What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-16 compared with 2020-02-12 · 397 added, 445 removed, 877 unchanged (49% of the section changed)

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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.

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.

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 (2013) issued by the Committee of Sponsoring Organizations (COSO).

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Gladstone Commercial Corporation

To the Board of Directors and Stockholders of Gladstone Commercial Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Gladstone Commercial Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018 , and the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019 , including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Gladstone Commercial Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Basis for Opinions

The Company's management is responsible for these consolidated financial statements, 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 Controls over Financial Reporting.

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Controls over Financial Reporting appearing under Item 8.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Impairment Assessment of Real Estate – Undiscounted Future Cash Flows

As described in Notes 1, 4, and 5 to the consolidated financial statements, the Company’s consolidated total real estate, net balance was $900.2 million as of December 31, 2020.

During 2020, the Company recognized an impairment charge of $3.6 million.

Management periodically reviews the carrying value of each property to determine if circumstances indicate impairment of the carrying value of the investment exists.

If circumstances indicate the possibility of impairment, management prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the carrying value of the investment in such property is recoverable.

As disclosed by management, in preparing the projection of undiscounted future cash flows, management estimates cap rates and market rental rates using information obtained from market comparability studies and other comparable sources, and applies the undiscounted cash flows against their expected holding period.

The principal considerations for our determination that performing procedures relating to the undiscounted future cash flows used in the impairment assessment of real estate is a critical audit matter are the significant judgment by management when determining the projection of undiscounted future cash flows, which led to a high degree of auditor judgment, subjectivity and effort in applying procedures and evaluating audit evidence relating to the cap rates, market rental rates and expected holding period assumptions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s impairment assessment of real estate, including controls over the projection of undiscounted future cash flows.

These procedures also included, among others (i) testing management’s process for determining the projection of undiscounted future cash flows;

(ii) evaluating the appropriateness of the model;

(iii) testing the completeness and accuracy of underlying data used in the model;

and (iv) evaluating the reasonableness of the cap rates, market rental rates and expected holding period assumptions.

Evaluating management’s assumptions related to the cap rates, market rental rates and expected holding period involved evaluating whether the assumptions were reasonable considering the consistency with external market and industry data and evidence obtained in other areas of the audit.

/s/ PricewaterhouseCoopers LLP

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

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Real estate, at cost $ 1,128,683 $ 1,056,978

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Lease intangibles, net 117,379 115,465

Real estate and related assets held for sale, net

Real estate and related assets held for sale 8,498 3,990

Cash and cash equivalents 11,016 6,849

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Deferred rent receivable, net 36,555 37,177

Other assets 4,458 8,913

TOTAL ASSETS $ 1,097,908 $ 1,039,508

LIABILITIES, MEZZANINE EQUITY AND EQUITY

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Accounts payable and accrued expenses 4,459 5,573

Liabilities related to assets held for sale, net

Liabilities related to assets held for sale — 21

Due to Adviser and Administrator (1) 2,960 2,904

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$ 25 per share liquidation preference;

12,760,000 and 6,000,000 shares authorized;

12,760,000 shares authorized;

and 6,571,003 and 6,269,555 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3)

$ 159,286 $ 152,153

TOTAL MEZZANINE EQUITY $ 159,286 $ 152,153

Series A and B redeemable preferred stock, par value $0.001 per share;

$25 per share liquidation preference;

0 and 5,350,000 shares authorized and 0 and 2,264,000 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively (3)

Senior common stock, par value $ 0.001 per share;

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Common stock, par value $ 0.001 per share, 60,290,000 and 86,290,000 shares authorized and 35,331,970 and 32,593,651 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3)

Series F redeemable preferred stock, par value $ 0.001 per share;

$ 25 per share liquidation preference;

26,000,000 and 0 shares authorized and 116,674 and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (3)

Additional paid in capital 626,533 571,205

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OP Units held by Non-controlling OP Unitholders (3) 2,854 2,903

TOTAL EQUITY $ 216,037 $ 211,037

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY $ 1,097,908 $ 1,039,508

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For the year ended December 31,

2020 2019 2018

Operating revenues

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Base management fee (1)

5,648 5,174 5,054

Incentive fee (1)

4,301 3,688 3,042

Administration fee (1)

1,598 1,690 1,605

General and administrative 3,259 3,235 2,358

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Gain on sale of real estate, net 8,096 2,952 2,763

Other income 395 712 72

Total other expense, net $ ( 18,312 ) $ ( 24,615 ) $ ( 23,337 )

Net loss (income) attributable to OP Units held by Non-controlling OP Unitholders

Net income $ 14,985 $ 9,541 $ 12,324

Net (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 47 ) 87 ( 4 )

Net income attributable to the Company $ 14,938 $ 9,628 $ 12,320

Distributions attributable to Series A, B, D, and E preferred stock

Distributions attributable to Series A, B, D, E, and F preferred stock ( 10,973 ) ( 10,822 ) ( 10,416 )

Series A and B Preferred Stock offering costs write off — ( 2,674 ) —

Distributions attributable to senior common stock ( 816 ) ( 892 ) ( 931 )

Net (loss) income (attributable) available to common stockholders

(Loss) earnings per weighted average share of common stock - basic & diluted

(Loss) earnings (attributable) available to common shareholders

Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973

Earnings (loss) per weighted average share of common stock - basic & diluted

Earnings (loss) available (attributable) to common shareholders $ 0.09 $ ( 0.16 ) $ 0.03

Weighted average shares of common stock outstanding

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Comprehensive income

Change in unrealized (loss) gain related to interest rate hedging instruments, net

Other Comprehensive (loss) income

Change in unrealized loss related to interest rate hedging instruments, net $ ( 2,219 ) $ ( 1,978 ) $ ( 183 )

Other Comprehensive loss ( 2,219 ) ( 1,978 ) ( 183 )

Net income $ 14,985 $ 9,541 $ 12,324

Comprehensive income $ 12,766 $ 7,563 $ 12,141

Comprehensive loss (income) attributable to OP Units held by Non-controlling OP Unitholders

Total comprehensive income attributable to the Company

Comprehensive (income) loss (available) attributable to OP Units held by Non-controlling OP Unitholders ( 47 ) 87 ( 4 )

Total comprehensive income available to the Company $ 12,719 $ 7,650 $ 12,137

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

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(Dollars in Thousands)

Series A and B Preferred Stock

Senior Common Stock

Series A and B Preferred Stock

Senior Common Stock

Additional Paid in Capital

Accumulated Other Comprehensive Income

Distributions in Excess of Accumulated Earnings

Total Stockholders' Equity

Non-Controlling Interest

Balance at December 31, 2016

Issuance of Series A and B preferred stock and common stock, net

Conversion of senior common stock to common stock

Retirement of senior common stock, net

Distributions declared to common, senior common and preferred stockholders

Comprehensive income

Series A and B Preferred Stock Series F Preferred Stock Common Stock Senior Common Stock Series A and B Preferred Stock Senior Common Stock Common Stock Series F Preferred Stock Additional Paid in Capital Accumulated Other Comprehensive Income Distributions in Excess of Accumulated Earnings Total Stockholders' Equity Non-Controlling Interest Total Equity

Balance at December 31, 2017 2,264,000 — 28,384,016 904,819 $ 2 $ 1 $ 28 $ — $ 534,790 $ 35 $ ( 268,058 ) $ 266,798 $ — $ 266,798

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Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — 9,118 — — 9,118 ( 9,118 ) —

Net income — — — — — — — — — — 12,320 12,320 4 12,324

Balance at December 31, 2018 2,264,000 — 29,254,899 866,259 $ 2 $ 1 $ 29 $ — $ 559,977 $ ( 148 ) $ ( 310,117 ) $ 249,744 $ 4,675 $ 254,419

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Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — ( 5,507 ) — — ( 5,507 ) 5,507 —

Net income — — — — — — — — — — 9,628 9,628 ( 87 ) 9,541

Balance at December 31, 2019 — — 32,593,651 806,435 $ — $ 1 $ 32 $ — $ 571,205 $ ( 2,126 ) $ ( 360,978 ) $ 208,134 $ 2,903 $ 211,037

Issuance of common stock and Series F preferred stock, net — 116,674 2,691,971 — — — 3 — 55,485 — — 55,488 — 55,488

Conversion of senior common stock to common stock — — 46,348 ( 56,063 ) — — — — — — — — — —

Distributions declared to common, senior common, preferred stockholders and Non-controlling OP Unit holders — — — — — — — — — — ( 63,001 ) ( 63,001 ) ( 756 ) ( 63,757 )

Comprehensive income — — — — — — — — — ( 2,219 ) — ( 2,219 ) — ( 2,219 )

Issuance of Non-controlling OP Units as consideration in real estate acquisitions, net — — — — — — — — — — — — 503 503

Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership — — — — — — — — ( 157 ) — — ( 157 ) 157 —

Net income — — — — — — — — — — 14,938 14,938 47 14,985

Balance at December 31, 2020 — 116,674 35,331,970 750,372 $ — $ 1 $ 35 $ — $ 626,533 $ ( 4,345 ) $ ( 409,041 ) $ 213,183 $ 2,854 $ 216,037

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

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For the year ended December 31,

2020 2019 2018

Cash flows from operating activities:

Net income $ 14,985 $ 9,541 $ 12,324

Adjustments to reconcile net income to net cash provided by operating activities:

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Asset retirement obligation expense 98 119 121

Amortization of right-of-use asset from operating leases and operating lease liabilities, net 52 53 —

Bad debt expense 56 152 —

Operating changes in assets and liabilities

(Increase) decrease in other assets

Decrease (increase) in other assets 2,875 ( 2,170 ) ( 445 )

Increase in deferred rent receivable ( 1,899 ) ( 1,477 ) ( 2,548 )

(Decrease) increase in accounts payable, accrued expenses, and amount due to Adviser and Administrator

Decrease in right-of-use asset from operating leases

Decrease in operating lease liabilities

Increase (decrease) in other liabilities

Tenant inducement payments

(Decrease) increase in accounts payable and accrued expenses ( 1,680 ) 1,540 515

Increase in amount due to Adviser and Administrator 56 381 234

Increase in other liabilities 1,808 2,075 246

Leasing commissions paid ( 1,464 ) ( 1,177 ) ( 402 )

