $7.3 million, excluding related acquisition expenses of $0.04 million. We funded this acquisition with existing cash on hand, and $4.4 million of mortgage debt on the property. The tenant has 10 years remaining on the lease and has 1 option to renew the lease for an additional 5 years. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.7 million.

2013 Financing Activities

The following is a summary of our recent financings:

Citigroup: On March 28, 2013, through a wholly-owned subsidiary, we borrowed $3.7 million pursuant to a long-term note payable from Citigroup Global Markets Realty Corp., which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.16% per year and we may not repay this note prior to the last two months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of April 6, 2023. We used the proceeds from the note to acquire the property in Egg Harbor Township, New Jersey on the same date.

Prudential: On July 3, 2013, through a wholly-owned subsidiary, we borrowed $8.2 million pursuant to a long-term note payable from Prudential Mortgage Capital Company, LLC, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 5.00% per year and we may not repay this note prior to the last three months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of August 1, 2023. We used the proceeds from the note to acquire properties.

Cantor Commercial Real Estate: On July 9, 2013, through a wholly-owned subsidiary, we borrowed $35.3 million pursuant to a long-term note payable from Cantor Commercial Real Estate Lending, L.P., which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.81% per year and we may not repay this note prior to the last three months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of August 6, 2023. We used the proceeds from the note to acquire the property in Austin, Texas on the same date.

Synovus Bank: On July 10, 2013, through a wholly-owned subsidiary, we borrowed $8.9 million pursuant to a long-term note payable from Synovus Bank, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.20% per year and we may prepay this note prior to maturity without penalty. The note has a maturity date of August 1, 2023. We used the proceeds from the note to acquire the property in Allen, Texas on the same date.

KeyBank Line of Credit: On August 7, 2013, we procured a new $60.0 million senior unsecured revolving credit facility, or the New Line of Credit, with Keybank National Association serving as a

revolving lender, a letter of credit issuer and an administrative agent, and Citizens Bank of Pennsylvania as an additional lender. This New Line of Credit has an initial maturity of August 2016, with a one-year extension option contingent upon an extension fee equal to 25 basis points on the initial maturity date, and certain other customary conditions. The interest rate per annum is equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of up to 3.25%, depending upon our leverage.

Wells Fargo: On November 26, 2013, through a wholly-owned subsidiary, we refinanced our mortgage at our Champaign, Illinois property that was originally set to mature on December 1, 2013. We borrowed $8.2 million pursuant to a long-term note payable from Wells Fargo. The new loan is variable rate, in which the interest rate resets monthly and is calculated as the one month London Interbank Offered Rate, or LIBOR, plus a margin of 2.15%. The LIBOR rate is subject to a floor of 0.5% per annum, and minimum interest on this note is 2.65%. The new note has a maturity date of December 1, 2016, with four, one-year extension options at the behest of the borrower. We simultaneously entered into an interest rate cap with Wells Fargo to hedge against the variability of the LIBOR rate, at a cost of approximately $0.03 million through December 1, 2016. We will receive payments from Wells Fargo if the one month LIBOR rate increases above 3.00%, to cap our interest costs at the all in 5.15% interest rate.

Guggenheim Investments: On December 18, 2013, through a wholly-owned subsidiary, we borrowed $11.3 million pursuant to a long-term note payable from Guggenheim Investments, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 4.74% per year. The note has a maturity date of January 6, 2039, but is subject to hyper-amortization if the note is not repaid on January 6, 2021. We used the proceeds to repay our line of credit.

KeyBank: On December 27, 2013, through a wholly-owned subsidiary, we borrowed $4.4 million pursuant to a long-term note payable from KeyBank National Association, which is collateralized by a security interest in one of our properties. The note accrues interest at a fixed rate of 5.28% per year and we may not repay this note prior to the last three months of the term, or we would be subject to a prepayment penalty. The note has a maturity date of January 1, 2024. We used the proceeds from the note to acquire the property in Novi, Michigan on the same date.

2013 Leasing Activities

The following is a summary of our recent leasing activity:

Champaign, Illinois: On January 14, 2013, we extended the lease with the tenant occupying our property located in Champaign, Illinois. The lease covering this property was extended for an additional 11 years, through December 2024. The lease was originally set to expire in December 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.4 million in leasing commissions.

Canton, Ohio: On April 10, 2013, we extended the lease with the tenant occupying our property located in Canton, Ohio. The lease covering this property was extended for an additional 10 years, through January 2024. The lease was originally set to expire in January 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.5 million.

Dayton, Ohio: On May 14, 2013, our tenant occupying our Dayton, Ohio property notified us of their intention to exercise their early termination option. The lease requires the tenant to continue to pay monthly rent through the effective termination date of June 30, 2015.

Hazelwood, Missouri: On July 17, 2013, we executed a revised lease with a tenant to occupy our previously vacant property located in Hazelwood, Missouri. The lease commences on August 1, 2013 and expires in May 2023. The tenant has two options to purchase the property: one in March 2017 and the other in May 2023. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.1 million in leasing commissions and $0.3 million in tenant improvements.

South Hadley, Massachusetts: On August 7, 2013, we extended the lease with the tenant occupying our property located in South Hadley, Massachusetts for an additional year, through January 2015. The lease was originally set to expire in January 2014. The lease provides a scheduled rent increase over the previous lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $3,400 in leasing commissions.

Lexington, North Carolina: On August 15, 2013, we extended the lease with the tenant occupying our property located in Lexington, North Carolina. The lease covering this property was extended for an additional 12 years, through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.05 million, and we paid $0.2 million in leasing commissions.

Crenshaw, Pennsylvania: On August 15, 2013, we extended the lease with the tenant occupying our property located in Crenshaw, Pennsylvania. The lease covering this property was extended for an additional 12 years, through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.7 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.08 million, and we paid $0.4 million in leasing commissions.

Canton, North Carolina: On November 11, 2013, we amended the lease with the tenant occupying our property located in Canton, North Carolina. The amended lease provided that we construct an expansion to the premises of approximately 150,000 rentable square feet. The term of the lease will be extended so that after substantial completion of the expansion, the term remaining under the lease is 20 years. The lease was originally set to expire in July 2024. During the extended term of the lease, rent shall be equal to our incurred construction costs times 9.25% per annum, and subject to a 2% rental increase per year.

2013 Equity Activities

The equity issuances summarized below were issued under our universal shelf registration statements, (File No. 333-169290 and File No. 333-190931) that were effective and on file with the Securities and Exchange Commission at the time of the respective issuance.

Common Equity: During the year ended December 31, 2013, we completed three separate public offerings for a total issuance of 4,146,922 shares of our common stock. We issued 1,265,000 shares of common stock in the first offering, which closed on April 29, 2013, at a public offering price of $18.90 per share. Gross proceeds of this offering totaled $23.9 million and net proceeds, after deducting offering expenses and underwriter discounts, were $22.6 million. We issued 1,478,000 shares of common stock in the second offering, which closed on June 24, 2013, with a partial exercise of the over-allotment option closing on July 11, 2013, at a public offering price of $18.82 per share. Gross proceeds of this offering totaled $27.8 million and net proceeds, after deducting offering expenses and underwriter discounts, were $26.3 million. We issued 1,403,922 shares of common stock in the third offering, which closed on November 25, 2013, with a partial exercise of

the over-allotment option closing on December 26, 2013, at a public offering price of $18.15 per share. Gross proceeds of this offering totaled $25.5 million and net proceeds, after deducting offering expenses and underwriter discounts, were $24.2 million. Proceeds from these offerings were used to acquire real estate and for general corporate purposes.

ATM Program: During the year ended December 31, 2013, we raised approximately $7.7 million in net proceeds under our ATM Program with Jefferies. Proceeds from this offering were used to acquire real estate and for general corporate purposes. Under this agreement we may, from time to time, offer to sell shares of our common stock with an aggregate sales price of up to $25.0 million on the open market through Jefferies, as agent, or to Jefferies, as principal, based upon our instructions (including any price, time or size limits or other customary parameters or conditions that we may impose). Sales of shares of our common stock through Jefferies will be executed by means of ordinary brokers’ transactions on the NASDAQ Global Select Market, or the NASDAQ, or otherwise at market prices, in privately negotiated transactions, crosses or block transactions, as may be agreed between us and Jefferies, including a combination of any of these transactions.

Senior Common Equity: During the year ended December 31, 2013, we sold 189,241, shares of our senior common stock at $15.00 per share in an ongoing best-efforts public offering and issued 8,443 shares of our senior common stock under the Dividend Reinvestment Plan, or DRIP, program. The net proceeds, after deducting the underwriting discount and commission were $2.6 million. We can issue up to 3,000,000 shares of senior common stock and the offering will continue until the earlier of March 28, 2015 or the date on which a total of 3,000,000 shares of senior common stock are sold. Proceeds from this offering were used to acquire real estate and for general corporate purposes.

Diversity of Our Portfolio

Gladstone Management Corporation, or our Adviser, seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. The table below reflects the breakdown of our total rental income by tenant industry classification for the years ended December 31, 2013, 2012 and 2011, respectively (dollars in thousands):


	For the year ended December 31,
	2013					2012					2011
Industry Classification	Rental Income		Percentage of Rental Income			Rental Income		Percentage of Rental Income			Rental Income		Percentage of Rental Income
Telecommunications	$	10,102		17.0	%	$	7,351		14.4	%	$	6,206		14.1	%
Healthcare		7,486		12.5			5,228		10.3			4,108		9.4
Automobile		5,589		9.4			1,944		3.8			1,168		2.7
Personal, Food & Miscellaneous Services		5,231		8.8			2,479		4.9			649		1.5
Electronics		4,982		8.3			6,189		12.3			6,046		13.9
Diversified/Conglomerate Manufacturing		3,665		6.1			3,664		7.2			3,664		8.4
Chemicals, Plastics & Rubber		3,236		5.4			3,153		6.2			3,146		7.2
Beverage, Food & Tobacco		3,007		5.0			2,844		5.6			2,271		5.2
Personal & Non-Durable Consumer Products		2,583		4.3			2,507		4.9			2,316		5.3
Machinery		2,265		3.8			2,259		4.4			2,256		5.2
Containers, Packaging & Glass		2,171		3.6			2,344		4.6			2,339		5.4
Buildings and Real Estate		2,160		3.6			2,144		4.2			2,120		4.9
Printing & Publishing		1,848		3.1			1,894		3.7			1,979		4.5
Oil & Gas		1,275		2.1			1,271		2.5			1,271		2.9
Diversified/Conglomerate Services		1,244		2.1			1,244		2.4			1,001		2.3
Banking		1,156		1.9			1,149		2.3			204		0.5
Education		656		1.1			2,138		4.2			1,775		4.1
Childcare		583		1.0			583		1.1			583		1.3
Home & Office Furnishings		530		0.9			530		1.0			530		1.2

	$	59,769		100.0	%	$	50,915		100.0	%	$	43,632		100.0	%

Our Adviser and Administrator

Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. Our Adviser is controlled by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone is also the chairman and chief executive officer of our Adviser. Terry Lee Brubaker, our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser. Gladstone Administration, LLC, or our Administrator, employs our chief financial officer and treasurer, chief compliance officer, internal counsel and secretary and their respective staffs. Mr. Gladstone is also the chairman and chief executive officer of our Administrator. Terry Lee Brubaker is also the vice chairman and chief operating officer of our Administrator.

Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly-traded, agricultural real estate company. With the exception of Ms. Danielle Jones, our chief financial officer and treasurer, and Mr. Robert Cutlip, our president, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception of our president, all of our executive officers and all of our directors, with the exception of Mr. David Dullum, serve as either directors or executive officers, or both, of Gladstone Land Corporation. In the future, our Adviser may provide investment advisory services to other companies, both public and private.

Advisory and Administration Agreements

We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator. Our Adviser and Administrator employ all of our personnel and pay their payroll, benefits and general expenses directly. We have an investment advisory agreement with our Adviser, or the Advisory Agreement, and an administration agreement with our Administrator, or the Administration Agreement.

Advisory Agreement

The 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, or total common stockholders’ equity, and for an incentive fee based on FFO. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common with other externally-advised REITs; however, our Adviser may earn fee income from our borrowers or tenants or other sources. For each of the years ended December 31, 2013, 2012 and 2011, tenants paid approximately $10,000 in fees to our Adviser, respectively.

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock and senior common stock, but FFO does not include any unrealized capital gains or losses. The incentive fee would reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or the hurdle rate, of total common stockholders’ equity. We pay our Adviser an incentive fee with respect to our pre-incentive fee FFO quarterly as follows:

•

no incentive fee in any calendar quarter in which our pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized);

•

100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% in any calendar quarter (8.75% annualized); and

•

20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Quarterly Incentive Fee Based on FFO

Pre-incentive fee FFO

(expressed as a percentage of total common stockholders’ equity)

LOGO

Percentage of pre-incentive fee FFO allocated to the incentive fee

The incentive fee may be reduced because of a covenant which exists in our New Line of Credit agreement which limits distributions to our stockholders to 100% of FFO with acquisition-related costs that are required to be expensed under ASC 805, Business Combinations, added back to FFO. In order to comply with this covenant, our Board of Directors accepted our Adviser’s offer to unconditionally, irrevocably and voluntarily waive on a quarterly basis a portion of the incentive fee for the years ended December 31, 2013, 2012 and 2011, which allowed us to maintain the current level of distributions to our stockholders. These waived fees may not be recouped by our Adviser in the future. 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 such waiver, either in whole or in part.

Administration Agreement

Pursuant to the Administration Agreement, we pay for our allocable portion of our Administrator’s overhead expenses incurred while performing its obligations to us, including, but not limited to, rent and the salaries and benefits expenses of our personnel, including our chief financial officer and treasurer, chief compliance officer, internal counsel and secretary, and their respective staffs. Our allocable portion of expenses is generally derived by multiplying our Administrator’s total expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all companies managed by our Adviser under similar agreements.

Critical Accounting Policies

The preparation of our financial statements in accordance with Generally Accepted Accounting Principles in the U.S., or GAAP, requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding 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 Form 10-K. 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. There were no material changes to our critical accounting policies during the year ended December 31, 2013.

Allocation of Purchase Price

When we acquire real estate, we allocate the purchase price to (i) the acquired tangible assets and liabilities, consisting of land, building, tenant improvements and long-term debt and (ii) the identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, in-place leases, unamortized lease origination costs, tenant relationships and capital lease obligations, based in each case on their fair values in accordance with ASC 805, Business Combinations. All expenses related to the acquisition are expensed as incurred.

