As filed with the Securities and Exchange Commission on December 5, 2007September 9, 2010
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.DC 20549
Form S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
   
Maryland
02-0681276
(State or other jurisdiction of Organization)
incorporation or organization)		 02-0681276
(I.R.S.IRS Employer
Identification No.)Number)
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5800
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
David J. Gladstone
Chairman and Chief Executive Officer
Gladstone Commercial Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5800
(Name, address, including zip code, and telephone number,
including area code, of agent for service):
Copies to:
Thomas R. Salley, Esq.
Darren K. DeStefano, Esq.
Christina L. Novak, Esq.
Cooley Godward Kronish LLP
One Freedom Square
Reston Town Center
11951 Freedom Drive
Reston, Virginia 20190-5656
(703) 456-8000
(703) 456-8100 (facsimile)
 
Michael B. LiCalsi, Esq.
Gladstone Management Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
Telephone: (703) 287-5800
Facsimile: (703) 287-5899		John A. Good, Esq.
Helen W. Brown, Esq.
Bass, Berry & Sims PLC
100 Peabody Place, Suite 900
Memphis, Tennessee 38103
Telephone: (901) 543-5900
Facsimile: (888) 543-4644
Approximate Datedate of Commencementcommencement of Proposed Saleproposed sale to the Public:public:From time to time after the Registration Statementregistration statement becomes effective.
 
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.  o
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box:  þ
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, of 1933, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following boxbox.  o
 
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following boxbox.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
Large accelerated filer oAccelerated filer þNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
         
 
    Proposed Maximum  Amount of 
 Title of Each Class of  Aggregate Offering  Registration 
 Securities to be Registered  Price(1)(2)  Fee 
 Shares of Common Stock, par value $0.001 per share  (3)  — 
 Shares of Preferred Stock, par value $0.001 per share  (3)  — 
 Total  $300,000,000  $9,210 
 
                     
      Proposed Maximum
  Proposed Maximum
  Amount of
Title of Each Class of
  Amount
  Offering
  Aggregate
  Registration
Securities to be Registered  to be Registered(1)  Price per Share(1)(2)  Offering Price  Fee
Common Stock, $0.001 par value per share(3)                  — 
Senior Common Stock, $0.001 par value per share(3)                  — 
Preferred Stock, $0.001 par value per share(3)                  — 
Debt Securities(3)                  — 
Depositary Shares(4)          ��       — 
Subscription Rights(3)                    
Total            $300,000,000   $(5)
                     
(1)PursuantOmitted pursuant to General Instruction III.D.II.D ofForm S-3 under the Securities Act of 1933, as amended.
(2)The registrant will determine the proposed maximum offering price per share from time to time in connection with, and at the time of, the issuance of the securities registered hereunder. Securities registered hereby may be offered for U.S. dollars or in foreign currencies or currency units and may be sold separately or together in units with other securities registered hereby.
(3)Also includes such indeterminate principal amount, liquidation amount or number of securities as may be issued upon conversion or exchange of any securities that provide for conversion or exchange into other securities. Separate consideration may or may not be received by the registrant for securities that are issuable upon exercise, conversion or exchange of other securities. The aggregate maximum offering price of all securities offered and sold by the registrant pursuant to this registration statement shall not have a maximum aggregate offering price that exceeds $300,000,000 in U.S. dollars or the equivalent at the time of offering in any other currency.
(4)Each depositary share will be issued under a deposit agreement, will represent an interest in a fractional share or multiple shares of preferred shares and will be evidenced by a depositary receipt.
(5)In accordance with Rule 415(a)(6) under the Securities Act of 1933, as amended, (the “Securities Act”), the fee table does not specifyregistrant may potentially include unsold securities previously registered on its Registration Statement on Form S-3, File No. 333-147856, which was declared effective on December 19, 2007 by each classthe Securities and Exchange Commission. The registrant will identify in a pre-effective amendment to this registration statement the exact amount of unsold securities to be carried forward pursuant to Rule 415(a)(6) and the amount of any new securities to be registered information as to the amount to be registered and proposed maximum offering price per unit.
(2)Estimated solely for the purpose of computing theon this registration fee pursuant to Rule 457(o) under the Securities Act.
(3)There are being registered hereunder such indeterminate number of shares of common stock and preferred stock as shall have an aggregate offering price not to exceed $300,000,000. Any securities offered hereunder may be sold separately or as units with the other securities registered hereunder.statement.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to sell these securities and we are not soliciting any offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 5, 2007SEPTEMBER 9, 2010
PROSPECTUS
(LOGO)
GLADSTONE COMMERCIAL CORPORATION
$300,000,000
Shares of
(GLADSTONE COMMERCIAL LOGO)
Common Stock
Shares of Senior Common Stock
Preferred Stock
Debt Securities
Depositary Shares
Subscription Rights
 
We may offer, from time to time, one or more series or classes of common stock, senior common stock, preferred stock, debt securities, depositary shares and subscription rights. We refer to our common stock, senior common stock, preferred stock, debt securities, depositary shares and subscription rights collectively as the “securities.” We may offer these securities with an aggregate initial public offering price of up to $300,000,000, or its equivalent in a foreign currency based upon the exchange rate at the time of sale, in amounts, at initial prices and on terms determined at the time of the offering.
We may offer and sell from timethese securities to time securities inor through one or more offerings upunderwriters, dealers and agents, or directly to an aggregate dollar amountpurchasers, on a continuous or delayed basis. If any underwriters, dealers or agents are involved in the sale of $300,000,000 of securities. This prospectus provides you with a general descriptionany of the securities, we may offer.their names, and any applicable purchase price, fee, commission or discount arrangement with, between or among them, will be set forth, or will be calculable from the information set forth, in an accompanying prospectus supplement. For more detailed information, see “Plan of Distribution” beginning on page 47 of this prospectus.
 We
No securities may offerbe sold without delivery of an accompanying prospectus supplement describing the method and sellterms of the following securities:
•shares of common stock; and
•shares of preferred stock, which may be convertible into our shares of common stock.
          Each time securities are sold usingoffering of those securities. Accordingly, we will deliver this prospectus we will provide atogether with an accompanying prospectus supplement to this prospectus containing specific information about the offering. The supplement may also add, update or change information contained in this prospectus. You should read this prospectus and any supplement before you invest.
          The securities will be offered directly to investors or through underwriters, dealers or agents. The supplements to this prospectus will providesetting forth the specific terms of the plan of distribution.
          To ensuresecurities that we maintainare offering. The accompanying prospectus supplement also will contain information, where applicable, about federal income tax considerations relating to, and any listing on a securities exchange of, the securities covered by the prospectus supplement. In addition, the specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the securities offered by this prospectus, in each case as may be appropriate to preserve our qualificationstatus as a real estate investment trust under the applicable provisions of the Internal Revenue Code of 1986, as amended, ownership of our equity securities by any person is subject to certain limitations. See “Certain Provisions of Maryland Law and of our Articles of Incorporation and Bylaws — Restrictions on Ownership of Shares.”for federal income tax purposes, among other purposes.
 
Our common stock is traded on the NasdaqNASDAQ Global Select Market under the symbol “GOOD.” On December
Investing in our securities involves substantial risks. See “Risk Factors” on page 3 2007,of this prospectus, as well as the last reported sale price of“Risk Factors” incorporated by reference herein from our common stockmost recent Annual Report onForm 10-K, our Quarterly Reports onForm 10-Q and other reports and information that we file with the Nasdaq Global Market was $16.81. The applicable prospectus supplement will contain information, where applicable, as to any other listing on the Nasdaq Global Market or any other securities exchange of the securities covered by such prospectus.Securities and Exchange Commission.
 We maintain our executive offices at 1521 Westbranch Drive, Suite 200, McLean, Virginia 22102. Our telephone number is (703) 287-5800.
 Please see page 2 for risk factors relating to an investment in Gladstone Commercial Corporation which you should consider.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is          , 2007.2010

 

 You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information different from that contained in or incorporated by reference in this prospectus. We are offering to sell, and seeking offers to buy, the securities described in this prospectus only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares. You should not assume that the information appearing in this prospectus or any applicable prospectus supplement or the documents incorporated by reference herein or therein is accurate as of any date other than their respective dates. Our business, financial condition, results of operation and prospects may have changed since those dates.
TABLE OF CONTENTS
     
Prospectus Summary
ABOUT THIS PROSPECTUS
  1 
Recent Developments
FORWARD-LOOKING STATEMENTS
  1 
About This Prospectus
THE COMPANY
  23 
Risk Factors
RISK FACTORS
  23 
Forward-Looking Statements
USE OF PROCEEDS
  103 
Incorporation by Reference
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
4
DESCRIPTION OF CAPITAL STOCK
4
DESCRIPTION OF DEBT SECURITIES
  11 
Where You Can Find More Information12
Use of Proceeds13
Ratio of Earnings to Fixed Charges and Preferred Dividends13
Description of Our Capital Stock14
Certain Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws
DESCRIPTION OF DEPOSITARY SHARES
  17 
Certain United States Federal Tax Considerations
DESCRIPTION OF SUBSCRIPTION RIGHTS
19
BOOK ENTRY PROCEDURES AND SETTLEMENT
  20 
Plan of Distribution
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
  3520 
Experts
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
  3624 
Legal Matters
PLAN OF DISTRIBUTION
  3647
LEGAL MATTERS
49
EXPERTS
49
WHERE YOU CAN FIND MORE INFORMATION
50
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
50 
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained or incorporated by reference in this prospectus, any accompanying prospectus supplement or any free writing prospectus that we may provide to you in connection with an offering of securities. You must not rely upon any unauthorized information or representations not contained or incorporated by reference in this prospectus, any accompanying prospectus supplement or any free writing prospectus. This prospectus, any accompanying prospectus supplement or any free writing prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the registered securities to which they relate, nor does this prospectus, any accompanying prospectus supplement or any free writing prospectus constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The information contained in this prospectus, any accompanying prospectus supplement, any free writing prospectus or the documents incorporated by reference herein or therein are accurate only as of the date of such document. Our business, financial condition, liquidity, results of operations, funds from operations and prospects may have changed since those dates.

ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement onForm S-3 that we filed with the Securities and Exchange Commission, or SEC, using a “shelf” registration process for the offering and sale of securities pursuant to Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. Under the shelf registration process, we may, over time, sell any combination of the securities described in this prospectus in one or more offerings. This prospectus provides you with a general description of the securities that we may offer. As allowed by SEC rules, this prospectus does not contain all of the information that you can find in the registration statement or the exhibits thereto. For further information, we refer you to the registration statement, including any amendments thereto, including its exhibits.
We will not use this prospectus to offer and sell securities unless it is accompanied by a prospectus supplement that more fully describes the securities being offered and the terms of such offering. Any accompanying prospectus supplement or free writing prospectus may also update, amend or supersede other information contained in this prospectus. Before purchasing any securities, you should carefully read this prospectus, any accompanying prospectus supplement and any free writing prospectus together with the information incorporated or deemed to be incorporated by reference herein as described under the heading “Where You Can Find More Information” below.
Unless the context otherwise requires or indicates, all references to “we,” “our,” “us” and the “Company” in this prospectus mean Gladstone Commercial Corporation, a Maryland corporation, and its consolidated subsidiaries. All references to the “Operating Partnership” in this prospectus mean Gladstone Commercial Limited Partnership, a subsidiary of the Company and a Delaware limited partnership. All references to “Adviser” in this prospectus mean, Gladstone Management Corporation, a Delaware corporation.
FORWARD-LOOKING STATEMENTS
This prospectus and any accompanying prospectus supplement, including the documents incorporated by reference into this prospectus and any accompanying prospectus supplement, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and funds from operations, our strategic plans and objectives, cost management, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated capital expenditures (and access to capital) required to complete projects, amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predictand/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Statements regarding the following subjects, among others, are forward-looking by their nature:
• our business and financing strategy;
• our ability to implement our business plan;
• pending transactions;
• our projected operating results;
• our ability to obtain future financing arrangements;
• estimates relating to our future distributions;
• our understanding of our competition and our ability to compete effectively;


1

 

PROSPECTUS SUMMARY
• market and industry trends;
• interest and insurance rates;
• estimates of our future operating expenses, including payments to our Adviser under the terms of our advisory agreement;
• projected capital expenditures; and
• use of the proceeds of our credit facilities, mortgage notes payable and other future capital resources, if any.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
 As used
• the loss of any of our key employees, such as Mr. David Gladstone, our Chairman and Chief Executive Officer, Mr. Terry Lee Brubaker, our Vice Chairman and Chief Operating Officer, or Mr. George Stelljes III, our President and Chief Investment Officer;
• general volatility of the capital markets and the market price of our common stock;
• risks associated with negotiation and consummation of pending and future transactions;
• changes in our business strategy;
• the adequacy of our cash reserves and working capital;
• our failure to successfully integrate and operate acquired properties and operations;
• defaults upon or non-renewal of leases by tenants;
• decreased rental rates or increased vacancy rates;
• the degree and nature of our competition;
• availability, terms and deployment of capital, including the ability to maintain and borrow under our existing credit facility, arrange for long-term mortgages on our properties, secure one or more additional long-term credit facilities and raise equity capital;
• our ability to identify, hire and retain highly-qualified personnel in the future;
• changes in our industry or the general economy;
• changes in real estate and zoning laws and increases in real property tax rates;
• changes in governmental regulations, tax rates and similar matters; and
• environmental uncertainties and risks related to natural disasters.
This list of risks and uncertainties, however, is only a summary of some of the most important factors to us and is not intended to be exhaustive. You should carefully review the risks and information contained, or incorporated by reference, in this prospectus referencesor in any accompanying prospectus supplement, including, without limitation, the “Risk Factors” incorporated by reference herein from our most recent Annual Report onForm 10-K, our Quarterly Reports onForm 10-Q and other reports and information that we file with the SEC. New factors may also emerge from time to “we,” “our,” “us,” the “Company”time that could materially and the “REIT” are to Gladstone Commercial Corporation and, except as the context otherwise requires, its wholly owned subsidiaries Gladstone Commercial Limited Partnership, Gladstone Commercial Partners, LLC, Gladstone Lending LLC and Gladstone Commercial Advisers, Inc. References to the “Operating Partnership” are to Gladstone Commercial Limited Partnership, a Delaware limited partnership, which we control through our ownership of GCLP Business Trust II, a Massachusetts business trust, which is the general partner of our Operating Partnership, and of GCLP Business Trust I, a Massachusetts business trust, which currently holds all of the limited partnership units of our Operating Partnership. When we use the term “Adviser” we are referring to our Adviser, Gladstone Management Corporation. The Operating Partnership is also the sole member of Gladstone Lending, LLC, which we refer to herein as “Gladstone Lending.” Gladstone Lending is a Delaware limited liability company created to hold all real estate mortgage loans issued by the Operating Partnership.adversely affect us.


2

THE COMPANY
 
We were incorporated under the Maryland General Corporation Law, of the State of Marylandor MGCL, on February 14, 2003 primarily for the purpose of investing in and owning net leased industrial and commercial real estate property and selectively making long-term industrial and commercial mortgage loans to creditworthy entities. Subject to certain restrictions and limitations, the business of the Company is managed by the Adviser. Most of the portfolio of real estate that we currently own is leased to a wide cross section of tenants ranging from small businesses to large public companies, many of which do not have publicly ratedpublicly-rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate that have triple net leases with terms of 10 to 15 years and built in rental increases. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We are actively communicatingcommunicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or mortgage financing in an effort to build our portfolio. At September 30, 2007, we owned 47 properties totaling approximately 5.5 million square feet, and had one mortgage loan outstanding. All of our properties are fully leased and all tenants and borrowers are current and paying in accordance with their leases and loan, respectively.
 
We conduct substantially all of our activities, including the ownership of all of our properties, through our Operating Partnership, which was formed on May 28, 2003.Partnership. We control our Operating Partnership through our ownership of GCLP Business Trust II, a subsidiary of the Company and a Massachusetts business trust which isholds the sole general partner ofpartnership interest in our Operating Partnership, and of GCLP Business Trust I, a subsidiary of the Company and a Massachusetts business trust which currently holds all of the limited partnership unitsinterests of our Operating Partnership. We expect the Operating Partnership to issue limited partnership units from time to time in exchange for industrial and commercial real property. By structuring our acquisitions in this manner, the sellers of the real estate will generally be able to defer the realization of gains until they redeem the limited partnership units. Limited partners who hold limited partnership units in the Operating Partnership will be entitled to redeem these units for cash or, at our election, shares of our common stock on a one-for-one basis at any time. Whenever we issue common stock for cash, we will be obligated to contribute any net proceeds we receive from the sale of the stock to the Operating Partnership and the Operating Partnership will, in turn, be obligated to issue an equivalent number of limited partnership units to us. The Operating Partnership will distribute the income it generates from its operations to Gladstone Commercial Partners, LLC and its limited partners, including us, on a pro rata basis. We will, in turn, distribute the amounts we receive from the Operating Partnership to our stockholders in the form of monthly cash distributions. We have historically operated, and intend to continue to operate, so as to qualify as a REIT for federal tax purposes, thereby generally avoiding federal and state income taxes on the distributions we make to our stockholders.
 
The Operating Partnership is also the sole member of Gladstone Lending. GladstoneCommercial Lending, isLLC, a subsidiary of the Company and a Delaware limited liability company thatcompany. Gladstone Commercial Lending, LLC was formed on January 27, 2004 to holdconduct all ofoperations related to our real estate mortgage loans.
 
Our Adviser is aan affiliated registered investment adviser and an affiliateunder the Investment Advisers Act of ours.1940. Our Adviser is responsible for managing our business on a day-to-daydaily basis and for identifying and making acquisitions and dispositions that it believes meetsatisfy our investment criteria.
RECENT DEVELOPMENTS
          On October 15, 2007, through wholly-owned subsidiaries, we borrowed $16.0 million pursuant to a long-term note payable from Countrywide Commercial Real Estate Finance, which is collateralized by security interests in our Mt. Pocono, Pennsylvania property, our Raleigh, North Carolina propertyOur executive offices are located at 1521 Westbranch Drive, Suite 200, McLean, Virginia 22102, and our Mason, Ohio property intelephone number is(703) 287-5800. Our website address ishttp://www.GladstoneCommercial.com. However, the amounts of approximately $5.4 million, $5.6 millioninformation located on, or accessible from, our website is not, and $5.0 million, respectively. The note accrues interest atshall not be deemed to be, a rate of 6.63% per year and we may not repay this note prior to the last three months of the term, or we would be subject to a substantial prepayment penalty. The note has a maturity date of November 8, 2017. We used the proceeds from the note to pay down the outstanding balance on the line of credit.
          On November 13, 2007, we, through our Operating Partnership, exercised an option under our existing credit agreement with KeyBank National Association to increase the current maximum availability under the credit agreement from $75 million to $95 million. The credit agreement was originally established on December 29, 2006.

1

ABOUT THIS PROSPECTUS
          This prospectus is part of a registration statement that we filed with the SEC using a “shelf” registration process or continuous offering process. Under this shelf registration process, we may, from time to time, sell the securities described in this prospectus, in one or more offerings. This prospectus provides you with a general description of the securities that may be offered by us. We may also file, from time to time, a prospectus supplement or an amendment to the registration statement of which this prospectus forms a part containing specific information about us and the terms of the securities being offered. That prospectus supplement or amendment may include additional risk factors or other special considerations applicable to those securities. Any prospectus supplement or amendment may also add, update, or change information in this prospectus. If there is any supplement or amendment, you should rely on the information in that prospectus supplement or amendment.
          This prospectus and any accompanying prospectus supplement do not contain all ofor any free writing prospectus or incorporated into any other filings that we make with the information includedSEC.
RISK FACTORS
An investment in the registration statement. For further information, we refer youany securities offered pursuant to the registration statement and any amendments to such registration statement, including its exhibits. Statements contained in this prospectus and any accompanying prospectus supplement about the provisions or contents of any agreement or other document are not necessarily complete. If the SEC’s rules and regulations require that an agreement or document be filed as an exhibit to the registration statement, please see that agreement or document for a complete description of these matters.
          You should read both this prospectus and any prospectus supplement together with additional information described below under the heading “Where You Can Find More Information.” Information incorporated by reference with the SEC after the date of this prospectus, or information included in any prospectus supplement or an amendment to the registration statement of which this prospectus forms a part, may add, update, or change information in this prospectus or any prospectus supplement. If information in these subsequent filings, prospectus supplements or amendments is inconsistent with this prospectus or any prospectus supplement, the information incorporated by reference or included in the subsequent prospectus supplement or amendment will supersede the information in this prospectus or any earlier prospectus supplement. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of each document.
RISK FACTORS
involves substantial risks. You should carefully consider the risk factors set forth below as well asincorporated by reference herein from our most recent Annual Report onForm 10-K, our subsequent Quarterly Reports onForm 10-Q and the other information included or incorporated by reference in this prospectus. An investment in the securities offered by this prospectus involves a significant degree of risk, including but not limited to the risks described below. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such case, you could lose a portion of your original investment.
Real estate industry risks
We are subject to certain risks associated with real estate ownership and lending which could reduce the value of our investments.
          Our investments include net leased industrial and commercial property and mortgage loans secured by industrial and commercial real estate. Our performance, and the value of our investments, is subject to risks incident to the ownership and operation of these types of properties, including:
•changes in the general economic climate;
•changes in local conditions such as an oversupply of space or reduction in demand for real estate;
•changes in interest rates and the availability of financing;
•competition from other available space; and
•changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.
Competition for the acquisition of real estate may impede our ability to make acquisitions or increase the cost of these acquisitions.
          We compete for the acquisition of properties with many other entities engaged in real estate investment activities, including financial institutions, institutional pension funds, other REITs, other public and private real estate companies and private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for real estate. Our competitors may have greater resources than we do, and may be willing to pay more for certain assets or may have a more compatible operating philosophy with our acquisition targets. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties.

2

Risks related to our tenants, borrowers and properties
Highly leveraged tenants or borrowers may be unable to pay rent or make mortgage payments, which could adversely affect our cash available to make distributions to our stockholders.
          Some of our tenants or borrowers may have been recently restructured using leverage or been acquired in a leveraged transaction. Tenants or borrowers that are subject to significant debt obligations may be unable to make their rent or mortgage payments if there are adverse changes to their businesses or economic conditions. Tenants that have experienced leveraged restructurings or acquisitions will generally have substantially greater debt and substantially lower net worth than they had prior to the leveraged transaction. In addition, the payment of rent and debt service may reduce the working capital available to leveraged entities and prevent them from devoting the resources necessary to remain competitive in their industries.
          In situations where management of the tenant or borrower will change after a transaction, it may be difficult for our Adviser to determine with certainty the likelihood of the tenant’s or borrower’s business success and of its ability to pay rent or make mortgage payments throughout the lease or loan term. These companies generally are more vulnerable to adverse economic and business conditions, and increases in interest rates.
          Leveraged tenants and borrowers are more susceptible to bankruptcy than unleveraged tenants. Bankruptcy of a tenant or borrower could cause:
•the loss of lease or mortgage payments to us;
•an increase in the costs we incur to carry the property occupied by such tenant;
•a reduction in the value of our securities; or
•a decrease in distributions to our stockholders.
          Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing or terminating any unexpired lease. If a bankrupt tenant terminates a lease with us, any claim we might have for breach of the lease (excluding a claim against collateral securing the claim) will be treated as a general unsecured claim. Our claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year’s lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years’ lease payments). In addition, due to the long-term nature of our leases and terms providing for the repurchase of a property by the tenant, a bankruptcy court could re-characterize a net lease transaction as a secured lending transaction. If that were to occur, we would not be treated as the owner of the property, but might have additional rights as a secured creditor.
Net leases may not result in fair market lease rates over time.
          We expect a large portion of our rental income to come from net leases and, net leases frequently provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Further, net leases are typically for longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and distributions to our stockholders could be lower than it would otherwise be if we did not engage in net leases.
Many of our tenants are small and medium size businesses, which exposes us to additional risks unique to these entities.
          Leasing real property or making mortgage loans to small and medium-sized businesses exposes us to a number of unique risks related to these entities, including the following:
•Small and medium-sized businesses may have limited financial resources and may not be able to make their lease or mortgage payments.A small or medium-sized tenant or borrower is more likely to have difficulty making its lease or mortgage payments when it experiences adverse events, such as the failure to meet its business plan, a downturn in its industry or negative economic conditions.