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Deposits on future acquisitions ( 300 ) ( 1,542 ) —

Deposits applied against acquisition of real estate investments

Net cash used in investing activities $ ( 100,258 ) $ ( 132,037 ) $ ( 34,440 )

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Repayments on revolving credit facility ( 141,200 ) ( 163,600 ) ( 59,400 )

(Decrease) increase in security deposits

Decrease in security deposits ( 22 ) ( 192 ) 83

Distributions paid for common, senior common, preferred stock and Non-controlling OP Unitholders ( 63,757 ) ( 58,887 ) ( 54,565 )

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Cash, cash equivalents, and restricted cash at end of period $ 16,076 $ 11,488 $ 9,082

SUPPLEMENTAL NON-CASH INFORMATION

SUPPLEMENTAL AND NON-CASH INFORMATION

Cash paid during year for interest $ 26,098 $ 25,685 $ 24,987

Tenant funded fixed asset improvements $ 2,978 $ 2,787 $ 1,608

Acquisition of real estate and related intangible assets $ 1,542 $ — $ —

Assumed mortgage in connection with acquisition $ — $ — $ 6,918

Assumed interest rate swap fair market value

Reserves released by title company to tenant $ — $ — $ 3,966

Capital improvements and leasing commissions included in accounts payable and accrued expenses $ 1,070 $ 390 $ 311

Assumed tenant improvement allowance in connection with acquisition

Unrealized (loss) gain related to interest rate hedging instruments, net

Non-controlling OP Units issued in connection with acquisition

Unrealized loss related to interest rate hedging instruments, net $ ( 2,219 ) $ ( 1,978 ) $ ( 183 )

Increase in asset retirement obligation assumed in acquisition $ — $ 164 $ —

Non-controlling OP Units issued in connection with acquisition $ 503 $ — $ 13,975

Series A and B Preferred Stock offering cost write off $ — $ 2,674 $ —

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For the year ended December 31,

2020 2019 2018

Cash and cash equivalents $ 11,016 $ 6,849 $ 6,591

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We focus on acquiring, owning and managing primarily office and industrial properties.

On a selective basis, we may make long term industrial and office mortgage loans receivable;

however, we do not have any mortgage loans currently outstanding.

Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company (the “Administrator”), each pursuant to a contractual arrangement with us.

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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.

All references to annualized GAAP (as defined below) rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease.

A ll references herein and throughout the Notes to Consolidated Financial Statements to the number of properties and square footage are unaudited.

We conduct substantially all of our operations through the Operating Partnership.

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We compute depreciation using the straight-line method over the estimated useful life, or up to 39 years, for buildings and improvements, five 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.

Most properties that we acquire are already being operated as rental properties, which we consider to be asset acquisitions under Accounting Standards Codification (“ASC”) 360, “Property Plant and Equipment” (“ASC 360”) after adopting Accounting Standards Update (“ASU”) 2017-01 “Clarifying the Definition of a Business” (“ASU 2017-01”), described in more detail below.

When an acquisition is considered an asset acquisition, ASC 360 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 lease origination costs and the value of tenant relationships, based in each case on their fair values.

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We made payments of $ 0.6 million, $ 2.5 million, and $ 0.4 million for deferred financing costs during the years ended December 31, 2020, 2019, and 2018, respectively.

Total amortization expense related to deferred financing costs is included in interest expense and was $1.6 million , $1.4 million , and $1.7 million for the years ended December 31, 2019 , 2018 , and 2017 , respectively.

Total amortization expense related to deferred

financing costs is included in interest expense and was $ 1.5 million, $ 1.6 million, and $ 1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Gains on Sale of Real Estate, Net

Gains on sale of real estate, net, consist of the excess consideration received for a property over the property carrying value at the time of sale, or gains on real estate, offset by consideration received for a property less than the property carrying value at the time of sale, or loss on sale of real estate.

We recognize gains on sale of real estate, net, in accordance with GAAP.

Revenue Recognition

Lease Revenue

Lease 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.

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In the event that the collectability of deferred rent with respect to any given tenant is in doubt, we record an allowance for uncollectible accounts or record a direct write-off of the specific rent receivable.

We incurred $0.2 million in deferred rent write offs during the year ended December 31, 2018 .

No such reserves or direct write offs were recorded during the year ended 2019 and 2017 , respectively.

We incurred $ 0.2 million in deferred rent write offs during each of the years ended December 31, 2020 and 2018, respectively.

No such reserves or direct write offs were recorded during the year ended 2019.

Tenant recovery revenue includes payments from tenants as reimbursements for franchise taxes, management fees, insurance, maintenance and repairs, utilities, and ground lease payments.

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We do not record any tenant recovery revenues or operating expenses associated with costs paid directly by our tenants for our net leased properties.

On January 1, 2020, we completed the integration of the accounting records of certain of our triple net leased third-party asset managed properties into our accounting system and paid out property operating expenses of our operating bank accounts.

For periods prior to January 1, 2020, we recorded property operating expenses and offsetting lease revenues for these certain triple net leased properties on a net basis.

Beginning January 1, 2020, we began to record the property operating expenses and offsetting lease revenues for these triple net leased properties on a gross basis, as we have amended our process whereby we are paying operating expenses on behalf of our tenants and receiving reimbursement, whereas, previously these tenants were paying these expenses directly, with limited insight provided to us.

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.

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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, 2019 , 2018 , and 2017 , we did not record any provisions for uncertain tax positions.

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, 2020, 2019, and 2018, we did no t record any provisions for uncertain tax positions.

Asset Retirement Obligations

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The liabilities are accreted to their estimated obligation over the life of the leases for the respective properties.

We accrued $0.2 million of liabilities in connection with acquisitions for the years ended December 31, 2019 , and no liabilities in connection with acquisitions for the years ended December 31, 2018 and 2017 .

We accrued $ 0.2 million of liabilities in connection with acquisitions for the year ended December 31, 2019, and no liabilities in connection with acquisitions for the years ended December 31, 2020 and 2018.

We recorded accretion expense of $ 0.1 million in each of the years ended December 31, 2020, 2019, and 2018, respectively, to general and administrative expense.

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The aggregate undiscounted obligation on all properties is $ 5.6 million and the discount rates used in the calculations range from 2.5 % to 7.0 %.

We do no t expect to make any material payments in conjunction with these obligations in each of the next five years.

We do not expect to make any material payments in conjunction with these obligations in each of the next five years.

Stock Issuance Costs

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Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the recognition of revenue from contracts with customers.

Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted this guidance for our annual and interim periods beginning January 1, 2018 and used the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application.

Our adoption of this guidance did not have a material impact on our consolidated financial statements.

Further, as discussed below, we adopted the new guidance regarding the principles for the recognition measurement, presentation and disclosure of leases on January 1, 2019.

The new revenue standard applies to executory costs and other components of revenue due under leases that are deemed to be non-lease components (examples include common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease.

Revenue from these non-lease components, which were previously recognized on a straight-line basis under previous lease guidance, are recognized under the new revenue guidance as the related services are delivered.

As a result, while our total revenue recognized over the lease term does not differ under the new guidance, the revenue recognition pattern could be different.

The new leasing guidance allows for an accounting election to account for each separate lease component and its associated non-lease components as a single lease component.

As a lessor, we have made an accounting election to account for each separate lease component and its associated non-lease components as a single lease component.

As a result of this election, our revenue recognition pattern for our leasing arrangements is consistent with how we recognized lease revenue prior to our adoption of the new leasing standard.

In February 2016, the FASB issued ASU 2016-02, “Leases:

Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”).

The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee.

This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.

The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.

We adopted ASU 2016-02, as amended, as of January 1, 2019, which resulted in the recording of additional right-of-use assets from operating leases and operating lease liabilities of approximately $6.0 million for the four operating ground lease arrangements with terms greater than one year for which we are the lessee.

We adopted the modified retrospective method, where we recorded the cumulative effect of applying the guidance as of January 1, 2019.

We also adopted the full suite of practical expedients provided under this guidance, whereby we are not reassessing whether a contract is or contains a lease, the lease classification and the initial direct costs incurred upon onset of our leases.

We have also adopted the hindsight practical expedient whereby we can use hindsight to determine the lease term as of the date of implementation, and we adopted the land easements practical expedient where we do not have to assess whether existing or expired land easements contain a lease.

We analyzed our operating ground leases on the date of implementation and identified any option periods we believed were appropriate to include in the lease term, and discounted the future lease payments using a discount rate equivalent to a treasury rate with a similar lease term plus a spread ranging from 2.50% to 2.60% .

This spread was determined by reviewing market premiums over treasuries for fully securitized assets.

The weighted average discount rate used was 5.34% .

Three of our ground leases have fixed rental charges, and one has variable charges that are driven by the consumer price index.

Three of our ground leases have options to extend, and one ground lease has multiple early termination options.

We will include option periods or exclude termination options in future lease payments for ground leases located in our target markets.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new standard requires more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair market value through net income.

The standard also requires that financial assets measured at amortized cost be presented at the net amount anticipated to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

We would be required to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.

We are currently evaluating the impact from adopting ASU 2016-13, but we anticipate adopting this standard will not have a material impact to our consolidated financial statements.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”).

The new standard requires more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair market value through net income.

The standard also requires that financial assets measured at amortized cost be presented at the net amounts anticipated to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

We are required to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

We adopted ASU 2016-13 beginning with the three months ended March 31, 2020.

Adopting ASU 2016-13 has not resulted in a material impact to our consolidated financial statements, as we do not have any loans receivable outstanding.

In March 2020, the FASB issued Accounting Standards Update 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), subsequently clarified in January 2021 by Accounting Standards Update 2021-01 “Reference Rate Reform (Topic 848)” (“ASU 2021-01”).

The main provisions of this update provide optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate

expected to be discontinued because of reference rate reform.

ASU 2020-04 is effective for all entities as of March 12, 2020, and ASU 2021-01 is effective for all entities as of January 31, 2021.

We adopted ASU 2020-04 beginning with the three months ended March 31, 2020, and ASU 2021-01 as of January 31, 2021.

Adopting ASU 2020-04 and ASU 2021-01 has not resulted in a material impact to our consolidated statements, as ASU 2020-04 and ASU 2021-01 allows for prospective application of any changes in the effective interest rate for our LIBOR based debt, and allows for practical expedients that will allow us to treat our derivative instruments designated as cash flow hedges consistent with how they are currently accounted for.