Our Adviser estimates value 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. Our Adviser also considers 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 hypothetical expected lease-up periods, which primarily range from 9 to 18 months, depending on specific local market conditions. Our Adviser 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. Our Adviser 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 management’s 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 purchase price 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, depending on the amounts allocated between land and other depreciable assets, changes in the purchase price allocation among our assets could have a material impact on our FFO, a metric which is used by many REIT investors to evaluate our operating performance; and

•

The period of time over which tangible and intangible assets are depreciated 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. Also, we depreciate our buildings over 39 years, but do not depreciate our land. These differences in timing could have a material impact on our results 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. In determining if impairment exists, our Adviser considers such factors as our tenants’ payment histories, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industries in which our tenants operate and whether the carrying value of our real estate has decreased. If any of the factors above indicate 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 carrying amount of such property is recoverable. In preparing the projection of undiscounted future cash flows, we estimate the holding periods of the properties and cap rates using information that we obtain from market comparability studies and other comparable sources. If impairment were 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 using assumptions from

market participants. 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 of whether impairment is deemed to have occurred and the amount of impairment loss that we would recognize.

Using the methodology discussed above we evaluated our entire portfolio as of December 31, 2013 for any impairment indicators and performed an impairment analysis on those select properties that had an indication of impairment. We concluded that none of our properties were impaired as of December 31, 2013; however, we determined that our properties located in South Hadley, Massachusetts and Roseville, Minnesota are at risk to become impaired in the future. We recently extended the lease on the property in South Hadley Massachusetts for one year, and it now expires in January 2015. There is a possibility we may have to impair this property in 2014 if we do not negotiate another lease extension on this building or find a replacement tenant.

The current tenant in our property located in Roseville, Minnesota downsized on January 1, 2013. We are currently working to re-tenant the remainder of this building; however, if we do not secure a tenant in the near term there is a possibility we may have to impair this property in 2014.

We will continue to monitor our portfolio for any other indicators of impairment. There have been no impairments recognized on our real estate assets since inception.

Results of Operations

The weighted-average yield on our total portfolio, which was 8.9% as of December 31, 2013, is calculated by taking the annualized straight-line rents, reflected as rental income on our consolidated statements of operations, of each acquisition as a percentage of the acquisition. The weighted-average yield does not account for the interest expense incurred on the mortgages placed on our properties.

A comparison of our operating results for the years ended December 31, 2013 and 2012 is below (dollars in thousands, except per share amounts):


	For the year ended December 31,
	2013			2012			$ Change			% Change

Operating revenues
Rental income	$	59,769		$	50,915		$	8,854			17	%
Tenant recovery revenue		1,574			355			1,219			343	%

Total operating revenues		61,343			51,270			10,073			20	%


Operating expenses
Depreciation and amortization		22,827			16,831			5,996			36	%
Property operating expenses		3,348			1,588			1,760			111	%
Acquisition related expense		768			949			(181	)		–19	%
Base management fee		2,014			1,467			547			37	%
Incentive fee		4,201			3,569			632			18	%
Administration fee		1,467			1,118			349			31	%
General and administrative		1,655			1,594			61			4	%

Total operating expenses before credit to incentive fee		36,280			27,116			9,164			34	%


Credit to incentive fee		(3,457	)		(2,221	)		(1,236	)		56	%

Total operating expenses		32,823			24,895			7,928			32	%


Other income (expense)
Interest expense		(24,351	)		(20,226	)		(4,125	)		20	%
Distributions attributable to Series C mandatorily redeemable preferred stock		(2,743	)		(2,515	)		(228	)		9	%
Other income		101			127			(26	)		–20	%

Total other expense		(26,993	)		(22,614	)		(4,379	)		19	%


Net income		1,527			3,761			(2,234	)		–59	%


Distributions attributable to Series A and B preferred stock		(4,094	)		(4,093	)		(1	)		0	%
Distributions attributable to senior common stock		(300	)		(113	)		(187	)		165	%


Net loss available to common stockholders	$	(2,867	)	$	(445	)	$	(2,422	)		544	%


Net loss available to common stockholders per weighted average share of common stock - diluted	$	(0.22	)	$	(0.04	)	$	(0.18	)		450	%


FFO available to common stockholders	$	19,960		$	16,386		$	3,574			22	%


FFO per weighted average share of common stock - diluted	$	1.49		$	1.48		$	0.01			1	%

Operating Revenues

Rental income increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because of the seven properties acquired during 2013, partially offset by a loss of rental income due to vacancies in our portfolio during 2013.

Tenant recovery revenue increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012. This increase was primarily due to reimbursements from our tenant in our partially vacant building located in Roseville, Minnesota.

Operating Expenses

Depreciation and amortization expenses increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because of the seven properties acquired during 2013 and a full year of depreciation for properties acquired in 2012.

Property operating expenses consist of franchise taxes, management fees, insurance, ground lease payments and overhead expenses paid on behalf of certain of our properties. Property operating expenses increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, primarily because of an increase in overhead (maintenance, repair and utilities) expenses at our partially vacant Roseville, Minnesota building.

Acquisition related expenses primarily consists of legal fees and fees incurred for third-party reports prepared in connection with potential acquisitions and our due diligence analyses related thereto. Acquisition related expense decreased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, as a result of acquiring only seven properties during 2013, as compared to eight properties during 2012.

The base management fee increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, due to an increase in total common stockholders’ equity, the main component of the calculation. The calculation of the base management fee is described in detail above under “Advisory and Administration Agreements.”

The incentive fee increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because of an increase in pre-incentive fee FFO. The increase in pre-incentive fee FFO was due to an increase in rental revenues from the properties acquired during 2013, which was partially offset by an increase in property operating and interest expenses during the year ended December 31, 2013, as compared to the year ended December 31, 2012.

The incentive fee credit increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because of an increase in the amount of common dividends paid from the shares issued during 2013. The calculation of the incentive fee is described in detail above within “Advisory and Administration Agreements.”

The administration fee increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, as a result of an increase in the amount of the total expenses our Administrator incurred during 2013, coupled with a larger percentage of the fee being allocated to us as a result of the increase in our total assets during 2013. The calculation of the administration fee is described in detail above within “Advisory and Administration Agreements.”

General and administrative expenses increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, as a result of an increase in professional fees related to tax and audit services from the increase in our portfolio.

Other Income and Expenses

Interest expense increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012. This increase was primarily a result of interest on the $80.0 million of mortgage debt assumed and issued during 2013, partially offset by reduced interest expense on our long-term financings from amortizing and balloon principal payments made during 2013.

Distributions for our mandatorily redeemable preferred stock increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because the public offering of shares of our 7.125% Series C Cumulative Term Preferred stock, or Term Preferred Stock, was completed in February 2012, and thus was not outstanding for the full year ended December 31, 2012.

Other income decreased during the year ended December 31, 2013, as compared to the year ended December 31, 2012, because of lower interest income on employee loans earned during 2013, as compared to 2012 due to principal repayments made by employees of our Adviser during 2013.

Net Loss Available to Common Stockholders

Net loss available to common stockholders increased for the year ended December 31, 2013, as compared to the year ended December 31, 2012, primarily because of increased interest expense, property operating expenses, depreciation expense and increased distributions to our preferred stockholders from the issuance of our Term Preferred Stock, partially offset by an increase in rental income earned from the seven properties acquired during 2013.

A comparison of our operating results for the years ended December 31, 2012 and 2011 is below (dollars in thousands, except per share amounts):


	For the year ended December 31,
	2012			2011			$ Change			% Change

Operating revenues
Rental income	$	50,915		$	43,632		$	7,283			17	%
Tenant recovery revenue		355			344			11			3	%

Total operating revenues		51,270			43,976			7,294			17	%


Operating expenses
Depreciation and amortization		16,831			14,149			2,682			19	%
Property operating expenses		1,588			986			602			61	%
Acquisition related expenses		949			700			249			36	%
Base management fee		1,467			1,629			(162	)		–10	%
Incentive fee		3,569			3,398			171			5	%
Administration fee		1,118			1,024			94			9	%
General and administrative		1,594			1,497			97			6	%

Total operating expenses before credit from Adviser		27,116			23,383			3,733			16	%


Credit to incentive fee		(2,221	)		(2,113	)		(108	)		5	%

Total operating expenses		24,895			21,270			3,625			17	%


Other income (expense)
Interest expense		(20,226	)		(17,076	)		(3,150	)		18	%
Distributions attributable to mandatorily redeemable preferred stock		(2,515	)		—			(2,515	)		NM
Other income		127			84			43			51	%

Total other expense		(22,614	)		(16,992	)		(5,622	)		33	%


Net income		3,761			5,714			(1,953	)		–34	%


Distributions attributable to preferred stock		(4,093	)		(4,094	)		1			0	%
Distributions attributable to senior common stock		(113	)		(62	)		(51	)		82	%


Net (loss) income available to common stockholders	$	(445	)	$	1,558		$	(2,003	)		–129	%


Net (loss) income available to common stockholders per weighted average share of common stock - diluted	$	(0.04	)	$	0.15		$	(0.19	)		–127	%


FFO available to common stockholders	$	16,386		$	15,707		$	679			4	%


Diluted FFO per weighted average share of common stock	$	1.48		$	1.53		$	(0.05	)		–4	%

NM = Not meaningful

Operating Revenues

Rental income increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, because of the eight properties acquired during 2012.

Tenant recovery revenue increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011. There was an increase in insurance premiums from 2011, resulting in increased reimbursements from our tenants coupled with an increase in insurance reimbursements we received from certain of our tenants at our properties acquired during 2012.

Operating Expenses

Depreciation and amortization expenses increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, because of the eight properties acquired during 2012 and a full year of depreciation for properties acquired in 2011.

Property operating expenses consist of franchise taxes, management fees, insurance, ground lease payments and overhead expenses paid on behalf of certain of our properties. Property operating expenses increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily because of ground lease payments we are responsible for paying at two of our properties acquired in the fourth quarter of 2011, coupled with an increase in overhead expenses and franchise taxes paid at certain of our vacant properties.

Acquisition related expenses primarily consist of legal fees and fees incurred for third-party reports prepared in connection with potential acquisitions and our due diligence analyses related thereto. Acquisition related expenses increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, as a result of costs incurred related to the eight properties acquired during 2012 coupled with costs incurred for other potential acquisitions, partially offset by an out of period adjustment of $250,000 recorded during the year ended December 31, 2011, related to the acquisition of the property in Orange City, Iowa in December 2010.

The base management fee decreased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to a decrease in total common stockholders’ equity, the main component of the calculation. The calculation of the base management fee is described in detail above under “Advisory and Administration Agreements.”

The incentive fee increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, because of an increase in pre-incentive fee FFO. The increase in pre-incentive fee FFO was due to an increase in rental revenues from the eight acquisitions made in 2012, which was partially offset by an increase in property operating, due diligence and interest expenses during the year ended December 31, 2012, as compared to the year ended December 31, 2011.

The incentive fee credit increased slightly for the year ended December 31, 2012, as compared to the year ended December 31, 2011, because of the increase in the amount of common dividends paid for 2012, which resulted in a larger portion of the incentive fee which was credited. The calculation of the incentive fee is described in detail above within “Advisory and Administration Agreements.”

The administration fee increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily as a result of an increase in the amount of the total expenses our Administrator incurred during 2012. The calculation of the administration fee is described in detail above within “Advisory and Administration Agreements.”

General and administrative expenses increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to increase in legal fees incurred at certain of our properties for various projects at those properties coupled with an increase in stockholder related expenses.

Other Income and Expense

Interest expense increased for the year ended December 31, 2012, as compared to the year ended December 31, 2011. This increase was primarily a result of interest on the $124.4 million of mortgage debt assumed and issued during 2012, partially offset by reduced interest expense on our long-term financings from amortizing and balloon principal payments made during 2012.

Distributions on our mandatorily redeemable preferred stock for the year ended December 31, 2012, are from the public offering of 1,540,000 shares of our 7.125% Series C Term Preferred Stock completed in February 2012. There were no distributions on our mandatorily redeemable preferred stock for the year ended December 31, 2011 as there was none outstanding.

Other income increased during the year ended December 31, 2012, as compared to the year ended December 31, 2011, because of an easement payment and a bankruptcy settlement from a former tenant received in 2012 related to our property located in Sterling Heights, Michigan. This was partially offset by lower interest income on employee loans during the year ended December 31, 2012, as compared to the year ended December 31, 2011 due to principal repayments made by employees of our Adviser during 2012.

Net (Loss) Income Available to Common Stockholders

Net (loss) income available to common stockholders decreased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily because of increased interest expense, increased depreciation expense, and increased distributions to our preferred stockholders from the issuance of our Term Preferred Stock, partially offset by an increase in rental income earned from the eight properties acquired in 2012.

Liquidity and Capital Resources

Overview

Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our New Line of Credit, obtaining mortgages on our unencumbered properties and issuing additional equity securities. Our available liquidity at December 31, 2013, was $25.6 million, including $8.5 million in cash and cash equivalents and an available borrowing capacity of $17.1 million under our New Line of Credit.

Future Capital Needs

We actively seek conservative investments that are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial, commercial and retail real property, make mortgage loans, or pay down outstanding borrowings under our New Line of Credit. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and on borrowings under our New Line of Credit, and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments.

We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and borrowings under our New Line of Credit and fund our current operating costs in the near term. Additionally, to satisfy our short-term obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. Historically, our Adviser has provided such partial credits to our management fees on a quarterly basis. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs.

Equity Capital

During 2013, we raised $77.2 million of common equity in three follow-on public offerings, or $73.1 million in net proceeds, at a weighted average share price of $18.62. We also raised $7.8 million of common equity under our ATM Program, or $7.7 million in net proceeds, at an average share price of $18.72. Furthermore, we raised $2.6 million in net proceeds of senior common equity. We used these proceeds to acquire additional real estate and repay a portion of the outstanding balance of the New Line of Credit, with the remainder used for general corporate and working capital needs.

As of today, we have the ability to raise up to $273.6 million of additional equity capital through the sale and issuance of securities that are registered under our universal shelf registration statement on Form S-3 (File No. 333-190931), or the Universal Shelf, in one or more future public offerings. Of the $273.6 million of available capacity under our Universal Shelf, $11.0 million of common stock is reserved for additional sales under our ATM Program and $48.2 million is reserved for sales of our senior common stock.

Debt Capital

As of December 31, 2013, we had mortgage notes payable in the aggregate principal amount of $421.9 million, collateralized by a total of 70 properties with terms at issuance ranging from 4 years to 25 years. The weighted-average interest rate on the mortgage notes payable as of December 31, 2013 was 5.4%.

The CMBS market has returned; see the discussion in “Business Environment” above. Specifically, we continue to see banks and other non-bank lenders willing to issue 10-year mortgages. Consequently, we are focused on obtaining mortgages through regional banks, non-bank lenders and CMBS.

