Gladstone Commercial Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

9 Months Ended

Sep. 30, 2011

Real Estate and Intangible Assets [Abstract]

4.	Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of the Company’s investments in real estate, including capitalized leases, as of September 30, 2011 and December 31, 2010:


	September 30, 2011			December 31, 2010
Real estate:
Land	$	58,146	⁽¹⁾	$	55,158	⁽¹⁾
Building and improvements		349,920			335,576
Tenant improvements		12,175			10,283
Accumulated depreciation		(51,119	)		(43,659	)

Real estate, net	$	369,122		$	357,358

⁽¹⁾	Includes land held under a capital lease carried at $1,100.

During the nine months ended September 30, 2011, the Company acquired two properties, which are summarized below:

On April 4, 2011, the Company acquired a 60,000 square foot office building located in Hickory, North Carolina for $10,650, excluding related acquisition expenses of $59. The Company funded this acquisition using borrowings from its line of credit. At closing, the Company was assigned the triple net lease with Fiserv Solutions, Inc., which has a remaining term of approximately nine years. The tenant has two options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1,100.

On June 20, 2011, the Company acquired a 78,421 square foot office building located in Springfield, Missouri for $15,850, excluding related acquisition expenses of $55. The Company funded this acquisition through a combination of borrowings from its line of credit and the assumption of $11,584 of mortgage debt on the property. At closing, the Company was assigned the existing triple net lease with T-Mobile USA, Inc., which has a remaining term of approximately ten years. The tenant has three options to extend the lease for additional periods of five years each. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1,422.

In accordance with ASC 805 the Company allocated the purchase price of the properties acquired during the nine months ended September 30, 2011 as follows:


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Carrying Value of Assumed Debt		Premium on Assumed Debt			Total Purchase Price

Hickory, North Carolina	$	1,163	$	5,567	$	1,038	$	736	$	559	$	616	$	971	$	—	$	—		$	10,650
Springfield, Missouri ⁽¹⁾		1,700		11,626		413		1,174		572		702		—		11,583		(337	)		15,850


	$	2,863	$	17,193	$	1,451	$	1,910	$	1,131	$	1,318	$	971	$	11,583	$	(337	)	$	26,500

⁽¹⁾	The Company paid $4.3 million in cash for this property, the remaining $11.6 million was funded with the assumed mortgaged debt.

The weighted average amortization period for the intangible assets acquired during the nine months ended September 30, 2011, were as follows:


Intangible assets	Years
In-place leases		9.4
Leasing costs		9.4
Customer relationships		17.5
Above market leases		8.8

All intangible assets		11.9

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2011 and each of the five succeeding fiscal years and thereafter is as follows:


Year	Tenant Lease Payments
Three months ending December 31, 2011	$	10,550
2012		42,316
2013		37,936
2014		33,884
2015		29,865
2016		25,423
Thereafter		164,174

In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, the Company would be required to pay property taxes on the respective properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the tenant fails to pay them. The total annualized property taxes for all properties held by the Company at September 30, 2011 was $6,900, and the total annual ground lease payments on the property located in Tulsa, Oklahoma was $153.

On January 31, 2011, the Company extended the lease with its tenant occupying its properties located in Decatur, Georgia, Lawrenceville, Georgia, Snellville, Georgia, Covington, Georgia, and Conyers, Georgia. The lease covering all of these properties was extended for an additional five year period, thereby extending the lease until December 2031. The lease was originally set to expire in December 2026. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1,616. Furthermore, the lease grants the tenant four options to extend the lease for a period of five years each. In connection with the extension of the lease and the modification of certain terms under the lease, the tenant paid $750 to the Company.

On May 15, 2011, the Company re-leased its previously vacant building located in South Hadley, Massachusetts for a period of six months, and the tenant has a three-month extension option. The tenant exercised its three-month extension option in September 2011 and the lease now expires in February 2012.

On June 23, 2011, the Company extended the lease with its tenant occupying its properties located in Angola, Indiana and Rock Falls, Illinois. The lease covering these properties was extended for an additional three year period, thereby extending the lease until August 2023. The lease was originally set to expire in August 2020. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $345. Furthermore, the lease grants the tenant three options to extend the lease for a period of five years each.

Intangible Assets

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


	September 30, 2011					December 31, 2010
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization

In-place leases	$	21,879	$	(9,750	)	$	17,011	$	(8,362	)
Leasing costs		12,160		(5,405	)		10,764		(4,685	)
Customer relationships		19,429		(6,522	)		17,636		(5,617	)

	$	53,468	$	(21,677	)	$	45,411	$	(18,664	)

The estimated aggregate amortization expense for the remainder of 2011 and each of the five succeeding fiscal years and thereafter is as follows:


Year	Estimated Amortization Expense
Three months ending December 31, 2011	$	1,810
2012		6,054
2013		3,360
2014		3,090
2015		2,700
2016		2,131
Thereafter		12,646

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

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