3

•Small and medium-sized businesses typically have narrower product lines and smaller market shares than large businesses.Because our target tenants and borrowers are smaller businesses, they will tend to be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, our target tenants and borrowers may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger number of qualified managerial and technical personnel.
•There is generally little or no publicly available information about our target tenants and borrowers.Many of our tenants and borrowers are likely to be privately owned businesses, about which there is generally little or no publicly available operating and financial information. As a result, we will rely on our Adviser to perform due diligence investigations of these tenants and borrowers, their operations and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations.
•Small and medium-sized businesses generally have less predictable operating results.We expect that many of our tenants and borrowers may experience significant fluctuations in their operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive positions, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our tenants and borrowers may not meet net income, cash flow and other coverage tests typically imposed by their senior lenders. The failure of a tenant or borrower to satisfy financial or operating covenants imposed by senior lenders could lead to defaults and, potentially, foreclosure on credit facilities, which could additionally trigger cross-defaults in other agreements. If this were to occur, it is possible that the ability of the tenant or borrower to make required payments to us would be jeopardized.
•Small and medium-sized businesses are more likely to be dependent on one or two persons.Typically, the success of a small or medium-sized business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our tenant or borrower and, in turn, on us.
•Small and medium-sized businesses may have limited operating histories.While we intend to target as tenants and borrowers stable companies with proven track records, we may lease properties or lend money to new companies that meet our other investment criteria. Tenants or borrowers with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.
We may not have funding for future tenant improvements.
          When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. We cannot assure you that we will have sufficient sources of funding available to us for such purposes in the future.
Our real estate investments may include special use and single or multi-tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
          We focus our investments on commercial, industrial and retail properties, a number of which include manufacturing facilities, special use storage or warehouse facilities and special use single or multi-tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed.
          These and other limitations may affect our ability to sell or re-lease properties without adversely affecting returns to our stockholders.
The inability of a tenant in a single tenant property to pay rent will reduce our revenues.
          Since most of our properties are occupied by a single tenant, the success of our investments will be materially dependent on the financial stability of these tenants. Lease payment defaults by these tenants could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders. In the event of a default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss.

4

Liability for uninsured losses could adversely affect our financial condition.
          Losses from disaster-type occurrences (such as wars or earthquakes) may be either uninsurable or not insurable on economically viable terms. Should an uninsured loss occur, we could lose our capital investment or anticipated profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our financial condition.
          Our purchase of industrial, commercial and retail properties subjects us to the risk of liabilities under federal, state and local environmental laws. Some of these laws could subject us to:
•responsibility and liability for the cost of removal or remediation of hazardous substances released on our properties, generally without regard to our knowledge of or responsibility for the presence of the contaminants;
•liability for the costs of removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of these substances; and
•potential liability for common law claims by third parties for damages resulting from environmental contaminants.
          We generally include provisions in our leases making tenants responsible for all environmental liabilities and for compliance with environmental regulations, and requiring tenants to reimburse us for damages or costs for which we have been found liable. However, these provisions will not eliminate our statutory liability or preclude third party claims against us. Even if we were to have a legal claim against a tenant to enable us to recover any amounts we are required to pay, there are no assurances that we would be able to collect any money from the tenant. Our costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or lease the property or to borrow using the property as collateral.
          We obtain environmental site assessments, or ESAs, on all of our properties at the time of acquisition. The ESAs are intended to identify potential environmental contamination. The ESAs include a historical review of the property, a review of certain public records, a preliminary investigation of the site and surrounding properties, screening for the presence of hazardous substances and underground storage tanks, and the preparation and issuance of a written report.
          The ESAs that we have obtained have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability. Nevertheless, it is possible that these ESAs do not reveal all environmental liabilities or that there are material environmental liabilities or compliance concerns that we are not aware of. Moreover, we cannot assure you that (i) future laws, ordinances or regulations will not impose material environmental liability, or (ii) the current environmental condition of a property will not be affected by the condition of properties in the vicinity of the property (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Risks related to our Adviser
We are dependent upon our key management personnel, who are employed by our Adviser, for our future success, particularly David Gladstone, Terry Lee Brubaker and George Stelljes III.
          We are dependent on our senior management and other key management members to carry out our business and investment strategies. Our future success depends to a significant extent on the continued service and coordination of our senior management team, particularly David Gladstone, our chairman and chief executive officer, Terry Lee Brubaker, our vice chairman and chief operating officer, and George Stelljes III, our president and chief investment officer, all of whom are subject to an employment agreement with our Advisor. The departure of any of our executive officers or key employees could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.
Our success depends on the performance of our Adviser and if our Adviser makes inadvisable investment or management decisions, our operations could be materially adversely impacted.
          Our ability to achieve our investment objectives and to pay distributions to our stockholders is dependent upon the performance of our Adviser in evaluating potential investments, selecting and negotiating property purchases and dispositions and mortgage loans, selecting tenants and borrowers, setting lease or mortgage loan terms and determining financing arrangements. Accomplishing these objectives on a cost-effective basis is largely a function of our Adviser’s marketing capabilities, management of the investment process, ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. Our stockholders have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments and must rely entirely on the analytical and management abilities of our Adviser and the oversight of our board of directors. If our Adviser or our board of directors makes inadvisable investment or management decisions, our operations could be materially adversely impacted. As we grow, our Adviser may be required to hire, train, supervise and manage new employees. Our Adviser’s failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.

5

We may have conflicts of interest with our Adviser and other affiliates.
          Our Adviser manages our business and locates, evaluates, recommends and negotiates the acquisition of our real estate investments. At the same time, our advisory agreement permits our Adviser to conduct other commercial activities and provide management and advisory services to other entities, including Gladstone Capital Corporation, Gladstone Investment Corporation and Gladstone Land Corporation, an entity affiliated with our chairman David Gladstone. Moreover, all of our officers and directors are also officers and directors of Gladstone Capital Corporation and Gladstone Investment Corporation, which actively make loans to and invest in small and medium-sized companies. As a result, we may from time to time have conflicts of interest with our Adviser in its management of our business and with Gladstone Capital and Gladstone Investment, which may arise primarily from the involvement of our Adviser, Gladstone Capital, Gladstone Investment, Gladstone Land and their affiliates in other activities that may conflict with our business.
          Examples of these potential conflicts include:
•our Adviser may realize substantial compensation on account of its activities on our behalf;
•we may experience competition with our affiliates for financing transactions;
•our Adviser may earn fee income from our borrowers or tenants; and
•our Adviser and other affiliates such as Gladstone Capital, Gladstone Investment and Gladstone Land could compete for the time and services of our officers and directors.
          These and other conflicts of interest between us and our Adviser and other affiliates could have a material adverse effect on the operation of our business and the selection or management of our real estate investments.
Our Adviser is not obligated to provide a waiver of the incentive fee, which could negatively impact our earnings and our ability to maintain our current level of, or increase, distributions to our stockholders.
          On January 1, 2007, the Amended Advisory Agreement became effective. In addition to providing for a base management fee based on our stockholders equity, this agreement contemplates a quarterly incentive fee based on our funds from operations. Our Adviser has the ability to issue a full or partial waiver of the incentive fee for current and future periods, however our Adviser is not required to issue this waiver. If our Adviser does not issue this waiver in future quarters, it could negatively impact our earnings and may compromise our ability to maintain our current level of, or increase, distributions to our stockholders, which could have a material adverse impact on our stock price.
We may be obligated to pay our Adviser incentive compensation even if we incur a loss.
          On January 1, 2007, the Amended Advisory Agreement became effective and entitled our Adviser to incentive compensation based on our FFO, which rewards the Adviser if our quarterly FFO (before giving effect to any incentive fee) exceeds 1.75% (7% annualized) of our total stockholders’ equity (less the recorded value of any preferred stock). Our pre-incentive fee FFO for incentive compensation purposes excludes the effect of any unrealized gains, losses or other items that do not affect realized net income that we may incur in the fiscal quarter, even if such losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our Adviser incentive compensation for a fiscal quarter even if we incur a net loss for that quarter.
Financing Risks
Our business strategy relies heavily on external financing, which may expose us to risks associated with leverage such as restrictions on additional borrowing and payment of distributions, risks associated with balloon payments, and risk of loss of our equity upon foreclosure.
          Our current business strategy involves the use of leverage so that we may make more investments than would otherwise be possible in order to maximize potential returns to stockholders. If the income generated by our properties and other assets fails to cover our debt service, we could be forced to reduce or eliminate distributions to our stockholders and may experience losses. We may borrow on a secured or unsecured basis.

6

          Our ability to achieve our investment objectives will be affected by our ability to borrow money in sufficient amounts and on favorable terms. We expect that we will borrow money that will be secured by our properties and that these financing arrangements will contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. In addition, our short-term line of credit contains, and any other credit facility we might enter into is likely to contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness, and will specify debt ratios that we will be required to maintain. Accordingly, we may be unable to obtain the degree of leverage we believe to be optimal, which may cause us to have less cash for distribution to stockholders than we would have with an optimal amount of leverage. Our use of leverage could also make us more vulnerable to a downturn in our business or the economy generally. There is also a risk that a significant increase in the ratio of our indebtedness to the measures of asset value used by financial analysts may have an adverse effect on the market price of our common stock.
          Some of our debt financing arrangements may require us to make lump-sum or “balloon” payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or to sell the financed property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment, which could adversely affect the amount of distributions to our stockholders.
          We intend to acquire additional properties by using our $95 million short-term line of credit and by continuing to seek long-term financing, where we will borrow all or a portion of the purchase price of a potential acquisition and securing the loan with a mortgage on some or all of our existing real property. To date we have obtained approximately $202 million in long-term financing, which we have used to acquire additional properties. If we are unable to make our debt payments as required, a lender could foreclose on the property securing its loan. This could cause us to lose part or all of our investment in such property which in turn could cause the value of our securities or the amount of distributions to our stockholders to be reduced.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations.
          We may experience interest rate volatility in connection with mortgage loans on our properties or other variable-rate debt that we may obtain from time to time. We currently have one variable rate loan, certain of our leases contain escalations based on market interest rates, and the interest rate on our existing line of credit is variable. We mitigate this risk by structuring such provisions to contain a minimum interest rate or escalation rate, as applicable. We are also exposed to the effects of interest rate changes as a result of the holding of our cash and cash equivalents in short-term, interest-bearing investments. A significant change in interest rates could have an adverse impact on the results of our operations. To date we have not entered into any derivative contracts, however certain of our mortgage loans and properties have embedded derivatives in the form of interest rate floors and ceilings. These embedded derivatives do not require separate accounting under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
Risks of being a REIT
We may not qualify as a REIT for federal income tax purposes, which would subject us to federal income tax on our taxable income at regular corporate rates, thereby reducing the amount of funds available for paying distributions to our stockholders.
          We have historically operated and intend to continue to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes. Our qualification as a REIT depends on our ability to meet various requirements set forth in the Internal Revenue Code concerning, among other things, the ownership of our outstanding common stock, the nature of our assets, the sources of our income and the amount of our distributions to our stockholders. The REIT qualification requirements are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so as to qualify as a REIT. At any time new laws, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is also possible that future economic, market, legal, tax or other considerations may cause our board of directors to revoke our REIT election, which it may do without stockholder approval.
          If we lose or revoke our REIT status, we will face serious tax consequences that will substantially reduce the funds available for distribution to you because:
we would not be allowed a deduction for distributions to stockholders in computing our taxable income, we would be subject to federal income tax at regular corporate rates and we might need to borrow money or sell assets in order to pay any such tax;

7

•we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
•unless we are entitled to relief under statutory provisions, we would be prevented from re-qualifying to be taxed as a REIT for the four taxable years following the year during which we ceased to qualify.
In addition, if we fail to qualify as a REIT, distributions to stockholders would be taxable to the extent of our current and accumulated earnings and profits, and, then, to the extent that the amount by which the balance of such distribution exceeds the stockholder’s adjusted basis in such stockholder’s stock of the REIT. If we were taxed as a regular corporation, corporate distributees might be eligible for the dividends received deduction, but we would not be required to make distributions to stockholders.
We have not sought a ruling from the Internal Revenue Service that we qualify as a REIT, nor do we intend to do so in the future.
          An IRS determination that we do not qualify as a REIT would deprive our stockholders of the tax benefits of our REIT status only if the IRS determination is upheld in court or otherwise becomes final. To the extent that we challenge an IRS determination that we do not qualify as a REIT, we may incur legal expenses that would reduce our funds available for distribution to our stockholders. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.
Failure to make required distributions or to satisfy certain income requirements would subject us to tax.
          In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our taxable income, other than any net capital gains. To the extent that we satisfy the distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of:
•85% of our ordinary income for that year;
•95% of our capital gain net income for that year; and
•100% of our undistributed taxable income from prior years.
          In addition, each year at least 95% of our gross income must be derived from passive sources in real estate and securities, and at least 75% of our gross income must be derived from real estate sources. If we fail to satisfy either of these gross income tests, but nonetheless continue to qualify as a REIT because we meet certain other requirements, we will incur a tax of up to 100% on the greater of the excess of 95% of our gross income over the amount of our qualifying income, or the excess of 75% of our gross income over the amount of our qualifying income.
          We intend to pay out our income to our stockholders in a manner intended to satisfy the distribution requirement applicable to REITs and to satisfy the foregoing gross income tests and, thus, avoid corporate income taxes and the 4% excise tax. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. In the future, we may borrow funds to pay distributions to our stockholders and the limited partners of our Operating Partnership. Any funds that we borrow would subject us to interest rate and other market risks.
Because we must distribute a substantial portion of our net income to qualify as a REIT, we will be largely dependent on third-party sources of capital to fund our future capital needs.
          To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs, including property acquisitions, from retained earnings. Therefore, we will likely rely on public and private debt and equity capital to fund our business. This capital may not be available on favorable terms or at all. Our access to additional capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings. Moreover, additional debt financings may substantially increase our leverage.
Other Risks
We are subject to restrictions that may discourage a change of control. Certain provisions contained in our articles of incorporation and Maryland law may prohibit or restrict a change of control.

8

•Our articles of incorporation prohibit ownership of more than 9.8% of the outstanding shares of our capital stock by one person. This restriction may discourage a change of control and may deter individuals or entities from making tender offers for our capital stock, which offers might otherwise be financially attractive to our stockholders or which might cause a change in our management.
•Our board of directors are divided into three classes, with the term of the directors in each class expiring every third year. At each annual meeting of stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. After election, a director may only be removed by our stockholders for cause. Election of directors for staggered terms with limited rights to remove directors makes it more difficult for a hostile bidder to acquire control of us. The existence of this provision may negatively impact the price of our securities and may discourage third-party bids to acquire our securities. This provision may reduce any premiums paid to stockholders in a change in control transaction.
          Certain provisions of Maryland law applicable to us prohibit business combinations with:
•any person who beneficially owns 10% or more of the voting power of our common stock, referred to as an “interested stockholder;”
•an affiliate of ours who, at any time within the two-year period prior to the date in question, was an interested stockholder; or
•an affiliate of an interested stockholder.
          These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of common stock and two-thirds of the votes entitled to be cast by holders of our common stock other than shares held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder.
Market conditions could adversely affect the market price and trading volume of our securities.
          The market price of our common and preferred stock may be highly volatile and subject to wide fluctuations and the trading volume in our common and preferred stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some market conditions that could negatively affect our share price or result in fluctuations in the price or trading volume of our securities include:
•price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;
•significant volatility in the market price and trading volume of shares of REITs, real estate companies or other companies in our sector, which is not necessarily related to the performance of those companies;
•price and volume fluctuations in the stock market as a result of terrorist attacks, or speculation regarding future terrorist attacks, in the United States or abroad;
•actual or anticipated variations in our quarterly operating results or distributions;
•changes in our funds from operations or earnings estimates or the publication of research reports about us or the real estate industry generally;
•actions by institutional stockholders;
•speculation in the press or investment community;
•changes in regulatory policies or tax guidelines, particularly with respect to REITs; and
•Investor confidence in the stock market.

9

Shares of common stock eligible for future sale may have adverse effects on our share price.
          We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock (including shares of common stock issuable upon the conversion of units of our operating partnership that we may issue from time to time), or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.
An increase in market interest rates may have an adverse effect on the market price of our securities.
          One of the factors that investors may consider in deciding whether to buy or sell our common stock or preferred stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our securities or seek securities paying higher dividends or interest. The market price of our securities likely will be based primarily on the earnings that we derive from rental income with respect to our properties, interest earned on our mortgage loans and our related distributions to stockholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our securities, and such effects could be significant. For instance, if interest rates rise without a corresponding increase in our distribution rate, the market price of our common stock could decrease because potential investors may require a higher distribution yield on our common stock as market rates on interest-bearing securities, such as bonds, rise. Additionally, because both our Series A and Series B Preferred Stock is entitled to receive dividends at a fixed rate (and any series of preferred stock we may authorize and issue in the future will also likely receive dividends at a fixed rate), any increase in interest rates is likely to result in a decrease in the market price of our Series A and Series B Preferred Stock or any future series of preferred stock.
Legislative or regulatory action could adversely affect investors.
          In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal and state income tax laws applicable to investments in REIT shares. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure you that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our properties.
If our Operating Partnership fails to maintain its status as a partnership or other form of pass-through entity for federal income tax purposes, its income may be subject to taxation.
          As we hold all of the ownership interests in our Operating Partnership, it is currently disregarded for income tax purposes. We intend that it will qualify as a partnership for income tax purposes upon the admission of additional partners; however, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This could also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on your investment. In addition, if any of the entities through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
Our potential participation in joint ventures creates additional risk.
          We may participate in joint ventures or purchase properties jointly with other unaffiliated entities. There are additional risks involved in these types of transactions. These risks include the potential of our joint venture partner becoming bankrupt or our economic or business interests diverging. These diverging interests could, among other things, expose us to liabilities of the joint venture in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property.
FORWARD-LOOKING STATEMENTS
          Some of the statements contained in or incorporated by reference in this prospectus constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements made with respect to possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Statements regarding the following subjects are forward-looking by their nature:
•our business strategy;
•pending transactions;
•our projected operating results;

10

•our ability to obtain future financing arrangements;
•estimates relating to our future distributions;
•our understanding of our competition;
•market trends;
•estimates of our future operating expenses, including payments to our Adviser under the terms of our advisory agreement;
•projected capital expenditures; and
•use of the proceeds of our credit facilities, mortgage notes payable, and other future capital resources, if any.
          These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements.
          The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Although we believe that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future results, levels of activity, performance, growth or achievements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in or implied by our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:
•the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief executive officer, Mr. Terry Lee Brubaker, our vice chairman and chief operating officer, or Mr. George Stelljes III, our president and chief investment officer;
•general volatility of the capital markets and the market price of our common stock;
•risks associated with negotiation and consummation of pending and future transactions;
•changes in our business strategy;
•availability, terms and deployment of capital, including the ability to maintain and borrow under our existing credit facility, arrange for long-term mortgages on our properties; secure one or more additional long-term credit facilities, and to raise equity capital;
•availability of qualified personnel;
•changes in our industry, interest rates or the general economy;
•the degree and nature of our competition; and
•those factors discussed in the “Risk Factors” section of this prospectus and those factors listed under the caption “Risk Factors” in our Securities and Exchange Commission filings incorporated herein by reference.
          We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results.
INCORPORATION BY REFERENCE
          There are incorporated by reference in this prospectus the following documents previously filed by Gladstone Commercial Corporation with the Securities and Exchange Commission (the “SEC”).
•Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed February 27, 2007;
•Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007, filed May 1, 2007;

11

•Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007, filed July 31, 2007;
•Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007, filed October 30, 2007;
•Current Reports on Form 8-K filed January 3, 2007, July 10, 2007 and November 16, 2007;
•The description of our common stock contained in our Registration Statement on Form 8-A filed August 12, 2003 as updated through subsequently filed reports;
•The description of our 7.75% Series A Cumulative Redeemable Preferred Stock contained in our Registration Statement on Form 8-A filed January 19, 2006, as updated through subsequently filed reports; and
•The description of our 7.50% Series B Cumulative Redeemable Preferred Stock contained in our Registration Statement on Form 8-A filed October 19, 2006, as amended October 23, 2006, as updated through subsequently filed reports.
          The SEC has assigned file number 0-50363 to reports and other information that Gladstone Commercial Corporation files with the Securities and Exchange Commission.
          All documents subsequently filed by Gladstone Commercial Corporation pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering of the offered securities, shall be deemed to be incorporated by reference in this prospectus and to be a part of this prospectus from the date of filing of such documents. Any statement contained in this prospectus, or in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed to be modifiedas updated, amended or superseded for purposes of this prospectus to the extent that a statement contained in this prospectus, or in any subsequently filed document which is incorporated or deemed to be incorporated by reference in this prospectus, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus.
          Gladstone Commercial Corporation will provide without charge to each person, including any beneficial owner, to whom a copy of this prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference in this prospectus, other than exhibits to such documents unless such exhibits are specifically incorporated by reference into such documents. Requests should be addressed to:
Investor Relations
Gladstone Commercial Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5835
WHERE YOU CAN FIND MORE INFORMATION
          We are subject to the informational requirements ofour subsequent filings under the Exchange Act, and in accordance therewith, file reports, proxy statementsthe risk factors and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected, without charge, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copiescontained in any accompanying prospectus supplement before acquiring any of such material can be obtained at prescribed rates from the Public Reference Roomsecurities. The occurrence of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operationany of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Such materials may also be inspected on the Securities and Exchange Commission’s website at www.sec.gov. Our outstanding shares of common stock are listed on the Nasdaq Global Market under the symbol “GOOD.” You can also obtain information about Gladstone Commercial Corporation at our website, www.GladstoneCommercial.com. Information included on,these risks might cause you to lose all or accessible through our website is not a part of this prospectus.
          This prospectus constitutes part of a registration statement on Form S-3 filed by Gladstone Commercial Corporation with the SEC under the Securities Act of 1933. This prospectus does not contain all of the information set forthyour investment in the registration statement, parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information, reference is madeoffered securities. Please also refer to the registration statement.section entitled “Forward-Looking Statements” above.

12

USE OF PROCEEDS
 
Unless we specify otherwise described in the applicablean accompanying prospectus supplement, we intend to use the net proceeds from the sale of the offered securities to:
•pay down our revolving lineby us to provide additional funds for general corporate purposes. Any specific allocation of credit, which currently accrues interest at the rate of approximately 6.47% and matures on December 29, 2009, with an option to extend for an additional year;
•acquire and develop commercial and industrial real estate for lease to tenants as suitable opportunities arise;
•make industrial and commercial mortgage loans as suitable opportunities arise;
•reimburse our Adviser for the expenses and fees it incurs in connection with our business;
•repay any outstanding indebtedness at the time it is due; and
•fund general business purposes.
          Pending their use, we may invest the net proceeds fromof an offering of securities to a specific purpose will be determined at the saletime of such offering and will be described in the offered securities in REIT-qualified money market instruments, short-term repurchase agreements or other cash equivalents that are expectedaccompanying prospectus supplement to provide a lower net return than we hope to achieve from our intended real estate investments. We may also temporarily invest in securities that qualify as “real estate assets” under the REIT provisions of the Internal Revenue Code, such as mortgage-backed securities. We may not be able to achieve our targeted investment pace.this prospectus.