We have mortgage debt in the aggregate principal amount of $24.8 million payable during 2014 and $42.4 million payable during 2015. The 2014 principal amounts payable include both amortizing principal payments and a balloon principal payment due in June 2014 of $17.5 million. We are currently in conversations with the lender in advance of the maturity in June 2014. We intend to pay the 2014 debt amortization payments from operating cash flow and borrowings under our New Line of Credit.

Operating Activities

Net cash provided by operating activities during the year ended December 31, 2013, was $19.9 million, as compared to net cash provided by operating activities of $23.4 million for the year ended December 31, 2012. This decrease was primarily a result of a decrease in our account payables coupled with the loss of rental income from vacancies in our portfolio, partially offset by an increase in rental income received from the properties acquired in 2013. The majority of cash from operating activities is generated from the rental payments that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our New Line of Credit, distributions to our stockholders, management fees to our Adviser, and other entity-level expenses.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2013, was $137.1 million, which primarily consisted of the acquisition of seven properties, the expansion at another property and tenant improvements performed at certain of our properties during the year ended December 31, 2013, as compared to net cash used in investing activities during the year ended December 31, 2012, of $92.0 million, which primarily consisted of the acquisition of eight properties, coupled with tenant improvements performed at certain of our properties and net payments to our lenders for reserves.

Financing Activities

Net cash provided by financing activities during the year ended December 31, 2013, was $120.2 million, which primarily consisted of proceeds from the sale of common stock and proceeds from the issuance of mortgage notes payable, partially offset by the increase in distributions paid to our stockholders and principal repayments on mortgage notes payable. Net cash provided by financing activities for the year ended December 31, 2012, was $70.8 million, which primarily consisted of proceeds from the sale of our Term Preferred Stock and proceeds from the issuance of mortgage notes payable, partially offset by distributions paid to our stockholders, principal repayments on mortgage notes payable and net repayments on our Prior Line of Credit.

Line of Credit

In August 2013, we procured the $60.0 million New Line of Credit, with Keybank National Association serving as a revolving lender, a letter of credit issuer and an administrative agent and Citizens Bank of Pennsylvania as an additional lender. Commerica Bank was subsequently added as an additional lender in December 2013. The New Line of Credit initially matures in August 2016; however, we have a one-year extension option subject to the payment of an extension fee equal to 25 basis points on the initial maturity date and certain other customary conditions. The New Line of Credit replaced the Credit Agreement, dated as of December 28, 2010 with Capital One, N.A., as administrative agent, and the other lenders party thereto, or the Prior Line of Credit. The Prior Line of Credit provided for a senior secured revolving credit facility in the amount of $75.0 million and was originally scheduled to mature on December 28, 2013.

The New Line of Credit has a letter of credit sublimit of up to $20.0 million. In addition, we may expand the New Line of Credit up to a total of $75.0 million upon satisfaction of certain conditions and payment of the associated up front and arrangement fees at the time of such increase. The interest rate per annum applicable to the New Line of Credit is equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of up to 3.25%, depending upon our leverage. The leverage ratio used in determining the applicable margin for interest on the New Line of Credit is recalculated quarterly. We are subject to an annual maintenance fee of $0.03 million per year and an unused commitment fee of 25 basis points per year, which accrues quarterly. Our ability to access this source of financing is subject to our continued ability to meet customary lending requirements, such as compliance with financial and operating covenants and our meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 100% of our FFO, with acquisition-related costs required to be expensed under ASC 805 added back to FFO. In addition, the maximum amount we may draw under the New Line of Credit is based on a percentage of the value of a pool of unencumbered properties, which must meet agreed upon eligibility standards.

If and when long-term mortgages are arranged for properties in the unencumbered pool, the banks will reduce the availability under the New Line of Credit by the amount advanced against that property’s value. Conversely, as we purchase new properties meeting the eligibility standards, we may add these new properties to the unencumbered pool to obtain additional availability under the New Line of Credit. The availability under the New Line of Credit is also reduced by letters of credit used in the ordinary course of business. We may use the advances under the New Line of Credit for both general corporate purposes and the acquisition of new investments.

As of December 31, 2013, there was $24.4 million outstanding under our New Line of Credit at an interest rate of approximately 3.4% and $10.3 million outstanding under letters of credit at a weighted average interest rate of 3.4%. As of February 18, 2014, the maximum additional amount we could draw was $20.1 million. Our ability to increase the availability under our New Line of Credit is dependent upon us adding additional properties to the unencumbered pool, which must meet predetermined eligibility standards. We were in compliance with all covenants under the New Line of Credit as of December 31, 2013.

Contractual Obligations

The following table reflects our material contractual obligations as of December 31, 2013 (in thousands):


	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Debt Obligations ⁽¹⁾	$	484,779	$	24,830	$	155,525	$	124,566	$	179,858
Interest on Debt Obligations ⁽²⁾		127,549		24,671		44,904		22,119		35,855
Operating Lease Obligations ⁽³⁾		6,992		413		826		833		4,920
Purchase Obligations ⁽⁴⁾		5,675		5,675		—		—		—

Total	$	624,995	$	55,589	$	201,255	$	147,518	$	220,633

(1)	Debt obligations represent borrowings under our New Line of Credit, which represents $24.4 million of the debt obligation due in 2016, mortgage notes payable that were outstanding as of December 31, 2013, and amounts due to the holders of our Term Preferred Stock.

(2)

Interest on debt obligations includes estimated interest on our borrowings under our New Line of Credit, mortgage notes payable and interest due to the holders of our Term Preferred Stock. The balance and interest rate on our New Line of Credit is variable; thus, the amount of interest calculated for purposes of this table was based upon rates and balances as of December 31, 2013.

(3)	Operating lease obligations represent the ground lease payments due on our Tulsa, Oklahoma, Dartmouth, Massachusetts, and Springfield, Missouri properties.

(4)	Purchase obligations consist of $5.3 million in 2014 to fund the expansion of the premises in our Canton, NC property, and tenant improvements at four properties

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2013.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary risk that we believe we are and will be exposed to is interest rate risk. Certain of our leases contain escalations based on market indices, and the interest rate on our New Line of Credit is variable. Although we seek to mitigate this risk by structuring such provisions of our loans and leases to contain a minimum interest rate or escalation rate, as applicable, these features do not eliminate this risk. To that end, we have entered into a derivative contract with Wells Fargo to cap interest rates for the variable rate note payable on our Champaign, Illinois property. We paid a fee of $0.03 million to cap LIBOR rates at 3.0%, to limit our exposure to interest rates on this note payable.

To illustrate the potential impact of changes in interest rates on our net income for the year ended December 31, 2013, we have performed the following analysis, which assumes that our balance sheet remains constant and that no further actions beyond a minimum interest rate or escalation rate are taken to alter our existing interest rate sensitivity.

The following table summarizes the annual impact of a 1%, 2% and 3% increase in the one month LIBOR as of December 31, 2013. As of December 31, 2013, our effective average LIBOR was 0.17%; thus, a 1%, 2% or 3% decrease could not occur.


	(Dollars in Thousands)
Interest Rate Change	Increase to Interest Expense		Net Decrease to Net Income

1% Increase to LIBOR	$	310	$	(310	)
2% Increase to LIBOR		619		(619	)
3% Increase to LIBOR		898		(898	)

As of December 31, 2013, the fair value of our mortgage debt outstanding was $421.8 million. Interest rate fluctuations may affect the fair value of our debt instruments. If interest rates on our debt instruments, using rates at December 31, 2013, had been one percentage point higher or lower, the fair value of those debt instruments on that date would have decreased or increased by $20.5 million and $15.1 million, respectively.

In the future, we may be exposed to additional effects of interest rate changes, primarily as a result of our New Line of Credit or long-term mortgage debt, which we use to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate the interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees and borrowers, all of which may affect our ability to refinance debt, if necessary.

Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements


Report of Management on Internal Controls over Financial Reporting			63

Report of Independent Registered Public Accounting Firm			64

Consolidated Balance Sheets as of December 31, 2013 and 2012			65

Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011			66

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011			67

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011			68

Notes to Consolidated Financial Statements			69

Schedule III – Real Estate and Accumulated Depreciation			90

Report of Management on Internal Controls over Financial Reporting

To the Stockholders and Board of Directors of Gladstone Commercial Corporation:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets, provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations (COSO). Based on our assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2013.

The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

February 18, 2014

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Gladstone Commercial Corporation:

In our opinion, the accompanying consolidated balance sheets and the related statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Gladstone Commercial Corporation and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

McLean, VA

February 18, 2014

Gladstone Commercial Corporation

Consolidated Balance Sheets

(Dollars in Thousands, Except Share and Per Share Data)


	December 31, 2013			December 31, 2012

ASSETS
Real estate, at cost	$	642,353		$	533,753
Less: accumulated depreciation		81,241			65,730

Total real estate, net		561,112			468,023

Lease intangibles, net		79,632			57,254
Cash and cash equivalents		8,546			5,546
Restricted cash		5,051			2,935
Funds held in escrow		8,653			7,591
Deferred rent receivable, net		18,905			15,124
Deferred financing costs, net		6,840			6,569
Other assets		1,786			1,737


TOTAL ASSETS	$	690,525		$	564,779


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Mortgage notes payable	$	422,602		$	359,185
Borrowings under line of credit		24,400			25,000
Series C mandatorily redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 1,700,000 shares authorized; and 1,540,000 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		38,500			38,500
Deferred rent liability, net		6,015			5,379
Asset retirement obligation liability		3,884			3,755
Accounts payable and accrued expenses		2,359			4,715
Due to Adviser and Administrator ⁽¹⁾		1,360			1,175
Other liabilities		8,259			4,705


Total Liabilities	$	507,379		$	442,414


Commitments and contingencies ⁽²⁾

STOCKHOLDERS’ EQUITY
Series A and B redeemable preferred stock, par value $0.001 per share; $25 per share liquidation preference; 2,300,000 shares authorized and 2,150,000 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively	$	2		$	2
Senior common stock, par value $0.001 per share; 7,500,000 shares authorized and 374,484 and 179,511 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		—			—
Common stock, par value $0.001 per share, 38,500,000 shares authorized and 15,662,414 and 11,083,584 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		16			11
Additional paid in capital		298,751			215,470
Notes receivable - employee		(375	)		(410	)
Distributions in excess of accumulated earnings		(115,248	)		(92,708	)


Total Stockholders’ Equity		183,146			122,365


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	690,525		$	564,779

⁽¹⁾	Refer to Note 2 “Related-Party Transactions”

⁽²⁾	Refer to Note 7 “Commitments and Contingencies”

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

Gladstone Commercial Corporation

Consolidated Statements of Operations

(Dollars in Thousands, Except Per Share Data)


	For the year ended December 31,
	2013			2012			2011
Operating revenues
Rental income	$	59,769		$	50,915		$	43,632
Tenant recovery revenue		1,574			355			344

Total operating revenues		61,343			51,270			43,976


Operating expenses
Depreciation and amortization		22,827			16,831			14,149
Property operating expenses		3,348			1,588			986
Acquisitions related expense		768			949			700
Base management fee⁽¹⁾		2,014			1,467			1,629
Incentive fee ⁽¹⁾		4,201			3,569			3,398
Administration fee ⁽¹⁾		1,467			1,118			1,024
General and administrative		1,655			1,594			1,497

Total operating expenses before credit to incentive fee		36,280			27,116			23,383


Credit to incentive fee ⁽¹⁾		(3,457	)		(2,221	)		(2,113	)

Total operating expenses		32,823			24,895			21,270


Other income (expense)
Interest expense		(24,351	)		(20,226	)		(17,076	)
Distributions attributable to Series C mandatorily redeemable preferred stock		(2,743	)		(2,515	)		—
Other income		101			127			84

Total other expense		(26,993	)		(22,614	)		(16,992	)


Net income		1,527			3,761			5,714


Distributions attributable to Series A and B preferred stock		(4,094	)		(4,093	)		(4,094	)
Distributions attributable to senior common stock		(300	)		(113	)		(62	)


Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558


Earnings per weighted average share of common stock - basic & diluted
(Loss) income from continuing operations (net of dividends attributable to preferred stock)	$	(0.22	)	$	(0.04	)	$	0.15

Net (loss) income available to common stockholders	$	(0.22	)	$	(0.04	)	$	0.15


Weighted average shares of common stock outstanding
Basic		13,164,244			10,953,325			10,236,859

Diluted		13,164,244			10,953,325			10,288,711


Earnings per weighted average share of senior common stock	$	1.04		$	1.06		$	1.05

Weighted average shares of senior common stock outstanding - basic		287,178			106,721			59,258

⁽¹⁾	Refer to Note 2 “Related-Party Transactions”

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

Gladstone Commercial Corporation

Consolidated Statements of Stockholders’ Equity

(Dollars in Thousands)


												Distributions in
							Capital in		Notes			Excess of			Total
	Preferred		Senior Common		Common		Excess of		Receivable			Accumulated			Stockholders’
	Stock		Stock		Stock		Par Value		from Employees			Earnings			Equity
Balance at December 31, 2010	$	2	$	—	$	9	$	174,261	$	(963	)	$	(61,934	)	$	111,375


Issuance of common stock, net		—		—		2		37,292		—			—			37,294

Repayment of principal on employee notes receivable		—		—		—		—		541			—			541

Distributions declared to common, senior common and preferred stockholders		—		—		—		—		—			(19,610	)		(19,610	)

Net income		—		—		—		—		—			5,714			5,714

Balance at December 31, 2011	$	2	$	—	$	11	$	211,553	$	(422	)	$	(75,830	)	$	135,314


Issuance of senior common stock and common stock, net		—		—		—		3,917		—			—			3,917

Repayment of principal on employee notes receivable		—		—		—		—		12			—			12

Distributions declared to common, senior common and preferred stockholders		—		—		—		—		—			(20,639	)		(20,639	)

Net income		—		—		—		—		—			3,761			3,761

Balance at December 31, 2012	$	2	$	—	$	11	$	215,470	$	(410	)	$	(92,708	)	$	122,365


Issuance of senior common stock and common stock, net		—		—		5		83,281		—			—			83,286

Repayment of principal on employee notes receivable		—		—		—		—		35			—			35

Distributions declared to common, senior common and preferred stockholders		—		—		—		—		—			(24,067	)		(24,067	)

Net income		—		—		—		—		—			1,527			1,527

Balance at December 31, 2013	$	2	$	—	$	16	$	298,751	$	(375	)	$	(115,248	)	$	183,146

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

Gladstone Commercial Corporation

Consolidated Statements of Cash Flows

(Dollars in Thousands)