In April 2020, the FASB issued a staff question-and-answer document, Topic 842 and Topic 840:

Accounting for Lease Concessions related to the Effects of the COVID-19 Pandemic (“COVID-19 Q&A”), to address frequently asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic.

Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the tenant, which would be addressed under the lease modification accounting framework, or if a lease concession was under the enforceable rights and obligations within the existing lease agreement, which would not fall under the lease modification accounting framework.

The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease modification, as long as the concession does not result in a substantial increase in rights of the lessor or obligations of the lessee.

This election is available for concessions that result in the total payments required by the modified contract being substantially the same as or less than the total payments required by the original contract.

At this time, we have granted rent deferrals to three tenants representing approximately 2 % of total portfolio rents.

The agreements with these tenants include current partial payments in exchange for rent deferrals of varying terms with deferred amounts to be paid by the respective tenant back to us, for the period starting in July 2020 and ending in March 2021.

We have elected to not evaluate these leases under the lease modification accounting framework.

Related-Party Transactions

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Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr.

David Gladstone, our chairman and chief executive officer.

Gladstone, our chairman and chief executive officer.

Two of our executive officers, Mr.

Gladstone and Mr.

Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator.

Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator.

Our president, Mr.

Robert Cutlip, is an executive managing director of our Adviser.

Cutlip, is an executive managing director of our Adviser.

Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary.

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Base Management Fee

On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement with the Adviser, effective as of October 1, 2018 to clarify that the agreement’s definition of Total Equity includes outstanding OP Units issued to Non-controlling OP Unitholders.

On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement (the “Fifth Amended Advisory Agreement”) with the Adviser, effective as of October 1, 2018, to clarify that the agreement’s definition of Total Equity includes outstanding OP Units issued to Non-controlling OP Unitholders.

Our entrance into the Advisory Agreement (and each amendment thereto) has been approved unanimously by our Board of Directors.

Our Board of Directors reviews and considers renewing the agreement with our Adviser each July.

During its July 2019 meeting, our Board of Directors reviewed and renewed the Advisory Agreement for an additional year, through August 31, 2020.

Under the Advisory Agreement, the calculation of the annual base management fee equals 1.5% of our Total Equity, which is our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges), adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include OP Units held by Non-controlling OP Unitholders.

The fee is calculated and accrued quarterly as 0.375% per quarter of such Total Equity figure.

Our Board of Directors also reviews and considers renewing the agreement with our Adviser each July.

Under the Fifth Amended Advisory Agreement, the calculation of the annual base management fee equaled 1.5 % of our Total Equity, which was our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that did not affect realized net income (including impairment charges), adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include OP Units held by Non-controlling OP Unitholders.

The fee was calculated and accrued quarterly as 0.375 % per quarter of such Total Equity figure.

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.

On July 14, 2020, the Company amended and restated the Fifth Amended Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between the Company and the Adviser (the “Sixth Amended Advisory Agreement”).

The Sixth Amended Advisory Agreement replaced the Fifth Amended Advisory Agreement’s previous calculation of the base management fee with a calculation based on Gross Tangible Real Estate.

The revised Base Management

Fee will be payable quarterly in arrears and shall be calculated at an annual rate of 0.425 % ( 0.10625 % per quarter) of the prior calendar quarter’s “Gross Tangible Real Estate,” defined in the Sixth Amended Advisory Agreement as the current gross value of the Company’s property portfolio (meaning the aggregate of each property’s original acquisition price plus the cost of any subsequent capital improvements thereon).

The calculation of the other fees in the agreement remained unchanged.

The revised Base Management Fee calculation began with the fee calculations for the quarter ended September 30, 2020.

For the years ended December 31, 2020, 2019, and 2018, we recorded a base management fee of $ 5.6 million, $ 5.2 million, and $ 5.1 million, respectively.

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For the years ended December 31, 2020, 2019, and 2018, we recorded an incentive fee of $ 4.3 million, $ 3.7 million, and $ 3.0 million, respectively.

The Adviser did not waive any portion of the incentive fee for the years ended December 31, 2019 , 2018 , and 2017 .

The Adviser did no t waive any portion of the incentive fee for the years ended December 31, 2020, 2019, and 2018.

Waivers cannot be recouped by the Adviser in the future.

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We believe that the methodology of allocating the Administrator’s total expenses by approximate percentage of time services were performed among all companies serviced by our Administrator more closely approximates fees paid to actual services performed.

For the years ended December 31, 2019 , 2018 , and 2017 , we recorded an administration fee of $1.7 million , $1.6 million , and $1.3 million , respectively.

For the years ended December 31, 2020, 2019, and 2018, we recorded an administration

fee of $ 1.6 million, $ 1.7 million, and $ 1.6 million, respectively.

Our Board of Directors reviews and considers approving or renewing the Administration Agreement each July.

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Our Board of Directors renewed the agreement for an additional year, through August 31, 2021, at its July 2020 meeting.

Dealer Manager Agreement

On February 20, 2020 we entered into a dealer manager agreement (the “Dealer Manager Agreement”), whereby Gladstone Securities will act as the exclusive dealer manager in connection with our offering (the “Offering”) of up to (i) 20,000,000 shares of our 6.00 % Series F Cumulative Redeemable Preferred Stock of the Company, par value $ 0.001 per share (the “Series F Preferred Stock”) on a “reasonable best efforts” basis (the “Primary Offering”), and (ii) 6,000,000 shares of Series F Preferred Stock pursuant to our distribution reinvestment plan (the “DRIP”) to those holders of the Series F Preferred Stock who participate in such DRIP.

The Series F Preferred Stock is registered with the SEC pursuant to a registration statement on Form S-3 (File No.

333-236143), as the same may be amended and/or supplemented (the “Registration Statement”), under the Securities Act of 1933, as amended, and will be offered and sold pursuant to a prospectus supplement, dated February 20, 2020, and a base prospectus dated February 11, 2020 relating to the Registration Statement (the “Prospectus”).

Under the Dealer Manager Agreement, Gladstone Securities, as dealer manager, will provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay Gladstone Securities (i) selling commissions of 6.0 % of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Selling Commissions”), and (ii) a dealer manager fee of 3.0 % of the gross proceeds from sales of Series F Preferred Stock in the Primary Offering (the “Dealer Manager Fee”).

No Selling Commissions or Dealer Manager Fee shall be paid with respect to Shares sold pursuant to the DRIP.

Gladstone Securities may, in its sole discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering.

Earnings per Share of Common Stock

The following tables set forth the computation of basic and diluted (loss) earnings per share of common stock for the years ended December 31, 2019 , 2018 and 2017 , respectively.

The following tables set forth the computation of basic and diluted earnings (loss) per share of common stock for the years ended December 31, 2020, 2019 and 2018, respectively.

The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted earnings per share calculation, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of income would also be added back to net income.

Net income figures are presented net of such non-controlling interests in the earnings per share calculation.

We computed basic (loss) earnings per share for the years ended December 31, 2019 , 2018 and 2017 , respectively, using the weighted average number of shares outstanding during the periods.

Diluted (loss) earnings per share for the years ended December 31, 2019 , 2018 and 2017 , reflects additional shares of common stock related to our convertible Senior Common Stock, if the effect would be dilutive, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net (loss) income (attributable) available to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).

We computed basic earnings (loss) per share for the years ended December 31, 2020, 2019 and 2018, respectively, using the weighted average number of shares outstanding during the periods.

Diluted earnings (loss) per share for the years ended December 31, 2020, 2019 and 2018, reflects additional shares of common stock related to our convertible Senior Common Stock, if the effect would be dilutive, that would have been outstanding if dilutive potential shares of common stock had been

issued, as well as an adjustment to net income (loss) available (attributable) 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,

Calculation of basic (loss) earnings per share of common stock:

Net (loss) income (attributable) available to common stockholders

2020 2019 2018

Calculation of basic earnings (loss) per share of common stock:

Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973

Denominator for basic weighted average shares of common stock (1) 34,040,085 30,695,902 28,675,934

Basic (loss) earnings per share of common stock

Calculation of diluted (loss) earnings per share of common stock:

Net (loss) income (attributable) available to common stockholders

Net (loss) income (attributable) available to common stockholders plus assumed conversions (2)

Basic earnings (loss) per share of common stock $ 0.09 $ ( 0.16 ) $ 0.03

Calculation of diluted earnings (loss) per share of common stock:

Net income (loss) available (attributable) to common stockholders $ 3,149 $ ( 4,760 ) $ 973

Net income (loss) available (attributable) to common stockholders plus assumed conversions (2) $ 3,149 $ ( 4,760 ) $ 973

Denominator for basic weighted average shares of common stock (1) 34,040,085 30,695,902 28,675,934

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Denominator for diluted weighted average shares of common stock (2) 34,040,085 30,695,902 28,675,934

Diluted (loss) earnings per share of common stock

Diluted earnings (loss) per share of common stock $ 0.09 $ ( 0.16 ) $ 0.03

(1) The weighted average number of OP Units held by Non-controlling OP Unitholders was 502,586 , 700,924 , and 128,233 for the years ended December 31, 2020, 2019, and 2018, respectively.

The Company was the sole holder of OP Units during December 31, 2017 .

(2) We excluded convertible shares of Senior Common Stock of 628,263 , 674,611 and 724,336 from the calculation of diluted earnings per share for the years ended December 31, 2020, 2019 and 2018, respectively, because it was anti-dilutive.

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The following table sets forth the components of our investments in real estate as of December 31, 2020 and 2019, respectively, excluding real estate held for sale as of December 31, 2020 and 2019, respectively (dollars in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Land (1) $ 142,853 $ 137,532

Building and improvements 916,601 851,245

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Real estate, net $ 900,215 $ 849,455

(1) This amount includes $ 4,436 of land value subject to land lease agreements which we may purchase at our option for a nominal fee.

Real estate depreciation expense on building and tenant improvements was $ 36.0 million, $ 32.8 million, and $ 29.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.