3

RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
 The following table sets
Our ratios of earnings to fixed charges and preferred dividends for the six months ended June 30, 2010 and the years ended December 31, 2005, 2006, 2007, 2008 and 2009 are set forth below. For purposes of calculating the ratio of earnings to fixed charges and preferred dividends, for the periods indicated below. “Earnings”“earnings” consist of income (loss) from continuing operations before income taxes and fixed charges. “Fixed charges” consist of interest expense and the portion of operating lease expense that represents interest.
                     
  Nine Months             Period February 14,
  ended Year ended Year ended Year ended 2003 (inception)
  September 30, December 31, December 31, December 31, through December 31,
  2007 2006 2005 2004 2003
Ratio of earnings to combined fixed charges and preferred dividends  1.4x   1.3x   2.4x   60.8x   (1)
                         
  Six Months
          
  Ended
 Year Ended December 31,
  June 30, 2010 2009 2008 2007 2006 2005
 
Ratio of Earnings to Fixed Charges and Preferred Dividends  1.0x  1.0x  1.0x  1.1x  1.1x  2.4x
 
(1)For the period from our inception to December 31, 2003, our earnings were insufficient to cover fixed charges by $240,871.

13

DESCRIPTION OF OUR CAPITAL STOCK
General
 
General
Our authorized capital stock consists of 20,000,00050,000,000 shares of capital stock, $0.001 par value per share, 17,700,00040,200,000 of which are designatedclassified as common stock, 1,150,000 of which are designatedclassified as 7.75% Series A Cumulative Redeemable Preferred Stock, and 1,150,000 of which are designatedclassified as 7.50% Series B Cumulative Redeemable Preferred Stock and 7,500,000 of which are classified as Senior Common Stock. Under our articles of incorporation,charter, our board of directors is authorized to classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects, from time to time before issuance of such stock, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of such stock. AsOur board of September 30, 2007, there were 8,565,264directors may also, without stockholder approval, amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class that we have authority to issue.
For purposes of this section “Description of Capital Stock,” we refer to our common stock issuedwhich is listed on the NASDAQ Global Select Market under the symbol “GOOD” as our “Listed Common Stock.” Further, we refer to our (i) 7.75% Series A Cumulative Redeemable Preferred Stock which is listed on the NASDAQ Global Select Market under the symbol “GOOD.P” as our “Series A Preferred Stock” and outstanding and 2,150,000 shares of preferred stock issued and outstanding. (ii) 7.50% Series B Cumulative Redeemable Preferred Stock which is listed on the NASDAQ Global Select Market under the symbol “GOOD.O” as our “Series B Preferred Stock.”
The following summary description of our capital stock is not necessarily complete and is qualified in its entirety by reference to our articles of incorporationcharter and bylaws, each of which has been filed with the Securities and Exchange Commission,SEC, as well as applicable provisions of Maryland law.the MGCL.
Description of Common Stock
Listed Common Stock
Voting Rights of Common Stock
 Subject to the provisions of our articles of incorporation regarding restrictions on the transfer and ownership of our capital stock, each outstanding
Each share of common stock entitles the holderListed Common Stock is entitled to one vote on all matters submittedeach matter to a vote ofbe voted upon by our stockholders, including the election of directors, and, except as provided with respect to any other class or series of capital stock, (currently consisting of Series A Preferred Stock and Series B Preferred Stock), the holders of the common stockListed Common Stock possess the exclusive voting power. There is no cumulative voting in the election of directors which means that the holders of a majority of the outstanding common stock, voting as a single class,Listed Common Stock can elect all of the directors then standing for election and that the holders of the remaining shares are not able to elect any directors.
Dividends, Liquidations and Other Rights
 All shares of common stock offered by this prospectus will be duly authorized, fully paid and nonassessable.
Holders of our common stockListed Common Stock are entitled to receive dividendsdistributions, when declaredauthorized by our board of directors and declared by us, out of assets legally available for the payment of dividends.distributions. They also are entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation,


4

dissolution or winding up, after payment of or adequate provision for all of our known debts and liabilities. These rights are subject to the preferential rights of any other class or series of our shares, (currently consisting ofincluding the Senior Common Stock, our Series A Preferred Stock and our Series B Preferred Stock)Stock and to the provisions of our articles of incorporationcharter regarding restrictions on transfer and ownership of shares of our shares.capital stock.
 
Holders of our common stockListed Common Stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Subject to the restrictions on transfer and ownership of shares of our capital stock contained in our articlescharter, all shares of incorporation,Listed Common Stock have equal distribution, liquidation and other rights.
Senior Common Stock
Voting Rights
Holders of our Senior Common Stock have no voting rights, except as set forth below or as otherwise from time to time required by law. So long as any shares of Senior Common Stock remain outstanding, we will not, without the affirmative vote or consent of the holders of a least a majority of the shares of the Senior Common Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately by class), amend, alter or repeal the provisions of our charter, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Senior Common Stock or the holders thereof.
Dividends, Liquidations and Other Rights
The Senior Common Stock has priority over the Listed Common Stock with respect to payment of distributions and is pari passu with the Listed Common Stock with respect to distribution of amounts upon liquidation, dissolution or winding up; however, the Senior Common Stock ranks junior to our Series A Preferred Stock and Series B Preferred Stock with respect to payment of distributions and distribution of amounts upon liquidation, dissolution or winding up. The Senior Common Stock will be entitled to receive, subject to the preferential rights of the Series A Preferred Stock and the Series B Preferred Stock and any other preferred stock that we may issue in the future, when and as authorized by our board of directors and declared by us, out of funds legally available for payment of distributions, cash distributions in an amount equal to $1.05 per share per annum, declared daily and paid at the rate of $0.0875 per share per month. Distributions are cumulative from the date of issue of the shares and are payable monthly on or about the 5th business day of the month following the month in which such distributions are earned.
Exchange Option
Holders of Senior Common Stock have the right, but not the obligation, after the 5th anniversary of the issuance of the shares of Senior Common Stock proposed to be exchanged, to exchange any or all of such shares of Senior Common Stock for our Listed Common Stock at a predetermined exchange ratio, or the Exchange Ratio. The Exchange Ratio will be calculated by dividing $15.00 by the greatest of (i) the Closing Trading Price of the Listed Common Stock on the date on which such shares of Senior Common Stock were originally issued, (ii) the Book Value Per Share of the Listed Common Stock as determined as of the date on which such shares of Senior Common Stock were originally issued, and (iii) $13.68. For this purpose, “Book Value Per Share” means, as of a given date, the common stockholders’ equity (as reflected in our most recent public filing with the SEC) divided by the number of outstanding shares of common stock as of the same date. “Closing Trading Price” means, on any date of determination, (i) the most recently reported closing price per share of the Listed Common Stock as of such date on the NASDAQ Global Select Market, or (ii) if, as of such date, the Listed Common Stock is not traded on the NASDAQ Global Select Market, the most recently reported closing price per share of the Listed Common Stock on the primary stock exchange on which the Listed Common Stock is then listed for trading, or (iii) if, as of such date, the Listed Common Stock is not listed for trading on any stock exchange, the closing bid price for the Listed Common Stock on theOver-the-Counter Bulletin Board,over-the-counter market or on the Pink Sheets, or (iv) if there is no longer any public market for the Listed Common Stock as of such date, the fair market value of a share of Listed Common Stock as determined in good faith by our board of directors.


5

Solely for purposes of determining when shares of Senior Common Stock become exchangeable, shares of Senior Common Stock purchased by a holder on dates subsequent to such holder’s initial purchase of Senior Common Stock (excluding shares issued pursuant to such holder’s participation in a distribution reinvestment plan of the Company, if any) will be deemed to have equal dividend, liquidationbeen issued on their respective issuance dates and, other rights.accordingly, the5-year holding periods for such shares will commence from their respective issuance dates. In addition, any shares issued pursuant to a distribution reinvestment plan of the Company, if any, will be deemed to have been issued, and the five-year holding periods for such shares will be deemed to commence, on the date of issuance of the shares of Senior Common Stock purchased by the holder to which the shares issued pursuant to such Company’s distribution reinvestment plan relate.
All accumulated and unpaid distributions on the Senior Common Stock shall be paid to the holder through the date of exchange.
CertificatesAutomatic Conversion
 
Each share of Senior Common Stock will be converted into Listed Common Stock in accordance with the Exchange Ratio automatically upon any of the following events:
• an acquisition of the Company by another company by means of any transaction or series of related transactions to which we are a party (including, without limitation, any stock acquisition, reorganization, merger or consolidation, but excluding any sale of stock for capital raising purposes) other than a transaction or series of transactions in which the holders of our voting securities outstanding immediately prior to such transaction continue to retain at least 50% of the total voting power represented by our voting securities or those of such other surviving entity outstanding immediately after such transaction or series of transactions;
• a sale of all or substantially all of our assets; or
• a liquidation, dissolution or winding up of the Company.
All accumulated and unpaid distributions on the Senior Common Stock shall be paid to the holder through the date of conversion.
Call Protection
Shares of Senior Common Stock will be callable at our sole option upon the earlier of (i) September 1, 2017 or (ii) the 5th anniversary of the date on which $100 million of Senior Common Stock is sold. At such time the shares of Senior Common Stock will be callable for cash at our option, in whole or in part, at a redemption price equivalent to $15.30 per share, plus accrued and unpaid distributions. We may not call shares of Senior Common Stock prior to such date, except in certain limited circumstances relating to maintaining our ability to qualify as a real estate investment trust, or REIT.
Anti-Dilution
If the outstanding Listed Common Stock is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other company by reason of any reclassification, recapitalization, share split up, combination of shares, or share distribution, appropriate adjustment will be made to the number of shares and relative terms of the Senior Common Stock. There will be no anti-dilution adjustment upon the future sale of additional shares of Listed Common Stock, regardless of the price at which the Senior Common Stock is sold.
Valuation
We may consider implementing a valuation process to provide an estimate of the value per share of Senior Common Stock on either a monthly or quarterly basis.


6

Common Stock
Certificates
We will not issue certificates. Shares of Common Stock will be held in “uncertificated” form, which will eliminate the physical handling and safekeeping responsibilities inherent in owning transferable stock certificates and eliminate the need to return a duly executed stock certificate to the transfer agent to effect a transfer. Transfers can be effected simply by mailing to us a duly executed transfer form. Upon the issuance of our shares of Common Stock, we will send to each stockholder a written statement which will include all information that is required to be written upon stock certificates under Maryland law.pursuant to the MGCL.
Meetings and Special Voting Requirements
 
An annual meeting of the stockholders will be held each year for the purpose of electing the class of directors whose term is up for election and to conduct other business that may properly be before the stockholders. Special meetings of stockholders may be called only upon the request of a majority of our directors, a majority of our independent directors, our chairman or our president orand must be called by our secretary upon the written request of stockholders entitled to cast at least 20%a majority of all the votes entitled to be cast at a meeting. In general, the presence in person or by proxy of a majority of the outstanding shares, exclusive of excess shares (described in “Certain Provisions of Maryland Law and of Our Articles of IncorporationCharter and Bylaws — Restrictions on Ownership of Shares”Shares,” below), shall constitute a quorum. Generally, the affirmative vote of a majority of the votes entitled to be votedcast at a meeting at which a quorum is present is necessary to take stockholder action, except that a plurality of all votes cast at such a meeting is sufficient to elect a director.
 A proposal
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by our boardthe affirmative vote of directorsstockholders entitled to amend our articlescast at least two-thirds of incorporation orthe votes entitled to dissolve us requiresbe cast on the matter. However, a Maryland corporation may provide in its charter for approval atof these matters by a duly held meeting of our stockholders holding at leastlesser percentage, but not less than a majority of all of the sharesvotes entitled to vote. be cast on the matter. Our charter provide for a majority vote in these situations.
Stockholders may, by the affirmative vote of two-thirds of the shares entitled to vote on such matter,generally in the election of directors, elect to remove a director for cause. Stockholders do not have the ability to vote to replace our Adviser or to select a new adviser.

14

 The affirmative vote of a majority of all shares entitled to vote is required to approve any merger or sale of substantially all of our assets other than in the ordinary course of business. The term “substantially all” as used in this context is a term used in the Maryland General Corporate Law. The Maryland General Corporation Law does not include a definition of “substantially all” and Maryland case law suggests that the term be interpreted on a case-by-case basis. The effect for investors of the Maryland law’s lack of definition is that we cannot provide investors with a definition for “substantially all” and therefore stockholders will not know whether a sale of assets will constitute a sale of substantially all of the assets and, therefore, whether they will have the right to approve any particular sale.
Information Rights
 
Any stockholder may, during normal business hours and for any lawful and proper purpose, inspect and copy our bylaws, minutes of the proceedings of our stockholders, our annual financial statements and any voting trust agreement that is on file at our principal office. In addition, one or more stockholders who together are, and for at least six months have been, record or beneficial holders of 5% of any class of our common stock are entitled to inspect a copy of our stockholder list upon written request. The list will include the name and address of, and the number of shares owned by, each stockholder and will be available at our principal office within 20 days of the stockholder’s request.
 
The rights of stockholders described above are in addition to, and do not adversely affect rights provided to investors under,Rule 14a-7 promulgated under the Exchange Act, which provides that, upon request of investors and the payment of the expenses of the distribution, we are required to distribute specific materials to stockholders in the context of the solicitation of proxies for voting on matters presented to stockholders, or, at our option, provide requesting stockholders with a copy of the list of stockholders so that the requesting stockholders may make the distribution themselves.
Distributions
 
Distributions will be paid to investors who are stockholders as of the record date selected by our board of directors. Distributions on the Listed Common Stock will be paid on a quarterlymonthly basis regardless of the frequency with which such distributions are declared. We are required to make distributions to our stockholders sufficient to


7

satisfy the REIT requirements. Generally, income distributed as distributionsto our stockholders will not be taxable to us under federal income tax laws unless we fail to comply with the REIT requirements.
 
Distributions will be paid at the discretion of our board of directors based onupon our earnings, cash flow and general financial condition. The directors’ discretion will be governed, in substantial part, by their obligation to cause us to comply with the REIT requirements. Because we may receive income from interest or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period but may be made in anticipation of cash flow which we expect to receive during a later period of the year and may be made in advance of actual receipt in an attempt to make distributions relatively uniform. We may borrow to make distributions if the borrowing is necessary to maintain our REIT status, or if the borrowing is part of a liquidation strategy whereby the borrowing is done in anticipation of the sale of properties and the proceeds will be used to repay the loan.
Repurchases of Excess Shares
 
We have the authority to redeem “excess shares” (as defined in our articles of incorporation)charter) immediately upon becoming aware of the existence of excess shares or after giving the holder of the excess shares 30 days to transfer the excess shares to a person whose ownership of such shares would not exceed the ownership limit, and therefore such shares would no longer be considered excess shares. The price paid upon redemption by us shall be the lesser of the price paid for such excess shares by the stockholder holding the excess shares or the fair market value of the excess shares. We may purchase excess shares or otherwise repurchase shares if the repurchase does not impair our capital or operations. For additional information regarding excess shares, see “Certain Provisions of Maryland Law and of our Articles of IncorporationOur Charter and Bylaws — Restrictions on Ownership of Shares.”
Other Matters
 
The transfer and dividenddistribution paying agent and registrar for our common stock is The Bank of New York. The principal business address of The Bank of New York is 101 Barclay Street, Suite 11E, New York, New York 10286, telephone number (800) 274-2944. The Bank of New York also maintains an internet web site athttp://stock.bankofny.com.BNY Mellon Shareowner Services.

15

Description of Preferred Stock
General
 
Subject to limitations prescribed by Maryland lawthe MGCL and our articles of incorporation,charter, our board of directors is authorized to issue, from the authorized but unissued shares of stock, shares of preferred stock in class or series and to establish from time to time the number of shares of preferred stock to be included in the class or series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of the shares of each series, and any other subjects or matters as may be fixed by resolution of our board of directors or one of its duly authorized committees.
Existing Series of Preferred Stock
 As of the date of this prospectus, our
Our board of directors has designated:classified:
 • 1,150,000 shares of 7.75% Series A Cumulative Preferred Stock, 1,000,000 of which are outstanding;Stock; and
 
 • 1,150,000 shares of 7.75%7.50% Series B Cumulative Preferred Stock, all of which are outstanding.Stock.
Series A Preferred Stock
 The description
Voting Rights
Holders of Series A Preferred Stock generally have no voting rights. However, if dividends on any shares of the Series A Preferred Stock are in arrears for 18 or more consecutive months, holders of the Series A Preferred Stock (voting together as a single class with holders of shares of any series of our preferred stock equal in rank with the Series A Preferred Stock upon which like voting rights have been conferred) will have the right to elect two additional directors to serve on our board of directors until all dividends for the past dividend periods and the then current dividend period are fully paid or declared and set aside for payment. In addition, we may not amend the


8

charter, including the designations, rights, preferences, privileges or limitations in respect of the Series A Preferred Stock, in a manner that would materially and adversely affect the rights, preferences, privileges or voting powers of the Series A Preferred Stock or the holders thereof without the affirmative vote of at least two-thirds of the shares of Series A Preferred Stock then outstanding.
Dividends, Liquidation Preference and Other Rights
Holders of Series A Preferred Stock are entitled to receive preferential cumulative cash dividends at a rate of 7.75% per annum of the $25.00 per share liquidation preference (equivalent to $1.9375 per annum per share). Beginning on the date of issuance, dividends on the Series A Preferred Stock are payable monthly in arrears and are cumulative.
If we liquidate, dissolve or wind up, holders of the Series A Preferred Stock will have the right to receive the $25.00 per share liquidation preference, plus any accumulated and unpaid dividends to and including the date of payment, but without interest, before any payment is made to the holders of our common stock (including our Listed Common Stock and Senior Common Stock) or any other class or series of our capital stock ranking junior to the Series A Preferred Stock.
With respect to the payment of dividends and amounts upon liquidation, dissolution or winding up, the Series A Preferred Stock will be equal in rank with our Series B Preferred Stock and all equity securities that we issue, the terms of which specifically provide that such equity securities rank on a parity with the Series A Preferred Stock with respect to dividend rights or rights upon our liquidation, dissolution or winding up; senior to our common stock (including our Listed Common Stock and Senior Common Stock); and junior to all our existing and future indebtedness.
We may not redeem the Series A Preferred Stock prior to January 30, 2011, except in limited circumstances relating to our continuing qualification as a REIT. On and after January 30, 2011, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, by payment of $25.00 per share, plus any accumulated and unpaid dividends to and including the date of redemption.
Shares of Series A Preferred Stock are not convertible into or exchangeable for any other securities or property.
Series B Preferred Stock
Voting Rights
Holders of Series B Preferred Stock generally have no voting rights. However, if dividends on any shares of the Series B Preferred Stock are in arrears for 18 or more consecutive months, holders of the Series B Preferred Stock (voting together as a single class with holders of shares of any series of our preferred stock equal in rank with the Series B Preferred Stock upon which like voting rights have been conferred) will have the right to elect two additional directors to serve on our board of directors until all dividends for the past dividend periods and the then current dividend period are fully paid or declared and set aside for payment. In addition, we may not amend the charter, including the designations, rights, preferences, privileges or limitations in respect of the Series B Preferred Stock, in a manner that would materially and adversely affect the rights, preferences, privileges or voting powers of the Series B Preferred Stock or the holders thereof without the affirmative vote of at least two-thirds of the shares of Series B Preferred Stock then outstanding.
Dividends, Liquidation Preference and Other Rights
Holders of Series B Preferred Stock are entitled to receive preferential cumulative cash dividends on the Series B Preferred Stock at a rate of 7.50% per annum of the $25.00 per share liquidation preference (equivalent to $1.875 per annum per share). Beginning on the date of issuance, dividends on the Series B Preferred Stock are payable monthly in arrears and are cumulative.
If we liquidate, dissolve or wind up, holders of the Series B Preferred Stock will have the right to receive the $25.00 per share liquidation preference, plus any accumulated and unpaid dividends to and including the date of payment, but without interest, before any payment is made to the holders of our common stock (including our Listed


9

Common Stock and Senior Common Stock) or any other class or series of our capital stock ranking junior to the Series B Preferred Stock.
With respect to the payment of dividends and amounts upon liquidation, dissolution or winding up, the Series B Preferred Stock will be equal in rank with our Series A Preferred Stock is contained in our prospectus supplement dated January 18, 2006,and all other equity securities we issue, the terms of which was filed January 19, 2006specifically provide that such equity securities rank on a parity with the Securities and Exchange Commission.
          The description of our Series B Preferred Stock is containedwith respect to dividend rights or rights upon our liquidation, dissolution or winding up; senior to our common stock (including our Listed Common Stock and Senior Common Stock); and junior to all our existing and future indebtedness.
We may not redeem the Series B Preferred Stock prior to October 31, 2011, except in limited circumstances relating to our prospectus supplement datedcontinuing qualification as a REIT. On and after October 18, 2006, which was filed October 19, 2006 with31, 2011, we may, at our option, redeem the SecuritiesSeries B Preferred Stock, in whole or in part, at any time or from time to time, by payment of $25.00 per share, plus any accumulated and Exchange Commission.unpaid dividends to and including the date of redemption.
Shares of Series B Preferred Stock are not convertible into or exchangeable for any other securities or property.
Future Classes or Series of Preferred Stock
 
The following description of the terms of our preferred stock sets forth general terms and provisions of our preferred stock to which aan accompanying prospectus supplement may relate. Specific terms of any class or series of preferred stock offered by aan accompanying prospectus supplement will be described in that prospectus supplement. The description set forth below is subject to and qualified in its entirety by reference to the articles supplementary to our charter fixing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and relative rightsterms and conditions of redemption of a particular class or series of preferred stock.
 
If we offer preferred stock pursuant to this prospectus, the applicablean accompanying prospectus supplement will describe the specific terms of the class or series of shares of preferred stock being offered, including:including, but not limited to:
 • the title and stated value of the class or series of shares of preferred stock and the number of shares constituting that class or series;
 
 • the number of shares of the class or series of shares of preferred stock offered, the liquidation preference per share and the offering price of the shares of preferred stock;
 
 • the dividend rate(s), period(s)and/or payment date(s)or the method(s)of calculation for those values relating to the shares of preferred stock of the class or series;
 
 • the date from which dividends on shares of preferred stock of the class or series shall cumulate, if applicable;
 
 • the procedures for any auction and remarketing, if any, for shares of preferred stock of the class or series;
 
 • the provision for a sinking fund, if any, for shares of preferred stock of the class or series;
 
 • the provision for redemption or repurchase, if applicable, of shares of preferred stock of the class or series, and any restriction on our ability to exercise those redemption and repurchase rights;
 
 • any listing of the class or series of shares of preferred stock on any securities exchange or market;
 
 • the terms and conditions, if applicable, upon which shares of preferred stock of the class or series will be convertible into shares of preferred stock of another class or series or common stock, including the conversion price, or manner of calculating the conversion price, and the conversion period;
 
 • whether the preferred stock will be exchangeable into debt securities, and, if applicable, the exchange price, or how it will be calculated, and the exchange period;
 
 • voting rights, if any, of the shares of preferred stock of the class or series;
 
 • preemption rights, if any;
 
 • whether interests in shares of preferred stock of the class or series will be represented by global securities;

16
10

 

 • a discussion of U.S. Federalfederal income tax considerations applicable to shares of preferred stock of the series;class or series to the extent not discussed in “Material U.S. Federal Income Tax Considerations;”
 
 • the relative ranking and preferences of shares of preferred stock of the class or series as to dividend rights and rights upon liquidation, dissolution or winding up of our affairs;
 
 •to the extent not otherwise addressed in this prospectus, any limitations on issuance of any class or series of shares of preferred stock ranking senior to or on a parity with the class or series of shares of preferred stock as to dividend rights and rights upon liquidation, dissolution or winding up of our affairs; and
 
 • any limitations on direct or beneficial ownership and restrictions on transfer of shares of preferred stock of the class or series, in each case as may be appropriate to preserve our status as a REIT under the Code;Internal Revenue Code of 1986, as amended (the “Code”), among other purposes;
 
 • the registrar and transfer agent for the shares of preferred stock; and
 
 • any other specific terms, preferences, rights, limitations or restrictions of the class or series of shares of preferred stock.
If we issue shares of preferred stock under this prospectus, the shares will be fully paid and non-assessable and will not have, or be subject to, any preemptive or similar rights.
 