	For the year ended December 31,
	2013			2012			2011

Cash flows from operating activities:
Net income	$	1,527		$	3,761		$	5,714
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,827			16,831			14,149
Amortization of deferred financing costs		1,780			1,502			918
Amortization of deferred rent asset and liability, net		(333	)		(772	)		(616	)
Amortization of discount and premium on assumed debt		(171	)		9			94
Asset retirement obligation expense		129			168			157
Increase in other assets		(399	)		(211	)		(142	)
Increase in deferred rent liability		—			2,510			1,626
Increase in deferred rent receivable		(3,700	)		(2,144	)		(1,394	)
(Decrease) increase in accounts payable, accrued expenses, and amount due Adviser and Administrator		(2,171	)		2,746			(504	)
Increase (decrease) in other liabilities		1,437			743			(340	)
Leasing commissions paid		(1,041	)		(1,738	)		(6	)

Net cash provided by operating activities		19,885			23,405			19,656


Cash flows from investing activities:
Acquisition of real estate and related intangible assets		(131,188	)		(82,239	)		(42,681	)
Improvements of existing real estate		(5,176	)		(5,557	)		(1,844	)
Receipts from lenders for funds held in escrow		5,545			1,959			1,911
Payments to lenders for funds held in escrow		(6,606	)		(5,463	)		(3,376	)
Receipts from tenants for reserves		6,085			2,870			2,205
Payments to tenants from reserves		(3,949	)		(2,543	)		(2,031	)
Increase in restricted cash		(2,117	)		(461	)		(185	)
Deposits on future acquisitions		(2,375	)		(550	)		—
Deposits applied against real estate investments		2,725			—			—

Net cash used in investing activities		(137,056	)		(91,984	)		(46,001	)


Cash flows from financing activities:
Proceeds from issuance of equity		88,121			4,191			39,707
Offering costs		(4,963	)		(300	)		(2,412	)
Proceeds from issuance of mandatorily redeemable preferred stock		—			38,500			—
Borrowings under mortgage notes payable		79,995			99,455			20,052
Payments for deferred financing costs		(2,051	)		(4,598	)		(1,065	)
Principal repayments on mortgage notes payable		(16,407	)		(52,285	)		(6,311	)
Principal repayments on employee notes receivable		35			12			542
Borrowings from line of credit		75,400			41,800			58,474
Repayments on line of credit		(76,000	)		(35,500	)		(66,774	)
(Decrease) increase in security deposits		(19	)		134			9
Distributions paid for common, senior common and preferred stock		(23,940	)		(20,613	)		(19,610	)

Net cash provided by financing activities		120,171			70,796			22,612


Net increase (decrease) in cash and cash equivalents		3,000			2,217			(3,733	)

Cash and cash equivalents, beginning of period		5,546			3,329			7,062

Cash and cash equivalents, end of period	$	8,546		$	5,546		$	3,329


Cash paid during year for interest	$	26,679		$	21,239		$	17,076


Increase in asset retirement obligation	$	—		$	298		$	69


Fixed rate debt assumed in connection with acquisitions	$	—		$	24,926		$	11,921


Fixed asset additions in accounts payable	$	350		$	—		$	—


Senior common dividend issued in the dividend reinvestment program	$	126		$	26		$	—

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

Gladstone Commercial Corporation

Notes to Consolidated Financial Statements

1. Organization, Basis of Presentation and Significant Accounting Policies

Gladstone Commercial Corporation, is a real estate investment trust, or REIT, that was 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, commercial and retail real property and selectively making long-term industrial and commercial mortgage loans. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation, or the Adviser. We are externally managed pursuant to contractual arrangements with our Adviser and Gladstone Administration, LLC, or the Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly.

Subsidiaries

We conduct substantially all of our operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership, or the Operating Partnership. As we currently own all of the general and limited partnership interests of the Operating Partnership through two of our subsidiaries, GCLP Business Trust I and II, the financial position and results of operations of the Operating Partnership are consolidated with those of the Company.

Gladstone Commercial Lending, LLC, a Delaware limited liability company, or Gladstone Commercial Lending, a subsidiary of ours, 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 Commercial Lending, the financial position and results of operations of Gladstone Commercial Lending are consolidated with those of the Company.

Gladstone Commercial Advisers, Inc., a Delaware corporation, or Commercial Advisers, and a subsidiary of the Company, is a taxable REIT subsidiary, or TRS, which was created to collect any non-qualifying income related to our real estate portfolio. There has been no such income 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, each a subsidiary and business trust of the Company, were formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. We transferred our 99% limited partnership interest in the Operating Partnership to GCLP Business Trust I in exchange for 100 shares of the trust. Gladstone Commercial Partners, LLC transferred its 1% general partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100 trust shares.

All further references herein to “we,” “our,” “us” and the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.

Out of Period Adjustment

During 2011, the Company recorded adjustments to due diligence expense, depreciation and amortization expense and to certain balance sheet accounts in connection with the property the Company acquired in December 2010. As a result of these errors, the Company understated net income by $0.3 million for the year ended December 31, 2010, or $0.03 per share. The Company concluded that these adjustments were not material to the 2010 results of operations nor the 2011 results. As such, these adjustments were recorded during 2011.

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 periods. Actual results could materially differ from those estimates.

Reclassifications

Certain line items on the consolidated statements of operations and consolidated statements of cash flows from prior year’s financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income.

Real Estate and Lease Intangibles

We record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as such costs are incurred. We compute depreciation using the straight-line method over the estimated useful life or 39 years for buildings and improvements, 5 to 20 years for equipment and fixtures, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

Certain of our acquisitions involve sale-leaseback transactions with newly-originated leases, which we account for as asset acquisitions under Accounting Standards Codification, or ASC, 805, “Business Combinations.” In the case of an asset acquisition, we will capitalize the transaction costs incurred in connection with the acquisition. Other of our acquisitions involve the acquisition of properties that are already being operated as rental property, which we will generally consider to be a business combination under ASC 805. Business combination guidance is generally applicable to us when properties are acquired with leases in place at the time of acquisition. When an acquisition is considered a business combination, ASC 805 requires that the purchase price of real estate be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt assumed and identified intangible assets and liabilities, typically the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs and the value of tenant relationships, based in each case on their fair values. ASC 805 also requires that all expenses related to the acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition.

Management’s estimates of fair 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 hypothetical 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.

We allocate 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 $15.5 million, $11.9 million, and $10.1 million for the years ended December 31, 2013, 2012, and 2011, respectively

Above-market and below-market in-place lease fair 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. When determining the non-cancelable term of the lease, we evaluate if fixed-rate renewal options, if any, should be included. The capitalized above-market lease values, included in the accompanying consolidated balance sheets 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 $0.3 million, for each of the years ended December 31, 2013, 2012, and 2011, respectively. The capitalized below-market lease values, included in the accompanying consolidated balance sheets as part of deferred rent liability, are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases including any below market renewal periods. Total amortization related to below-market lease values was $0.6 million, $1.1 million, and $1.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

The total amount of the remaining intangible assets acquired, which consists 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 our overall relationship with that respective tenant. Characteristics to be considered by management in determining 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 our expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The value of in-place leases and 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 us 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 would be charged to rental income and the unamortized portion of in-place lease values, lease origination costs and customer relationship intangibles will be immediately charged to amortization expense. Total amortization expense related to these intangible assets and liabilities was $7.3 million, $4.9 million, and $4.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Impairment

We account for the impairment of real estate, including intangible assets, in accordance with ASC 360-10-35, “Property, Plant, and Equipment,” which requires us to periodically review the carrying value of each property to determine if circumstances indicate impairment of the carrying value of the investment exists or that depreciation periods should be modified. If circumstances indicate 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 carrying value of the investment in such property is recoverable. In performing the analysis, we consider such factors as the tenants’ payment history and financial condition, the likelihood of lease renewal, business conditions in the industry in which the tenants operate, whether there are indications that the fair value of the real estate has decreased and our intended holding period of the property. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.

We evaluate our entire portfolio of properties each quarter for any impairment indicators and perform an impairment analysis on those select properties that have an indication of impairment. We performed this evaluation and analysis and concluded that none of our properties were impaired as of December 31, 2013; however, we determined that properties located in South Hadley, Massachusetts and Roseville, Minnesota are at risk to become impaired in the future. We recently extended the lease on the property in South Hadley Massachusetts for one year, and it now expires in January 2015. There is a possibility we may have to impair this property in 2014 if we do not negotiate another lease extension on this building or find a replacement tenant.

Our property in Roseville, Minnesota remains partially vacant. We are currently working to re-tenant this building; however, if we do not secure a tenant in the near term there is a possibility we may have to impair this property in 2014.

We will continue to monitor our portfolio for any other indicators of impairment. There have been no impairments recognized on our real estate assets since inception.

Cash and Cash Equivalents

We consider cash equivalents to be 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, 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. At times, the balance of our cash and cash equivalents may exceed federally insurable limits.

Restricted Cash

Restricted cash consists of security deposits and receipts from tenants for reserves. 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 upon receipt by us of evidence of insurance and tax payments. For purposes of the consolidated statements of cash flows, changes in restricted cash caused by changes in reserves held for tenants are shown as investing activities. Changes in restricted cash caused by changes in security deposits are reflected in cash from financing activities.

Funds Held in Escrow

Funds held in escrow consist of funds held by certain of our lenders for properties held as collateral by these lenders. These funds will be released to us 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 secured financing. We made payments of $2.1 million, $4.6 million, and $1.1 million for deferred financing costs during the years ended December 31, 2013, 2012, and 2011, respectively. The decrease in payments incurred during the year ended December 31, 2013 was primarily related to the issuance of our 7.125% Series C Cumulative Term Preferred Stock in January 2012, or the Term Preferred Stock, discussed in further detail in Note 6 “Mandatorily Redeemable Preferred Stock.” Total amortization expense related to deferred financing costs is included in interest expense and was $1.8 million, $1.5 million, and $0.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.

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. Most of our leases contain rental increases at specified intervals. We recognize such revenues on a straight-line basis. Deferred rent receivable in the accompanying consolidated 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 in-place lease values of certain acquired properties. Accordingly, we determine, in our judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectable. We review deferred rent receivable, as it relates to straight line rents, on a quarterly basis and take 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 geographic area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, we record an allowance for uncollectable accounts or record a direct write-off of the specific rent receivable. No such reserves or direct write-offs have been recorded to date.

Tenant recovery revenue includes payments from tenants as reimbursements for franchise taxes, management fees, insurance, and ground lease payments. We recognize tenant recovery revenue in the same periods that we incur the related expenses.

Income Taxes

We have operated and intend to continue to operate in a manner that will allow us 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 that we distribute at least 90% of our REIT taxable income to our stockholders and meet certain other conditions. To the extent that we satisfy the distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our 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, we would account for any future income taxes in accordance with the provisions of ASC 740, “Income Taxes.” Under ASC 740-10-25, we account 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.

We may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite our belief that the filing position is supportable, the benefit of that tax position is not recognized in the statements of operations. We recognize interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. We recognize unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation. For the years ended December 31, 2013, 2012 and 2011, we did not record any uncertain tax positions.

Asset Retirement Obligations

ASC 410, “Asset Retirement and Environmental Obligation,” requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. ASC 410-20-20 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. ASC 410-20-25-6 clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We have 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 liabilities are accreted over the life of the leases for the respective properties. There were no liabilities accrued during the year ended December 31, 2013. There were $0.3 million and $0.1 million in liabilities accrued in connection with acquisitions for the years ended December, 2012 and 2011, respectively. We recorded expenses of $0.1 million, $0.2 million, and $0.2 million during the years ended December 31, 2013, 2012 and 2011, respectively, to general and administrative expense. Costs of future expenditures for obligations are discounted to their present value. The aggregate undiscounted obligation on all properties is $9.2 million and the discount rates used in the calculations range from 2.5% to 7.6%. We do not expect to make any payments in conjunction with these obligations in each of the next five years.

Stock Issuance Costs

We account for stock issuance costs in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 5.A, which states that incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. Accordingly, we record costs incurred related to our ongoing equity offerings to other assets on our consolidated balance sheet and ratably apply these amounts to the cost of equity as stock is issued. If an equity offering is subsequently terminated and there are amounts remaining in other assets that have not been allocated to the cost of the offering, the remaining amounts are recorded as a general and administrative expense on our consolidated statements of operations.

Comprehensive Income

For the years ended December 31, 2013, 2012, and 2011, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying consolidated financial statements.

2. Related-Party Transactions

Gladstone Management and Gladstone Administration

We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator which collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. We have an advisory agreement with our Adviser, or the Advisory Agreement, and an administration agreement with our Administrator, or the Administration Agreement. The management and administrative services and fees under the Advisory and Administration Agreements are described below. At December 31, 2013 and 2012, $1.4 million and $1.2 million, respectively, was collectively due to our Adviser and Administrator.

Advisory Agreement

The Advisory Agreement provides for an annual base management fee equal to 2% of our total stockholders’ equity, less the recorded value of any preferred stock, or common stockholders’ equity, and an incentive fee based on funds from operations, or FFO. For the years ended December 31, 2013, 2012, and 2011, we recorded a base management fee of $2.0 million, $1.5 million, and $1.6 million, respectively.

For purposes of calculating the incentive fee, FFO includes any realized capital gains and capital losses, less any distributions paid on preferred stock and senior common stock, but FFO does not include any unrealized capital gains or losses. The incentive fee rewards the Adviser if our quarterly FFO, before giving effect to any incentive fee, or pre-incentive fee FFO, exceeds 1.75%, or 7% annualized, or the hurdle rate, of total common stockholders’ equity. 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 our common stockholders’ equity. The Adviser also receives an incentive fee of 20% of the amount of our pre-incentive fee FFO that exceeds 2.1875% of common stockholders’ equity.

For the years ended December 31, 2013, 2012, and 2011, we recorded an incentive fee of $4.2 million, $3.6 million, and $3.4 million, respectively, offset by credits related to unconditional, voluntary and irrevocable waivers issued by the Adviser of $3.5 million, $2.2 million, and $2.1 million, respectively, resulting in a net incentive fee for the years ended December 31, 2013, 2012, and 2011, of $0.7 million, $1.4 million, and $1.3 million, respectively. Our Board of Directors accepted the Adviser’s offer to waive, on a quarterly basis, a portion of the incentive fee for the years ended December 31, 2013, 2012, and 2011, in order to support the current level of distributions to our stockholders. This waiver may not be recouped by the Adviser in the future.

Administration Agreement

Pursuant to the Administration Agreement, we pay for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us, including, but not limited to, rent and the salaries and benefits of its personnel, including our chief financial officer and treasurer, chief compliance officer, internal counsel and secretary and their respective staffs. Our allocable portion of expenses is derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of each quarter in comparison to the total assets of all companies managed by the Adviser under similar agreements. For the years ended December 31, 2013, 2012, and 2011, we recorded an administration fee of $1.5 million, $1.1 million, and $1.0 million, respectively.