During the year ended December 31, 2019 and 2018 we acquired 18 and five properties, respectively, which are summarized below (dollars in thousands):

Aggregate Square Footage

Weighted Average Lease Term

Aggregate Purchase Price

Acquisition Costs

Aggregate Annualized GAAP Rent

Aggregate Mortgage Debt Issued or Assumed

December 31, 2019

December 31, 2018

During the year ended December 31, 2020 and 2019 we acquired nine and 18 properties, respectively, which are summarized below (dollars in thousands):

Year Ended Aggregate Square Footage Weighted Average Lease Term Aggregate Purchase Price Capitalized Acquisition Costs

December 31, 2020 (1) 1,717,502 12.2 years $ 129,974 $ 814 (3)

December 31, 2019 (2) 2,562,483 12.8 years $ 130,313 $ 1,231 (3)

(1) On January 8, 2020, we acquired a 64,800 square foot property in Indianapolis, Indiana for $ 5.3 million.

The property is leased to three tenants, with a weighted average lease term of 7.2 years.

On January 27, 2020, we acquired a 320,838 square foot, three -property portfolio in Houston, Texas, Charlotte, North Carolina, and St.

Charles, Missouri for $ 34.7

The portfolio has a weighted average lease term of 20.0 years.

On March 9, 2020, we acquired a 504,400 square foot property in Crandall, Georgia for $ 32.0 million.

This property is fully leased to one tenant for 10.5 years.

On September 1, 2020, we acquired a 153,600 square foot property in Terre Haute, Indiana for $ 10.6 million.

This property is fully leased to one tenant for 9.7 years.

On October 14, 2020, we acquired a 240,714 square foot property in Montgomery, Alabama for $ 14.3 million.

This property is fully leased to one tenant for 7.2 years.

On December 18, 2020, we acquired a 277,883 square foot property in Huntsville, Alabama for $ 20.0 million.

This property is fully leased to one tenant for 9.2 years.

On December 21, 2020, we acquired a 155,267 square foot property in Pittsburgh, Pennsylvania for $ 13.0 million.

This property is fully leased to one tenant for 10.0 years.

(2) On February 8, 2019, we acquired a 26,050 square foot property in Moorestown, New Jersey for $ 2.7 million.

The annualized GAAP rent on the 15.1 year lease is $0.2 million .

This property is fully leased to one tenant for 15.1 years.

On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $ 3.6 million.

The annualized GAAP rent on the 10.0 year lease is $0.3 million .

This property is fully leased to one tenant for 10.0 years.

On April 5, 2019, we acquired a 383,000 square foot, two property portfolio located in Ocala, Florida for $ 19.2 million.

This portfolio has a weighted average lease term of 20.1 years, and annualized GAAP rent of $1.5 million .

This portfolio is leased to one tenant, and has a weighted average lease term of 20.1 years.

On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio for $ 3.2 million.

The annualized GAAP rent on the 7.0 year lease is $0.2 million .

This property is fully leased to one tenant for 7.0 years.

On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $ 17.9 million.

The annualized GAAP rent on the 8.5 year lease is $1.6 million .

We issued $8.9 million of mortgage debt with a fixed interest rate of 4.35% in connection with this acquisition.

This property is fully leased to one tenant for 8.5 years.

On July 30, 2019, we acquired a 78,452 square foot property in Denton, Texas, for $ 6.6 million.

The annualized GAAP rent on the 11.9 year lease is $0.5 million .

This property is fully leased to one tenant for 11.9 years.

On September 26, 2019, we acquired a 211,000 square foot two property portfolio in Temple, Texas, for $ 14.1 million.

The portfolio has a weighted average lease term of 20.0 years, and annualized GAAP rent of $1.2 million .

This portfolio is leased to one tenant, and has a weighted average lease term of 20.0 years.

On November 14, 2019, we acquired a 231,509 square foot property in Indianapolis, Indiana, for $ 8.2 million.

The annualized GAAP rent on the 13.5 year lease is $0.6 million .

This property is fully leased to one tenant for 13.5 years.

On December 16, 2019, we acquired a 241,000 square foot property in Jackson, Tennessee, for $ 9.1 million.

The annualized GAAP rent on the 9.7 year lease is $0.7 million .

We issued $4.8 million of mortgage debt with a fixed interest rate of 3.97% in connection with this acquisition.

This property is fully leased to one tenant for 9.7 years.

On December 17, 2019, we acquired a 117,000 square foot property in Carrollton, Georgia, for $ 8.1 million.

The annualized GAAP rent on the 12.0 year lease is $0.6 million .

We issued $4.2 million of mortgage debt with a fixed interest rate of 3.97% in connection with this acquisition.

This property is fully leased to one tenant for 12.0 years.

On December 17, 2019, we acquired a 509,211 square foot six property portfolio, for $ 37.6 million.

The portfolio has a weighted average lease term of 10.0 years, and annualized GAAP rent of $2.7 million .

We issued $19.5 million of mortgage debt with a fixed interest rate of 3.75% in connection with this acquisition.

On March 9, 2018 , we acquired a 127,444 square foot property in Vance, Alabama for $14.3 million .

The annualized GAAP rent on the 9.8 year lease is $1.1 million .

On September 20, 2018 , we acquired a 157,810 square foot property in Columbus, Ohio for $8.5 million .

We entered into an interest rate swap in connection with our $4.7 million of issued debt on our Columbus, Ohio acquisition resulting in a fixed interest rate of 5.32% on such debt.

The annualized GAAP rent on the 15.0 year lease is $0.8 million .

On October 30, 2018 , we acquired a 218,703 square foot, two property portfolio located in Detroit, Michigan for $21.7 million .

We assumed $6.9 million of mortgage debt with a fixed interest rate of 4.63% and issued 742,937 OP Units in connection with this acquisition.

This portfolio has a weighted average lease term of 10.5 years, and annualized GAAP rent of $1.7 million .

On December 27, 2018 , we acquired an 87,080 square foot property in Lake Mary, Florida for $18.7 million .

The annualized GAAP rent on the 11.0 year lease is $2.4 million .

We accounted for these transactions under ASU 2017-01.

As a result, we treated our acquisitions during the years ended December 31, 2019 and 2018 as asset acquisitions rather than business combinations.

As a result of this treatment, we capitalized $1.2 million and $0.9 million , respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.

We entered into an interest rate swap in connection with $4.7 million of issued debt on our Columbus, Ohio acquisition, pursuant to which we will pay our counterparty a fixed interest rate of 3.22% , and receive a variable interest rate of one month LIBOR from our counterparty.

Our total interest rate on this debt is fixed at 5.32% .

We have elected to treat this interest rate swap as a cash flow hedge, and all changes in fair market value will be recorded to accumulated other comprehensive income on the consolidated balance sheets.

The portfolio is fully leased to one tenant, and has a weighted average lease term of 10.0 years.

(3) During the years ended December 31, 2020 and 2019, we capitalized $0.8 million and $1.2 million, respectively, of acquisition costs.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2020 and 2019, respectively, as follows (dollars in thousands):

Year ended December 31, 2019

Year ended December 31, 2018

Acquired assets and liabilities

Purchase price

Year ended December 31, 2020 Year ended December 31, 2019

Acquired assets and liabilities Purchase price Purchase price

Land $ 11,264 (1) $ 12,351

Building 97,101 93,502

Tenant Improvements 2,684 3,119

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Total Purchase Price $ 129,974 $ 130,313

(1) This amount includes $ 2,711 of land value subject to a land lease agreement, which we may purchase for a nominal fee.

(2) This amount includes $ 53 of loans receivable included in Other assets on the consolidated balance sheets.

(3) This amount includes $ 62 of prepaid rent included in Other liabilities on the consolidated balance sheets.

Significant Real Estate Activity on Existing Assets

During the year ended December 31, 2019 and 2018 , we executed six and three leases, respectively, which are aggregated below (dollars in thousands):

Aggregate Square Footage

Weighted Average Remaining Lease Term

Aggregate Annualized GAAP Rent

Aggregate Tenant Improvement

Aggregate Leasing Commissions

December 31, 2019

December 31, 2018

Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease.

Our leases have terms ranging from 5.0 years to 11.5 years .

Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease.

Our leases have terms ranging from 3.6 years to 7.0 years .

During the year ended December 31, 2019 and 2018 , we had three and two lease contractions or terminations, respectively, which are aggregated below (dollars in thousands):

Aggregate Square Footage Reduced

Aggregate Square Footage Remaining

Aggregate Termination Fee

Aggregate Deferred Rent Write Off

December 31, 2019

December 31, 2018

A tenant in one of our Columbus, Ohio properties exercised a lease termination option effective October 31, 2019 .

In connection with this termination, we earned a termination fee of $0.1 million , which was recognized through lease revenue on the consolidated statements of operations and comprehensive income.

The tenant in our Fridley, Minnesota property executed a termination agreement to vacate the property on March 31, 2020 .

In connection with the early termination, we will earn a termination fee of $0.2 million , which is recognized through lease revenue on the consolidated statements of operations and comprehensive income through the remaining lease term.

The tenant in one of our Mason, Ohio properties executed a lease contraction in conjunction with a lease renewal.

At the conclusion of their current lease term on June 30, 2020 , they will continue to lease 39,417 square feet through June 30, 2030 .

A tenant in our Salt Lake City, Utah property exercised a lease contraction to reduce their occupancy in our building by 23,632 square feet.

They will continue to lease 81,271 square feet through their original lease term.

In connection with this contraction, we will earn a contraction fee of $0.3 million , which is recognized through lease revenue on the consolidated statements of operations and comprehensive income through the contraction term, and we wrote off $0.1 million of deferred rent asset to property operating expenses on the consolidated statements of operations and comprehensive income.

A tenant in our Champaign, Illinois property exercised a lease contraction to reduce its occupancy in our building by 20,400 square feet.

They will continue to lease 87,862 square feet through their original lease term.

In connection with this contraction, we will earn a contraction fee of $0.2 million , which is recognized through lease revenue on the consolidated statements of operations and comprehensive income through the contraction term, and we wrote off $0.1 million of deferred rent asset to property operating expenses on the consolidated statements of operations and comprehensive income.

We recorded contraction fees of $0.2 million , in the aggregate, during the year ended December 31, 2018 .

(4) This amount includes $ 187 of prepaid rent included in Other liabilities on the consolidated balance sheets.