The issuance of preferred stock could adversely affect the voting power, conversion or other rights of holders of common stock. Preferred stock could be issued quickly with terms designed to delay or prevent a change in control of our company or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock.
CERTAIN PROVISIONSDESCRIPTION OF MARYLAND LAW AND
OF OUR ARTICLES OF INCORPORATION AND BYLAWSDEBT SECURITIES
We may issue debt securities under one or more trust indentures to be executed by us and a specified trustee. The terms of the debt securities will include those stated in the indenture and those made a part of the indenture by reference to the Trust Indenture Act of 1939, or the Trust Indenture Act. The indentures will be qualified under the Trust Indenture Act.
The following description ofsets forth certain anticipated general terms and provisions of Maryland lawthe debt securities to which an accompanying prospectus supplement may relate. The particular terms of the debt securities offered by an accompanying prospectus supplement (which terms may be different than those stated below) and of our articles of incorporation and bylaws is only a summary. For a complete description, we refer youthe extent, if any, to which such general provisions may apply to the Maryland General Corporation Law, our articlesdebt securities so offered will be described in the prospectus supplement relating to such debt securities. Accordingly, for a description of incorporationthe terms of a particular issue of debt securities, investors should review both the accompanying prospectus supplement relating thereto and our bylaws. We havethe following description. A form of the indenture (as discussed herein) has been filed our articles of incorporation and bylaws as exhibitsan exhibit to the registration statement of which this prospectus is a part.
The debt securities will be our direct obligations and may be either senior debt securities or subordinated debt securities. The indebtedness represented by subordinated securities will be subordinated in right of payment to the prior payment in full of our senior debt (as defined in the applicable indenture).
Except as set forth in the applicable indenture and described in an accompanying prospectus supplement relating thereto, the debt securities may be issued without limit as to aggregate principal amount, in one or more series, secured or unsecured, in each case as established from time to time in or pursuant to authority granted by a resolution of the board of directors or as established in the applicable indenture. All debt securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the holders of the debt securities of such series, for issuance of additional debt securities of such series.


11

The accompanying prospectus supplement relating to any series of debt securities being offered will contain their specific terms, including, without limitation:
• their title and whether they are senior securities or subordinated securities;
• their initial aggregate principal amount and any limit on their aggregate principal amount;
• the percentage of the principal amount at which they will be issued and, if other than 100% of the principal amount, the portion of the principal amount payable upon declaration of acceleration of their maturity;
• the terms, if any, upon which they may be convertible into shares of our common stock or preferred stock and the terms and conditions upon which a conversion will be effected, including the initial conversion price or rate and the conversion period;
• if convertible, the portion of the principal amount that is convertible into common stock or preferred stock, or the method by which any portion will be determined;
• if convertible, any applicable limitations on the ownership or transferability of the common stock or preferred stock into which they are convertible;
• the date or dates, or the method for determining the date or dates, on which the principal will be payable;
• the rate or rates (which may be fixed or variable), or the method for determining the rate or rates, at which they will bear interest, if any;
• the date or dates, or the method for determining the date or dates, from which any interest will accrue, the interest payment dates on which any interest will be payable, the regular record dates for the interest payment dates, or the method by which the date will be determined, the person to whom the interest will be payable, and the basis upon which interest will be calculated if other than that of a360-day year of twelve30-day months;
• the place or places where the principal (and premium, if any) and interest, if any, will be payable, where they may be surrendered for conversion or registration of transfer or exchange and where notices or demands to or upon us may be served;
• the period or periods within which, the price or prices at which and the terms and conditions upon which they may be redeemed, as a whole or in part, at our option, if we are to have the option;
• our obligation, if any, to redeem, repay or purchase them pursuant to any sinking fund or analogous provision or at the option of a holder, and the period or periods within which, the price or prices at which and the terms and conditions upon which they will be redeemed, repaid or purchased, as a whole or in part, pursuant to this obligation;
• if other than U.S. dollars, the currency or currencies in which they are denominated and payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the related terms and conditions;
• whether the payments of principal (and premium, if any) or interest, if any, may be determined with reference to an index, formula or other method (which index, formula or method may, but need not be, based upon a currency, currencies, currency unit or units or composite currencies) and the manner in which the amounts will be determined;
• any additions to, modifications of or deletions from their terms with respect to the events of default or covenants set forth in the indenture;
• any provisions for collateral security for their repayment;
• whether they will be issued in certificated or book-entry form;
• whether they will be in registered or bearer form and, if in registered form, the denominations if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations and related terms and conditions;


12

• the applicability, if any, of defeasance and covenant defeasance provisions of the applicable indenture;
• whether and under what circumstances we will pay additional amounts as contemplated in the applicable indenture in respect of any tax, assessment or governmental charge and, if so, whether we will have the option to redeem them in lieu of making the payment; and
• any other terms and any deletions from or modifications or additions to the applicable indenture.
The debt securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof. Special federal income tax, accounting and other considerations applicable to debt securities will be described in the accompanying prospectus supplement.
The applicable indenture may contain provisions that would limit our ability to incur indebtedness or that would afford holders of debt securities protection in the event of a highly leveraged or similar transaction involving us or in the event of a change of control.
Restrictions on ownership and transfer of our common stock and preferred stock are designed to preserve our status as a REIT, among other purposes, and, therefore, may act to prevent or hinder a change of control. See “Certain Provisions of Maryland Law And of Our Charter And Bylaws — Restrictions on Ownership and Transfer” below. Investors should review the accompanying prospectus supplement for information with respect to any deletions from, modifications of or additions to the events of default or covenants that are described below, including any addition of a covenant or other provision providing event risk or similar protection.
Merger, Consolidation or Sale
The applicable indenture will provide that we may consolidate with, or sell, lease or convey all or substantially all of our assets to, or merge with or into, any other corporation, provided that:
• we are the continuing corporation, or the successor corporation (if other than the Company) formed by or resulting from any consolidation or merger or which has received the transfer of our assets will be organized and existing under U.S. or state law and expressly assumes payment of the principal of (and premium, if any), and interest on, all of the applicable debt securities and the due and punctual performance and observance of all of the covenants and conditions contained in the applicable indenture;
• immediately after giving effect to the transaction and treating any indebtedness which becomes our obligation or the obligation of any subsidiary as a result thereof as having been incurred by us or such subsidiary at the time of the transaction, no event of default under the applicable indenture, and no event which, after notice or the lapse of time, or both, would become an event of default, will have occurred and be continuing; and
• an officer’s certificate and legal opinion covering these conditions will be delivered to the trustee.
Covenants
The applicable indenture will contain covenants requiring us to take certain actions and prohibiting us from taking certain actions. The covenants with respect to any series of debt securities will be described in the accompanying prospectus supplement.
Events of Default, Notice and Waiver
Each indenture will describe specific “events of default” with respect to a series of debt securities issued under the indenture. These “events of default” are likely to include (with grace and cure periods):
• our failure to pay any installment of interest;
• our failure to pay their principal (or premium, if any) at their maturity;
• our failure to make any required sinking fund payment;


13

• our breach of any other covenant or warranty contained in the applicable indenture (other than a covenant added to the indenture solely for the benefit of a different series of debt securities); and
• certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of us or any substantial part of our property.
If an event of default under any indenture with respect to debt securities of any series at the time outstanding occurs and is continuing, then the applicable trustee or the holders of not less than 25% of the principal amount of the outstanding debt securities of that series may declare the principal amount (or, if the debt securities of that series are original issue discount securities or indexed securities, such portion of the principal amount as may be specified in the terms thereof) of all the debt securities of that series to be due and payable immediately by written notice thereof to us (and to the applicable trustee if given by the holders). However, at any time after such a declaration of acceleration with respect to debt securities of such series (or of all debt securities then outstanding under any indenture, as the case may be) has been made, but before a judgment or decree for payment of the money due has been obtained by the applicable trustee, the holders of not less than a majority in principal amount of outstanding debt securities of such series (or of all debt securities then outstanding under the applicable indenture, as the case may be) may rescind and annul such declaration and its consequences if:
• we shall have deposited with the applicable trustee all required payments of the principal of (and premium, if any) and interest on the debt securities of such series (or of all debt securities then outstanding under the applicable indenture, as the case may be), plus certain fees, expenses, disbursements and advances of the applicable trustee; and
• all events of default, other than the non-payment of accelerated principal (or specified portion thereof), with respect to debt securities of such series (or of all debt securities then outstanding under the applicable indenture, as the case may be) have been cured or waived as provided in such indenture.
Each indenture also will provide that the holders of not less than a majority in principal amount of the outstanding debt securities of any series (or of all debt securities then outstanding under the applicable indenture, as the case may be) may waive any past default with respect to the series and its consequences, except a:
• payment default; or
• covenant default that cannot be modified or amended without the consent of the holder of each outstanding debt security affected thereby.
Each trustee will be required to give notice to the holders of debt securities within a certain number of days of a default under the applicable indenture unless the default has been cured or waived; provided, however, that the trustee may withhold notice to the holders of any series of debt securities of any default with respect to the series (except a default in the payment of the principal of (or premium, if any) or interest on any debt security of the series or in the payment of any sinking fund installment in respect of any debt security of the series) if specified responsible officers of the trustee consider withholding the notice to be in the interest of the holders.
Each indenture will prohibit the holders of debt securities of any series from instituting any proceedings, judicial or otherwise, with respect to the indenture or for any remedy thereunder, except in the case of failure of the applicable trustee, for a certain period of time after the trustee has received a written request to institute proceedings in respect of an event of default from the holders of not less than a majority in principal amount of the outstanding debt securities of such series, as well as the furnishing of indemnity reasonably satisfactory to it. This provision will not prevent any holder of debt securities from instituting a suit to enforce the payment of the principal of (and premium, if any) and interest on the debt securities at the respective due dates thereof.
Subject to the indenture, no trustee will be under any obligation to exercise any of its rights or powers under an indenture at the request or direction of any holders of any series of debt securities then outstanding, unless the holders furnish the trustee thereunder reasonable security or indemnity. The holders of not less than a majority in principal amount of the outstanding debt securities of any series (or of all debt securities then outstanding under an indenture, as the case may be) will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the applicable trustee, or of exercising any trust or power conferred upon the trustee. However, a trustee may refuse to follow any direction which is in conflict with any law or the applicable indenture,


14

which may involve the trustee in personal liability or which may be unduly prejudicial to the holders of debt securities of such series not joining therein.
Within a certain period of time of the close of each fiscal year, we will be required to deliver to each trustee, a certificate, signed by one of several specified officers, stating whether or not the officer has knowledge of any default under the applicable indenture and, if so, specifying each default and the nature and status thereof.
Modification of the Indenture
The indenture will likely be modified or amended, with the consent of the holders of not less than a majority in principal amount of each series of the outstanding debt securities issued under the indenture affected by the modification or amendment, provided that no modification or amendment may, without the consent of each affected holder of the debt securities:
• change the stated maturity date of the principal of (or premium, if any) or any installment of interest, if any, on the debt securities;
• reduce the principal amount of (or premium, if any) or the interest, if any, on the debt securities or the principal amount due upon acceleration of an original issue discount security;
• change the place or currency of payment of principal of (or premium, if any) or interest, if any, on the debt securities;
• impair the right to institute suit for the enforcement of any payment on or with respect to the debt securities;
• reduce the above-stated percentage of holders of the debt securities necessary to modify or amend the indenture; or
• modify the foregoing requirements or reduce the percentage of the outstanding debt securities necessary to waive compliance with certain provisions of the indenture or for waiver of certain defaults.
A record date may be set for any act of the holders with respect to consenting to any amendment.
The holders of not less than a majority in principal amount of the outstanding debt securities of each series affected thereby will have the right to waive our compliance with certain covenants in the indenture. Each indenture will contain provisions for convening meetings of the holders of debt securities of a series to take permitted action. Under certain circumstances, we and the trustee may make modifications and amendments to an indenture without the consent of any holders of outstanding debt securities.
Redemption of Debt securities
The debt securities may be redeemed at any time at our option, in whole or in part, to protect our status as a REIT. The debt securities will also be subject to optional or mandatory redemption on terms and conditions described in the accompanying prospectus supplement.
Conversion of Debt securities
The terms and conditions, if any, upon which any debt securities are convertible into shares of our common stock or preferred stock will be set forth in the applicable prospectus supplement relating thereto. The terms will include:
• whether the debt securities are convertible into shares of our common stock or preferred stock;
• the conversion price (or the manner of calculating the price);
• the conversion period;
• the events requiring an adjustment to the conversion price and provisions affecting conversion if the debt securities are redeemed; and
• any restrictions on conversion.


15

Subordination
Upon any distribution to our creditors in a liquidation, dissolution or reorganization, the payment of the principal of and interest on any subordinated securities will be subordinated to the extent provided in the applicable indenture to the prior payment in full of all senior securities. No payment of principal or interest will be permitted to be made on subordinated securities at any time if any payment default or any other default which permits accelerations exists. After all senior securities are paid in full and until the subordinated securities are paid in full, holders of subordinated securities will be subrogated to the right of holders of senior securities to the extent that distributions otherwise payable to holders of subordinated securities have been applied to the payment of senior securities. By reason of any subordination, in the event of a distribution of assets upon our insolvency, some of our general creditors may recover more, ratably, than holders of subordinated securities. The accompanying prospectus supplement or the information incorporated herein by reference will contain the approximate amount of senior securities outstanding as of the end of our most recent fiscal quarter.
Global Debt Securities
The debt securities of a series may be issued in whole or in part in global form. The global securities will be deposited with a depositary, or with a nominee for a depositary, identified in the accompanying prospectus supplement. In this case, one or more global securities will be issued in a denomination or aggregate denominations equal to the portion of the aggregate principal amount of outstanding debt securities of the series to be represented by the global security or securities. Unless and until it is exchanged in whole or in part for debt securities in definitive form, a global security may not be transferred except as a whole by the depositary for the global security to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary or by the depositary or any nominee to a successor of the depositary or a nominee of the successor.
The specific material terms of the depositary arrangement with respect to any portion of a series of debt securities to be represented by a global security will be described in the accompanying prospectus supplement. We anticipate that the following provisions will apply to all depositary arrangements.
Upon the issuance of a global security, the depositary for the global security will credit, on its book-entry registration and transfer system, the respective principal amounts of the debt securities represented by the global security to the accounts of persons, or participants, that have accounts with the depositary. The accounts to be credited will be designated by any underwriters or agents participating in the distribution of the debt securities. Ownership of beneficial interests in a global security will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the global security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the depositary for the global security, with respect to interests of participants, or by participants or persons that hold through participants, with respect to interests of persons other than participants. So long as the depositary for a global security, or its nominee, is the registered owner of the global security, the depositary or the nominee, as the case may be, will be considered the sole owner or holder of the debt securities represented by the global security for all purposes under the indenture; provided, however, that for purposes of obtaining any consents or directions required to be given by the holders of the debt securities, we, the trustee and our agents will treat a person as the holder of the principal amount of debt securities as specified in a written statement of the depositary. Except as set forth herein or otherwise provided in the accompanying prospectus supplement, owners of beneficial interests in a global security will not be entitled to have the debt securities represented by the global security registered in their names, will not receive physical delivery of the debt securities in definitive form and will not be considered the owners or holders thereof under the indenture.
Principal, premium, if any, and interest payments on debt securities represented by a global security registered in the name of a depositary or its nominee will be made to the depositary or its nominee, as the case may be, as the registered owner of the global security. Neither we, the trustee nor any paying agent for the debt securities, will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the global security or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests.
We expect that the depositary for any debt securities represented by a global security, upon receipt of any payment of principal, premium, if any, or interest will immediately credit participants’ accounts with payments in


16

amounts proportionate to their respective beneficial interests in the principal amount of the global security as shown on the records of the depositary. We also expect that payments by participants will be governed by standing instructions and customary practices, as is now the case with the securities held for the accounts of customers registered in “street names” and will be the responsibility of the participants.
If the depositary for any debt securities represented by a global security is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by us within the period of time set forth in the indenture, we will issue the debt securities in definitive form in exchange for the global security. In addition, we may at any time, and in our sole discretion, determine not to have any of the debt securities of a series represented by one or more global securities and, in that event, will issue debt securities of the series in definitive form in exchange for all of the global security or securities representing the debt securities.
The laws of some states require that certain purchasers of securities take physical delivery of the securities in definitive form. These laws may impair the ability to transfer beneficial interests in debt securities represented by global securities.
Governing Law
The indenture and the debt securities will be governed by and construed in accordance with the internal laws of the State of New York.
DESCRIPTION OF DEPOSITARY SHARES
General
We may issue depositary shares, each of which will represent a fractional interest of a share of a particular class or series of our preferred stock, as specified in the accompanying prospectus supplement which will more fully describe the terms of those depositary shares. Shares of a class or series of preferred stock represented by depositary shares will be deposited under a separate deposit agreement among us, the depositary named therein and the holders from time to time of the depositary receipts issued by the preferred stock depositary which will evidence the depositary shares. Subject to the terms of the deposit agreement, each owner of a depositary receipt will be entitled, in proportion to the fractional interest of a share of a particular class or series of preferred stock represented by the depositary shares evidenced by that depositary receipt, to all the rights and preferences of the class or series of preferred stock represented by those depositary shares (including dividend, voting, conversion, redemption and liquidation rights).
The depositary shares to be issued will be evidenced by depositary receipts issued pursuant to the applicable deposit agreement. Immediately following the issuance and delivery of a class or series of preferred stock by us to the preferred stock depositary, we will cause the preferred stock depositary to issue, on our behalf, the depositary receipts. The following description of the depositary shares, and any description of the depositary shares in an accompanying prospectus supplement, may not be complete and is subject to, and qualified in its entirety by reference to, the underlying deposit agreement and the depositary receipt, which we will file with the SEC at or prior to the time of the sale of the depositary shares. You should refer to, and read this summary together with, the deposit agreement and related depositary receipt. You can obtain copies of any form of deposit agreement or other agreement pursuant to which the depositary shares are issued by following the directions described under the caption “Where You Can Find More Information” in the accompanying prospectus supplement.
Dividends And Other Distributions
The depositary will distribute all cash dividends or other cash distributions received in respect of our preferred stock to the record holders of depositary shares relating to such preferred stock in proportion to the number of such depositary shares owned by such holders. The depositary shall distribute only such amount, however, as can be distributed without attributing to any holder of depositary shares a fraction of one cent, and the balance not so distributed shall be added to and treated as part of the next sum received by the depositary for distribution to record holders of depositary shares.


17

In the event of a distribution other than in cash, the depositary will distribute property received by it to the record holders of depositary shares entitled thereto, unless the depositary determines that it is not feasible to make such distribution, in which case the depositary may, with our approval, sell such property and distribute the net proceeds from such sale to such holders.
The deposit agreement will also contain provisions relating to the manner in which any subscription or similar rights offered by us to holders of our preferred stock shall be made available to the holders of depositary shares.
Redemption Of Depositary Shares
If a class or series of preferred stock represented by depositary shares is subject to redemption, the depositary shares will be redeemed from the proceeds received by the depositary resulting from the redemption, in whole or in part, of such class or series of preferred stock held by the depositary. The redemption price per depositary share will be equal to the applicable fraction of the redemption price per share payable with respect to such class or series of preferred stock. Whenever we redeem shares of preferred stock held by the depositary, the depositary will redeem as of the same redemption date the number of depositary shares representing the shares of preferred stock so redeemed. If fewer than all the depositary shares are to be redeemed, the depositary shares to be redeemed will be selected by lot or pro rata as may be determined by the depositary.
After the date fixed for redemption, the depositary shares so called for redemption will no longer be outstanding and all rights of the holders of the depositary shares will cease, except the right to receive the money, securities or other property payable upon such redemption and any money, securities or other property to which the holders of such depositary shares were entitled upon such redemption upon surrender to the depositary of the depositary receipts evidencing such depositary shares.
Voting Our Preferred Stock
Upon receipt of notice of any meeting at which the holders of preferred stock are entitled to vote, the depositary will mail the information contained in such notice of meeting to the record holders of the depositary shares relating to such preferred stock. Each record holder of such depositary shares on the record date (which will be the same date as the record date for our preferred stock) will be entitled to instruct the depositary as to the exercise of the voting rights pertaining to the amount of preferred stock represented by such holder’s depositary shares. The depositary will endeavor, insofar as practicable, to vote the amount of preferred stock represented by such depositary shares in accordance with such instructions, and we will agree to take all action which may be deemed necessary by the depositary in order to enable the depositary to do so. The depositary may abstain from voting shares of preferred stock to the extent it does not receive specific instructions from the holders of depositary shares representing such preferred stock.
Amendment and Termination of The Depositary Agreement
The form of depositary receipt evidencing the depositary shares and any provision of the deposit agreement may at any time be amended by agreement between the depositary and us. However, any amendment that materially and adversely alters the rights of the holders of depositary shares will not be effective unless such amendment has been approved by the holders of at least a majority of the depositary shares then outstanding. The deposit agreement may be terminated by us or the depositary only if (i) all outstanding depositary shares have been redeemed or (ii) there has been a final distribution in respect of our preferred stock in connection with any liquidation, dissolution or winding up of the Company and such distribution has been distributed to the holders of depositary receipts.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. We will pay charges of the depositary in connection with the initial deposit of our preferred stock and any redemption of our preferred stock. Holders of depositary receipts will pay other transfer and other taxes and governmental charges and such other charges, including a fee for the withdrawal of shares of preferred stock upon surrender of depositary receipts, as are expressly provided in the deposit agreement to be for their accounts.