Gladstone Securities

Dealer Manager Agreement

In connection with the offering of our senior common stock (see Note 8, “Stockholders’ Equity,” for further details) we entered into a Dealer Manager Agreement, dated March 25, 2011, or the Dealer Manager Agreement, with Gladstone Securities pursuant to which Gladstone Securities agreed to act as our exclusive dealer manager in connection with the offering. Pursuant to the terms of the Dealer Manager Agreement, Gladstone Securities is entitled to receive a sales commission in the amount of 7.0% of the gross proceeds of the shares of senior common stock sold, plus a dealer manager fee in the amount of 3.0% of the gross proceeds of the shares of senior common stock sold. Gladstone Securities, in its sole and absolute discretion, may re-allocate all of its selling commissions attributable to a participating broker-dealer and may also re-allocate a portion of its dealer manager fee earned in respect of the proceeds generated by the participating broker-dealer to any participating broker-dealer as a non-accountable marketing allowance. In addition, we have agreed to indemnify Gladstone Securities against various liabilities, including certain liabilities arising under the federal securities laws. We made approximately $0.3 million, $0.2 million, and $0.005 million of payments during the years ended December 31, 2013, 2012, and 2011 respectively, to Gladstone Securities pursuant to this agreement, which are reflected as a component of senior common stock costs in the statement of stockholders’ equity. The Dealer Manager Agreement currently is scheduled to terminate on the earlier of (i) March 28, 2015 or (ii) the date on which 3,000,000 shares of Senior Common Stock are sold pursuant to the Dealer Manager Agreement.

Mortgage Financing Arrangement Agreement

We also entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own. In connection with this engagement, Gladstone Securities may from time to time solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We will pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees which are payable upon closing of the financing, will be based on a percentage of the amount of the mortgage, generally ranging from 0.5% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1 million during the year ended December 31, 2013, which are reflected as deferred financing costs in the consolidated balance sheet, on total mortgages secured of $76.3 million, or 0.18%. The agreement is scheduled to terminate on August 31, 2014, unless renewed or earlier terminated pursuant to the provisions contained therein.

3. Earnings (Loss) per Share of Common Stock

The following tables set forth the computation of basic and diluted earnings (loss) per share of common stock for the years ended December 31, 2013, 2012, and 2011. We computed basic earnings (loss) per share for the years ended December 31, 2013, 2012 and 2011 using the weighted average number of shares outstanding during the periods. Diluted earnings (loss) per share for the years ended December 31, 2013, 2012 and 2011, reflects additional shares of common stock, related to our convertible senior common stock, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net income available to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).


	For the year ended December 31,
	2013			2012			2011

Calculation of basic earnings per share of common stock:

Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558

Denominator for basic weighted average shares of common stock		13,164,244			10,953,325			10,236,859


Basic (loss) earnings per share of common stock	$	(0.22	)	$	(0.04	)	$	0.15


Calculation of diluted earnings per share of common stock:

Net (loss) income available to common stockholders	$	(2,867	)	$	(445	)	$	1,558
Add: Income impact of assumed conversion of senior common stock ⁽¹⁾		—			—			62

Net (loss) income available to common stockholders plus assumed conversions	$	(2,867	)	$	(445	)	$	1,620

Denominator for basic weighted average shares of common stock		13,164,244			10,953,325			10,236,859
Effect of convertible senior common stock ⁽¹⁾		—			—			51,852

Denominator for diluted weighted average shares of common stock		13,164,244			10,953,325			10,288,711


Diluted (loss) earnings per share of common stock	$	(0.22	)	$	(0.04	)	$	0.15

(1)	The convertible senior common stock was excluded from the calculation of diluted earnings per share for the years ended December 31, 2013 and December 31, 2012, because it was anti-dilutive.

4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2013 and 2012 (dollars in thousands):


	December 31, 2013			December 31, 2012
Real estate:
Land	$	79,153		$	69,126
Building and improvements		527,230			442,451
Tenant improvements		35,970			22,176
Accumulated depreciation		(81,241	)		(65,730	)

Real estate, net	$	561,112		$	468,023

2013 Real Estate Activity

During the year ended December 31, 2013, we acquired seven properties and completed an expansion of one property, which are summarized below (dollars in thousands):


Location	Acquisition/ Expansion Date		Square Footage		Lease Term	Renewal Options		Total Purchase/ Expansion Price		Acquistion Expenses		Annualized Straight Line Rent		Debt Issued

Egg Harbor Township, NJ		3/28/2013		29,257	10 years		1 (5 years)	$	5,650	$	152	$	490	$	3,700

Clintonville, WI⁽¹⁾		4/11/2013		102,400	15 years		N/A		3,250		N/A		961		—

Vance, AL		5/9/2013		170,000	10 years		2 (5 years)		13,388		186		1,173		—

Blaine, MN		5/10/2013		92,275	7 years		2 (5 years)		14,450		79		1,475		8,200

Austin, TX		7/9/2013		320,000	7 years		3 (3 years)		57,000		155		4,641		35,300

Allen, TX		7/10/2013		115,200	9 years		2 (5 years)		15,150		81		1,478		8,900

Englewood, CO		12/11/2013		99,797	8 years		2 (5 years)		18,250		66		1,497		11,315

Novi, MI		12/27/2013		156,200	10 years		1 (5 years)		7,300		42		684		4,380


Total				1,085,129				$	134,438	$	761	$	12,399	$	71,795

⁽¹⁾	The Clintonville, WI property was originally acquired in November 2005 for $5.3 million. After the expansion was completed in April 2013, the total investment in the property is $8.6 million.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the seven properties acquired during the year ended December 31, 2013 as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Total Purchase Price

Egg Harbor Township, NJ	$	1,627	$	2,735	$	282	$	558	$	189	$	259	$	—	$	—		$	5,650
Vance, AL		457		9,721		808		1,097		678		627		—		—			13,388
Blaine, MN		1,060		9,347		1,172		1,361		694		816		—		—			14,450
Austin, TX		2,330		37,207		6,814		6,118		1,906		3,793		—		(1,168	)		57,000
Allen, TX		2,699		5,758		2,187		1,525		1,146		1,499		336		—			15,150
Englewood, CO		1,503		9,889		1,850		2,036		1,178		1,850		—		(56	)		18,250
Novi, MI		352		5,354		272		663		434		225		—		—			7,300

	$	10,028	$	80,011	$	13,385	$	13,358	$	6,225	$	9,069	$	336	$	(1,224	)	$	131,188

Below is a summary of the total revenue and earnings recognized on the seven properties acquired during the year ended December 31, 2013 (dollars in thousands):


			For the year ended December 31,
			2013
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾

Egg Harbor Township, NJ		3/28/2013	$	373	$	209
Vance, AL		5/9/2013		757		363
Blaine, MN		5/10/2013		947		424
Austin, TX		7/9/2013		2,299		655
Allen, TX		7/10/2013		685		300
Englewood, CO		12/11/2013		85		25
Novi, MI		12/27/2013		9		5


			$	5,155	$	1,981

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Pro Forma

We acquired seven properties during the year ended December 31, 2013, eight properties during the year ended December 31, 2012, and seven properties during the year ended December 31, 2011. The following table reflects pro-forma consolidated statements of operations as if the properties were acquired as of the beginning of the previous period. The pro-forma earnings for the years ended December 31, 2013, 2012 and 2011 were adjusted assume that acquisition-related costs were incurred as of the beginning of the previous period (dollars in thousands, except per share data):


	For the year ended December 31,
	2013			2012			2011
	(unaudited)

Operating Data:
Total operating revenue	$	67,818		$	68,940		$	56,954
Total operating expenses		(36,979	)		(37,457	)		(29,013	)
Other expenses		(29,283	)		(28,754	)		(21,797	)

Net income		1,556			2,729			6,144
Dividends attributable to preferred and senior common stock		(4,394	)		(4,206	)		(4,156	)

Net (loss) income available to common stockholders	$	(2,838	)	$	(1,477	)		1,988


Share and Per Share Data:
Basic (loss) earnings per share of common stock	$	(0.22	)	$	(0.13	)	$	0.19
Diluted (loss) earnings per share of common stock	$	(0.22	)	$	(0.13	)	$	0.19
Weighted average shares outstanding-basic		13,164,244			10,953,325			10,236,859
Weighted average shares outstanding-diluted		13,164,244			10,953,325			10,288,711

Existing Real Estate Activity

On January 14, 2013, we extended the lease with the tenant occupying our property located in Champaign, Illinois. The lease covering this property was extended for an additional 11 years through December 2024. The lease was originally set to expire in December 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.4 million in leasing commissions.

On April 10, 2013, we extended the lease with the tenant occupying our property located in Canton, Ohio. The lease covering this property was extended for an additional 10 years, through January 2024. The lease was originally set to expire in January 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.5 million.

On April 11, 2013, we funded a $3.3 million 102,400 square foot recently completed expansion of our property located in Clintonville, Wisconsin. In connection with the expansion of the property, we executed a lease amendment to extend the lease for an additional eight years, through October 2028. The lease was originally set to expire in October 2020. The lease was also amended to provide for an increase to the rental income over the life of the lease, with annualized straight line rents of approximately $1.0 million, up from $0.6 million under the original lease.

On May 14, 2013, our tenant occupying our Dayton, Ohio property notified us of their intention to exercise their early termination option. The lease requires the tenant to continue to pay monthly rent through the effective termination date of June 30, 2015.

On July 17, 2013, we executed a lease with a tenant to occupy our previously vacant property located in Hazelwood, Missouri. The lease commenced on August 1, 2013 and expires in May 2023. The tenant has two options to purchase the property: one option in March 2017 and the other option in May 2023. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.1 million in leasing commissions and $0.3 million in tenant improvements.

On August 7, 2013, we extended the lease with the tenant occupying our property located in South Hadley, Massachusetts. The lease covering this property was extended for an additional year through January 2015. The lease was originally set to expire in January 2014. The lease provides a scheduled rent increase over the previous lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $3,400 in leasing commissions.

On August 15, 2013, we extended the lease with the tenant occupying our property located in Lexington, North Carolina. The lease covering this property was extended for an additional 12 years through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.05 million, and we paid $0.2 million in leasing commissions

On August 15, 2013, we extended the lease with the tenant occupying our property located in Crenshaw, Pennsylvania. The lease covering this property was extended for an additional 12 years through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.7 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.08 million, and we paid $0.4 million in leasing commissions.

On November 11, 2013, we amended the lease with the tenant occupying our property located in Canton, North Carolina. The amended lease provided that we construct an expansion to the premises of approximately 150,000 rentable square feet. The term of the lease will be extended so that after substantial completion of the expansion, the term remaining under the lease is 20 years. The lease was originally set to expire in July 2024. During the extended term of the lease, rent shall be equal to our incurred construction costs times 9.25% per annum, and subject to a 2% rental increase per year.

2012 Real Estate Activity

During the year ended December 31, 2012, we acquired eight properties, which are summarized below (dollars in thousands):


Location	Acquisition Date		Square Footage		Lease Term	Renewal Options		Total Purchase Price		Acquistion Expenses		Annualized Straight Line Rent		Debt Issued / Assumed

Ashburn, VA		1/25/2012		52,130	15 years		2 (5 years each)	$	10,775	$	102	$	989		N/A
Ottumwa, IA		5/30/2012		352,860	11.5 years		3 (5 years each)		7,100		49		684		5,000
New Albany, OH		6/5/2012		89,000	10.5 years		2 (5 years each)		13,333		196		1,361		N/A
Columbus, GA		6/21/2012		32,000	11.5 years		2 (5 years each)		7,320		71		656		4,750
Columbus, OH		6/28/2012		31,293	10 years		N/A		4,037		66		342		N/A
Jupiter, FL		9/26/2012		60,000	10.5 years		2 (5 years each)		15,500		61		1,372		10,758	⁽¹⁾
Fort Worth, TX		11/8/2012		208,234	14 years		N/A		19,950		128		1,628		14,168	⁽¹⁾
Columbia, SC		11/21/2012		146,483	10 years		3 (5 years each)		29,150		105		2,614		19,000


Total				972,000				$	107,165	$	778	$	9,646	$	53,676

⁽¹⁾	Debt assumed as part of acquisition.

In accordance with ASC 805, we determined the fair value of acquired assets related to the eight properties acquired during the year ended December 31, 2012 as follows (dollars in thousands):


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Discount/ (Premium) on Assumed Debt			Total Purchase Price

Ashburn, VA	$	706	$	6,551	$	1,307	$	804	$	908	$	499	$	—	$	—		$	—		$	10,775
Ottumwa, IA		212		4,743		329		940		484		499		—		(107	)		—			7,100
New Albany, OH		1,658		7,511		1,235		1,122		857		903		47		—			—			13,333
Columbus, GA		1,378		3,894		626		574		473		375		—		—			—			7,320
Columbus, OH		542		1,856		597		391		213		325		113		—			—			4,037
Jupiter, FL		1,160		11,249		745		1,603		701		909		—		—			(867	)		15,500
Fort Worth, TX		963		15,507		140		1,579		2,107		517		—		—			(863	)		19,950
Columbia, SC		1,905		17,765		2,883		2,454		1,490		1,919		734		—			—			29,150

	$	8,524	$	69,076	$	7,862	$	9,467	$	7,233	$	5,946	$	894	$	(107	)	$	(1,730	)	$	107,165

Below is a summary of the total revenue and earnings recognized on the eight properties acquired during the year ended December 31, 2012 (dollars in thousands):


			For the Year Ended December 31,
			2012
Location	Acquisition Date		Rental Revenue		Earnings ⁽¹⁾

Ashburn, VA		1/25/2012	$	925	$	555
Ottumwa, IA		5/30/2012		408		200
New Albany, OH		6/5/2012		776		445
Columbus, GA		6/21/2012		346		186
Columbus, OH		6/28/2012		168		65
Jupiter, FL		9/26/2012		362		191
Fort Worth, TX		11/8/2012		240		118
Columbia, SC		11/21/2012		282		123


			$	3,507	$	1,883

⁽¹⁾	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Tenant Lease Payments
2014	$	62,160
2015		59,885
2016		56,004
2017		54,332
2018		52,527
Thereafter		286,016

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay property taxes on the respective properties in the event the tenants fail to pay them. The total annual property taxes for all properties owned by us as of December 31, 2013, were $10.8 million.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class (in thousands):


	December 31, 2013					December 31, 2012
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization

In-place leases	$	47,442	$	(15,158	)	$	34,085	$	(12,125	)
Leasing costs		31,339		(9,323	)		24,071		(7,103	)
Customer relationships		35,739		(10,407	)		26,671		(8,345	)

	$	114,520	$	(34,888	)	$	84,827	$	(27,573	)

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2013 and 2012, respectively, were as follows:


Intangible Assets & Liabilities	2013		2012
In-place leases		8.9		11.2
Leasing costs		8.9		11.2
Customer relationships		13.7		14.6
Above market leases		8.8		10.1
Below market leases		7.5		11.3