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and excluding real estate held for sale as of December 31, 2019 , for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

Tenant Lease Payments

Future minimum lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and real estate held for sale as of December 31, 2018 , for each of the five succeeding fiscal years and thereafter, is as follows (dollars in thousands):

Tenant 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

2021 $ 110,417

Thereafter 323,814

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 operating expenses on the respective properties in the event the tenants fail to pay them.

Lease Revenue Reconciliation

The table below sets forth the allocation of lease revenue between fixed contractual payments and variable lease payments for the years ended December 31, 2020 and 2019, respectively (dollars in thousands):

For the twelve months ended December 31,

(Dollars in Thousands)

Lease revenue reconciliation 2020 2019 $ Change % Change

Fixed lease payments $ 117,248 $ 110,273 $ 6,975 6.3 %

Variable lease payments 15,904 4,114 11,790 286.6 %

$ 133,152 $ 114,387 $ 18,765 16.4 %

Intangible Assets

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of December 31, 2020 and 2019, excluding real estate held for sale as of December 31, 2020 and 2019, respectively (dollars in thousands):

December 31, 2019

December 31, 2018

Lease Intangibles

Accumulated Amortization

Lease Intangibles

Accumulated Amortization

December 31, 2020 December 31, 2019

Lease Intangibles Accumulated Amortization Lease Intangibles Accumulated Amortization

In-place leases $ 99,254 $ ( 54,168 ) $ 92,906 $ ( 48,468 )

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Customer relationships 68,268 ( 31,881 ) 65,363 ( 28,887 )

Deferred Rent Receivable/(Liability)

Accumulated (Amortization)/Accretion

Deferred Rent Receivable/(Liability)

Accumulated (Amortization)/Accretion

$ 241,229 $ ( 123,850 ) $ 226,525 $ ( 111,060 )

Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion Deferred Rent Receivable/(Liability) Accumulated (Amortization)/Accretion

Above market leases $ 15,076 $ ( 10,670 ) $ 16,502 $ ( 10,005 )

Below market leases and deferred revenue ( 38,319 ) 17,686 ( 34,322 ) 15,000

$ ( 23,243 ) $ 7,016 $ ( 17,820 ) $ 4,995

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $ 19.4 million, $ 19.2 million, and $ 17.7 million for the years ended December 31, 2020, 2019, and 2018, respectively, and is included in depreciation and amortization expense in the consolidated statement of operations and comprehensive income.

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The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs and customer relationships for each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of December 31, 2020 (dollars in thousands):

Estimated Amortization Expense

Year Estimated Amortization Expense

of In-Place Leases, Leasing

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Relationships

2021 $ 19,828

Thereafter 39,548

The estimated aggregate rental income to be recorded for the amortization of both above and below market leases for each of the five succeeding fiscal years and thereafter is as follows, excluding real estate held for sale as of December 31, 2020 (dollars in thousands):

Net Increase to Rental Income

Year Net Increase to Rental Income

Related to Above and Below

Market Leases (1)

Thereafter 4,160

(1) Does not include ground lease amortization of $ 176 .

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We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available.

During the year ended December 31, 2019 , we sold one non-core property, located in Maitland, Florida, which is detailed in the table below (dollars in thousands):

Square Footage Sold

Gain on Sale of Real Estate, net

Our 2019 disposition was not classified as discontinued operations because it did not represent a strategic shift in operations, nor will it have a major effect on our operations and financial results.

Accordingly, the operating results of this property are included within continuing operations for all periods reported.

During the year ended December 31, 2020, we sold six non-core properties, located in Charlotte, North Carolina, Maple Heights, Ohio, Champaign, Illinois, and Austin, Texas, which are summarized in the table below (dollars in thousands):

Aggregate Square Footage Sold Sales Price Sales Costs Gain on Sale of Real Estate, net

551,743 $ 37,532 $ 1,698 $ 8,096

Our 2020 dispositions were not classified as discontinued operations because they did not represent a strategic shift in operations, nor will they have a major effect on our operations and financial results.

Accordingly, the operating results of these properties are included within continuing operations for all periods reported.

The table below summarizes the components of operating income from the real estate and related assets disposed of during the years ended December 31, 2020, 2019, and 2018, respectively (dollars in thousands):

For the year ended December 31,

2020 2019 2018

Operating revenue $ 2,703 $ 3,176 $ 3,919

Operating expense 1,534 3,697 1,609

Other income, net

Other income (expense), net 8,181 (1) ( 54 ) ( 586 )

Income (expense) from real estate and related assets sold $ 9,350 $ ( 575 ) $ 1,724

(1) Includes $3.0 million gain on sale of real estate, net.

(1) Includes an $ 8.1 million gain on sale of real estate, net.

Real Estate Held for Sale

At December 31, 2020, we had three properties classified as held for sale, located in Boston Heights, Ohio, Rancho Cordova, California, and Champaign, Illinois.

We considered these assets to be non-core to our long term strategy.

At December 31, 2019, we had one property classified as held for sale, located in Charlotte, North Carolina.

We considered the asset to be non-core to our long term strategy.

At December 31, 2018 , we had one property classified as held for sale, located in Maitland, Florida.

This property was sold during the year ended December 31, 2020.

Our asset classified as held for sale at December 31, 2019 was not classified as discontinued operations because it does not represent a strategic shift in our operations, and it does not have a major effect on our financial results.

Our assets classified as held for sale at December 31, 2020 were not classified as discontinued operations because it does not represent a strategic shift in our operations, and it does not have a major effect on our financial results.

The table below summarizes the components of income from real estate and related assets held for sale at December 31, 2020 (dollars in thousands):

For the year ended December 31,

2020 2019 2018

Operating revenue $ 1,861 $ 1,769 $ 1,288

Operating expense 2,938 (1) 985 792

Other income, net

Income (expense) from real estate and related assets sold

(1) Includes $1.8 million impairment charge.

Other expense, net ( 388 ) ( 364 ) ( 394 )

(Loss) income from real estate and related assets held for sale $ ( 1,465 ) $ 420 $ 102

(1) Includes a $ 1.9 million impairment charge.

The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying consolidated balance sheet (dollars in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Assets Held for Sale

Real estate, at cost

accumulated depreciation

Total real estate held for sale, net

Total real estate held for sale $ 8,114 $ 3,990

Lease intangibles, net 384 —

Deferred rent receivable, net

Total Assets Held for Sale $ 8,498 $ 3,990

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Impairment Charges

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the year ended December 31, 2019 and did no t identify any impaired held and used assets during the fourth quarter of 2019 .

We classified one property as held for sale at December 31, 2019 .

We performed an analysis of the property classified as held for sale, and compared the fair market value of the asset less selling costs against the carrying value of the asset available for sale.

As a result of this analysis, we recorded an impairment charge of $1.8 million during the year ended December 31, 2019 , as the fair market value less selling costs was less than the carrying value.

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the year ended December 31, 2020 and identified three held and used assets, located in Blaine, Minnesota, Champaign, Illinois, and Rancho Cordova, California, which were impaired by an aggregate of $ 3.6 million during the year ended December 31, 2020 when we determined the carrying value of these assets was unrecoverable based on an undiscounted cash flow analysis.

As a result, we recorded an impairment charge to reflect the fair market value of these assets.

The Rancho Cordova, California property was further impaired when we classified the property as held for sale as of December 31, 2020 to record the carrying value equal to the fair value less costs of sale and recorded an impairment charge to our Rancho Cordova, California asset of $ 0.7 million, which is reflected in aggregate impairment charge of $ 3.6 million during the year ended December 31, 2020.

We classified one property as held for sale at December 31, 2019.

We performed an analysis of the property classified as held for sale and compared the fair market value of the asset less selling costs against the carrying value of the asset available for sale.

We did no t record an impairment charge during the year ended December 31, 2018 , as the fair market value less selling costs was greater than the carrying value.

As a result of this analysis, we recorded an impairment charge of $ 1.8 million during the year ended December 31, 2019, as the fair market value minus selling costs was less than the carrying value.

Fair market value for this asset was calculated using Level 3 inputs (defined in Note 6 “Mortgage Notes Payable and Credit Facility”), which were determined using a negotiated sales price from an executed purchase and sale agreement with a third party.

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Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis.

We recognized $6.8 million of impairment charges on three properties during the year ended December 31, 2017 .

These properties were impaired through our held for sale carrying value analysis during the year ended December 31, 2017 , and we concluded that the fair market value less selling costs was below the carrying value of the respective properties.

We sold two of these properties during the year ended December 31, 2017 , and one of these properties during the year ended December 31, 2018 .

The fair values for the above properties were calculated using Level 3 inputs which were calculated using an estimated sales price, less estimated costs to sell.

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Our mortgage notes payable and Credit Facility as of December 31, 2020 and December 31, 2019 are summarized below (dollars in thousands):

Encumbered properties at

Carrying Value at

Stated Interest Rates at

Scheduled Maturity Dates at

December 31, 2019

December 31, 2018

December 31, 2019

Encumbered properties at Carrying Value at Stated Interest Rates at Scheduled Maturity Dates at

December 31, 2020 December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2020

Mortgage and other secured loans:

1 unchanged sentence

Variable rate mortgage loans 7 24,809 45,151 (3) (2)

Premiums and discounts, net

Deferred financing costs, mortgage loans, net

Premiums and discounts, net - ( 182 ) ( 239 ) N/A N/A

Deferred financing costs, mortgage loans, net - ( 3,479 ) ( 3,944 ) N/A N/A

Total mortgage notes payable, net 68 $ 456,177 $ 453,739 (4)

Variable rate revolving credit facility

LIBOR + 1.65%

Deferred financing costs, revolving credit facility

Variable rate revolving credit facility 50 (6) $ 53,900 $ 52,400 LIBOR + 1.65 %

Deferred financing costs, revolving credit facility - ( 588 ) ( 821 ) N/A N/A

Total revolver, net 50 $ 53,312 $ 51,579

Variable rate term loan facility

LIBOR + 1.60%

Deferred financing costs, term loan facility

Total term loan, net

Variable rate term loan facility - $ 160,000 $ 122,300 LIBOR + 1.60 %

Deferred financing costs, term loan facility - ( 797 ) ( 1,024 ) N/A N/A

Total term loan, net N/A $ 159,203 $ 121,276

Total mortgage notes payable and credit facility 118 $ 668,692 $ 626,594 (5)

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As of December 31, 2020, we had 53 mortgage notes payable, collateralized by a total of 68 properties with a net book value of $ 687.6 million.