18

Miscellaneous
The depositary will forward to holders of depositary receipts all reports and communications from the Company that are delivered to the depositary and that we are required to furnish to holders of preferred stock.
Neither the depositary nor the Company will be liable if it is prevented or delayed by law or any circumstance beyond its control in performing its obligations under the deposit agreement. The obligations of the depositary and the Company under the deposit agreement will be limited to performance in good faith of their duties thereunder and they will not be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or preferred stock unless satisfactory indemnity is furnished. They may rely upon written advice of counsel or accountants, or upon information provided by persons presenting preferred stock for deposit, holders of depositary receipts or other persons believed to be competent and on documents believed to be genuine.
Resignation and Removal of the Depositary
The depositary may resign at any time by delivering to us notice of its election to do so, and we may at any time remove the depositary, any such resignation or removal to take effect upon the appointment of a successor depositary and its acceptance of such appointment. Such successor depositary must be appointed within 60 days after delivery of the notice of resignation or removal.
Restrictions on Ownership
The deposit agreement will contain provisions restricting the ownership and transfer of depositary shares. Such restrictions will be described in the accompanying prospectus supplement and will be referenced on the applicable depositary receipts.
DESCRIPTION OF SUBSCRIPTION RIGHTS
We may issue subscription rights to purchase one or more series or classes of common stock, preferred stock, debt securities and depositary shares. We may issue subscription rights independently or together with any other offered security, which may or may not be transferable by the stockholder. In connection with any offering of subscription rights, we may enter into a standby arrangement with one or more underwriters or other purchasers pursuant to which the underwriters or other purchasers may be required to purchase any securities remaining unsubscribed for after such offering.
The accompanying prospectus supplement relating to any subscription rights we may offer will contain the specific terms of the subscription rights. These terms may include the following:
• the price, if any, for the subscription rights;
• the exercise price payable for common stock, preferred stock, debt securities or depositary shares upon the exercise of the subscription rights;
• the number of subscription rights issued to each security holder;
• the number and terms of the common stock, preferred stock, debt securities or depositary shares which may be purchased per each subscription right;
• the extent to which the subscription rights are transferable;
• any provisions for adjustment of the number or amount of securities receivable upon exercise of the subscription rights or the exercise price of the subscription rights;
• any other terms of the subscription rights, including the terms, procedures and limitations relating to the exchange and exercise of the subscription rights;
• the date on which the right to exercise the subscription rights shall commence, and the date on which the subscription rights shall expire;


19

• the extent to which the subscription rights may include an over-subscription privilege with respect to unsubscribed securities; and
• if applicable, the material terms of any standby underwriting or purchase arrangement entered into by us in connection with the offering of subscription rights.
The description in the accompanying prospectus supplement of any subscription rights we offer will not necessarily be complete and will be qualified in its entirety by reference to the applicable subscription rights certificate or subscription rights agreement, which will be filed with the SEC if we offer subscription rights. For more information on how you can obtain copies of any subscription rights certificate or subscription rights agreement if we offer subscription rights, see “Where You Can Find More Information.” We urge you to read the applicable subscription rights certificate, the applicable subscription rights agreement and any accompanying prospectus supplement in their entirety.
BOOK ENTRY PROCEDURES AND SETTLEMENT
We may issue the securities offered pursuant to this prospectus in certificated or book-entry form or in the form of one or more global securities. The accompanying prospectus supplement will describe the manner in which the securities offered thereby will be issued.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
Classification of our Board of Directors
 
Pursuant to our bylaws, our board of directors is comprised of ten members and is divided into three classes of directors. Directors of each class are elected for a three-year term, and each year one class of directors will be elected by the stockholders. The current terms of the Class II, Class III and Class I directors will expire in 2008, 2009 and 2010, respectively, and when their respective successors are duly elected and qualify. Any director elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected and qualifies. We believe that classification of our board of directors helps to assure the continuity and stability of our business strategies and policies as determined by our directors. Holders of shares of our capital stock have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the capital stock are able to elect all of the successors of the class of directors whose terms expire at that meeting.
 
Our classified board could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, our classified board could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us or another transaction that might involve a premium price for our common stock that might be in the best interest of our stockholders.
Removal of Directors
 
Any director may be removed only for cause by the stockholders upon the affirmative vote of at least two-thirds of all the votes entitled to be cast at a meeting called forgenerally in the purposeelection of the proposed removal. The notice of the meeting shall indicate that the purpose, or one of the purposes, of the meeting is to determine if the director shall be removed.directors.
Restrictions on Ownership of Sharesand Transfer
 
In order for us to qualify as a REIT, not more than 50% (by value) of our outstanding shares may be owned by any five or fewer individuals (including some tax-exempt entities) during the last half of each taxable year, and the outstanding shares must be owned by 100 or more persons independent of us and each other during at least 335 days of a12-month taxable year or during a proportionate part of a shorter taxable year for which an election to be treated as a REIT is made. We may prohibit certain acquisitions and transfers of shares so as to facilitatemaintain our continued qualification as a REIT under the Internal Revenue Code. However, no assurance can be given that this prohibition may notwill be effective.

17

 Our articles of incorporation, in
In order to assist our board of directors in preserving our status as a REIT, containamong other purposes, our charter contains an ownership limit which prohibits any person or group of persons from acquiring, directly or indirectly,


20

beneficial ownership of more than 9.8% of our outstanding shares of capital stock.stock (which includes our common stock and preferred stock). Shares owned by a person or a group of persons in excess of the ownership limit are deemed “excess shares.” Shares owned by a person who individually owns of record less than 9.8% of outstanding shares may nevertheless be excess shares if the person is deemed part of a group for purposes of this restriction.
 
Our articles of incorporation stipulatecharter stipulates that any purported issuance or transfer of shares shall be valid only with respect to those shares that do not result in the transferee-stockholder owning shares in excess of the ownership limit. If the transferee-stockholder acquires excess shares, the person is considered to have acted as our agent and holds the excess shares on behalf of the ultimate stockholder.
 
The ownership limit does not apply to offerors which, in accordance with applicable federal and state securities laws, make a cash tender offer, where at least 90% of the outstanding shares of our common stock (not including shares or subsequently issued securities convertible into common stock which are held by the tender offeror and any “affiliates” or “associates” thereof within the meaning of the Exchange Act) are duly tendered and accepted pursuant to the cash tender offer. The ownership limit also does not apply to the underwriter in a public offering of our shares. The ownership limit also does not apply to a person or persons which our directors so exempt from the ownership limit upon appropriate assurances that our qualification as a REIT is not jeopardized.
Business Combinations
 Maryland law
The MGCL prohibits “business combinations” between usa corporation and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, statutory share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassificationcertain transfers of equity securities. Maryland lawassets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested stockholders and their affiliates. The MGCL defines an interested stockholder as:
 • any person who beneficially owns 10% or more of the voting power of our shares;outstanding voting stock; or
 
 • an affiliate or associate of oursthe corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of ourthe then-outstanding voting shares.stock of the corporation.
A person is not an interested stockholder if ourthe board of directors approvedapproves in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving athe transaction, ourthe board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by ourthe board of directors.
 
After the five-year prohibition, any business combination between usa corporation and an interested stockholder generally must be recommended by ourthe board of directors and approved by the affirmative vote of at least:
 • 80% of the votes entitled to be cast by holders of our then-outstandingthe then outstanding shares of capitalvoting stock; and
 
 • two-thirds of the votes entitled to be cast by holders of ourthe voting sharesstock other than shares held by (a) the interested stockholder with whom or with whose affiliate the business combination is to be effected and (b)or shares held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if ourthe common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are exemptedapproved by ourthe board of directors before the time that the interested stockholder becomes an interested stockholder. The
Our board of directors has by resolution exempted any business combination statute may discourage othersbetween the corporation and our officers and directors from tryingthese provisions of the MGCL and, consequently, the five-year prohibition and the super-majority vote requirements will not apply to acquire control ofbusiness combinations between us and increaseany of our officers and directors unless our board later resolves otherwise. We believe that our ownership restrictions will substantially


21

reduce the difficultyrisk that a stockholder would become an “interested stockholder” within the meaning of consummatingthe Maryland business combination statute.
Subtitle 8
Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any offer.contrary provision in the charter or bylaws, to any or all of five provisions:
• a classified board of directors;
• a two-thirds vote requirement for removing a director;
• a requirement that the number of directors be fixed only by vote of the directors;
• a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred; and
• a majority requirement for the calling by stockholders of a special meeting of stockholders.
We have elected to be subject to each of the above provisions of Title 3, Subtitle 8 of the MGCL.
Merger; Amendment of Articles of IncorporationCharter
 
Under Maryland law, we generally will not be able to amend our articles of incorporationcharter or merge with another entity unless declared advisable by our board of directors and approved by the affirmative vote of stockholders holdingentitled to cast at least a majority of the sharesvotes entitled to votebe cast on the matter. As permitted by Maryland law, our articles of incorporation containcharter contains a provision permitting our directors, without any action by our stockholders, to amend the articles of incorporationcharter to increase or decrease the aggregate number of shares of stock or the number of shares of any class of stock that we have the authority to issue.

18

Operations
 
We generally are prohibited from engaging in certain activities, including acquiring or holding property or engaging in any activity that would cause us to fail to qualify as a REIT.
Term and Termination
 
Our articles of incorporation providecharter provides for us to have a perpetual existence. Pursuant to our articles of incorporation,charter, and subject to the provisions of any of our classes or series of stock then outstanding and the approval by a majority of the entire board of directors, our stockholders, at any meeting thereof, by the affirmative vote of a majority of all of the votes entitled to be cast on the matter, may approve a plan of liquidation and dissolution.
Advance Notice of Director Nominations and New Business
 
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of persons for election to our board of directors and the proposal of business to be considered by stockholders at the annual meeting may be made only:
 • pursuant to our notice of the meeting;
 
 • by or at the direction of our board of directors; or
 
 • by a stockholder who was a stockholder of record both at the time of the provision of notice and at the time of the meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures set forth in our bylaws.


22

With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to our board of directors at which directors are to be elected pursuant to our notice of the meeting may be made only:
•pursuant to our notice of the meeting;
 • by or at the direction of our board of directors; or
 
 •provided that our board of directors has determined that directors shall be elected at such meeting, by a stockholder who was a stockholder of record both at the time of the provision of notice and at the time of the meeting, who is entitled to vote at the meeting and who has complied with the advance notice provisions set forth in our bylaws.
Power to Issue Additional Shares
 
We currently do not intend to issue any securities other than the shares described in this prospectus, although we may do so at any time, including upon the redemption of limited partnership interests that we may issue in connection with acquisitions of real property. We believe that the power to issue additional shares of stock and to classify or reclassify unissued shares of common stock or preferred stock and thereafter to issue the classified or reclassified shares provides us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. These actions can be taken without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although we have no present intention of doing so, we could issue a class or series of shares that could delay, defer or prevent a transaction or a change in control that might involve a premium price for holders of common stock or otherwise be in their best interest.
Control Share Acquisitions
 Maryland law
The MGCL provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights unlessexcept to the corporation’s stockholders approve such voting rightsextent approved at a special meeting by athe affirmative vote of two-thirds of the votes entitled to be cast on the matter. Shares owned bymatter, excluding shares of stock in a corporation in respect of which any of the acquiror,following persons is entitled to exercise or by officersdirect the exercise of the voting power of shares of stock of the corporation in the election of directors: (i) a person who makes or directorsproposes to make a control share acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who areis also employees are excluded from shares entitled to vote ona director of the matter.corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiring person,acquiror or in respect of which the acquiring personacquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiring personacquiror to exercise voting power in electing directors within one of the following ranges of voting power:
(i) one-tenth or more but less than one-third, of all voting power;

19

•one-third or more but less than a majority of all voting power; or
•(ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power.
Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.
 
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel our board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including providing a statement to us detailing, among other things, the acquiring person’s identity and stock ownership and an undertaking to pay the expenses of the meeting. If no request for a meeting is made, wethe corporation may itself present the question at any stockholders’stockholders meeting.
 
If voting rights are not approved at the stockholders’ meeting or if the acquiring person does not deliver thean acquiring person statement as required by Maryland law,the statute, then, subject to certain conditions and limitations, wethe corporation may redeem any or all of the control shares except(except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair market value of the shares as determined for purposes of such shares. appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.


23

The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if we arethe corporation is a party to the transaction nor does it applyor (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws do not contain a provision which exempts from the control share acquisition statute any and all acquisitions by any person of our articlesstock and, consequently, the applicability of incorporation or bylaws.the control share acquisitions.
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Articles of IncorporationCharter and Bylaws
 
The business combination provisions and the control share acquisition provisions of Maryland law,the MGCL, the provisions of our bylaws regarding the classification of our board of directors and the restrictions on the transfer and ownership of stock and the advance notice provisions of our bylaws could have the effect of delaying, deferring or preventing a transaction or a change in the control that might involve a premium price for holders of common stock or otherwise be in their best interest.interests.
CERTAIN UNITED STATESMATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
 The following discussion
This section summarizes our taxation and the current material U.S. Federalfederal income tax consequences generally resulting from our election to stockholders of theirbe taxed as a REIT and the current material federal income tax considerations relating to the ownership and disposition of our common stock, senior common stock and preferred stock. TheIf we offer securities other than our common stock, senior common stock and preferred stock, information about any additional federal income tax treatmentconsiderations to holders of stockholdersthose securities will vary depending uponbe included in the stockholder’s particular situation,documents pursuant to which those securities are offered. As used in this section, the terms “we” and this“our” refer solely to Gladstone Commercial Corporation and not to our subsidiaries and affiliates which have not elected to be taxed as REITs for federal income tax purposes.
This discussion addresses only stockholders that hold our stock as a capital assetis not exhaustive of all possible tax considerations and does not deal withprovide a detailed discussion of any state, local or foreign tax considerations. This discussion does not address all aspects of taxation that may be relevant to particular stockholdersinvestors in light of their personal investment or tax circumstances. This section also does not deal with all aspects of taxation that may be relevantcircumstances, or to certain types of stockholdersinvestors that are subject to which special provisions oftreatment under the U.S. Federalfederal income tax laws, apply, including:
•dealers in securities or currencies;
•traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
•banks;
•tax-exempt organizations;
•certain insurance companies;
•persons liable for the alternative minimum tax;
•persons that hold our stock as a hedge against interest rate or currency risks or as part of a straddle or conversion transaction; and
•stockholders whose functional currency is not the U.S. dollar.
          Thissuch as insurance companies, tax-exempt organizations (except to the limited extent discussed below under “— Taxation of Tax-Exempt Stockholders”), financial institutions or broker-dealers,non-U.S. individuals and foreign corporations (except to the limited extent discussed below under “— Taxation ofNon-U.S. Stockholders”) and other persons subject to special tax rules. Moreover, this summary isassumes that our stockholders hold our stock as a capital asset for federal income tax purposes, which generally means property held for investment. The statements in this section are based on the Code, its legislative history, existingcurrent federal income tax laws, are for general purposes only and proposed regulations under the Code, published rulings and court decisions. This summary describes the provisions of these sourcesare not tax advice. We cannot assure you that new laws, interpretations of law, only as they are currentlyor court decisions, any of which may take effect retroactively, will not cause any statement in effect. All of these sources of law may change at any time, and any change in the law may apply retroactively.this section to be inaccurate.
 
We urge you to consult with your own tax advisor regarding the specific tax consequences to you of acquiring, owningacquisition, ownership and sellingdisposition of our common stock, includingsenior common stock and preferred stock and of our election to be taxed as a REIT. Specifically, you should consult your own tax advisor regarding the U.S. Federal,federal, state, local, foreign, and foreignother tax consequences of acquiring, owningsuch acquisition, ownership, disposition and selling our stock in your particular circumstanceselection, and regarding potential changes in applicable tax laws.

20

Taxation of theOur Company
We elected to be taxed as a REIT
          In under the opinion of Cooley Godward Kronish LLP, commencingfederal income tax laws beginning with our taxable year endingended December 31, 2003,2003. We believe that, beginning with such taxable year, we have been organized and have operated in conformity with the requirementssuch a manner as to qualify for qualification and taxation as a REIT under the Code, and we intend to continue to operate in such a manner. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on our continuing to satisfy numerous asset, income, stock ownership and distribution tests described below, the satisfaction of which depends, in part, on our operating results.
The sections of the Code relating to qualification, operation and taxation as a REIT are highly technical and complex. The following discussion sets forth only the material aspects of those sections. This summary is qualified in its entirety by the applicable Code provisions and the related rules and regulations.


24

In the opinion of Bass, Berry & Sims PLC, we qualified to be taxed as a REIT under the federal income tax laws for our taxable years ended December 31, 2006 through December 31, 2009, and our organization and current and proposed method of operation will enable us to continue to meetqualify as a REIT for our taxable year ending December 31, 2010 and in the requirements forfuture. Investors should be aware that Bass, Berry & Sims PLC’s opinion is based on existing federal income tax law governing qualification as a REIT, which is subject to change, possibly on a retroactive basis, is not binding on the Internal Revenue Service, or the “IRS,” or any court, and speaks only as of the date issued. In addition, Bass, Berry & Sims PLC’s opinion is based on customary assumptions and is conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the future conduct of our business. Moreover, our continued qualification and taxation as a REIT underdepend on our ability to meet, on a continuing basis, through actual results, certain qualification tests set forth in the Code. You should be aware, however,federal income tax laws. Those qualification tests involve the percentage of our income that opinionswe earn from specified sources, the percentage of counsel are not binding uponour assets that falls within specified categories, the IRS or any court.
          In providing its opinion, Cooley Godward Kronish LLP is relying as to certain factualdiversity of our stock ownership, and the percentage of our earnings that we distribute. While Bass, Berry & Sims PLC has reviewed those matters upon the statements and representations contained in certificates provided to Cooley Godward Kronish LLP by us. Commencing with our taxable year ending December 31, 2003, we have been organized in conformityconnection with the requirements for qualification and taxation asforegoing opinion, Bass, Berry & Sims PLC will not review our compliance with those tests on a REIT under the Code, and our proposed method of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the Code.
          Our qualification as a REIT will depend upon our continuing satisfaction of the requirements of the Code relating to qualification for REIT status. Some of these requirements depend upon actual operating results, distribution levels, diversity of stock ownership, asset composition, source of income and record keeping.basis. Accordingly, while we intend to continue to qualify tono assurance can be taxed as a REIT,given that the actual results of our operations for any particular taxable year mightwill satisfy such requirements. Bass, Berry & Sims PLC’s opinion does not satisfy these requirements.
          The sectionsforeclose the possibility that we may have to use one or more of the Code applicableREIT savings provisions described below, which may require us to REITs are highly technical and complex. The followingpay a material excise or penalty tax in order to maintain our REIT qualification. For a discussion summarizes the material aspects of relevant sections of the Code.tax consequences of our failure to qualify as a REIT, see ‘‘—Failure to Qualify as a REIT” below.
 As
If we qualify as a REIT, we generally will not havebe subject to pay U.S. Federal corporatefederal income taxestax on netthe taxable income that we currently distribute to our stockholders. ThisThe benefit of that tax treatment substantially eliminatesis that it avoids the “double taxation”taxation,” or taxation at both the corporate and stockholder levels, that generally results from investmentowning stock in a regular corporation. Our dividends, however, will generally not be eligible for (i) the reduced tax rates applicable to dividends received by individuals or (ii) the corporate dividends received deduction. In addition, our domestic taxable REIT subsidiaryHowever, we will be subject to U.S. Federal, state and local corporate income tax.federal tax in the following circumstances:
 Even if we qualify for taxation as a REIT, we may be subject to U.S. Federal income tax as follows:
 •First, we will haveWe are subject to paythe corporate federal income tax at regular corporate rates on any undistributed real estate investment trust taxable income, including undistributed net capital gains.gain, that we do not distribute to our stockholders during, or within a specified time period after, the calendar year in which the income is earned.
 
 •Second, under certain circumstances, weWe may havebe subject to pay the alternativecorporate “alternative minimum taxtax” on any items of tax preference, if any.including any deductions of net operating losses.
 
 •We are subject to tax, at the highest corporate rate, on:
 Third, if we have (a) • net income from the sale or other disposition of “foreclosure property acquired through foreclosure (“foreclosure property”), as described below under “— Gross Income Tests — Foreclosure Property,” as defined in the Code, which is heldthat we hold primarily for sale to customers in the ordinary course of business, or (b) other non-qualifying net income from foreclosure property, we will have to pay tax at the highest corporate rate on that income.and
 
 •other non-qualifying income from foreclosure property.
 Fourth, if we have net income from “prohibited transactions,” as defined in the Code, we will have• We are subject to pay a 100% tax on that income. Prohibited transactions are, in general, certainnet income from sales or other dispositions of property, other than foreclosure property, heldthat we hold primarily for sale to customers in the ordinary course of business. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We and our subsidiaries intend to hold the interests in our properties for investment with a view to long-term appreciation and to make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will only make sales that satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.
 
 •Fifth, ifIf we should fail to satisfy one or both of the 75% gross income test or the 95% gross income test, as discusseddescribed below under “— Gross Income Tests,” but we have nonetheless maintained our qualificationcontinue to qualify as a REIT because we have satisfiedmeet other requirements, necessary to maintain REIT qualification, we will havebe subject to pay a 100% tax on an amount equal to (a) the gross income attributable to on:
• the greater of (i)the amount by which we fail the 75% of our gross income overtest or the amount of95% gross income that is qualifying income for purposes of the 75% test, and (ii) 95% of our gross income over the amount of gross income that is qualifying income for purposes of the 95% test,in either case, multiplied by (b) 
• a fraction intended to reflect our profitability.

21

 •Sixth, ifIf we should fail to distribute during eacha calendar year at least the sum ofof: (1) 85% of our real estate investment trustREIT ordinary income for thatthe year, (2) 95% of our real estate investment trustREIT capital gain net income for thatthe year, and (3) any undistributed taxable income required to be distributed from priorearlier periods, then we would havewill be subject to pay a non-deductible 4% nondeductible excise tax on the excess of thatthe required distribution over the amountsamount we actually distributed.
 
 •Seventh, ifIf we acquirefail any asset from a C corporation in certain transactions in which we must adopt the basis of the asset or anytests, other property in the handsthan a de minimis failure of the C corporation5% asset test, the 10% vote test or the 10% value test, as our basis ofdescribed below under “— Asset Tests,” as long as (1) the asset in our hands, and we subsequently recognize gain on the disposition of that asset during the 10-year period beginning on the date on which we acquired that asset, then we will havefailure was due to pay tax on the built-in gain at the highest regular corporate rate. A “C corporation” means generally a corporation that has to pay full corporate-level tax.reasonable


25

 •Eighth, ifcause and not to willful neglect, (2) we receive non-arm’s length income from onefile a description of our taxable REIT subsidiaries (as defined under “— Asset Tests”), we will be subject to a 100% tax oneach asset that caused such failure with the amount of our non-arm’s length income.
•Ninth, if we should fail to satisfy the asset test (as discussed below) but nonetheless maintain our qualification as a REIT because certain other requirements have been met, we may be subject to a tax that would be the greater of (a) $50,000; or (b) an amount determined by multiplying the highest rate of tax for corporations by the net income generated by the assets for the period beginning on the first date of the failureIRS, and ending on the day(3) we dispose of the assets (orcausing the failure or otherwise comply with the asset tests within six months after the last day of the quarter in which we identify such failure, we will pay a tax equal to the greater of $50,000 or the highest federal corporate income tax rate (currently 35%) multiplied by the net income from the nonqualifying assets during the period in which we failed to satisfy the requirements for maintaining REIT qualification).asset tests.
 •Tenth, ifIf we should fail to satisfy one or more requirements for REIT qualification, other than the 95% and 75% gross income tests and other than the asset test, but nonetheless maintain our qualification astests, and such failure is due to reasonable cause and not to willful neglect, we will be required to pay a REIT because certain other requirements have been met, we may be subject to apenalty of $50,000 penalty for each such failure.
 
 •Eleventh, if we should failWe may elect to comply with the record-keeping requirements in ascertaining the actual ownershipretain and pay income tax on our net long-term capital gain, as described below under “— Taxation of the outstanding shares of our stock, we may be subject to a $25,000 or a $50,000 penalty for each failure.
Requirements for Qualification as a REIT
     The Code defines a REIT as a corporation, trust or association that is:
•managed by one or more trustees or directors;Taxable U.S. Stockholders.”
 
 •the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;We will be subject to a 100% excise tax on transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.
 