All intangible assets & liabilities		10.0		12.1

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Year	Estimated Amortization Expense
2014	$	10,490
2015		9,903
2016		9,075
2017		8,898
2018		8,330
Thereafter		32,936

5. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of December 31, 2013 and December 31, 2012 are summarized below (dollars in thousands):


					Principal Balance Outstanding
Date of Issuance/ Assumption	Principal Maturity Date	Stated Interest Rate at December 31, 2013 ⁽¹⁾			December 31, 2013		December 31, 2012

02/21/06	06/30/14		5.20	%	$	17,455	$	17,930
08/25/05	09/01/15		5.33	%		19,664		20,074
09/12/05	09/01/15		5.21	%		11,593		11,821
09/06/07	12/11/15		5.81	%		4,052		4,141
12/21/05	01/08/16		5.71	%		17,816		18,155
03/29/06	04/01/16		5.92	%		16,434		16,669
04/27/06	05/05/16		6.58	%		12,696		13,080
08/29/08	06/01/16		6.80	%		5,687		5,866
06/20/11	06/30/16		6.08	%		11,164		11,341
11/22/06	12/01/16		5.76	%		13,324		13,558
11/26/13	12/01/16		LIBOR +2.15	%⁽²⁾		8,200		—
12/22/06	01/01/17		5.79	%		20,376		20,731
02/08/07	03/01/17		6.00	%		13,775		13,775
06/05/07	06/08/17		6.11	%		13,999		14,163
10/15/07	11/08/17		6.63	%		14,848		15,072
09/26/12	07/01/18		5.75	%		10,478		10,707
11/18/11	11/01/18		4.50	%		4,155		4,256
12/06/11	12/06/19		6.00	%		8,031		8,272
10/28/11	11/01/21		6.00	%		6,938		7,068
04/05/12	05/01/22		6.10	%		18,467		18,821
06/21/12	07/06/22		5.05	%		4,608		4,712
08/03/12	07/31/22		5.00	%		2,911		2,979
07/24/12	08/01/22		5.60	%		9,361		9,661
10/01/12	10/01/22		4.86	%		33,133		33,888
11/21/12	12/06/22		4.04	%		18,525		19,000
03/28/13	04/06/23		4.16	%		3,638		—
07/03/13	08/01/23		5.00	%		8,163		—
07/10/13	08/01/23		4.20	%		8,852		—
07/09/13	08/06/23		4.81	%		35,093		—
12/27/13	01/01/24		5.28	%		4,380		—
12/15/10	12/10/26		6.63	%		9,496		9,983
05/16/12	12/31/26		4.30	%		2,829		2,897
11/08/12	02/01/27		5.69	%		13,864		14,145
05/30/12	05/10/27		6.50	%		4,653		4,883
06/27/12	07/01/29		5.10	%		1,905		1,984
12/18/13	01/06/39		4.74	%		11,315		—
02/21/06	12/01/13		5.91	%		—		8,658


Contractual Mortgage Notes Payable:					$	421,878	$	358,290


Premiums and (Discounts), net:						724		895


Total Mortgage Notes Payable:					$	422,602	$	359,185


Variable-Rate Line of Credit:
08/07/13	08/07/16		LIBOR +3.25	%	$	24,400	$	25,000


Total Mortgage Notes Payable and Line of Credit					$	447,002	$	384,185

(1)	The weighted average interest rate on all debt outstanding at December 31, 2013, was approximately 5.31%.

(2)	At December 31, 2013, one month LIBOR was approximately 0.17%.

Mortgage Notes Payable

As of December 31, 2013, we had 36 mortgage notes payable, collateralized by a total of 70 properties and the net book value of these collateralized properties was $561.5 million. Gladstone Commercial Corporation has limited recourse liabilities that could result from any one or more of the following circumstances: 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, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. We will also indemnify 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 December 31, 2013 was 5.4%.

During the year ended December 31, 2013, we issued seven long-term mortgages, which are summarized below (dollars in thousands):


Date of Issuance	Issuing Bank	Borrowings		Interest Rate			Maturity Date

3/28/2013	Citigroup Global Markets Realty Corp.	$	3,700		4.16	%		4/6/2023

7/3/2013	Prudential Mortgage Capital Company LLC		8,200		5.00	%		8/1/2023

7/9/2013	Cantor Commercial Real Estate Lending		35,300		4.81	%		8/6/2023

7/10/2013	Synovus Bank		8,900		4.20	%		8/1/2023

11/26/2013	Wells Fargo		8,200		LIBOR +2.15	%		12/1/2016

12/18/2013	Guggenheim Partners		11,315		4.74	%		1/6/2039

12/27/2013	Key Bank		4,380		5.28	%		1/1/2024


		$	79,995

Scheduled principal payments of mortgage notes payable for the each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):


Year	Scheduled Principal Payments
2014	$	24,830
2015		42,415
2016		88,709
2017		66,749
2018		19,317
Thereafter		179,858

	$	421,878

Refinancing

On November 26, 2013, through a wholly-owned subsidiary, we refinanced our mortgage at our Champaign, Illinois property which was originally set to mature on December 1, 2013. We borrowed $8.2 million pursuant to a long-term note payable from Wells Fargo. The new loan is variable rate, in which the interest rate resets monthly and is calculated as the one month London Interbank Offered Rate, or LIBOR,

plus a margin of 2.15%. The LIBOR rate is subject to a floor of 0.5% per annum, and minimum interest on this note is 2.65%. The new note has a maturity date of December 1, 2016, with four, one-year extension options at the behest of the borrower. We simultaneously entered into an interest rate cap with Wells Fargo to hedge against the variability of the LIBOR rate, at a cost of approximately $0.03 million through December 1, 2016. We will receive payments from Wells Fargo if the one month LIBOR rate increases above 3.0%.

Interest Rate Cap

We have entered into an interest rate cap agreement with Wells Fargo that caps the interest rate on the note payable for our Champaign, Illinois property. The agreement provides that the interest rate on the note payable for our Champaign, Illinois property is capped at a certain interest rate when one-month LIBOR is in excess of 3.0%. The fair value of the interest rate cap agreement is recorded in other assets on our accompanying Consolidated Balance Sheets. We record changes in the fair value of the interest rate cap agreement quarterly based on the current market valuations at quarter end as other income (loss) on our accompanying Consolidated Statements of Operations. Generally, we will estimate the fair value of our interest rate cap using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At December 31, 2013, our interest rate cap agreement was valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):


										As of December 31, 2013
Interest Rate Cap	Notional Amount		LIBOR Cap			Effective Date		Maturity Date		Cost		Fair Value
November 26, 2013	$	8,200		3.00	%		December 31, 2013		December 1, 2016	$	31	$	22

Fair Value

The fair value of all mortgage notes payable outstanding as of December 31, 2013, was $421.8 million, as compared to the carrying value stated above of $421.9 million. The fair value is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

Line of Credit

In August 2013, we procured a new $60.0 million senior unsecured revolving credit facility, or the New Line of Credit, with Keybank National Association serving as a revolving lender, a letter of credit issuer and an administrative agent and Citizens Bank of Pennsylvania as an additional lender. On December 16, 2013, Comerica Bank was also added as an additional lender. The New Line of Credit initially matures in August 2016; however, we have a one-year extension option subject to the payment of an extension fee equal to 25 basis points on the initial maturity date and certain other customary conditions. The New Line of Credit replaced the Credit Agreement, dated as of December 28, 2010 with Capital One, N.A., as administrative agent, and the other lenders party thereto, or the Prior Line of Credit. The Prior Line of Credit provided for a senior secured revolving credit facility in the amount of $75.0 million and was originally scheduled to mature on December 28, 2013.

The New Line of Credit has a letter of credit sublimit of up to $20.0 million. In addition, we may expand the New Line of Credit up to a total of $75.0 million upon satisfaction of certain conditions, including obtaining commitments from any one or more lenders, whether or not currently a party to the New Line of Credit, to provide such increased amounts and payment of the associated up front and arrangement fees at the time of such increase. The interest rate per annum applicable to the New Line of Credit is equal to the LIBOR plus an applicable margin of up to 3.25%, depending upon our leverage. The leverage ratio used in

determining the applicable margin for interest on the New Line of Credit is recalculated quarterly. We are subject to an annual maintenance fee of $0.03 million per year and an unused commitment fee of 25 basis points per year, which accrues quarterly. Our ability to access this source of financing is subject to our continued ability to meet customary lending requirements, such as compliance with financial and operating covenants and our meeting certain lending limits. One such covenant requires us to limit distributions to our stockholders to 100% of our FFO, with acquisition-related costs required to be expensed under ASC 805 added back to FFO. In addition, the maximum amount we may draw under the New Line of Credit is based on a percentage of the value of a pool of unencumbered properties which must meet agreed upon eligibility standards.

As of December 31, 2013, there was $24.4 million outstanding under our New Line of Credit at an interest rate of approximately 3.4% and $10.3 million outstanding under letters of credit at a weighted average interest rate of 3.4%. As of December 31, 2013, the maximum additional amount we could draw was $17.1 million. We were in compliance with all covenants under the New Line of Credit as of December 31, 2013. The amount outstanding on the New Line of Credit as of December 31, 2013 approximates fair value, because the debt is subject to a variable interest rate, determined by market forces, as well as a recently negotiated interest rate spread.

6. Mandatorily Redeemable Preferred Stock

In February 2012, we completed a public offering of 1,540,000 shares of 7.125% Series C Cumulative Term Preferred Stock, par value $0.001 per share, or the Term Preferred Stock, at a public offering price of $25.00 per share. Gross proceeds of the offering totaled $38.5 million and net proceeds, after deducting offering expenses borne by us, were $36.7 million and were used to repay a portion of outstanding borrowings under our Line of Credit, for acquisitions of real estate and for working capital. The Term Preferred Stock is traded under the ticker symbol GOODN on the NASDAQ Global Select Market, or the NASDAQ. The Term Preferred Stock is not convertible into our common stock or any other security of ours. Generally, we may not redeem shares of the Term Preferred Stock prior to January 31, 2016, except in limited circumstances to preserve our status as a REIT. On or after January 31, 2016, we may redeem the shares at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends to and including the date of redemption. The shares of the Term Preferred Stock have a mandatory redemption date of January 31, 2017. We incurred $1.8 million in total offering costs related to these transactions, which have been recorded as deferred financing costs on the consolidated balance sheet and will be amortized over the redemption period ending January 31, 2017.

The Term Preferred Stock is recorded as liability in accordance with ASC 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the consolidated statements of operations.

The fair value of our Term Preferred Stock as of December 31, 2013, was $39.5 million, as compared to the carrying value stated above of $38.5 million. The fair value is calculated based on the closing share price as of December 31, 2013 of $25.65. The fair value was calculated using Level 1 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

7. Commitments and Contingencies

Ground Leases

We are obligated as lessee under three ground leases. Future minimum rental payments due under the terms of these leases as of December 31, 2013, are as follows (dollars in thousands):


			For the year ended December 31,
Location	Lease End Date		2014		2015		2016		2017		2018		2019		Thereafter

Tulsa, OK		Apr-21	$	153	$	153	$	153	$	153	$	153	$	153	$	229
Dartmouth, MA		May-36		174		174		174		174		174		174		3,300
Springfield, MA		Feb-30		86		86		86		89		90		90		974

			$	413	$	413	$	413	$	416	$	417	$	417	$	4,503

Expenses recorded in connection to rental expense incurred for the properties listed above during the years ended December 31, 2013, 2012, and 2011 were $0.4 million, $0.4 million, and $0.2 million, respectively. Rental expenses are reflected in property operating expenses on the consolidated statements of operations.

Tenant Improvements

We have committed to provide tenant improvement funding for certain properties. In addition, we have committed to provide financing to expand our building located in Canton, North Carolina. Future tenant improvement payments due on these properties as of December 31, 2013, are as follows (dollars in thousands):


				For the year ended December 31,
Location	Lease End Date			2014		2015		2016		2017		2018		2019		Thereafter

Canton, NC		Jul-24	⁽¹⁾	$	5,285	$	—	$	—	$	—	$	—	$	—	$	—
Concord Township, OH		Aug-34			150		—		—		—		—		—		—
Austin, TX		Jun-15			125		—		—		—		—		—		—
Roseville, MN		Dec-17			80		—		—		—		—		—		—
Hialeah, FL		Mar-27			35		—		—		—		—		—		—

				$	5,675	$	—	$	—	$	—	$	—	$	—	$	—

⁽¹⁾	Upon completion of expansion of this property, currently projected to be September of 2014, the lease will be extended for 20 years, through September 2034.

8. Stockholders’ Equity

Distributions

Our Board of Directors declared the following distributions per share for the years ended December 31, 2013, 2012, and 2011:


	For the year ended December 31,
	2013		2012			2011

Common Stock	$	1.50	$	1.50		$	1.50
Senior Common Stock		1.05		1.05			1.05
Series A Preferred Stock		1.9374996		1.9374996			1.9374996
Series B Preferred Stock		1.8750		1.8750			1.8750
Series C Preferred Stock ⁽¹⁾		1.7813		1.6328	⁽¹⁾		N/A	⁽¹⁾

⁽¹⁾	The Series C Preferred Stock was issued on January 31, 2012.

For federal income tax purposes, distributions paid to stockholders may be characterized as ordinary income, capital gains, return of capital or a combination of the foregoing. We had no capital gains during the last three years. The characterization of distributions during each of the last three years is reflected in the table below:


	Ordinary Income			Return of Capital

Common Stock
For the year ended December 31, 2011		16.62560	%		83.37440	%
For the year ended December 31, 2012		0.00000	%		100.00000	%
For the year ended December 31, 2013		18.32962	%		81.67038	%

Senior Common Stock
For the year ended December 31, 2011		100.00000	%		0.00000	%
For the year ended December 31, 2012		0.00000	%		100.00000	%
For the year ended December 31, 2013		100.00000	%		0.00000	%

Series A Preferred Stock
For the year ended December 31, 2011		100.00000	%		0.00000	%
For the year ended December 31, 2012		91.70830	%		8.29170	%
For the year ended December 31, 2013		100.00000	%		0.00000	%

Series B Preferred Stock
For the year ended December 31, 2011		100.00000	%		0.00000	%
For the year ended December 31, 2012		91.70830	%		8.29170	%
For the year ended December 31, 2013		100.00000	%		0.00000	%

Series C Preferred Stock
For the year ended December 31, 2011		N/A			N/A	⁽¹⁾
For the year ended December 31, 2012		91.70830	%		8.29170	%
For the year ended December 31, 2013		100.00000	%		0.00000	%

⁽¹⁾	There was no Series C Preferred Stock outstanding during the year ended December 31, 2011.

Recent Activity

On April 29, 2013, we completed a public offering of 1,265,000 shares of our common stock at a public offering price of $18.90 per share. Gross proceeds of the offering totaled $23.9 million and net proceeds, after deducting offering expenses borne by us, were $22.6 million, which we used to acquire real estate.