Gladstone Commercial Corporation has limited recourse liabilities that could result from any one or more of the following circumstances:

We have 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 have full recourse for $4.8 million of the mortgage notes payable, net or 1.1% of the outstanding balance.

As of December 31, 2020, we did not have any recourse mortgage.

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.

During the year ended December 31, 2019 , we partially repaid one mortgage collateralized by three properties, releasing one of the collateralized properties that we sold on January 31, 2019, and fully repaid four mortgages collateralized by eight properties, all of which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Repaid

Weighted Average Interest Rate on Fixed Rate Debt Repaid

Aggregate Variable Rate Debt Repaid

Weighted Average Interest Rate on Variable Rate Debt Repaid

During the year ended December 31, 2019 , we issued 11 mortgages, collateralized by 11 properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Issued

Weighted Average Interest Rate on Fixed Rate Debt

We issued $10.6 million of fixed rate debt in connection with one property acquired on December 27, 2018 , with a maturity date of February 8, 2029 .

The interest rate is fixed at 4.7% for the first seven years of the mortgage.

After the fixed interest rate period expires, we have the option to adjust the interest rate to a fixed interest rate equal to 1.8% , plus the three -year treasury rate per annum, or a variable interest rate equal to 1.8% , plus the 30 day LIBOR rate per annum.

On May 31, 2019 , we issued $21.6 million of floating rate debt swapped to fixed rate debt of 3.42% in connection with refinancing mortgage debt on one property with a new maturity date of June 1, 2024 .

We issued $8.9 million of fixed rate debt in connection with our June 18, 2019 property acquisition with a maturity date of June 18, 2024 and a rate of 4.35% .

We issued $4.8 million of fixed rate debt in connection with our December 16, 2019 property acquisition with a maturity date of December 10, 2026 and a rate of 3.97% .

We issued $4.2 million of fixed rate debt in connection with our December 17, 2019 property acquisition with a maturity date of December 17, 2026 and a rate of 3.97% .

We issued an aggregate $19.5 million of fixed rate debt in connection with our December 17, 2019 six property portfolio acquisition with a maturity date of January 1, 2027 and a rate of 3.75% .

During the year ended December 31, 2019 , we extended the maturity dates of two mortgages, collateralized by four properties, which are summarized below (dollars in thousands):

Aggregate Variable Rate Debt Extended

Weighted Average Interest Rate on Variable Rate Debt Extended

Weighted Average Extension Term

During the year ended December 31, 2020, we repaid seven mortgages collateralized by eight properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Repaid Weighted Average Interest Rate on Fixed Rate Debt Repaid

$ 18,109 5.19 %

Aggregate Variable Rate Debt Repaid Weighted Average Interest Rate on Variable Rate Debt Repaid

$ 19,284 LIBOR + 2.20 %

During the year ended December 31, 2020, we issued six mortgages, collateralized by six properties, which are summarized below (dollars in thousands):

Aggregate Fixed Rate Debt Issued Weighted Average Interest Rate on Fixed Rate Debt

$ 52,578 (1) 3.18 %

(1) We issued an aggregate of $ 18.3 million of fixed rate debt in connection with our three property portfolio acquisition on January 27, 2020, with a maturity date of February 1, 2030 and a rate of 3.625 %.

We issued $ 17.5 million of floating rate debt swapped to fixed of 2.8 % in connection with our March 9, 2020 property acquisition, with a maturity date of March 9, 2030.

We issued $ 10.3 million of fixed rate debt in connection with our December 18, 2020 property acquisition, with a maturity date of January 1, 2028 and a rate of 3.0 %.

We issued $ 6.4 million of floating rate debt swapped to fixed of 3.25 % in connection with our December 21, 2020 property acquisition, with a maturity date of December 23, 2030.

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

Scheduled Principal Payments

Year Scheduled Principal Payments

2021 $ 23,056

Thereafter 171,344

$ 459,838 (1)

(1) This figure is does not include $( 0.2 ) million premiums and (discounts), net, and $ 3.5 million of deferred financing costs, which are reflected in mortgage notes payable on the consolidated balance sheet.

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The following table summarizes the interest rate caps at December 31, 2020 and 2019 (dollars in thousands):

December 31, 2019

December 31, 2018

Aggregate Cost

Aggregate Notional Amount

Aggregate Fair Value

Aggregate Notional Amount

Aggregate Fair Value

December 31, 2020 December 31, 2019

Aggregate Cost Aggregate Notional Amount Aggregate Fair Value Aggregate Notional Amount Aggregate Fair Value

$ 1,537 (1) $ 177,060 $ 9 $ 166,728 $ 250

(1) We have entered into various interest rate cap agreements on new variable rate debt with LIBOR caps ranging from 1.50 % to 2.75 %.

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The following table summarizes our interest rate swaps at December 31, 2020 and 2019 (dollars in thousands):

December 31, 2019

December 31, 2018

Aggregate Notional Amount

Aggregate Fair Value Asset

Aggregate Fair Value Liability

Aggregate Notional Amount

Aggregate Fair Value Asset

Aggregate Fair Value Liability

December 31, 2020 December 31, 2019

Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability

$ 68,829 $ — $ ( 3,055 ) $ 45,777 $ — $ ( 1,173 )

The following tables present the impact of our derivative instruments in the consolidated financial statements (dollars in thousands):

Amount of (Loss) Gain, net recognized in Comprehensive Income

Amount of loss recognized in Comprehensive Income

2020 2019 2018

Derivatives in cash flow hedging relationships

1 unchanged sentence

Interest rate swaps ( 1,882 ) ( 1,229 ) ( 260 )

Total $ ( 2,219 ) $ ( 1,978 ) $ ( 183 )

The following table sets forth certain information regarding our derivative instruments (dollars in thousands):

Asset (Liability) Derivatives Fair Value at

Derivatives Designated as Hedging Instruments

Balance Sheet Location

December 31, 2019

December 31, 2018

Interest rate caps

Interest rate swaps

Other liabilities

Derivatives Not Designated as Hedging Instruments

Interest rate caps

Total derivative (liabilities) assets

Derivatives Designated as Hedging Instruments Balance Sheet Location December 31, 2020 December 31, 2019

Interest rate caps Other assets $ 9 $ 250

Interest rate swaps Other liabilities ( 3,055 ) ( 1,173 )

Total derivative liabilities, net $ ( 3,046 ) $ ( 923 )

The fair value of all mortgage notes payable outstanding as of December 31, 2020 was $ 468.6 million, as compared to the carrying value stated above of $ 456.2 million.

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Future minimum rental payments due under the terms of these leases as of December 31, 2020, are as follows (dollars in thousands):

Future Lease Payments Due Under Operating Leases

Year Future Lease Payments Due Under Operating Leases

Thereafter 7,305

Total anticipated lease payments $ 9,750

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Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the consolidated statements of operations and comprehensive income.

Our ground leases have a weighted average remaining lease term of 22.9 years.

Future minimum rental payments due under the terms of these leases as of December 31, 2018 are as follows (dollars in thousands):

For the year ended December 31,

Minimum Rental Payments Due

Our ground leases have a weighted average remaining lease term of 20.1 years and weighted average discount rate of 5.32 %.

Letters of Credit

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For the year ended December 31,

2020 2019 2018

Common Stock and Non-controlling OP Units $ 1.5018 $ 1.5000 $ 1.5000

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Series E Preferred Stock 1.656252 0.404900 (3) —

We fully redeemed our Series A and B Preferred Stock on October 28, 2019 , and paid all outstanding shareholders a prorated dividend for the month of October.

We issued our new Series E Preferred Stock on October 4, 2019 , paying a prorated dividend for the month of October and full dividends for November and December.

Series F Preferred Stock 0.7500 (2) — —

(1) We fully redeemed our Series A and B Preferred Stock on October 28, 2019.

(2) Prior to July 1, 2020, Series F Preferred Stock distributions were declared, but not paid, as there were no Series F Preferred Stock shares outstanding on the applicable dividend record dates.

(3) We issued our Series E Preferred Stock on October 4, 2019.

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.

The characterization of distributions during each of the last three years is reflected in the table below:

Ordinary Income

Return of Capital

Long-Term Capital Gains

Ordinary Income Return of Capital Long-Term Capital Gains

Common Stock and OP Units

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For the year ended December 31, 2020 100.00000 % — % — %

Series F Preferred Stock

For the year ended December 31, 2018 — % — % — %

For the year ended December 31, 2019 — % — % — %

For the year ended December 31, 2020 100.00000 % — % — %

Recent Activity

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LLC (“Goldman Sachs”), Stifel, Nicolaus & Company, Incorporated (“Stifel”), BTIG, LLC, and Fifth Third Securities, Inc.

(“Fifth Third”) (collectively the “Common Stock Sales Agents”), pursuant to which we may sell shares of our common stock in an aggregate offering price of up to $250.0 million .

Previously, we had a common stock ATM program with Cantor Fitzgerald & Co (“Cantor”) that was terminated upon entering into the Common Stock Sales Agreement.

Under both programs, during the year ended December 31, 2019 , we sold 3.0 million shares of common stock, raising $64.5 million in net proceeds.

(“Fifth Third”) (collectively the “Common Stock Sales Agents”), pursuant to which we may sell shares of our common stock in an aggregate offering price of up to $ 250.0 million (the “Common Stock ATM Program”).

During the year ended December 31, 2020, we sold 2.7 million shares of common stock, raising $ 52.8 million in net proceeds under the Common Stock ATM Program.

As of December 31, 2020, we had a remaining capacity to sell up to $ 183.9 million of common stock under the Common Stock Sales Agreement.

The proceeds from these issuances were used to acquire real estate, repay outstanding debt and for other general corporate purposes.

Series A and B Preferred Stock ATM Programs

Previously under another open market sales agreement with Cantor (the “Series A and B Preferred ATM Program”), we could, from time to time, offer to sell (i) shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), and (ii) shares of our 7.50% Series B Cumulative Redeemable Preferred Stock, (“Series B Preferred Stock”), having an aggregate offering price of up to $40.0 million , through Cantor, acting as sales agent and/or principal.