 •If we acquire any asset from a C corporation, or a corporation that would otherwise be taxable asgenerally is subject to full corporate-level tax, in a domestic corporation, but for Sections 856 through 859merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if we recognize gain on the sale or disposition of the Code;asset during the10-year period after we acquire the asset. The amount of gain on which we will pay tax generally is the lesser of:
 •the amount of gain that is neither a financial institution nor an insurance company to which certain provisionswe recognize at the time of the Code apply;
•the beneficial ownership of which is held by 100sale or more persons;
•that, during the last half of each taxable year, has no more than 50% in value of its outstanding stock owned, directly or constructively, by five or fewer individuals, as defined in the Code to include certain entities;disposition, and
 
 •the amount of gain that we would have recognized if we had sold the asset at the time we acquired it.
 that meets• We may be required to pay monetary penalties to the IRS in certain other tests,circumstances, including if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described below regarding the naturein “— Recordkeeping Requirements.”
• The earnings of itsour lower-tier entities that are C corporations, including taxable REIT subsidiaries, are subject to federal corporate income and assets.tax.
In addition, we may be subject to a variety of taxes, including payroll taxes and state, local and foreign income, property and other taxes on our assets and operations. We also could be subject to tax in situations and on transactions not presently contemplated.
 The
Requirements for Qualification as a REIT
A REIT is a corporation, trust or association that meets each of the following requirements:
(1) It is managed by one or more trustees or directors;
(2) Its beneficial ownership is evidenced by transferable shares of stock, or by transferable shares or certificates of beneficial interest;
(3) It would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code, providesi.e. the REIT provisions;
(4) It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws;
(5) At least 100 persons are beneficial owners of its stock or ownership shares or certificates (determined without reference to any rules of attribution);
(6) Not more than 50% in value of its outstanding stock or ownership shares or certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax law defines to include certain entities, during the last half of any taxable year;


26

(7) It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that the conditions described in the first through fourth bullet points above must be met to elect and maintain REIT status;
(8) It uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the federal income tax laws; and
(9) It meets certain other qualifications, tests described below, regarding the sources of its income, the nature and diversification of its assets and the distribution of its income.
We must meet requirements 1 through 4, 8 and 9 during theour entire taxable year and that the condition described in the fifth bullet point above must be metmeet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Under applicable Treasury regulations,If we must maintaincomply with certain records and request certain information from our stockholders designed to discloserequirements for ascertaining the actualbeneficial ownership of our stock. The Code waivesoutstanding stock in a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. For purposes of determining stock ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the requirementsfederal income tax laws, and beneficiaries of such a trust will be treated as holding our stock in proportion to their actuarial interests in the fifth and sixth bullet pointstrust for the first taxable year for which an election is made to be taxed as a REIT.

22

          We expect that we will satisfy the conditions described in the first through sixth bullet pointspurposes of the second preceding paragraph. In addition, our articles of incorporation providerequirement 6. Our charter provides for restrictions regarding the ownership and transfer of our stock. These restrictions are intendedstock that should allow us to assist us in continuingcontinue to satisfy the share ownership requirements described in the fifth and sixth bullet pointsthese requirements. The provisions of the second preceding paragraph. Thecharter restricting the ownership and transfer restrictions pertaining toof our stock are described in this prospectus under the heading “Certain Provisions of Maryland Law and of our Articles of IncorporationOur Charter and Bylaws — Restrictions on Ownership of Shares.” Our boardWe believe we have issued sufficient stock with enough diversity of directors will require an IRS ruling or an opinion of counsel before granting any request for an exemption from such ownership limitations in circumstances where it is unable to satisfy itself thatrequirements 5 and 6 set forth above.
Qualified REIT Subsidiaries.  A “qualified REIT subsidiary” is a corporation, all of the ownership limitations would not be violated.
          We own interests in two corporate subsidiaries. Code Section 856(i) provides that unlessstock of which is owned, directly or indirectly, by a REIT makes an electionand that has not elected to treat the corporation asbe a taxable REIT subsidiary (as defined below), a wholly owned corporate subsidiary of a REIT whichsubsidiary. A corporation that is a “qualified REIT subsidiary,” as defined in the Code, will not besubsidiary” is treated as a division of its owner and not as a separate corporation, andentity for federal income tax purposes. Thus, all assets, liabilities, and items of income, deduction, and credit of a qualified“qualified REIT subsidiary will besubsidiary” are treated as assets, liabilities, and items of these kindsincome, deduction, and credit of the REIT. Thus,REIT that directly or indirectly owns the qualified REIT subsidiary. Consequently, in applying the REIT requirements described in this section, our qualifiedherein, the separate existence of any “qualified REIT subsidiaries, if any,subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of these subsidiariessuch subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.
Other Disregarded Entities and Partnerships.  An unincorporated domestic entity, such as a partnership or limited liability company that has a single owner as determined under federal income tax law, generally is not treated as an entity separate from its owner for federal income tax purposes. We own various direct and indirect interests in entities that are classified as partnerships, limited liability companies and trusts for state law purposes. Nevertheless, these kindsentities currently are not treated as entities separate from us for federal income tax purposes because we currently own, directly or indirectly, all of ours.the ownership interests in these entities. Consequently, the assets and items of gross income of these entities will be treated as our assets and items of gross income for purposes of applying the various REIT qualification tests.
An unincorporated domestic entity with two or more owners, as determined under the federal income tax laws, generally is treated as a partnership for federal income tax purposes. In the case of a REIT that is a partner in a partnership, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the assets and items of gross income of any partnership, joint venture, or limited liability company that is treated as a partnership for federal income tax purposes would be treated as our assets and items of gross income for purposes of applying the various REIT qualification tests. For purposes of the 10% value test (described in “— Asset Tests”), our proportionate share would be based on our proportionate interest in the equity interests and certain debt securities issued by a partnership. For all of the other asset and income tests, our proportionate share would be based on our proportionate interest in the capital of the partnership.


27

Taxable REIT Subsidiaries
Subsidiaries.  A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries.” A taxable REIT subsidiary or TRS, is anya fully taxable corporation inthat may earn income that would not be qualifying income for purposes of the gross income tests, as described below, if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns stock, provided that the REIT and that corporation make a joint election to treat that corporation as a TRS. The election can be revoked at any time as long as the REIT and the TRS revoke such election jointly. In addition, if a TRS holds directly or indirectly, more than 35% of the voting power or value of the securities, of any other corporation (by vote or by value), then that other corporationhowever, is alsoautomatically treated as a TRS. A corporation can betaxable REIT subsidiary without an election. We are not treated as holding the assets of a TRStaxable REIT subsidiary or as receiving any income that the taxable REIT subsidiary earns. Rather, the stock issued by a taxable REIT subsidiary to us is an asset in our hands, and we treat the distributions paid to us from such taxable REIT subsidiary, if any, as income. This treatment may affect our compliance with respect to more than one REIT.the gross income tests and asset tests.
 
A TRS is subject to U.S. Federaltaxable REIT subsidiary will pay income tax at regular corporate rates (currently aton any income that it earns. In addition, the top marginal ratetaxable REIT subsidiary rules limit the deductibility of 35%), and may also beinterest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to statean appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a taxable REIT subsidiary and local taxation.
          Any dividends paidits parent REIT or deemed paid by any onethe REIT’s tenants that are not conducted on an arm’s-length basis. We may engage in activities indirectly through a taxable REIT subsidiary as necessary or convenient to avoid obtaining the benefit of income or services that would jeopardize our TRSs will also be subject to tax, either (i) to usREIT status if we do not payengaged in the dividends received to our stockholders as dividends, or (ii) to our stockholdersactivities directly. In particular, we likely would engage in activities through a taxable REIT subsidiary if we do pay outwished to provide services to unrelated parties which might produce income that does not qualify under the dividends receivedgross income tests described below. We also might dispose of an unwanted asset through a taxable REIT subsidiary as necessary or convenient to our stockholders. We may hold more than 10% ofavoid the stock of a TRS without jeopardizing our qualification as a REIT notwithstanding the rule described100% tax on income from prohibited transactions. See description below under “— Asset Tests”Gross Income Tests — Prohibited Transactions.”
Rent that generally precludes ownership of more than 10% of any issuer’s securities. However, as noted below, in order for us towe receive from a taxable REIT subsidiary will qualify as a REIT, the securities of all“rents from real property” for purposes of the TRSs in which we have invested either directly or indirectly may not represent more than 20%gross income tests described below if (1) at least 90% of the total value of our assets. Although we expect that the aggregate value of all of our interests in TRSs will represent less than 20% of the total value of our assets, we cannot assure that this will always be true. Other than certain activities related to operating or managing a lodging or health care facility as more fully described belowleased space in the section entitled “— Income Tests,” a TRS may generally engage in any business includingproperty is leased to persons other than taxable REIT subsidiaries and related-party tenants, and (2) the provision of customary or non-customary servicesamount paid by the taxable REIT subsidiary to rent space at the property is substantially comparable to rents paid by other tenants of the parent REIT.property for comparable space, as described in further detail below under “— Gross Income Tests — Rents from Real Property.”
Gross Income Tests
 In order
We must satisfy two gross income tests annually to maintain our qualification as a REIT, we annually must satisfy twoREIT. First, at least 75% of our gross income requirements:for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or qualified temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes:
 •First, we must derive at least 75% of our gross income, excluding gross income from prohibited transactions, for each taxable year directly or indirectly from investments relating to real property or mortgages on real property, including “rentsrents from real property,” as defined in the Code, or from certain types of temporary investments. Rents from real property generally include our expenses that are paid or reimbursed by tenants.property;
 
 •interest on debt secured by mortgages on real property or on interests in real property;
 Second, at least 95% of our gross income, excluding gross income from prohibited transactions, for each taxable year must be derived from real property investments as described in the preceding bullet point, • dividends (including dividends from a TRS), interestor other distributions on, and gain from the sale or disposition of, stock or securitiesshares of beneficial interest in other REITs;
• gain from the sale of real estate assets;
• income and gain derived from foreclosure property; and
• income derived from the temporary investment of new capital that do not constitute dealer property,is attributable to the issuance of our stock or from any combinationa public offering of these typesour debt with a maturity date of sources.at least five years and that we receive during the one-year period beginning on the date on which we receive such new capital.
     ForSecond, in general, at least 95% of our gross income for each taxable years beginning on or after January 1, 2005,year must consist of income that is qualifying income for purposes of the American Jobs Creation Act of 2004, effective as of October 22, 2004, or the 2004 Act, clarifies the75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these.
Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both gross income tests. In addition, any gains


28

from “hedging transactions,” as defined in “— Hedging Transactions,” that are hedging transactionsclearly and timely identified as such will be excluded from both the numerator and the denominator for purposes of the 95% gross income testtest. Income and statesgain from “hedging transactions” entered into after July 30, 2008 that any income from a hedging transaction that isare clearly and timely identified as such will also be excluded from both the numerator and hedges indebtedness incurredthe denominator for purposes of the 75% gross income test; however, income and gain from “hedging transactions” entered into on or before July 30, 2008 will be treated as non-qualifying income for purposes of the 75% gross income test. In addition, certain foreign currency gains recognized after July 30, 2008 will be excluded from gross income for purposes of one or both of the gross income tests. See “— Foreign Currency Gain.”
The following paragraphs discuss the specific application of the gross income tests to us.
Rents from Real Property.  Rent that we receive for the use of our real property will qualify as “rents from real property,” which is qualifying income for purposes of the 75% and 95% gross income tests, only if the following conditions are met:
First, the rent must not be based in whole or in part on the income or profits of any person. Participating rent, however, will qualify as “rents from real property” if it is based on percentages of receipts or sales and the percentages:
• are fixed at the time the leases are entered into;
• are not renegotiated during the term of the leases in a manner that has the effect of basing percentage rent on income or profits; and
• conform with normal business practice.
More generally, the rent will not qualify as “rents from real property” if, considering the relevant lease and all the surrounding circumstances, the arrangement does not conform with normal business practice, but is in reality used as a means of basing the rent on income or profits. We have represented to Bass, Berry & Sims PLC that we intend to set and accept rents which are fixed dollar amounts or a fixed percentage of gross revenue, and not to any extent determined by reference to any person’s income or profits, in compliance with the rules above.
Second, we must not own, actually or constructively, 10% or more of the stock or the assets or net profits of any tenant, referred to as a “related-party tenant,” other than a taxable REIT subsidiary. The constructive ownership rules generally provide that, if 10% or more in value of our stock is owned, directly or indirectly, by or for any person, we are considered as owning the stock owned, directly or indirectly, by or for such person. We do not own any stock or any assets or net profits of any tenant directly. However, because the constructive ownership rules are broad and it is not possible to monitor direct and indirect transfers of our stock continually, no absolute assurance can be given that such transfers or other events of which we have no knowledge will not cause us to own constructively 10% or more of a tenant (or a subtenant, in which case only rent attributable to the subtenant is disqualified) other than a taxable REIT subsidiary at some future date.
Under an exception to the related-party tenant rule described in the preceding paragraph, rent that we receive from a taxable REIT subsidiary will qualify as “rents from real property” as long as (1) at least 90% of the leased space in the property is leased to persons other than taxable REIT subsidiaries and related-party tenants, and (2) the amount paid by the taxable REIT subsidiary to rent space at the property is substantially comparable to rents paid by other tenants of the property for comparable space. The “substantially comparable” requirement must be satisfied when the lease is entered into, when it is extended, and when the lease is modified, if the modification increases the rent paid by the taxable REIT subsidiary. If the requirement that at least 90% of the leased space in the related property is rented to unrelated tenants is met when a lease is entered into, extended, or modified, such requirement will continue to be incurredmet as long as there is no increase in the space leased to acquireany taxable REIT subsidiary or carry real estate assetsrelated-party tenant. Any increased rent attributable to a modification of a lease with a taxable REIT subsidiary in which we own, directly or indirectly, more than 50% of the voting power or value of the stock (a “controlled taxable REIT subsidiary”) will not constitute grossbe treated as “rents from real property.”
Third, we must not furnish or render noncustomary services, other than a de minimis amount of noncustomary services, as described below, to the tenants of our properties, or manage or operate our properties, other than through an independent contractor who is adequately compensated and from whom we do not derive or receive any income.


29

However, we need not provide services through an “independent contractor,” but instead may provide services directly to our tenants, if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal amount of “noncustomary” services to the tenants of a property, other than through an independent contractor, as long as our income ratherfrom the services (valued at not less than 150% of our direct cost for performing such services) does not exceed 1% of our income from the related property. Finally, we may own up to 100% of the stock of one or more taxable REIT subsidiaries, which may provide noncustomary services to our tenants without our rents from the related properties being treated as nonqualifying income for purposes of the 75% and 95% gross income tests. We have not performed, and do not intend to perform, any services other than customary ones for our tenants, unless such services are provided through independent contractors or taxable REIT subsidiaries.
If the rent from a lease of property does not qualify as “rents from real property” because (1) the rent is based on the net income or profits of the tenant, (2) the lessee is a related-party tenant or fails to qualify for the exception to the related-party tenant rule for qualifying taxable REIT subsidiaries, or (3) we furnish noncustomary services to the tenants of the property, or manage or operate the property, other than through a qualifying independent contractor or a taxable REIT subsidiary, that are in excess of 1% of our income from the related property, none of the rent from the property would qualify as “rents from real property.” In any of these circumstances, we could lose our REIT status, unless we qualified for certain statutory relief provisions, because we might be unable to satisfy either the 75% or 95% gross income test.
Tenants may be required to pay, in addition to base rent, reimbursements for certain amounts we are obligated to pay to third parties (such as a lessee’s proportionate share of a property’s operational or capital expenses), penalties for nonpayment or late payment of rent or additions to rent. These and other similar payments should qualify as “rents from real property.” To the extent they do not, they should be treated as interest that qualifies for the 95% gross income test.
In addition, rent attributable to any personal property leased in connection with a lease of real property will not qualify as “rents from real property” if the rent attributable to such personal property exceeds 15% of the total rent received under the lease. The rent attributable to personal property under a lease is the amount that bears the same ratio to total rent under the lease for the taxable year as the average of the fair market values of the leased personal property at the beginning and at the end of the taxable year bears to the average of the aggregate fair market values of both the real and personal property covered by the lease at the beginning and at the end of such taxable year, or the personal property ratio. If a portion of the rent that we receive from a property does not qualify as “rents from real property” because the rent attributable to personal property exceeds 15% of the total rent for a taxable year, the portion of the rent that is attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income test. Thus, if such rent attributable to personal property, plus any other income that is nonqualifying income for purposes of the 95% gross income test.

23

          Rents that we receive or are deemed to have received will qualify as rents from real property in satisfying thetest, during a taxable year exceeds 5% of our gross income requirementsduring the year, we would lose our REIT status, unless we qualified for a REIT described above only ifcertain statutory relief provisions. With respect to each of our leases, we believe that the rents satisfy several conditions:
•First, the amount of rent must not be basedpersonal property ratio generally is less than 15%. Where that is not, or may in whole or in part on the future not be, the case, we believe that any income or profits of any person. However, an amount received or accrued generally will not be excluded from rents from real property solely because it is based on a fixed percentage or percentages of receipts or sales.
•Second, the Code provides that rents received from a tenant will not qualify as rents from real property in satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of the REIT, directly or under the applicable attribution rules, owns a 10% or greater interest in that tenant; except that rents received from a TRS under certain circumstances qualify as rents from real property even if we own more than a 10% interest in the subsidiary. We refer to a tenant in which we own a 10% or greater interest as a “related party tenant.”
•Third, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.
•Finally, for rents received to qualify as rents from real property, the REIT generally must not operate or manage the property or furnish or render services to the tenants of the property, other than through an independent contractor from whom the REIT derives no revenue and who is adequately compensated or through a TRS. However, we may directly perform certain services that landlords usually or customarily render when renting space for occupancy only or that are not considered rendered to the occupant of the property.
          We do not expect to perform any services for our tenants. If we were to provide services to a tenant that are other than those landlords usually or customarily provide when renting space for occupancy only, amounts received or accrued by us for any of these services will not be treated as rents from real property for purposes of the REIT gross income tests. However, the amounts received or accrued for these services will not cause other amounts received with respect to the property to fail to be treated as rents from real property unless the amounts treated as received in respect of the services, together with amounts received for certain management services, exceed 1% of all amounts received or accrued by us during the taxable year with respect to the property. For purposes of the 1% threshold, the amount treated as received for any service may not be less than 150% of the direct cost incurred in furnishing or rendering the service. If the sum of the amounts received in respect of the services to tenants and management services described in the preceding sentence exceeds the 1% threshold, then all amounts received or accrued by us with respect to the property will not jeopardize our ability to qualify as rents from reala REIT. There can be no assurance, however, that the IRS would not challenge our calculation of a personal property even ifratio, or that a court would not uphold such assertion. If such a challenge were successfully asserted, we providecould fail to satisfy the impermissible services to some, but not all, of the tenants of the property.
          For purposes of the75% or 95% gross income tests, thetest and thus potentially lose our REIT status.
Interest.  The term “interest” generally does not include any amount received or accrued, directly or indirectly, if the determination of thatsuch amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term interest“interest” solely because it is based on a fixed percentage or percentages of receipts or sales. Furthermore, to the extent that interest from a loan that is based on the profit or net cash proceeds from the sale of the property securing the loan constitutes a “shared appreciation provision,” income attributable to such participation feature will be treated as gain from the sale of the secured property.
We may invest opportunistically from time to time in mortgage debt and mezzanine loans when we believe our investment will allow us to acquire control of the related real estate. Interest on debt secured by a mortgage on real


30

property or on interests in real property, including, for this purpose, discount points, prepayment penalties, loan assumption fees, and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income test. However, if a loan is secured by real property and other property and the highest principal amount of such loan that was outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of the date the REIT agreed to originate or acquire the loan, a portion of the interest income from such loan will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not be qualifying income for purposes of the 75% gross income test will be equal to the interest income attributable to the portion of the principal amount of the loan that is not secured by real property. The principal amount of the loan that is not secured by real property is the amount by which the loan exceeds the value of the real estate that is security for the loan.
Mezzanine loans are loans secured by equity interests in an entity that directly or indirectly owns real property, rather than by a direct mortgage of the real property. IRS Revenue Procedure2003-65 provides a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests described below, and interest derived from it will be treated as qualifying mortgage interest for purposes of the 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We anticipate that any mezzanine loans that we acquire typically will not meet all of the requirements for reliance on this safe harbor. Nevertheless, we intend to invest in mezzanine loans in manner that will enable us to continue to satisfy the gross income tests and asset tests.
Dividends.  Our share of any dividends received from any corporation (including any taxable REIT subsidiary, but excluding any REIT) in which we own an equity interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. Our share of any dividends received from any other REIT in which we own an equity interest will be qualifying income for purposes of both gross income tests.
Prohibited Transactions.  A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets are held primarily for sale to customers and that a sale of any of our assets will not be in the ordinary course of our business. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the facts and circumstances that exist from time to time, including those related to a particular asset. A safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction and the 100% prohibited transaction tax is available if the following requirements are met:
• the REIT has held the property for not less than two years (or, for sales made on or before July 30, 2008, four years);
• the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period (or, for sales made on or before July 30, 2008, four-year period) preceding the date of the sale that are includable in the basis of the property do not exceed 30% of the selling price of the property;
• either (1) during the year in question, the REIT did not make more than seven property sales other than sales of foreclosure property or sales to which Section 1033 of the Code applies, (2) the aggregate adjusted bases of all such properties sold by the REIT during the year did not exceed 10% of the aggregate bases of all of the assets of the REIT at the beginning of the year or (3) for sales made after July 30, 2008, the aggregate fair market value of all such properties sold by the REIT during the year did not exceed 10% of the aggregate fair market value of all of the assets of the REIT at the beginning of the year;
• in the case of property not acquired through foreclosure or lease termination, the REIT has held the property for at least two years (or, for sales made on or before July 30, 2008, four years) for the production of rental income; and
• if the REIT has made more than seven property sales (excluding sales of foreclosure property) during the taxable year, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor from whom the REIT derives no income.


31

We will attempt to comply with the terms of the safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property held “primarily for sale to customers in the ordinary course of a trade or business.” We may hold and dispose of certain properties through a taxable REIT subsidiary if we conclude that the sale or other disposition of such property may not fall within the safe-harbor provisions. The 100% tax will not apply to gains from the sale of property that is held through a taxable REIT subsidiary or other taxable corporation, although such income will be taxed to the taxable REIT subsidiary or other taxable corporation at federal corporate income tax rates.
Foreclosure Property.  We will be subject to tax at the maximum corporate rate on any income from foreclosure property, which includes certain foreign currency gains and related deductions recognized subsequent to July 30, 2008, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure property will qualify under the 75% and 95% gross income tests. “Foreclosure property” is any real property, including interests in real property, and any personal property incident to such real property:
• that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or default was imminent on a lease of such property or on indebtedness that such property secured;
• for which the related loan or leased property was acquired by the REIT at a time when the default was not imminent or anticipated; and
• for which the REIT makes a proper election to treat the property as foreclosure property.
A REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as amortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property (or longer if an extension is granted by the Secretary of the U.S. Treasury). This period (as extended, if applicable) terminates, and foreclosure property ceases to be foreclosure property on the first day:
• on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test;
• on which any construction takes place on the property, other than completion of a building, or any other improvement, where more than 10% of the construction was completed before default became imminent; or
• which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income.
Hedging Transactions.  From time to time, we or our subsidiaries may enter into hedging transactions with respect to one or more of our or our subsidiaries’ assets or liabilities. Our or our subsidiaries’ hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. For hedging transactions entered into on or before July 30, 2008, income and gain from “hedging transactions” will be excluded from gross income for purposes of the 95% gross income test, but not the 75% gross income test. For hedging transactions entered into after July 30, 2008, income and gain from “hedging transactions” will be excluded from gross income for purposes of both the 75% and 95% gross income tests. A “hedging transaction” means either (1) any transaction entered into in the normal course of our or our subsidiaries’ trade or business primarily to manage the risk of interest rate, price changes, or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets or (2) for transactions entered into after July 30, 2008, any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property which generates such income or gain). We are required to clearly


32

identify any such hedging transaction before the close of the day on which it was acquired, originated, or entered into and to satisfy other identification requirements. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT; however, no assurance can be given that our hedging activities will give rise to income that qualifies for purposes of either or both of the gross income tests.
Foreign Currency Gain.  Certain foreign currency gains recognized after June 30, 2008 will be excluded from gross income for purposes of one or both of the gross income tests. “Real estate foreign exchange gain” will be excluded from gross income for purposes of the 75% and 95% gross income tests. Real estate foreign exchange gain generally includes foreign currency gain attributable to any item of income or gain that is qualifying income for purposes of the 75% gross income test, foreign currency gain attributable to the acquisition or ownership of (or becoming or being the obligor under) obligations secured by mortgages on real property or an interest in real property and certain foreign currency gain attributable to certain “qualified business units” of a REIT. “Passive foreign exchange gain” will be excluded from gross income for purposes of the 95% gross income test. Passive foreign exchange gain generally includes real estate foreign exchange gain, as described above, and also includes foreign currency gain attributable to any item of income or gain that is qualifying income for purposes of the 95% gross income test and foreign currency gain attributable to the acquisition or ownership of (or becoming or being the obligor under) debt obligations. These exclusions for real estate foreign exchange gain and passive foreign exchange gain do not apply to any foreign currency gain that is derived from dealing, or engaging in substantial and regular trading, in securities. Such gain is treated as nonqualifying income for purposes of both the 75% and 95% gross income tests.
Failure to Satisfy Gross Income Tests.  If we fail to satisfy one or both of the 75% and 95% gross income tests for any taxable year, we nevertheless may nevertheless qualify as a REIT for that year if we satisfy the requirements of otherqualify for relief under certain provisions of the Code that allow relief from disqualification as a REIT. Thesefederal income tax laws. Those relief provisions as modified by the 2004 Act, will generally beare available if:
 • our failure to meet the income tests wasapplicable test is due to reasonable cause and not due to willful neglect; and
 
 • following our identificationsuch failure for any taxable year, we file a schedule of the failure, we filesources of our income with the IRS a schedule describing each item of our qualifying gross income forin accordance with regulations prescribed by the taxable yearSecretary of the failure.U.S. Treasury.
We might not be entitledcannot predict, however, whether any failure to meet these tests will qualify for the benefit of these relief provisions, however. Asprovisions. In addition, as discussed above in the fifth bullet point under the section “— Taxation of theOur Company, as a REIT,” even if thesethe relief provisions apply, we would have to payincur a 100% tax on the excess income.gross income attributable to the greater of (1) the amount by which we fail the 75% gross income test, or (2) the amount by which we fail the 95% gross income test, multiplied, in either case, by a fraction intended to reflect our profitability.
Asset Tests
To maintain our qualification as a REIT, we also must satisfy the following asset tests at the end of each quarter of each taxable year.
First, at least 75% of the value of our total assets, or the “75% asset test,” must consist of:
• cash or cash items, including certain receivables;
• government securities;
• interests in real property, including leaseholds and options to acquire real property and leaseholds;
• interests in mortgage loans secured by real property;
• stock in other REITs; and
• investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term.
Second, of our assets that are not qualifying assets for purposes of the 75% asset test described above, the value of our interest in any one issuer’s securities may not exceed 5% of the value of our total assets, or the “5% asset test.”