On June 24, 2013, we completed a public offering of 1,320,000 shares of our common stock at a public offering price of $18.82 per share. On July 11, 2013, the underwriters partially exercised their option to purchase an additional 158,000 shares of common stock. Gross proceeds of the offering were $27.8 million and net proceeds, after deducting offering expenses borne by us, were $26.3 million, which we used to acquire real estate.

On November 25, 2013, we completed a public offering of 1,377,500 shares of our common stock at a public offering price of $18.15 per share. On December 26, 2013, the underwriters partially exercised their option to purchase an additional 26,422 shares of common stock. Gross proceeds of the offering totaled $25.5 million and net proceeds, after deducting offering expenses borne by us, were $24.2 million, which we used to acquire real estate.

Ongoing Activity

We have an open market sale agreement, or the ATM Program, with Jefferies LLC, or Jefferies, under which we may, from time to time, offer to sell shares of our common stock with an aggregate sales price of up to $25.0 million on the open market through Jefferies, as agent, or to Jefferies, as principal. During the year ended December 31, 2013, we raised approximately $7.8 million in gross proceeds under the ATM Program. As of December 31, 2013, we had sold a total of 762,478 shares with aggregate gross proceeds of $14.0 million, and have a remaining capacity to sell up to $11.0 million of common stock under the ATM Program with Jefferies.

In March 2011, we commenced an offering of an aggregate of 3,500,000 shares of our senior common stock, par value $0.001 per share, at a price to the public of $15.00 per share, of which 3,000,000 shares are intended to be offered pursuant to the primary offering and 500,000 shares are intended to be offered pursuant to our senior common distribution reinvestment plan, or the DRIP. We, however, reserve the right to reallocate the number of shares being offered between the primary offering and the DRIP. As of December 31, 2013, we had sold 307,979 shares of senior common stock in this ongoing offering, for gross proceeds of $4.6 million, and issued an additional 10,223 shares of senior common stock under the DRIP program.

Notes to Employees

The following table is a summary of the outstanding note issued to an employee of the Adviser for the exercise of stock options (dollars in thousands):


Date Issued	Outstanding Balance of Employee Loan at December 31, 2013		Outstanding Balance of Employee Loans at December 31, 2012		Maturity Date of Note	Interest Rate on Note

Apr 2006	$	—	$	3	Apr 2015		7.77	%
May 2006		—		32	May 2016		7.87	%
Nov 2006		375		375	Nov 2015		8.15	%

	$	375	$	410

In accordance with ASC 505-10-45-2, “Equity,” 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, this note was recorded as a full recourse loan to the employee and is included in the equity section of the accompanying consolidated balance sheets. As of December 31, 2013, this loan maintained its full recourse status.

9. Quarterly Financial Information (unaudited)

The following table reflects the quarterly results of operations for the years ended December 31, 2013 and 2012 (dollars in thousands).


	Quarter ended
	December 31, 2013			September 30, 2013			June 30, 2013			March 31, 2013

Operating revenues	$	16,860		$	16,190		$	14,258		$	14,035
Operating expenses		9,542			8,639			7,369			7,273
Other expense		(6,984	)		(7,242	)		(6,438	)		(6,329	)

Net income		334			309			451			433
Dividends attributable to preferred and senior common stock		(1,120	)		(1,106	)		(1,092	)		(1,076	)

Loss available to common stockholders		(786	)		(797	)		(641	)		(643	)

Loss income available to common stockholders - basic & diluted	$	(0.05	)	$	(0.06	)	$	(0.05	)	$	(0.06	)

Weighted average shares outstanding - basic		14,798,950			14,196,423			12,380,402			11,230,647
Weighted average shares outstanding - diluted		14,798,950			14,196,423			12,380,402			11,230,647


	Quarter ended
	December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012

Operating revenues	$	13,790		$	12,970		$	12,410		$	12,100
Operating expenses		6,971			6,100			6,027			5,797
Other expense		(6,205	)		(5,878	)		(5,529	)		(5,002	)

Net income		614			992			854			1,301
Dividends attributable to preferred and senior common stock		(1,065	)		(1,053	)		(1,046	)		(1,042	)

Net income available to common stockholders		(451	)		(61	)		(192	)		259

Net (loss) income available to common stockholders - basic & diluted	$	(0.04	)	$	(0.01	)	$	(0.02	)	$	0.02

Weighted average shares outstanding - basic		10,976,992			10,945,379			10,945,379			10,945,379
Weighted average shares outstanding - diluted		10,976,992			10,945,379			10,945,379			11,006,597

10. Subsequent Events

On January 7, 2014, our Board of Directors declared the following monthly distributions:


Record Date	Payment Date	Common Stock Distributions per Share		Series A Preferred Distributions per Share		Series B Preferred Distributions per Share		Series C Preferred Distributions per Share

January 22, 2014	January 31, 2014	$	0.125	$	0.1614583	$	0.15625	$	0.1484375
February 19, 2014	February 28, 2014		0.125		0.1614583		0.15625		0.1484375
March 17, 2014	March 31, 2014		0.125		0.1614583		0.15625		0.1484375


Total		$	0.375	$	0.4843749	$	0.46875	$	0.4453125


Senior Common Stock Distributions
Payable to the Holders of Record During the Month of:	Payment Date	Distribution per Share

January	February 7, 2014	$	0.0875
February	March 7, 2014		0.0875
March	April 7, 2014		0.0875


Total		$	0.2625

GLADSTONE COMMERCIAL CORPORATION

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2013 (Dollars in Thousands)


			Initial Cost						Total Cost
							Improvement
							Costs Capitalized												Year
					Buildings &		Subsequent to				Buildings &				Accumulated		Net Real		Construction/	Date
Location of Property	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Total (1)		Depreciation (2)		Estate		Improvements	Acquired
Raleigh, North Carolina Office Building	$	4,856	$	960	$	4,481	$	—	$	960	$	4,481	$	5,441	$	1,636	$	3,805	1997		12/23/2003
Canton, Ohio Office Building		2,717		186		3,083		500		186		3,583		3,769		874		2,895	1994		1/30/2004
Akron, Ohio Office Building		6,962		1,973		6,771		284		1,973		7,055		9,028		1,737		7,291	1968/1999		4/29/2004
Charlotte, North Carolina Office Building		6,440		740		8,423		61		740		8,484		9,224		2,098		7,126	1984/1995		6/30/2004
Canton, North Carolina Industrial Building		3,722		150		5,050		535		150		5,585		5,735		1,227		4,508	1998		7/6/2004
Crenshaw, Pennsylvania Industrial Building		5,274		100		6,574		272		100		6,846		6,946		1,612		5,334	1991		8/5/2004
Lexington, North Carolina Industrial Building		2,683		820		2,107		69		820		2,176		2,996		519		2,477	1986		8/5/2004
Austin, Texas Office Building		6,500		1,000		6,296		81		1,000		6,377		7,377		1,557		5,820	2001		9/16/2004
Mt. Pocono, Pennsylvania Industrial Building		4,969		350		5,819		18		350		5,837		6,187		1,399		4,788	1995-1999		10/15/2004
San Antonio, Texas Office Building		6,760		843		7,514		625		843		8,139		8,982		2,165		6,817	1999		2/10/2005
Columbus, Ohio Industrial Building		2,565		410		2,385		—		410		2,385		2,795		548		2,247	1995		2/10/2005
Big Flats, New York Industrial Building		5,442		275		6,459		34		275		6,493		6,768		1,457		5,311	2001		4/15/2005
Wichita, Kansas Office Building		7,696		1,525		9,703		67		1,525		9,770		11,295		2,262		9,033	2000		5/18/2005
Arlington, Texas Industrial Building		3,881		636		3,695		416		636		4,111		4,747		899		3,848	1966		5/26/2005
Dayton, Ohio Office Building		1,914		525		1,877		120		525		1,997		2,522		780		1,742	1956		6/30/2005
Eatontown, New Jersey Office Building		4,427		1,351		3,520		534		1,351		4,054		5,405		897		4,508	1991		7/7/2005
Franklin Township, New Jersey Industrial Building		6,564		1,632		6,200		—		1,632		6,200		7,832		1,354		6,478	1978		7/11/2005
Duncan, South Carolina Industrial Building		10,592		783		10,790		1,615		783		12,405		13,188		2,660		10,528	1984/2001/2007		7/14/2005
Duncan, South Carolina Industrial Building		2,633		195		2,682		419		195		3,101		3,296		661		2,635	1984/2001/2007		7/14/2005
Hazelwood, Missouri Industrial Building		2,320		763		2,309		372		763		2,681		3,444		540		2,904	1977		8/5/2005

GLADSTONE COMMERCIAL CORPORATION

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

DECEMBER 31, 2013 (Dollars in Thousands)


			Initial Cost						Total Cost
							Improvement
							Costs Capitalized												Year
					Buildings &		Subsequent to				Buildings &				Accumulated		Net Real		Construction/	Date
Location of Property	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Total (1)		Depreciation (2)		Estate		Improvements	Acquired
Angola, Indiana Industrial Building	$	646	$	66	$	1,075	$	49	$	66	$	1,124	$	1,190	$	237	$	953	1982		9/2/2005
Angola, Indiana Industrial Building		620		132		1,130		51		132		1,181		1,313		369		944	1982		9/2/2005
Rock Falls, Illinois Industrial Building		644		35		1,113		50		35		1,163		1,198		126		1,072	1982		9/2/2005
Newburyport, Massachusetts Industrial Building		6,385		629		6,504		1,847		629		8,351		8,980		1,655		7,325	1994		10/17/2005
Clintonville, Wisconsin Industrial Building		3,090		55		4,717		3,250		55		7,967		8,022		1,091		6,931	1992/2013		10/31/2005
Maple Heights, Ohio Industrial Building		9,977		1,609		10,065		1,198		1,609		11,263		12,872		2,825		10,047	1974		12/21/2005
Richmond, Virginia Office Building		5,275		736		5,336		36		736		5,372		6,108		1,150		4,958	1972		12/30/2005
Toledo, Ohio Medical Office Building		2,798		263		2,812		390		263		3,202		3,465		656		2,809	1979		12/30/2005
South Hadley, Massachusetts Industrial Building		—		471		2,765		38		471		2,803		3,274		561		2,713	1978		2/15/2006
Champaign, Illinois Office Building		1,545		687		2,036		2		687		2,038		2,725		444		2,281	1996		2/21/2006
Champaign, Illinois Office Building		3,030		1,347		3,992		4		1,347		3,996		5,343		871		4,472	1996		2/21/2006
Champaign, Illinois Office Building		1,894		842		2,495		2		842		2,497		3,339		544		2,795	1996		2/21/2006
Champaign, Illinois Office Building		1,731		770		2,281		2		770		2,283		3,053		497		2,556	1996		2/21/2006
Roseville, Minnesota Office Building		17,455		2,588		25,290		584		2,588		25,874		28,462		6,030		22,432	1964		2/21/2006
Burnsville, Minnesota Office Building		11,193		3,511		8,746		—		3,511		8,746		12,257		2,273		9,984	1984		5/10/2006
Menomonee Falls, Wisconsin Industrial Building		6,823		625		6,911		57		625		6,968		7,593		1,367		6,226	1986/2000		6/30/2006
Baytown, Texas Medical Office Building		2,000		221		2,443		—		221		2,443		2,664		533		2,131	1997		7/11/2006
Sterling Heights, Michigan⁽³⁾ Industrial Building		—		2,735		8,606		13		2,735		8,619		11,354		1,608		9,746	1979/1989		9/22/2006
Birmingham, Alabama⁽³⁾ Industrial Building		—		612		2,326		—		612		2,326		2,938		443		2,495	1961/1980		9/29/2006
Montgomery, Alabama⁽³⁾ Industrial Building		—		222		844		—		222		844		1,066		161		905	1961/1980		9/29/2006

GLADSTONE COMMERCIAL CORPORATION

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

DECEMBER 31, 2013 (Dollars in Thousands)


			Initial Cost						Total Cost
							Improvement
							Costs Capitalized												Year
					Buildings &		Subsequent to				Buildings &				Accumulated		Net Real		Construction/	Date
Location of Property	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Total (1)		Depreciation (2)		Estate		Improvements	Acquired
Columbia, Missouri⁽³⁾ Industrial Building	$	—	$	146	$	555	$	—	$	146	$	555	$	701	$	106	$	595	1961/1980		9/29/2006
Mason, Ohio Office Building		4,346		797		6,258		538		797		6,796		7,593		1,368		6,225	2002		1/5/2007
Raleigh, North Carolina Industrial Building		5,249		1,606		5,513		—		1,606		5,513		7,119		997		6,122	1994		2/16/2007
Tulsa, Oklahoma Industrial Building		8,031		—		14,057		—		—		14,057		14,057		2,889		11,168	2004		3/1/2007
Hialeah, Florida (3) Industrial Building		—		3,562		6,672		630		3,562		7,302		10,864		1,233		9,631	1956/1992		3/9/2007
Tewksbury, Massachusetts⁽³⁾ Industrial Building		—		1,395		8,893		—		1,395		8,893		10,288		1,636		8,652	1985/1989		5/17/2007
Mason, Ohio Retail Building		4,630		1,201		4,961		—		1,201		4,961		6,162		840		5,322	2007		7/1/2007
Cicero, New York Industrial Building		4,052		299		5,019		—		299		5,019		5,318		813		4,505	2005		9/6/2007
Grand Rapids, Michigan Office Building		5,964		1,629		10,500		15		1,629		10,515		12,144		1,778		10,366	2001		9/28/2007
Bollingbrook, Illinois (3) Industrial Building		—		1,272		5,003		—		1,272		5,003		6,275		856		5,419	2002		9/28/2007
Decatur, Georgia (3) Medical Office Building		—		784		3,245		—		784		3,245		4,029		550		3,479	1989		12/13/2007
Decatur, Georgia (3) Medical Office Building		—		205		848		—		205		848		1,053		144		909	1989		12/13/2007
Decatur, Georgia (3) Medical Office Building		—		257		1,064		—		257		1,064		1,321		180		1,141	1989		12/13/2007
Lawrenceville, Georgia (3) Medical Office Building		—		679		2,809		—		679		2,809		3,488		476		3,012	1989		12/13/2007
Snellville, Georgia (3) Medical Office Building		—		176		729		—		176		729		905		124		781	1989		12/13/2007
Covington, Georgia (3) Medical Office Building		—		232		959		—		232		959		1,191		163		1,028	1989		12/13/2007
Cumming, Georgia Medical Office Building		3,216		738		3,055		2,511		738		5,566		6,304		518		5,786	1989		12/13/2007
Conyers, Georgia (3) Medical Office Building		—		297		1,228		—		297		1,228		1,525		208		1,317	1989		12/13/2007
Reading, Pennsylvania Industrial Building		4,073		491		6,202		—		491		6,202		6,693		944		5,749	2007		1/29/2008
Fridley, Minnesota Office Building		5,220		1,354		8,074		399		1,383		8,444		9,827		1,560		8,267	1985/2006		2/26/2008

