GLADSTONE COMMERCIAL CORP.

Gladstone Commercial Corp. is a publicly traded (NASDAQ: GOOD) Equity Real Estate Investment Trust (REIT) with a real estate portfolio valued at approx-imately $343MM as of August 1, 2007. Gladstone Commercial Corp. is a member of the “Gladstone family of funds” commonly known as The Gladstone Companies (Gladstone Com-mercial Corp., Gladstone Capital Corp. and Gladstone Investment Corp.) All of the Gladstone Companies trade on the NASDAQ exchange.

Gladstone’s investment professionals have been active in real estate investment for an average of 17 years. We are a “buy and hold” investor of single-tenant triple-net (“NNN”) real estate, purchased from owner occupants (sale-leasebacks) and third-party sellers. Our typical tenant is a private company or non-investment grade public company located in the United States.

Robert Corry
Gladstone Commercial Corp.

Brokerage and Advisory firms bring Gladstone a majority of its opportunities. They are Gladstone’s life blood. Given the volume of transactions to review in today’s marketplace, it is difficult for us to get out and meet all of the market participants that we would like to on a regular basis. Please stop by our offices or give us a call at your convenience to touch base. We would love to hear from you. Currently, Gladstone does not have any formal relationships with intermediaries.

Q	Over the last several years, the net lease investment market has seen decreased yields by plummeting capitalization rates.  How does Gladstone Commercial compete in such an aggressive investment environment?

Gladstone Commercial closes all its transactions in cash from either its balance sheet or its aggregation line of credit. Sellers appreciate that Gladstone truly does not have a financing contingency vs. other market participants who are “truly” dependent on finding a loan before the end of the due diligence period. Consequently, Gladstone is able to aggregate several investments (post closing) and bundle them up in a cross collateralized pool for a conduit lender. Therefore, the financing request is really that of a “virtual multi-tenant transaction.” Employing this structure affords Gladstone excellent execution in the debt capital markets and in turn makes Gladstone a very competitive buyer in today’s aggressive investment environment. Gladstone is a buy and hold investor.

In the recent past I would say due to the imbalance between supply and demand of NNN product, there has been little difference in the yields available on “Credit Deals” vs. “Non-Credit deals.” I believe that is going to change moving forward as lenders are reigning in their underwriting standards and B Piece buyers have lately been “kicking” more deals out of securitizations. The debt side of the Cap Rate equation is starting to differentiate deals over the credit spectrum. Conduits are losing faith that “all closed deals are sold deals.” Sellers of “non-credit deals” should no longer expect the premiums they have gotten used to because the debt on those deals is getting more expensive.

In the non-investment grade world, “better credit” companies have some of the following attributes: a “defensible” product from competitors, a history of profitable operations, a seasoned management team, a funded debt to EBITDA of under 4X, recurring revenue streams, low customer concentration, low supplier concentration, raw material inputs that are not subject to significant price volatility or the Tenant has the ability to pass price increases onto customers and a fixed charge ratio of greater than 1.1X.

Q	Obviously, the main headline in the national news is the instability of the nation’s debt markets.  With the Ten Year Treasury down to extremely low levels and the turbulence in the conduit markets, how do you foresee the change in pricing and subsequent investor returns?

Cap Rates will always be a spread over the cost of funds (index plus credit spread). In the recent past the Ten Year Treasury index decreased but that change was significantly offset by the rising spread lender’s charge. The lender’s credit spreads rose due to investors’ panic over credit quality in the CMBS market. The latter dynamics/risks in the debt capital markets are unavoidable. What the debt capital markets can control is underwriting.

I believe changes in underwriting going forward will have significant impact on the market in the future. In the recent past, the existence of aggressive underwriting coupled with low interest rates allowed buyers to finance purchases and transact refinancings so aggressively that many transactions resulted in the property owner having closer to an “option” on the property (especially given the non recourse nature of conduit financing) vs. a true “equity stake” in the property. Therefore, if conduit underwriting truly comes back to “pre-bubble standards” then property prices will decrease, more equity will be required in deals, competition for deals will decrease and Cap Rates will increase. Lastly, the equity risk in transactions will shift back to the property owner and away from the B piece buyers in CMBS conduit securitizations. Then the debt capital markets will stabilize.