24
33

 

Asset TestsThird, of our assets that are not qualifying assets for purposes of the 75% asset test described above, we may not own more than 10% of the voting power of any one issuer’s outstanding securities, or the “10% vote test,” or more than 10% of the value of any one issuer’s outstanding securities, or the “10% value test.”
 At
Fourth, no more than 25% of the closevalue of each quarter of eachour total assets (or, prior to our 2009 taxable year, we must also satisfy three tests relating to20% of the naturevalue of our assets:
•First, at least 75% of the value of our total assets must be represented by real estate assets, including (a) real estate assets held by our qualified REIT subsidiaries, our allocable share of real estate assets held by partnerships in which we own an interest and stock issued by another REIT, (b) for a period of one year from the date of our receipt of proceeds of an offering of its shares of beneficial interest or publicly offered debt with a term of at least five years, stock or debt instruments purchased with these proceeds and (c) cash, cash items and government securities.
•Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class.
•Third, not more than 20% of our total assets may constitute securities issued by one or more TRSs and of the investments included in the 25% asset class, the value of any one issuer’s securities, other than securities issued by another REIT or by a TRS may not exceed 5% of the value (“5% test”) of our total assets, and we may not own more than 10% of the vote (“10% voting test”) or value (“10% value test”) of any one issuer’s outstanding securities, except in the case of a TRS as described above. If, for example, the IRS would successfully challenge the partnership status of any of the partnerships in which we maintain an interest, and the partnership is reclassified as a corporation or a publicly traded partnership taxable as a corporation, we could lose our REIT status.
total assets) may consist of the securities of one or more taxable REIT subsidiaries.
 The following
Fifth, no more than 25% of the value of our total assets may consist of the securities of taxable REIT subsidiaries and other taxable subsidiaries and other assets that are not treated asqualifying assets for purposes of the 75% asset test.
For purposes of the 5% asset test, the 10% vote test and the 10% value test, the term “securities” helddoes not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or taxable REIT subsidiary, mortgage loans that constitute real estate assets, or equity interests in a partnership. The term “securities,” however, generally includes debt securities issued by usa partnership or another REIT, except that for purposes of the 10% value test, (i) “straight debt” meeting certain requirements, unless we hold (either directly or through our “controlled” taxable REIT subsidiaries) certain other securities of the same corporate or partnership issuer that have an aggregate value greater than 1% of such issuer’s outstanding securities; (ii) loans to individuals or estates; (iii) certain rental agreements calling for deferred rents or increasing rents that are subject to Section 467 of the Code, other than with certain related persons; (iv) obligations to pay us amounts qualifying as “rents from real property” under the 75% and 95% gross income tests; (v) securities issued by a state or any political subdivision of a state, the District of Columbia, a foreign government, any political subdivision of a foreign government, or the Commonwealth of Puerto Rico, but only if the determination of any payment received or accrued under the securityterm “securities” does not depend in whole or in partinclude:
• “Straight debt” securities, which is defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (1) the debt is not convertible, directly or indirectly, into equity, and (2) the interest rate and interest payment dates are not contingent on the profits, the borrower’s discretion, or similar factors. “Straight debt” securities do not include any securities issued by a partnership or a corporation in which we or any controlled taxable REIT subsidiary hold non-“straight debt” securities that have an aggregate value of more than 1% of the issuer’s outstanding securities. However, “straight debt” securities include debt subject to the following contingencies:
• a contingency relating to the time of payment of interest or principal, as long as either (1) there is no change to the effective yield of the debt obligation, other than a change to the annual yield that does not exceed the greater of 0.25% or 5% of the annual yield, or (2) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt obligations held by us exceeds $1 million and no more than 12 months of unaccrued interest on the debt obligations can be required to be prepaid; and
• a contingency relating to the time or amount of payment on a default or prepayment of a debt obligation, as long as the contingency is consistent with customary commercial practice.
• Any loan to an individual or an estate.
• Any “section 467 rental agreement,” other than an agreement with a related-party tenant.
• Any obligation to pay “rents from real property.”
• Certain securities issued by governmental entities.
• Any security issued by a REIT.
• Any debt instrument issued by an entity treated as a partnership for federal income tax purposes in which we are a partner to the extent of our proportionate interest in the debt and equity securities of the partnership.
• Any debt instrument issued by an entity treated as a partnership for federal income tax purposes not described in the preceding bullet points if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test described above in “— Gross Income Tests.”
For purposes of any person not described in this category, or payments on any obligation issued by such an entity; (vi) securities issued by another qualifying REIT; and (vii) other arrangements identified in Treasury regulations (which have not yet been issued or proposed). In addition, any debt instrument issued by a partnership will not be treated as a “security” under the 10% value test, if at least 75% of the partnership’s gross income (excluding gross income from prohibited transactions) is derived from sources meeting the requirements of the 75% gross income test. If the partnership fails to meet the 75% gross income test, then the debt instrument issued by the partnership nevertheless will not be treated as a “security” to the extent of our interest as a partner in the partnership. Also, in looking through any partnership to determine our allocable share of any securities owned by the partnership, ourproportionate share of the assets of a partnership is our proportionate interest in any securities issued by the partnership, solelywithout regard to the securities described in the preceding two bullet points above.
We believe that the assets that we hold satisfy the foregoing asset test requirements. However, we will not obtain, nor are we required to obtain under the federal income tax laws, independent appraisals to support our conclusions as to the value of our assets and securities or the real estate collateral for the mortgage or mezzanine loans that we may acquire. Moreover, the values of some assets may not be susceptible to a precise determination.


34

As a result, there can be no assurance that the IRS will not contend that our ownership of securities and other assets violates one or more of the asset tests applicable to REITs.
As noted above, we may invest opportunistically in loans secured by interests in real property when we believe our investment will allow us to acquire control of the related real property. If the outstanding principal balance of a loan during a taxable year exceeds the fair market value of the real property securing such loan as of the date we agreed to originate or acquire the loan, a portion of such loan likely will not constitute a qualifying real estate asset under the federal income tax laws. Although the law on the matter is not entirely clear, it appears that the nonqualifying portion of such loan will be equal to the portion of the loan amount that exceeds the value of the associated real property that serves as security for that loan.
We will monitor the status of our assets for purposes of applyingthe various asset tests and will manage our portfolio in order to comply at all times with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we would not lose our REIT status if:
• we satisfied the asset tests at the end of the preceding calendar quarter; and
• the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets.
If we did not satisfy the condition described in the second bullet point immediately above, we still could avoid REIT disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which the discrepancy arose.
In the event that we violate the 5% asset test, the 10% vote test or the 10% value test in taxable years beginning on or after January 1, 2005,described above, we will correspond not only tolose our interest as a partner inREIT status if (1) the partnership but also to our proportionate interest in certain debt securities issued by the partnership.
          If we fail to meet the 5% test, the 10% value test or the 10% voting test described in the third bullet point of the second preceding paragraph above at the end of any quarter and such failure is not cured within 30 days thereafter, we would failde minimis (up to qualify as a REIT. Under the 2004 Act, after the 30 day cure period, we could dispose of sufficient assets to cure such a violation that does not exceed the lesser of 1% of our assets ator $10 million) and (2) we dispose of assets causing the end offailure or otherwise comply with the relevant quarter or $10,000,000 if the disposition occursasset tests within six months after the last day of the calendar quarter in which we identify such failure. In the violation. For violationsevent of these tests that are larger than this amount and for violationsa failure of the otherany of such asset tests other than a de minimis failure, as described in the preceding paragraph, where such violations aresentence, we will not lose our REIT status if (1) the failure was due to reasonable cause and not to willful neglect, (2) we file a description of each asset causing the 2004 Act permits us to avoid disqualification as a REIT, afterfailure with the 30 day cure period, by taking steps includingIRS, (3) we dispose of assets causing the disposition of sufficient assets to meetfailure or otherwise comply with the asset tests (withinwithin six months after the last day of the calendar quarter in which we identify the violation)failure, and paying(4) we pay a tax equal to the greater of $50,000 or 35% of the highest corporate tax rate multiplied by our net income generated byfrom the non-qualifyingnonqualifying assets during the period beginning on the first date of the failure and ending on the datein which we dispose offailed to satisfy the asset (or otherwise cure the asset test failure).tests.
Annual Distribution RequirementRequirements
 We are required to
Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount at least equal to (1) the sum of (a) 90% of our “real estate investment trust taxable income,” computed without regard to the dividends paid deduction, and our net capital gain, and (b) 90% of the net after-tax income, if any, from foreclosure property minus (2) the sum of certain items of non-cash income.to:
 These
• the sum of
• 90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and our net capital gain or loss, and
• 90% of our after-tax net income, if any, from foreclosure property, minus
• the sum of certain items of non-cash income.
Generally, we must pay such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declaredeither (1) we declare the distribution before we timely file our federal income tax return for the year to which they relate and if paidpay the distribution on or before the first regular dividend payment date after such declaration or (2) we declare the declaration.distribution in October, November, or December of the taxable year, payable to stockholders of record on a specified day in any such month, and we actually pay the dividend before the end of January of the following year. In both instances, these distributions relate to our prior taxable year for purposes of the annual distribution requirement.

25
35

 

          To the extentWe will pay federal income tax on taxable income, including net capital gain, that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our real estate investment trust taxable income, as adjusted, we will have to pay tax on those amounts at regular ordinary and capital gain corporate tax rates, as the case may be. If we so choose, we may retain, rather than distribute, our net long-term capital gains and pay the tax on those gains. In this case, our stockholders would include their proportionate share of the undistributed long-term capital gains in income. However, our stockholders would then be deemed to have paid their share of the tax, which would be credited or refunded to them. In addition, our stockholders would be able to increase their basis in our shares they hold by the amount of the undistributed long-term capital gains, less the amount of capital gains tax we paid, included in the stockholders’ long-term capital gains.stockholders. Furthermore, if we fail to distribute during eacha calendar year, or by the end of January of the following calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (a) 85% of our REIT ordinary income for that year, (b) 95% of our REIT capital gain income for that year, and (c) any undistributed taxable income from prior periods, of:
• 85% of our REIT ordinary income for the year,
• 95% of our REIT capital gain income for the year, and
• any undistributed taxable income from prior years,
we would have to paywill incur a 4% nondeductible excise tax on the excess of thesuch required distribution over the amounts we actually distributed.
We may elect to retain and pay federal income tax on the net long-term capital gain that we receive in a taxable year. If we so elect, we will be treated as having distributed any such retained amount for purposes of the 4% nondeductible excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements.requirement and to avoid corporate income tax and the 4% nondeductible excise tax.
 From
It is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement due toexperience timing differences between (a) when we actually receivethe actual receipt of income and when we actually payactual payment of deductible expenses and (b) when we include the inclusion of that income and deduct thededuction of such expenses in arriving at our REIT taxable income. Further, it is possible that, from time to time, we may be allocated a share of net capital gain from a partnership (or an entity treated as a partnership for federal income tax purposes) in which we own an interest that is attributable to the sale of depreciated property whichthat exceeds our allocable share of cash attributable to that sale. In these cases,As a result of the foregoing, we may have less cash available for distribution than is necessary to make distributions to our stockholders that are sufficient to avoid corporate income tax and the 4% nondeductible excise tax imposed on certain undistributed income or even to meet ourthe annual 90% distribution requirement. To meet the 90% distribution requirement,In such a situation, we may find it necessaryneed to arrange for short-term,borrow funds or possibly long-term, borrowingsissue additional stock or, toif possible, pay taxable dividends in the form of taxableour stock dividends.or debt securities.
 
Under certain circumstances, we may be able to rectifycorrect a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year, whichyear. We may be includedinclude such deficiency dividends in our deduction for dividends paid for the earlier year. Thus,Although we may be able to avoid being taxedincome tax on amounts distributed as deficiency dividends; however,dividends, we will be required to pay penalties and interest to the IRS based uponon the amount of any deduction takenwe take for deficiency dividends.
The IRS recently issued guidance that permits certain distributions made by a publicly traded REIT that (i) are declared on or after January 1, 2008 and on or before December 31, 2012 with respect to a taxable year ending on or before December 31, 2011 and (ii) consist of both cash and its stock to be treated as dividend distributions for purposes of satisfying the annual distribution requirement applicable to REITs. Based on that guidance, if we are publicly traded on an established securities market in the United States and if we satisfy certain requirements, including the requirement that at least 10% of the total value of any such distribution consists of cash, the cash and our stock that we distribute will be treated as a dividend, to the extent of our earnings and profits. If we make such a distribution to our stockholders, each of our stockholders will be required to treat the total value of the distribution that each stockholder receives as a dividend, to the extent of each stockholder’s pro-rata share of our earnings and profits, regardless of whether such stockholder receives cash, our stock or a combination of cash and our stock. For a general discussion of the federal income tax consequences to our stockholders on the receipt of dividends, see below, “— Taxation of Taxable U.S. Stockholders,” “— Taxation of Tax-Exempt Stockholders” and “— Taxation ofNon-U.S. Stockholders.”
We advise each of our stockholders that the taxes resulting from your receipt of a distribution consisting of cash and our stock may exceed the cash that you receive in the distribution. We urge each of our stockholders to consult your tax advisor regarding the specific federal, state, local and foreign income and other tax consequences of distributions consisting of both cash and our stock.


36

Recordkeeping Requirements
We must maintain certain records in order to qualify as a REIT. In addition, to avoid paying a monetary penalty, we must request, on an annual basis, information from certain of our stockholders designed to disclose the actual ownership of our outstanding stock. We intend to comply with these recordkeeping requirements.
Failure to Qualify as a REIT
 
If we fail to qualifysatisfy one or more requirements for taxationREIT qualification, other than the gross income tests and the asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. In addition, there are relief provisions for a failure of the gross income tests and asset tests, as described in “— Gross Income Tests” and “— Asset Tests.”
If we were to fail to qualify as a REIT in any taxable year, and theno relief provisions do not apply,provision applied, we will havewould be subject to payfederal income tax includingand any applicable alternative minimum tax on our taxable income at regular federal corporate income tax rates. We willIn calculating our taxable income for a year in which we failed to qualify as a REIT, we would not be able to deduct distributionsamounts distributed to stockholders in any year in whichour stockholders. In fact, we fail to qualify, nor will wewould not be required to make distributions to stockholders. In addition, if we fail to qualify as a REIT, distributionsdistribute any amounts to stockholders would be taxablefor that year. In such event, to the extent of our current and accumulated earnings and profits, and, then, with respectdistributions to each stockholder,stockholders generally would be taxable to the extent that the balanceour stockholders as ordinary income. Subject to certain limitations of the distribution exceeds the stockholder’s adjusted basis in such stockholder’s stock. Corporate distributeesfederal income tax laws, corporate stockholders may be eligible for the dividends received deduction, if they satisfy the relevant provisions of the Code.and stockholders taxed at individual rates may be eligible for a reduced federal income tax rate (15% through 2010) on such dividends. Unless entitled towe qualified for relief under specific statutory provisions, we will also would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.we ceased to qualify as a REIT. We might not be entitled to the statutory relief described in this paragraphcannot predict whether in all circumstances.circumstances we would qualify for such statutory relief.
 The 2004 Act provides additional relief in the event that we fail to satisfy one or more requirements for qualification as a REIT, other than the 75% gross income test and the 95% gross income test and other than the new rules provided for failures of the asset tests described above if:
•the violation is due to reasonable cause and not willful neglect; and
•we pay a penalty of $50,000 for each failure to satisfy the provision.
Taxation of Taxable U.S. Stockholders
 U.S. Stockholders
          As used in this section,For purposes of our discussion, the term “U.S. stockholder” means a holder of our common stock, who,senior common stock or preferred stock that, for U.S. Federalfederal income tax purposes, is:
 • a citizen or resident of the United States;
 
 • a domestic corporation partnership or other(including an entity treated as a corporation for federal income tax purposes) created or organized in or under the laws of the United States, any of its states or the District of any political subdivision of the United States;Columbia;
 
 • an estate whose income is subject to U.S. Federalfederal income taxation regardless of its source; or

26

 
 •aany trust if (1) a United StatesU.S. court canis able to exercise primary supervision over the trust’s administration of such trust and one or more United StatesU.S. persons have the authority to control all substantial decisions of the trust;trust or
• (2) it has a person or entity otherwise subjectvalid election in place to be treated as a U.S. Federal income taxation on a net income basis.person.
If a partnership, entity or arrangement treated as a partnership for federal income tax purposes holds our stock, the federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. If you are a partner in a partnership holding our stock, you should consult your tax advisor regarding the consequences of the ownership and disposition of our stock by the partnership.
 
DistributionsDistributions..  As long as we qualify as a REIT, distributions made by us out of our current or accumulated earnings and profits and not designated as capital gain dividends, will constitute dividends taxable to our taxable U.S. stockholders as ordinary income. Our individual U.S. stockholders will generally not be entitled to the lower tax rate applicable to certain types of dividends under law enacted in 2003 except that individual U.S. stockholders may be eligible for the lower tax rate with respect to the portion of any distribution (a) that represents income from dividends we received from a corporation in which we own shares (but only if such dividends would be eligible for the lower rate on dividends if paid by the corporation to its individual stockholders) or (b) that is equal to our real estate investment trust taxable income (taking into account the dividends paid deduction available to us) and less any taxes paid by us on these items during our previous taxable year. Individual U.S. stockholders should consult their own tax advisors to determine the impact of this legislation. Distributions of this kind will not be eligible for the dividends received deduction in the case of U.S. stockholders that are corporations. Distributions made by us that we properlydo not designate as capital gain dividends or retained long-term capital gains will be dividend income to taxable U.S. stockholders. A corporate U.S. stockholder will not qualify for the dividends-received deduction generally available to corporations. Dividends paid to a U.S. stockholder generally will not qualify for the tax rates applicable to “qualified dividend income.” Legislation enacted in 2003 and 2006 reduced the maximum tax rate for qualified dividend income to 15% for tax years 2003 through 2010. Without future congressional action, the maximum tax rate on qualified dividend income will increase to 39.6% in 2011. Qualified dividend income generally includes dividends paid by domestic C corporations and certain qualified foreign corporations to U.S. stockholders that are taxed at individual rates. Because we are not generally subject to federal income tax on the portion of our REIT taxable income that we distribute to our stockholders, our dividends generally will not constitute qualified dividend income. As a result, our REIT dividends generally will be taxed at the higher tax rates applicable to ordinary income. The highest marginal individual income tax rate on ordinary


37

income is 35% through 2010. Without future congressional action, the maximum individual income tax rate on ordinary income will increase to 39.6% in 2011. The federal income tax rates applicable to qualified dividend income will apply, however, to our ordinary REIT dividends, if any, that are (1) attributable to qualified dividends received by us in 2010 from non-REIT corporations, such as gain from the sale of a capital asset held for more than one year,any taxable REIT subsidiaries, or (2) attributable to income on which we have paid federal corporate income tax (e.g., to the extent that they do not exceedwe distribute less than 100% of our actual nettaxable income). In general, to qualify for the reduced federal income tax rate on qualified dividend income under such circumstances, a U.S. stockholder must hold our stock for more than 60 days during the121-day period beginning on the date that is 60 days before the date on which our stock becomes ex-dividend. In addition, for taxable years beginning after December 31, 2012, dividends paid to certain individuals, estates or trusts will be subject to a 3.8% Medicare tax.
Any distribution we declare in October, November, or December of any year that is payable to a U.S. stockholder of record on a specified date in any of those months will be treated as paid by us and received by the U.S. stockholder on December 31 of that year, provided we actually pay the distribution during January of the following calendar year.
Distributions to a U.S. stockholder which we designate as capital gain for the taxable year,dividends generally will be treated as long-term capital gain, without regard to the period for which athe U.S. stockholder has held hisour stock. Thus, with certain limitations, capital gain dividends received by an individualSee “— Capital Gains and Losses” below. A corporate U.S. stockholder may be eligible for preferential rates of taxation. U.S. stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. In addition, net capital gains attributable
We may elect to the sale of depreciable real property held for more than twelve months are subject to a 25% maximum U.S. Federalretain and pay income tax rateon the net long-term capital gain that we receive in a taxable year. In that case, to the extent of previously claimed real property depreciation.
          To the extent that we make distributions, not designated asdesignate such amount in a timely notice to our stockholders, a U.S. stockholder would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. stockholder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. stockholder would increase its basis in our stock by the amount of its proportionate share of our undistributed long-term capital gain, dividends,minus its share of the tax we paid.
A U.S. stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits these distributions will be treated first as a tax-free return of capital to each U.S. stockholder. Thus, these distributions will reduce the adjusted basis which the U.S. stockholder has in his stock for tax purposes by the amount ofif the distribution butdoes not below zero. Distributions in excess of aexceed the U.S. stockholder’s adjusted basis in hisour stock. Instead, the distribution will reduce the U.S. stockholder’s adjusted basis in such stock, and any amount in excess of both our current and accumulated earnings and profits and the adjusted basis will be taxabletreated as capital gains, provided thatgain, long-term if the stock has been held asfor more than one year, provided the stock is a capital asset.
          Dividends authorized by usasset in October, November or December of any year and payable to a stockholder of record on a specified date in any of these months will be treated as both paid by us and received by the stockholder on December 31 of that year, provided that we actually pay the dividend on or before January 31hands of the following calendar year. StockholdersU.S. stockholder.
U.S. stockholders may not include in their ownindividual income tax returns any of our net operating losses or capital losses.
          U.S. stockholders holding our stock at the close of our taxable year will be required to include, in computing their long-term capital gains for the taxable year in which the last day of our taxable year falls, the amount that we designate in a written notice mailed to our stockholders. We may not designate amounts in excess of our undistributed net capital gain for the taxable year. Each U.S. stockholder required to include the designated amount in determining the stockholder’s long-term capital gains will be deemed to have paid, in the taxable year of the inclusion, the tax paid Instead, these losses are generally carried over by us in respect of the undistributed net capital gains. U.S. stockholders to whom these rules apply will be allowed a credit or a refund, as the case may be, for the tax they are deemed to have paid. U.S. stockholders will increase their basis in their stock by the difference between the amount of the includible gains and the tax deemed paid by the stockholder in respect of these gains.
          Distributions made bypotential offset against our future income. Taxable distributions from us and arisinggain from a U.S. stockholder’s sale or exchangethe disposition of our stock will not be treated as passive activity income. As a result,income; and, therefore, U.S. stockholders generally will not be able to apply any passive“passive activity losses,” such as, for example, losses from certain types of limited partnerships in which the U.S. stockholder is a limited partner, against that income or gain.
          Our dividends, tosuch income. In addition, taxable distributions from us and gain from the extent they do not constitute a returndisposition of capital,our stock generally will generally be treated as investment income for purposes of the investment interest limitation under Section 163limitations. We will notify U.S. stockholders after the close of our taxable year as to the portions of the Code. Netdistributions attributable to that year that constitute ordinary income, return of capital and capital gain.
Dispositions.  A U.S. stockholder who is not a dealer in securities generally must treat any gain from theor loss realized on a taxable disposition of our stock as long-term capital gain or loss if the U.S. stockholder has held such stock for more than one year, and otherwise as short-term capital gains generally will be eliminated from investment income unless the taxpayer elects to have the gain taxed at ordinary income rates.
Sales of Stock. Whenor loss. In general, a U.S. stockholder sells or otherwise disposes of our stock, the stockholder will recognizerealize gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between (a)the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. stockholder’s adjusted tax basis. A U.S. stockholder’s adjusted tax basis generally will equal the U.S. stockholder’s acquisition cost, increased by the excess of undistributed net capital gains deemed distributed to the U.S. stockholder over the tax deemed paid by the U.S. stockholder on such gains and reduced by any returns of capital. However, a U.S. stockholder must treat any loss on a sale or exchange of our stock held by such stockholder for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us that such U.S. stockholder treats as long-term capital gain. All or a portion of any loss that a U.S. stockholder realizes on a taxable disposition