We did not sell any shares of our Series A or Series B Preferred Stock during the year ended December 31, 2019 .

On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor, as the Series A Preferred Stock and Series B Preferred Stock were fully redeemed on this date.

Series A and B Preferred Stock Redemption

On October 28, 2019 , we voluntarily redeemed all 1,000,000 outstanding shares of our Series A Preferred Stock and all 1,264,000 outstanding shares of our Series B Preferred Stock at a redemption price of $25.1506944 per share and $25.1458333 per share, respectively, which represents the liquidation preference per share, plus accrued and unpaid dividends through October 28, 2019 for an aggregate redemption price of approximately $56.9 million .

In connection with this redemption, we recognize a $2.7 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred upon the issuance of our Series A and B Preferred Stock.

Mezzanine Equity

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In addition, our Series E Preferred Stock is redeemable at the option of the shareholder in the event a delisting event occurs.

We will periodically evaluate the likelihood that a change of control or delisting event of greater than 50% will take place, and if we deem this probable, we would adjust the Series D Preferred Stock and Series E Preferred Stock presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment.

offset to gain (loss) on extinguishment.

We currently believe the likelihood of a change of control of greater than 50% is remote.

Under a third open market sales agreement with Cantor (the “Series D Preferred ATM Program”), we may, from time to time, offer to sell shares of our Series D Preferred Stock, having an aggregate offering price of up to $50.0 million through Cantor, acting as sales agent and/or principal.

We did not sell any shares of our Series D Preferred under our Series D Preferred ATM Program during the year ended December 31, 2019 .

We have not allocated any funds on our Universal Shelf (defined below) towards the Series D Preferred ATM Program.

Series E Preferred Stock

On October 4, 2019 , we completed an underwritten public offering of 2,760,000 shares of our newly designated Series E Preferred Stock, at a public offering price of $25.00 per share, raising $69.0 million in gross proceeds and approximately $66.6 million in net proceeds, after payment of underwriting discounts and commissions.

We used the net proceeds from this offering to redeem all outstanding shares of our Series A Preferred Stock and Series B Preferred Stock, and pay down our Credit Facility.

On December 3, 2019, we entered into an At-the -Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”), with Baird, Goldman Sachs, Stifel, Fifth Third, and U.S.

Bancorp Investments, Inc.

(the “Series E Preferred Stock Sales Agents”), pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $100.0 million .

We did not sell any of our Series E Preferred Stock pursuant to the Series E Preferred Stock Sales Agreement during the year ended December 31, 2019.

Amendments to Articles of Incorporation

On April 11, 2018 , we filed with the Maryland State Department of Assessments and Taxation an Articles Supplementary reclassifying 3,500,000 authorized but unissued shares of our convertible senior common stock (the “Senior Common Stock”), as authorized but unissued shares of our common stock.

As a result of the reclassification, there were 57,969 authorized but unissued shares of Senior Common Stock.

On April 11, 2018 , we also filed with the Maryland State Department of Assessments and Taxation an Articles of Amendment to increase the number of shares of capital stock we have authority to issue to 100,000,000 and authorized common stock to 87,700,000 shares.

On September 27, 2019 , the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary (i) setting forth the rights, preferences and terms of its newly designated Series E Preferred Stock and (ii) reclassifying and designating 4,000,000 shares of the Company’s authorized and unissued shares of common stock as shares of Series E Preferred Stock.

The reclassification decreased the number of shares classified as common stock from 87,700,000 shares immediately prior to the reclassification to 83,700,000 shares immediately after the reclassification.

On December 2, 2019, the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary reclassifying 2,600,000 authorized but unissued shares of our Series A Preferred Sock as 2,590,000 shares of our common stock and 10,000 shares of our Series E Preferred Stock, and reclassifying 2,750,000 authorized but unissued shares of our Series B Preferred Stock as 2,750,000 shares of our Series E Preferred Stock.

After giving effect to such reclassifications, we have authorized 86,290,000 shares of Common Stock, 6,000,000 shares of Series D Preferred Stock, 6,760,000 shares of Series E Preferred Stock and 950,000 shares of our Senior Common Stock.

We did not have an active At-the-Market program for our Series D Preferred Stock during the year ended December 31, 2020.

Series E Preferred Stock ATM Program

We have an At-the-Market Equity Offering Sales Agreement (the “Series E Preferred Stock Sales Agreement”), with sales agents Baird, Goldman Sachs, Stifel, Fifth Third, and U.S.

Bancorp Investments, Inc., pursuant to which we may, from time to time, offer to sell shares of our Series E Preferred Stock in an aggregate offering price of up to $ 100.0 million.

We sold 0.3 million shares of our Series E Preferred Stock, raising $ 7.1 million in net proceeds pursuant to the Series E Preferred Stock Sales Agreement during the year ended December 31, 2020.

As of December 31, 2020, we had remaining capacity to sell up to $ 92.8 million of Series E Preferred Stock under the Series E Preferred Stock Sales Agreement.

Universal Shelf Registration Statement

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As of December 31, 2020, we had the ability to issue up to $ 377.2 million under the Universal Shelf.

On January 29, 2020, we filed an additional universal registration statement on Form S-3, File No.

333-236143 (the “2020 Universal Shelf”).

The 2020 Universal Shelf was declared effective on February 11, 2020 and is in addition to the 2019 Universal Shelf.

The 2020 Universal Shelf allows us to issue up to an additional $ 800.0 million of securities.

Of the $ 800.0 million of available capacity under our 2020 Universal Shelf, approximately $ 636.5 million is reserved for the sale of our Series F Preferred Stock.

As of December 31, 2020, we had the ability to issue up to $ 797.1 million of securities under the 2020 Universal Shelf.

Preferred Series F Continuous Offering

On February 20, 2020, we filed with the Maryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of the Company’s authorized and unissued shares of common stock as shares of Series F Preferred Stock.

The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification.

We sold 0.1 million shares of our Series F Preferred Stock, raising $ 2.7 million in net proceeds during the year ended December 31, 2020.

As of December 31, 2020, we had remaining capacity to sell up to $ 633.6 million of Series F Preferred Stock.

Amendment to Operating Partnership Agreement

In connection with the authorization of the Series F Preferred Stock in February of 2020, the Operating Partnership controlled by the Company through its ownership of GCLP Business Trust II, the general partner of the Operating Partnership, adopted the Second Amendment to its Second Amended and Restated Agreement of Limited Partnership (collectively, the “Amendment”), as amended from time to time, establishing the rights, privileges and preferences of 6.00 % Series F Cumulative Redeemable Preferred Units, a newly-designated class of limited partnership interests (the “Series F Preferred Units”).

The Amendment provides for the Operating Partnership’s establishment and issuance of an equal number of Series F Preferred Units as are issued shares of Series F Preferred Stock by the Company in connection with the offering upon the Company’s contribution to the Operating Partnership of the net proceeds of the offering.

Generally, the Series F Preferred Units provided for under the Amendment have preferences, distribution rights and other provisions substantially equivalent to those of the Series F Preferred Stock.

Non-controlling Interests in Operating Partnership

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During November 2019, 263,300 OP units were redeemed for Common Stock.

On January 8, 2020, we issued 23,396 OP units as partial consideration to acquire a 64,800 square foot property located in Indianapolis, Indiana for $ 5.3 million.

The Operating Partnership is required to make distributions on each OP Unit in the same amount as those paid on each share of the Company’s common stock, with the distributions on the OP Units held by the Company being utilized to make distributions to the Company’s common stockholders.

As of December 31, 2020 and 2019, there were 503,033 and 479,637 outstanding OP Units held by Non-controlling OP Unitholders, respectively.

Quarterly Financial Information (unaudited)

The following table reflects the quarterly results of operations for the years ended December 31, 2019 and 2018 (dollars in thousands):

Quarter ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

Operating revenues

Operating expenses

Other expense, net

Net loss (income) attributable (available) to OP Units held by Non-controlling OP Unitholders

Dividends attributable to preferred and senior common stock (1)

Net (loss) income (attributable) available to common stockholders

Net (loss) income (attributable) available to common stockholders per share - basic & diluted

Other Comprehensive income (loss)

Quarter ended

December 31, 2018

September 30, 2018

June 30, 2018

March 31, 2018

Operating revenues

Operating expenses

Other expense, net

Net income available to OP Units held by Non-controlling OP Unitholders

Dividends attributable to preferred and senior common stock

Net (loss) income (attributable) available to common stockholders

Net (loss) income (attributable) available to common stockholders - basic & diluted

Other Comprehensive (loss) income

Includes $2.7 million of Series A and B Preferred Stock offering costs written off as a result of their redemption.

Subsequent Events

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On January 12, 2021, our Board of Directors declared the following monthly distributions for the months of January, February, and March of 2021:

Common Stock and Non-controlling OP Unit Distributions per Share

Series D Preferred Distributions per Share

Series E Preferred Distributions per Share

January 24, 2020

January 31, 2020

February 19, 2020

February 28, 2020

March 20, 2020

March 31, 2020

Record Date Payment Date Common Stock and Non-controlling OP Unit Distributions per Share Series D Preferred Distributions per Share Series E Preferred Distributions per Share

January 22, 2021 January 29, 2021 $ 0.12515 $ 0.1458333 $ 0.138021

February 17, 2021 February 26, 2021 0.12515 0.1458333 0.138021

March 18, 2021 March 31, 2021 0.12515 0.1458333 0.138021

$ 0.37545 $ 0.4374999 $ 0.414063

Series F Preferred Stock Distributions

Record Date Payment Date Distribution per Share

January 27, 2021 February 5, 2021 $ 0.125

February 24, 2021 March 5, 2021 0.125

March 24, 2021 April 5, 2021 0.125

Senior Common Stock Distributions

Payable to the Holders of Record During the Month of:

Distribution per Share

February 7, 2020

March 6, 2020

April 7, 2020

Payment Date Distribution per Share

January February 5, 2021 $ 0.0875

February March 5, 2021 0.0875

March April 5, 2021 0.0875

Equity Activity

Subsequent to December 31, 2019 and through February 12, 2020 , we raised $27.9 million in net proceeds from the sale of 1.3 million shares of Common Stock under our Common Stock ATM Program.