GLADSTONE COMMERCIAL CORPORATION

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

DECEMBER 31, 2013 (Dollars in Thousands)


			Initial Cost							Total Cost
							Improvement
							Costs Capitalized													Year
					Buildings &		Subsequent to					Buildings &				Accumulated		Net Real		Construction/	Date
Location of Property	Encumbrances		Land		Improvements		Acquisition			Land		Improvements		Total (1)		Depreciation (2)		Estate		Improvements	Acquired
Concord Township, Ohio⁽³⁾ Office Building	$	—	$	1,796	$	11,154	$	(11	)	$	1,785	$	11,154	$	12,939	$	1,752	$	11,187	1957/2008		3/31/2008
Pineville, North Carolina Industrial Building		2,368		669		3,028		6			669		3,034		3,703		455		3,248	1985		4/30/2008
Marietta, Ohio Industrial Building		5,779		829		6,607		209			829		6,816		7,645		929		6,716	1992/2007		8/29/2008
Chalfont, Pennsylvania Industrial Building		5,687		1,249		6,420		165			1,249		6,585		7,834		1,063		6,771	1987		8/29/2008
Orange City, Iowa Industrial Building		9,496		258		5,861		—			258		5,861		6,119		560		5,559	1990		12/7/2010
Hickory, North Carolina Office Building		6,827		1,163		6,605		—			1,163		6,605		7,768		824		6,944	2008		4/4/2011
Springfield, Missouri Office Building		11,164		1,700		12,038		—			1,700		12,038		13,738		916		12,822	2006		6/20/2011
Boston Heights, Ohio Office Building		2,697		449		3,010		—			449		3,010		3,459		294		3,165	2011		10/20/2011
Parsippany, New Jersey Office Building		6,938		1,696		7,077		81			1,696		7,158		8,854		583		8,271	1984		10/27/2011
Dartmouth, Massachusetts Retail Location		4,155		—		4,236		—			—		4,236		4,236		250		3,986	2011		11/18/2011
Springfield, Missouri Retail Location		1,905		—		2,275		—			—		2,275		2,275		168		2,107	2005		12/13/2011
Pittsburgh, Pennsylvania Office Building		2,829		281		3,205		—			281		3,205		3,486		208		3,278	1968		12/28/2011
Ashburn, Virginia Office Building		7,388		706		7,858		—			706		7,858		8,564		504		8,060	2002		1/25/2012
Ottumwa, Iowa Industrial Building		4,653		212		5,072		287			212		5,359		5,571		306		5,265	1970		5/30/2012
New Albany, Ohio Office Building		9,361		1,658		8,746		—			1,658		8,746		10,404		509		9,895	2007		6/5/2012
Columbus, Georgia Office Building		4,608		1,378		4,520		—			1,378		4,520		5,898		285		5,613	2012		6/21/2012
Columbus, Ohio Office Building		2,911		542		2,453		11			542		2,464		3,006		172		2,834	1981		6/28/2012
Jupiter, Florida Office Building		10,478		1,160		11,994		—			1,160		11,994		13,154		462		12,692	2011		9/26/2012
Fort Worth, Texas Industrial Building		13,864		963		15,647		—			963		15,647		16,610		546		16,064	2005		11/8/2012
Columbia, South Carolina Office Building		18,525		1,905		20,648		—			1,905		20,648		22,553		981		21,572	2010		11/21/2012

GLADSTONE COMMERCIAL CORPORATION

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

DECEMBER 31, 2013 (Dollars in Thousands)


			Initial Cost						Total Cost
							Improvement
							Costs Capitalized												Year
					Buildings &		Subsequent to				Buildings &				Accumulated		Net Real		Construction/	Date
Location of Property	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Total (1)		Depreciation (2)		Estate		Improvements	Acquired
Egg Harbor, New Jersey Office Building	$	3,638	$	1,627	$	3,017	$	—	$	1,627	$	3,017	$	4,644	$	85	$	4,559	1985		3/28/2013
Vance, Alabama (3) Industrial Building		—		457		10,529		—		457		10,529		10,986		237		10,749	2013		5/9/2013
Blaine, Minnesota Office Building		8,163		1,060		10,519		—		1,060		10,519		11,579		293		11,286	2009		5/10/2013
Austin, Texas Office Building		35,093		2,330		44,021		63		2,330		44,084		46,414		927		45,487	1999		7/9/2013
Allen, Texas Office Building		8,852		2,699		7,945		—		2,699		7,945		10,644		194		10,450	1998		7/10/2013
Englewood, Colorado Office Building		11,315		1,503		11,739		—		1,503		11,739		13,242		29		13,213	2008		12/11/2013
Novi, Michigan Industrial Building		4,380		352		5,626		—		352		5,626		5,978		3		5,975	1988		12/27/2013

	$	421,878	$	79,135	$	544,719	$	18,499	$	79,153	$	563,200	$	642,353	$	81,241	$	561,112

⁽¹⁾	The aggregate cost for land and building improvements for federal income tax purposes is the same as the total gross cost of land and building improvements.

⁽²⁾	Depreciable life of all buildings is 39 years. Depreciable life of all improvements is the shorter of the useful life of the assets or the life of the respective leases on each building, which range from 5-20 years.

⁽³⁾	These properties are in our unencumbered pool of assets on our New Line of Credit.

The following table reconciles the change in the balance of real estate during the years ended December 31, 2013, 2012 and 2011, respectively (in thousands):


	2013		2012		2011

Balance at beginning of period	$	533,753	$	442,521	$	401,017

Additions:

Acquisitions during period		103,424		85,462		43,735

Improvements		5,176		5,770		1,164

Deductions:

Dispositions during period		—		—		—

Purchase price adjustments		—		—		(3,395	)⁽¹⁾


Balance at end of period	$	642,353	$	533,753	$	442,521

(1)	Adjustment to Orange City, Iowa property acquired in December 2010 property purchase price. Refer to Note 1 out of period adjustment.

The following table reconciles the change in the balance of accumulated depreciation during the years ended December 31, 2013, 2012 and 2011, respectively (in thousands):


	2013		2012		2011

Balance at beginning of period	$	65,730	$	53,784	$	43,659

Additions during period		15,511		11,946		10,125

Dispositions during period		—		—		—


Balance at end of period	$	81,241	$	65,730	$	53,784

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2013, our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of December 31, 2013 in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of necessarily achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

b) Management’s Annual Report on Internal Control Over Financial Reporting

Refer to Management’s Report on Internal Controls over Financial Reporting located in Item 8 of this Form 10-K.

c) Attestation Report of the Registered Public Accounting Firm

Refer to the Report of Independent Registered Public Accounting Firm located in Item 8 of this Form 10-K.

d) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

Part III

We will file a definitive Proxy Statement for our 2014 Annual Meeting of Stockholders (the “2014 Proxy Statement”) with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after December 31, 2013. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2014 Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Item 10 is hereby incorporated by reference from our 2014 Proxy Statement under the captions “Election of Directors to Class of 2017,” “Information Regarding the Board of Directors and Corporate Governance,” “Compensation Committee Report,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and sub-caption “Code of Business Conduct and Ethics.”

Item 11. Executive Compensation.

The information required by Item 11 is hereby incorporated by reference from our 2014 Proxy Statement under the captions “Executive Compensation,” “Director Compensation,” and “Compensation Committee Report,” and sub-caption “Compensation Committee Interlocks and Insider Participation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 is hereby incorporated by reference from our 2014 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 is hereby incorporated by reference from our 2014 Proxy Statement under the captions “Transactions with Related Persons” and “Information Regarding the Board of Directors and Corporate Governance.”

Item 14. Principal Accountant Fees and Services.

The information required by Item 14 is hereby incorporated by reference from our 2014 Proxy Statement under the sub-captions “Independent Registered Public Accounting Firm Fees” and “Pre-Approval Policy and Procedures” under the caption “Ratification of Selection of Independent Registered Public Accounting Firm.”

Item 15. Exhibits and Financial Statement Schedules

a.	DOCUMENTS FILED AS PART OF THIS REPORT

The following financial statements are filed herewith:

Report of Management on Internal Controls over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2013 and 2012

Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011

Notes to Financial Statements

Financial statement schedules

Schedule III – Real Estate and Accumulated Depreciation is filed herewith.

All other schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto.

Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the Securities and Exchange Commission:

Exhibit Index


Exhibit Number		Exhibit Description

3.1		Articles of Restatement, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33097), filed April 30, 2012.

3.2		Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003.

3.3		First Amendment to Bylaws of the Registrant, incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed July 10, 2007.

4.1		Form of Certificate for Common Stock of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-11 (File No. 333-106024), filed August 8, 2003.

4.2		Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-A12G (File No. 000-50363), filed January 19, 2006.

4.3		Form of Certificate for 7.50% Series B Cumulative Redeemable Preferred Stock of the Registrant, incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-A12B (File No. 001-33097), filed October 19, 2006.

4.4		Form of Certificate for 7.125% Series C Cumulative Term Preferred Stock of the Registrant, incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-A12B (File No. 001-33097), filed January 31, 2012.

10.1		First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-50363),, filed February 1, 2006.

10.2		Gladstone Commercial Limited Partnership Schedule 4.2(a)(2) to First Amended and Restated Agreement of Limited Partnership Designation of 7.50% Series B Cumulative Redeemable Preferred Units, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed October 25, 2006.

10.3		Amended and Restated Investment Advisory Agreement between the Registrant and Gladstone Management Corporation, dated January 1, 2007, incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed January 3, 2007 (renewed on July 12, 2011).

10.4		Administration Agreement between the Registrant and Gladstone Administration, LLC, dated January 1, 2007, incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed January 3, 2007 (renewed on July 12, 2011).

10.5		Open Market Sale Agreement by and among the Registrant, Gladstone Commercial Limited Partnership and Jefferies & Company, Inc., incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed November 4, 2009.

10.6		Amendment to First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed April 29, 2010.

10.7		Gladstone Commercial Limited Partnership Schedule 4.2(a)(3) to First Amended and Restated Agreement of Limited Partnership; Designation of Senior Common Units, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed April 29, 2010.

10.8		Second Amendment to First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed February 3, 2012.



10.9		Gladstone Commercial Limited Partnership Schedule 4.2(a)(4) to First Amended and Restated Agreement of Limited Partnership Designation of 7.125% Series C Cumulative Term Preferred Units, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed February 3, 2012.

10.10		Amendment No. 1 to Open Market Sale Agreement by and among the Registrant, Gladstone Commercial Limited Partnership and Jefferies & Company, Inc., incorporated by reference to Exhibit No. 1.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed November 1, 2012.

10.11		Agreement of Purchase and Sale and Joint Escrow Instructions, by and between Gladstone Commercial Limited Partnership and Karlin Parmer Office, LLC, dated May 20, 2013, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed June 14, 2013.

10.12		Credit Agreement, dated as of December 28, 2010, by and among Gladstone Commercial Limited Partnership, the Registrant and each of the financial institutions initially a signatory thereto together with their successors and assignees under Section 12.6 thereof and Capital One, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed December 30, 2010.

10.13		Form of Second Amendment to Credit Agreement and Omnibus Amendment of Loan Documents, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed January 31, 2012.

10.14		Loan Agreement between NH10 CUMMING GA LLC, D08 MARIETTA OH LLC, MPI06 MASON OH LLC, SRFF08 READING PA, L.P., RPT08 PINEVILLE NC, L.P., IPA12 ASHBURN VA SPE LLC, and FTCHI07 GRAND RAPIDS MI LLC and KeyBank National Association, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed October 3, 2012.

10.15		Promissory Note in favor of KeyBank National Association, dated as of October 1, 2012 (File No. 001-33097), incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed October 3, 2012.

10.16		Guaranty Agreement, dated as of October 1, 2012 between the Registrant and KeyBank National Association, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed October 3, 2012.

10.17		Credit Agreement, dated as of August 7, 2013, by and among Gladstone Commercial Limited Partnership, the Registrant, each of the financial institutions initially a signatory thereto together with their successors and assignees and KeyBank National Association, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed August 9, 2013.

10.18		Unconditional Guaranty of Payment and Performance, dated as of August 7, 2013, by the Registrant, AL13 Brookwood LLC, CMS06-3 LLC, EI07 Tewksbury MA LLC, NJT06 Sterling Heights MI LLC, RB08 Concord OH LLC, DBPI07 Bolingbrook IL LLC, RCOG07 Georgia LLC, APML07 Hialeah FL LLC for the benefit of KeyBank National Association, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33097), filed August 9, 2013.

11		Computation of Per Share Earnings from Operations (included in the notes to the audited financial statements contained in this Report).

12		Statements re: computation of ratios (filed herewith).

21		List of Subsidiaries of the Registrant (filed herewith).

23		Consent of PricewaterhouseCoopers LLP (filed herewith).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

100



32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS***		XBRL Instance Document

101.SCH***		XBRL Taxonomy Extension Schema Document

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF***		XBRL Definition Linkbase

***

Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012, (ii) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011, (iii) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 and (v) the Notes to Consolidated Financial Statements.

101

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Gladstone Commercial Corporation

Date: February 18, 2014	By:	/s/ Danielle Jones
		Danielle Jones
		Chief Financial Officer and Treasurer

Date: February 18, 2014	By:	/s/ David Gladstone
		David Gladstone
		Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Date: February 18, 2014	By:	/s/ David Gladstone
		David Gladstone
		Chief Executive Officer and Chairman of the
		Board of Directors (principal executive officer)

Date: February 18, 2014	By:	/s/ Terry Lee Brubaker
		Terry Lee Brubaker
		Vice Chairman, Chief Operating Officer and Director

Date: February 18, 2014	By:	/s/ Danielle Jones
		Danielle Jones
		Chief Financial Officer and Treasurer (principal financial and accounting officer)

Date: February 18, 2014	By:	/s/ David A.R. Dullum
		David A.R. Dullum
		Director

Date: February 18, 2014	By:	/s/ Anthony W. Parker
		Anthony W. Parker
		Director

Date: February 18, 2014	By:	/s/ Michela A. English
		Michela A. English
		Director

Date: February 18, 2014	By:	/s/ Paul Adelgren
		Paul Adelgren
		Director

Date: February 18, 2014	By:	/s/ John Outland
		John Outland
		Director

102



Date: February 18, 2014	By:	/s/ John D. Reilly
		John D. Reilly
		Director

Date: February 18, 2014	By:	/s/ Terry Earhart
		Terry Earhart
		Director

103