Subsequent to December 31, 2020 and through February 16, 2021, we raised $ 6.8 million in net proceeds from the sale of 0.4 million shares of common stock under our Common Stock ATM Program and $ 0.03 million in net proceeds from the sale of 1,200 sales of Series F Preferred Stock.

We made no sales under our Series E Preferred ATM Program subsequent to December 31, 2020 and through February 16, 2021.

Acquisition Activity

On January 8, 2020, we purchased a 64,800 square foot industrial property in Indianapolis, Indiana for $5.3 million .

This property is fully leased to three tenants with a weighted average lease term of 7.2 years .

On January 27, 2020, we purchased a 320,838 square foot, three building industrial portfolio with a location in Houston, Texas;

Charlotte, North Carolina;

Charles, Missouri for $34.7 million .

This industrial portfolio is fully leased to one tenant on a 20 year lease term.

Leasing Activity

On January 9, 2020, a tenant in one of our Springfield, Missouri properties renewed their lease for an additional five years , with a new maturity date of May 31, 2026.

On January 23, 2020, the tenant in our Englewood, Colorado property renewed their lease for an additional five years , with a new maturity date of December 31, 2026

On January 22, 2021, we purchased a 180,152 square foot industrial property in Findlay, Ohio for $ 11.1 million.

This property is fully leased to one tenant on a 14.2 year lease.

Financing Activity

On January 27, 2020, we issued an aggregate of $18.3 million of fixed rate debt in connection with the three property industrial portfolio acquired on this same date.

The maturity date is February 1, 2030 and the interest rate is 3.625%

Universal Shelf Registration Statement

On January 29, 2020, we filed a universal registration statement on Form S-3, File No.

333-236143 (the “2020 Universal Shelf”).

Upon its effectiveness, the 2020 Universal Shelf will allow us to issue up to $800.0 million of securities.

On January 22, 2021, we issued $ 5.5 million of floating rate debt swapped to a fixed rate of 3.24 % in connection with the industrial property acquisition on the same date, with a maturity date of February 15, 2031.

On February 11, 2021, we added a new $ 65.0 million term loan component to our Credit Facility, inclusive of a $ 15.0 million delayed funding component.

The New Term Loan has a maturity date of 60 months from the closing of the amended Credit Facility and a London Inter-bank Offered Rate floor of 25 basis points.

GLADSTONE COMMERCIAL CORPORATION

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DECEMBER 31, 2020 (Dollars in Thousands)

Location of Property

Initial Cost Total Cost

Location of Property Encumbrances Land Buildings &

Improvements Improvement

Costs Capitalized

Subsequent to

Depreciation (2)

Acquisition Land Buildings &

Improvements Total

(1) Accumulated

Depreciation (2) Net Real

Estate (3) Year

Construction/

Improvements Date

Raleigh, North Carolina (4)

Office Building $ — $ 960 $ 4,481 $ 1,039 $ 960 $ 5,520 $ 6,480 $ 2,409 $ 4,071 1997 12/23/2003

Canton, Ohio (4)

Office Building — 186 3,083 500 187 3,582 3,769 1,658 2,111 1994 1/30/2004

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Office Building — 1,973 6,771 3,107 1,974 9,877 11,851 3,653 8,198 1968 / 1999

Charlotte, North Carolina

Office Building

Canton, North Carolina

4 unchanged sentences

Industrial Building — 820 2,107 69 820 2,176 2,996 954 2,042 1986 8/5/2004

Austin, Texas (3)

Office Building

Pocono, Pennsylvania (4)

10 unchanged sentences

Industrial Building — 783 10,790 1,889 783 12,679 13,462 4,919 8,543 1984 / 2001 / 2007

1984/2001/2007

Duncan, South Carolina (4)

Industrial Building — 195 2,682 470 195 3,152 3,347 1,223 2,124 1984 / 2001 / 2007

1984/2001/2007

Clintonville, Wisconsin (4)

Industrial Building — 55 4,717 3,250 55 7,967 8,022 2,665 5,357 1992 / 2013

Maple Heights, Ohio

Industrial Building

Richmond, Virginia (4)

2 unchanged sentences

Office Building — 687 2,036 ( 1,057 ) 326 1,340 1,666 754 912 1996 2/21/2006

Champaign, Illinois (3)

Office Building

Champaign, Illinois (3)

Office Building

Champaign, Illinois (3)

Office Building

Burnsville, Minnesota

6 unchanged sentences

Raleigh, North Carolina (4)

Location of Property

Costs Capitalized

Subsequent to

Depreciation (2)

Construction/

Industrial Building — 1,606 5,513 4,148 1,606 9,661 11,267 3,576 7,691 1994 2/16/2007

18 unchanged sentences

Lawrenceville, Georgia (4)

Initial Cost Total Cost

Location of Property Encumbrances Land Buildings &

Improvements Improvement

Costs Capitalized

Subsequent to

Acquisition Land Buildings &

Improvements Total

(1) Accumulated

Depreciation (2) Net Real

Estate (3) Year

Construction/

Improvements Date

Medical Office Building — 678 2,807 — 678 2,807 3,485 988 2,497 2005 12/13/2007

38 unchanged sentences

New Albany, Ohio

Location of Property

Costs Capitalized

Subsequent to

Depreciation (2)

Construction/

Office Building 6,908 1,658 8,746 — 1,658 8,746 10,404 2,760 7,644 2007 6/5/2012

24 unchanged sentences

Colleyville, Texas

Initial Cost Total Cost

Location of Property Encumbrances Land Buildings &

Improvements Improvement

Costs Capitalized

Subsequent to

Acquisition Land Buildings &

Improvements Total

(1) Accumulated

Depreciation (2) Net Real

Estate (3) Year

Construction/

Improvements Date

Retail Building 2,518 1,277 2,424 — 1,277 2,424 3,701 591 3,110 2000 3/27/2014

21 unchanged sentences

Office Building — 650 2,034 60 650 2,094 2,744 567 2,177 1982 / 2010

Office Building

Office Building 3,800 1,338 5,058 1,086 1,338 6,144 7,482 1,374 6,108 1980 /Various

Office Building 11,930 3,248 13,129 74 3,248 13,203 16,451 2,998 13,453 2008 5/29/2015

4 unchanged sentences

Taylorsville, Utah

Location of Property

Costs Capitalized

Subsequent to

Depreciation (2)

Construction/

Office Building 8,867 3,008 10,659 435 3,008 11,094 14,102 2,703 11,399 1997 5/26/2016

34 unchanged sentences

Delaware, Ohio (4)

Initial Cost Total Cost

Location of Property Encumbrances Land Buildings &

Improvements Improvement

Costs Capitalized

Subsequent to

Acquisition Land Buildings &

Improvements Total

(1) Accumulated

Depreciation (2) Net Real

Estate (3) Year

Construction/

Improvements Date

Industrial Building — 316 2,355 — 316 2,355 2,671 165 2,506 2005 4/30/2019

22 unchanged sentences

Tucson, Arizona

Location of Property

Costs Capitalized

Subsequent to

Depreciation (2)

Construction/

Industrial Building 3,414 819 4,636 ( 2 ) 817 4,636 5,453 176 5,277 1987 / 1995 / 2005

1987/1995/2005

Albuquerque, New Mexico

Industrial Building 3,453 818 5,219 ( 4 ) 815 5,218 6,033 195 5,838 2000 / 2018

Indianapolis, Indiana (4)

Industrial Building — 489 3,956 206 493 4,158 4,651 137 4,514 1987 1/8/2020

Houston, Texas

Industrial Building 9,772 1,714 14,170 3 1,717 14,170 15,887 385 15,502 2000 / 2018

Charlotte, North Carolina

Industrial Building 5,279 1,458 6,778 4 1,461 6,779 8,240 234 8,006 1995 / 1999 / 2006

Charles, Missouri

Industrial Building 2,920 924 3,749 4 928 3,749 4,677 105 4,572 2012 1/27/2020

Crandall, Georgia

Industrial Building 17,224 2,711 26,632 115 2,711 26,747 29,458 641 28,817 2020 3/9/2020

Terre Haute, Indiana (4)

Industrial Building — 502 8,076 — 502 8,076 8,578 81 8,497 2010 9/1/2020

Montgomery, Alabama (4)

Industrial Building — 599 11,290 3 602 11,290 11,892 96 11,796 1990 / 1997

Huntsville, Alabama

Industrial Building 10,348 1,445 15,040 — 1,445 15,040 16,485 21 16,464 2001 12/18/2020

Pittsburgh, Pennsylvania

Industrial Building 6,375 1,422 10,094 — 1,422 10,094 11,516 13 11,503 1994 12/21/2020

$ 459,838 $ 142,993 $ 925,501 $ 71,711 $ 144,269 $ 995,936 $ 1,140,205 $ 231,876 $ 908,329

(1) The aggregate cost for land and building improvements for federal income tax purposes is the same as the total gross cost of land, building improvements and acquisition costs capitalized for asset acquisitions under ASC 360, which is $ 1,140.2 million.

1 unchanged sentence

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.

These properties are in our unencumbered pool of assets on our Credit Facility.

(3) The net real estate figure includes real estate held for sale as of December 31, 2020 of $ 8.1 million.

(4) These properties are in our unencumbered pool of assets on our Credit Facility.

(5) These properties were impaired during the year ended December 31, 2020.

The following table reconciles the change in the balance of real estate during the years ended December 31, 2020, 2019 and 2018, respectively (in thousands):

2020 2019 2018

Balance at beginning of period $ 1,064,389 $ 949,822 $ 906,850

Acquisitions during period 111,049 108,972 53,432

Improvements 11,696 10,580 4,824

Dispositions during period ( 43,383 ) ( 3,172 ) ( 15,284 )

5 unchanged sentences

The following table reconciles the change in the balance of accumulated depreciation during the years ended December 31, 2020, 2019 and 2018, respectively (in thousands):

2020 2019 2018

Balance at beginning of period $ 210,944 $ 178,475 $ 153,387

4 unchanged sentences

(2) The accumulated depreciation figure includes $ 3.4 million of real estate held for sale as of December 31, 2019.

The accumulated depreciation figure includes $4.0 million real estate held for sale as of December 31, 2017 .

(3) The accumulated depreciation figure includes $ 0.2 million of real estate held for sale as of December 31, 2018.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data