38

of shares of our stock may be disallowed if the U.S. stockholder purchases other shares of our stock within 30 days before or after the disposition.
Capital Gains and Losses.  The tax-rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate currently is 35% (which rate, absent congressional action, will increase to 39.6% in 2011). The maximum tax rate on long-term capital gain applicable to U.S. stockholders taxed at individual rates currently is 15% (which rate, absent congressional action, will increase to 20% in 2011). The maximum tax rate on long-term capital gain from the sale or exchange of “section 1250 property” (i.e., generally, depreciable real property) is 25% to the extent the gain would have been treated as ordinary income if the property were “section 1245 property” (i.e., generally, depreciable personal property). We generally may designate whether a distribution that we designate as capital gain dividends (and any retained capital gain that we are deemed to distribute) is attributable to the sale or exchange of “section 1250 property.” The characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at federal corporate income tax rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses carried back three years and forward five years.
Adjustments to Conversion Rate.  We may issue stock of a class that is senior to our common stock with respect to rights as to nonliquidating distributions and rights upon our liquidation, dissolution or winding up as compared to our common stock. Such stock may be convertible into common stock at our option, at the option of the stockholder, on a specific dateand/or on a specified occurrence, any such stock referred to as “convertible stock.” The conversion rate of convertible stock that we issue may be subject to adjustment under specified circumstances. In certain circumstances, U.S. stockholders who hold certain of our convertible stock that is subject to adjustment may be deemed to have received a distribution if and to the extent that the conversion rate is adjusted, resulting in ordinary income to the extent of our current and accumulated earnings and profits. In addition, the failure to provide for such an adjustment also may result in a deemed distribution to U.S. stockholders who hold such convertible stock. Adjustments to the conversion rate made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing the dilution of the interest of the holders of such convertible stock generally will not be deemed to result in a constructive distribution. Certain potential adjustments (including, without limitation, adjustments in respect of taxable dividends to our stockholders) will not qualify as being made pursuant to a bona fide reasonable adjustment formula. If such adjustments are made, a holder of such convertible stock will be deemed to have received constructive distributions from us, even though such stockholder has not received any cash or property as a result of such adjustments. The tax consequences of the receipt of a distribution from us, whether an actual or constructive distribution, are described in “— Distributions” above.
Redemption or Repurchase.  A redemption or repurchase of our stock will be treated for federal income tax purposes as a distribution taxable as a dividend to the extent of our current and accumulated earnings and profits at ordinary income rates unless the redemption or repurchase satisfies one of the tests set forth in the Code and is therefore treated as a sale or exchange of the redeemed or repurchased stock. The redemption or repurchase will be treated as a sale or exchange if it:
• is “substantially disproportionate” with respect to the U.S. stockholder;
• results in a “complete termination” of the U.S. stockholder’s stock interest in us; or
• is “not essentially equivalent to a dividend” with respect to the U.S. stockholder,
all within the meaning of the federal income tax laws.
In determining whether any of these tests has been met, stock considered to be owned by the U.S. stockholder by reason of certain constructive ownership rules in the federal income tax laws, as well as stock actually owned by the U.S. stockholder, generally must be taken into account. To the extent that one or more classes of our stock are widely held and publicly traded at any time that we repurchase our stock, such repurchase generally will be treated as a sale or exchange if it results in a proportionate reduction of a non-controlling U.S. stockholder’s right to vote, to


39

participate in current earnings and accumulated surplus or to share in our net assets on liquidation. However, because the determination as to whether any of the alternative tests described above will be satisfied with respect to the U.S. stockholder depends upon the facts and circumstances at the time that the determination must be made, U.S. stockholders are advised to consult their tax advisors to determine such tax treatment.
If a redemption or repurchase of our stock is treated as a distribution taxable as a dividend, the amount of the distribution will be measured by the amount of cash and the fair market value of any property received on the sale or other disposition and (b) the holder’sreceived. See “— Distributions” above. A U.S. stockholder’s adjusted basis in the redeemed or repurchased stock for tax purposes. Thispurposes will be transferred to its remaining stock, if any. If a U.S. stockholder disposes of its entire interest in our stock, such basis may, under certain circumstances, be transferred to a related person or it may be lost entirely.
If a redemption or repurchase of our stock is not treated as a distribution taxable as a dividend, it will be treated as a taxable sale or exchange in the manner described under “— Dispositions” above.
In addition, under certain circumstances, we may redeem or repurchase certain convertible stock for an amount greater than its issue price. We intend to take the position that any such convertible stock will not be issued with a redemption premium as a result of such rights and that any payments of such additional amounts will be taxable to a holder of convertible stock as described above. However, the IRS may take a contrary position from that described above, which could affect the timing and character of a holder’s income on such convertible stock.
Conversion of Convertible Stock into Common Stock.  Except as provided below, a U.S. stockholder generally will not recognize gain or loss upon the conversion of any of our convertible stock into our common stock. Except as provided below, a U.S. stockholder’s basis and holding period in our common stock received upon conversion generally will be the same as those of such convertible stock (but the basis will be reduced by the portion of adjusted tax basis allocated to any fractional share of common stock exchanged for cash). Although not entirely free from doubt, we intend to take the position that any cash payment that a U.S. stockholder makes to us in connection with a conversion of our convertible stock should be added to such U.S. stockholder’s basis in our common stock that such U.S. stockholder receives upon conversion. You should consult your tax advisor regarding the treatment of any such payment for federal income tax purposes, including your basis and holding period of our common stock acquired upon conversion.
Cash received upon conversion in lieu of a fractional share of our common stock generally will be treated as a payment in a taxable exchange for such fractional share, and a U.S. stockholder will recognize gain or loss on the receipt of cash in an amount equal to the difference between the amount of cash received and the adjusted tax basis allocable to the fractional share deemed exchanged. Any such gain or loss will be long-term capital gain or loss if the U.S. stockholder has held the stock as a capital asset. The gain or loss will be long-term gain or loss if the U.S. stockholder has held theconvertible stock for more than one year. Long-term capital gainSee “— Dispositions” above.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts and annuities, generally are exempt from federal income taxation. However, they are subject to taxation on their “unrelated business taxable income.” Although many investments in real estate generate unrelated business taxable income, the IRS has issued a ruling that dividend distributions from a REIT to an individual U.S.exempt employee pension trust do not constitute unrelated business taxable income so long as the exempt employee pension trust does not otherwise use the stock or shares of beneficial interest of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts that we distribute to tax-exempt stockholders generally should not constitute unrelated business taxable income. However, if a tax-exempt stockholder iswere to finance its acquisition of stock with debt, a portion of the income that it received from us would constitute unrelated business taxable income pursuant to the “debt-financed property” rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under special provisions of the federal income tax laws are subject to different unrelated business taxable income rules, which generally taxed at preferential rates. In general, any loss recognized bywill require them to characterize distributions that they receive from us as unrelated business taxable income. Finally, in certain circumstances, a U.S. stockholder whenqualified employee pension or profit-sharing trust that owns more than 10% of the stockholder sells or otherwise disposesvalue of our stock (by value) must treat a percentage of the dividends that it receives from us as unrelated business taxable income. Such percentage is equal to the stockholder has held for twelve months or more, after applying certain holding period rules, will be treated as a long-term capital loss.gross income we derive from an unrelated trade

27
40

 

Redemption of Stock. The treatmentor business, determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. Such rule applies to be accorded to any redemption by usa pension trust holding more than 10% of the stock can only be determined on the basis of particular facts as to each holdervalue of our stock at the time of redemption. In general, a preferred holder will recognize capital gain or loss measured by the difference between the amount realized by the holder upon the redemption and the holder’s adjusted tax basis in the stock redeemed, provided the stock is held as a capital asset, if the redemptiononly if:
 •  results in a “complete termination” of the holder’s shares interest in all classespercentage of our stock under Section 302(b)(3) ofdividends that the Code,tax-exempt trust must treat as unrelated business taxable income is at least 5%;
 
 •we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our stock be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as holding our stock in proportion to their actuarial interests in the pension trust; and
   is “substantially disproportionate” with respect to the holder’s interest in us under Section 302(b)(2)• either:
• one pension trust owns more than 25% of the Code;value of our stock; or
 
 •  is “not essentially equivalent to a dividend” with respect togroup of pension trusts, of which each pension trust holds more than 10% of the holdervalue of our stock, under Section 302(b)(1)collectively owns more than 50% of the Code.value of our stock.
          In determining whether anyAs a result of these tests have been met, shares consideredlimitations included in our charter on the transfer and ownership of our stock, we do not expect to be owned byclassified as a “pension-held REIT,” and, therefore, the holder by reasontax treatment described in this paragraph should be inapplicable to our stockholders. However, because certain classes of certain constructive ownership rules set forth inour stock are publicly traded, we cannot guarantee that this will always be the Code, as well as shares actually owned, must generally be taken into account. Becausecase.
Taxation ofNon-U.S. Stockholders
For purposes of our discussion, the determination as to whether any of the alternative tests of Section 302(b) of the Code will be satisfied with respect to any particularterm“non-U.S. stockholder” means a holder of our common stock, depends upon the factssenior common stock or preferred stock that is not a U.S. stockholder, a partnership (or an entity treated as a partnership for federal income tax purposes) or a tax-exempt stockholder. The rules governing federal income taxation ofnon-U.S. stockholders, including nonresident alien individuals, foreign corporations, foreign partnerships, and circumstances at the time when the determination must be made, prospective investorsother foreign stockholders, are advisedcomplex. This section is only a summary of certain of those rules.
We urgenon-U.S. stockholders to consult their own tax advisors to determine the impact of federal, state, local and foreign income tax treatmentlaws on the acquisition, ownership and disposition of our common stock, senior common stock and preferred stock, including any reporting requirements.
Distributions.  Anon-U.S. stockholder that receives a distribution that is not attributable to them. Any portiongain from our sale or exchange of a “United States real property interest,” or a USRPI (discussed below), and that we do not designate as a capital gain dividend or retained long-term capital gain will recognize ordinary income to the extent that we pay such distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the redemption proceeds attributable togross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. However, a declared but unpaid dividendnon-U.S. stockholder generally will be subject to federal income tax at graduated rates on any distribution treated as effectively connected with thenon-U.S. stockholder’s conduct of a distributionU.S. trade or business, in the same manner as U.S. stockholders are taxed on distributions. A corporatenon-U.S. stockholder may, in addition, be subject to the stock as described above under “— Taxation30% branch profits tax with respect to any such distribution. We plan to withhold federal income tax at the rate of Stockholders — U.S. Stockholders — Distributions.”30% on the gross amount of any distribution paid to anon-U.S. stockholder unless either:
 A “substantially disproportionate” reduction in the interest of a holder of our stock will have occurred if, as a result of the redemption,
 •a lower treaty rate applies and the holder’s ownership of all of our outstanding voting stock isnon-U.S. stockholder submits an IRS FormW-8BEN to us evidencing eligibility for that reduced immediately after the redemption to less than 80% of the holder’s percentage interest in the shares immediately before the redemption;rate;
 
 • the holder’s percentage ownership ofnon-U.S. stockholder submits an IRSForm W-8ECI to us claiming that the interest of our stock after and before the redemption meets the same 80% requirement; anddistribution is effectively connected income; or
 
 • the holder owns, immediately after the redemption, less than 50%distribution is treated as attributable to a sale of the total combined voting power of all classes of shares entitled to vote.a USRPI under FIRPTA (discussed below).
          Based uponAnon-U.S. stockholder will not incur tax on a distribution in excess of our current law, it is possibleand accumulated earnings and profits if the excess portion of such distribution does not exceed suchnon-U.S. stockholder’s adjusted basis in our stock. Instead, the excess portion of such distribution will reduce thenon-U.S. stockholder’s adjusted basis in our stock. Anon-U.S. stockholder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and thenon-U.S. stockholder’s adjusted basis in our stock, if thenon-U.S. stockholder otherwise would be subject to tax on gain from the sale or disposition of stock, as described


41

below. See “— Dispositions” below. Under FIRPTA (discussed below), we may be required to withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Although we intend to withhold at a rate of 30% on the entire amount of any distribution (other than a distribution attributable to a sale of a USRPI), to the extent that we do not do so, we may withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30%. Because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, we may withhold tax on the entire amount of any distribution. However, anon-U.S. stockholder may obtain a refund of amounts that we withhold if we later determine that a redemptiondistribution in fact exceeded our current and accumulated earnings and profits.
For any year in which we qualify as a REIT, the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, may apply to our sale or exchange of a USRPI. A USRPI includes certain interests in real property and stock in corporations at least 50% of whose assets consist of interests in real property. Under FIRPTA, anon-U.S. stockholder is taxed on distributions attributable to gain from sales of USRPIs as if such gain were effectively connected with the conduct of a holderU.S. trade or business of our stockthenon-U.S. stockholder. Anon-U.S. stockholder thus would be considered “not essentially equivalent to a dividend.” However, whethertaxed on such a distribution is “not essentially equivalentat the normal capital gains rates applicable to U.S. stockholders, subject to applicable alternative minimum tax and a dividend” dependsspecial alternative minimum tax in the case of a nonresident alien individual. Anon-U.S. corporate stockholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on all of the facts and circumstances. The application of these tests tosuch a redemptiondistribution.
If a class of our stock is unclear, and a holderregularly traded on an established securities market in the United States (any such class of our stock referred to as a “publicly traded class”), capital gain distributions to anon-U.S. stockholder in respect of stock of such publicly traded class that is attributable to our sale of real property will be treated as ordinary dividends rather than as gain from the sale of a USRPI, as long as suchnon-U.S. stockholder did not own more than 5% of the outstanding stock of such publicly traded class at any time during the one-year period preceding the distribution. As a result,non-U.S. stockholders owning 5% or less of the outstanding stock of such publicly traded class generally would be subject to withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on other distributions. If anon-U.S. stockholder owned more than 5% of the outstanding stock of a publicly traded class at any time during the one-year period preceding the distribution, capital gain distributions to suchnon-U.S. stockholder in respect of the stock of such publicly traded class that are attributable to our sale of real property would be subject to tax under FIRPTA, as described above. Additionally, capital gain distributions to anon-U.S. stockholder in respect of stock of a class that is not a publicly traded class that are attributable to our sale of real property would be subject to tax under FIRPTA, as described above.
If a distribution is subject to FIRPTA, we must withhold 35% of such distribution that we could designate as a capital gain dividend. Anon-U.S. stockholder may receive a credit against its tax liability for the amount we withhold. Moreover, if anon-U.S. stockholder disposes of our stock during the30-day period preceding a dividend payment, and suchnon-U.S. stockholder (or a person related to suchnon-U.S. stockholder) acquires or enters into a contract or option to acquire our stock within 61 days of the first day of the30-day period described above, and any portion of such dividend payment would, but for the disposition, be treated as a USRPI capital gain to suchnon-U.S. stockholder, then suchnon-U.S. stockholder will be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated as USRPI capital gain.
Dispositions.  Non-U.S. stockholders may incur tax under FIRPTA with respect to gain realized on a disposition of our stock since our stock will constitute a USRPI unless one of the applicable exceptions, as described below, applies. Any gain subject to tax under FIRPTA will be treated in the same manner as it would be in the hands of U.S. stockholders subject to alternative minimum tax, but under a special alternative minimum tax in the case of nonresident alien individuals.
Non-U.S. stockholders generally will not incur tax under FIRPTA with respect to gain on a sale of our stock, however, as long as, at all times we are domestically controlled, i.e.,non-U.S. persons hold, directly or indirectly, less than 50% in value of our outstanding stock. We cannot assure you that we will be domestically controlled. In addition, even if we are not domestically controlled, anon-U.S. stockholder that owned, actually or constructively, 5% or less of the outstanding stock of a publicly traded class at all times during a specified testing period will not incur tax under FIRPTA on gain from a sale of such stock.


42

Even if stock of a non-publicly traded class would otherwise constitute a USRPI, gain arising from the sale or other taxable disposition of such stock by anon-U.S. stockholder will not be subject to tax under FIRPTA as a sale of a USRPI if we have a publicly traded class and the applicablenon-U.S. stockholder has not, at the time it acquires the stock of a non-publicly traded class, and at certain other times described in the applicable Treasury Regulations, directly or indirectly held stock of a non-publicly traded class (and in certain cases other direct or indirect interests in our stock) that had a fair market value in excess of 5% of the fair market value of our publicly traded class with the lowest fair market value. In addition, stock of a non-publicly traded class that is convertible into a stock of a publicly traded class and that is owned by anon-U.S. stockholder would not be considered a USRPI if, on the acquisition date, such stock had a fair market value that did not exceed the fair market value on such date of 5% of the total outstanding stock of the publicly traded class into which the stock of the non-publicly traded class is convertible.
Anon-U.S. stockholder generally will incur tax on gain from a disposition of our stock not subject to FIRPTA if:
• the gain is effectively connected with the conduct of thenon-U.S. stockholder’s U.S. trade or business, in which case thenon-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain; or
• thenon-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the United States, in which case thenon-U.S. stockholder will incur a 30% tax on its capital gains.
Conversion of Convertible Stock into Common Stock.  Except as provided below, anon-U.S. stockholder generally will not recognize gain or loss upon the conversion of any of our convertible stock into our common stock, provided that such convertible stock does not constitute a USRPI. Even if such convertible stock does constitute a USRPI, provided that our common stock also constitutes a USRPI, anon-U.S. stockholder generally will not recognize gain or loss upon a conversion of such convertible stock into our common stock. Except as provided below, anon-U.S. stockholder’s basis and holding period in the common stock received upon conversion will be the same as those of the converted stock (but the basis will be reduced by the portion of adjusted tax basis allocated to any fractional share of common stock exchanged for cash). Although not entirely free from doubt, we intend to take the position that any payment that anon-U.S. stockholder makes to us in connection with a conversion of any such convertible stock should be added to suchnon-U.S. stockholder’s basis in our common stock that suchnon-U.S. stockholder receives upon conversion. You should consult its ownyour tax adviser to determine their application to its particular situation.advisor regarding the treatment of any such payment for federal income tax purposes.
 If the redemption does not meet any
Cash received upon conversion in lieu of the tests under Section 302a fractional share of the Code, then the redemption proceeds received from theour common stock generally will be treated as a distribution on the stock as described above underpayment in a taxable exchange for such fractional share. See “— Taxation of Stockholders — U.S. Stockholders — Distributions.” If the redemption is taxed as a dividend, the holders’ adjusted tax basis in the stock will be transferred to any other shareholdings of the holder in us. If, however, the shareholder has no remaining shareholdings in us, such basis could be transferred to a related person or it may be lost.Dispositions” above.
 
Information Reporting Requirements, Backup Withholding. and Other Required Withholding
We will report to our U.S. stockholders and to the IRS the amount of dividends paiddistributions that we pay during each calendar year, and the amount of tax withheld,that we withhold, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding may apply toat a stockholderrate of 28% with respect to dividends paiddistributions unless the holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. The IRS may also impose penalties on a U.S.stockholder:
• is a corporation or qualifies for certain other exempt categories and, when required, demonstrates this fact; or
• provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules.
A stockholder thatwho does not provide us with hisits correct taxpayer identification number. A stockholdernumber also may credit anybe subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to us.
 Taxation
Backup withholding generally will not apply to payments of Tax-Exempt Stockholders. The IRS has ruled that amounts distributeddividends made by us or our paying agents, in their capacities as dividends bysuch, to a REIT generally do not constitute unrelated business taxable income when received by a tax-exempt entity. Based on that ruling,non-U.S. stockholder provided that suchnon-U.S. stockholder furnishes to us or our paying agent the required certification as to itsnon-U.S. status, such as providing a tax-exempt stockholder (i) is not an entity described invalid IRSForm W-8BEN orW-8ECI, or certain other requirements are met. Notwithstanding the next paragraph, (ii) has not held its stock as “debt financed property” within the meaning of the Code and (iii) does not hold its stock in a trade or business, the dividend income received by such stockholder with respect to the stock will not be unrelated business taxable income to a tax-exempt stockholder. Similarly, income from the sale of our stock will not constitute unrelated business taxable income unless the tax-exempt stockholder has held the stock as “debt financed property” within the meaning of the Code or has used the stock in an unrelated trade or business.foregoing, backup withholding may apply if

28
43

 

          Income from an investment ineither we or our stock will constitute unrelated business taxable income for tax-exempt stockholderspaying agent has actual knowledge, or reason to know, that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. Federal income taxation under the applicable subsections of Section 501(c) of the Code, unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its stock. Prospective investors of the types described in the preceding sentence should consult their own tax advisors concerning these “set aside” and reserve requirements.
          Notwithstanding the foregoing, however, a portion of the dividends paid by a “pension-held REIT” will be treated as unrelated business taxable income to any trust which:
•is described in Section 401(a) of the Code;
•is tax-exempt under Section 501(a) of the Code; and
•  holds more than 10% (by value) of the equity interests in the REIT.
          Tax-exempt pension, profit-sharing and stock bonus funds that are described in Section 401(a) of the Code are referred to below as “qualified trusts.” A REITholder is a “pension-held REIT” if:
•it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by qualified trusts will be treated, for purposes of the “not closely held” requirement, as owned by the beneficiaries of the trust (rather than by the trust itself); and
•either (a) at least one qualified trust holds more than 25% by value of the interests in the REIT or (b) one or more qualified trusts, each of which owns more than 10% by value of the interests in the REIT, hold in the aggregate more than 50% by value of the interests in the REIT.
          The percentage of any REIT dividend treated as unrelated business taxable income to a qualifying trust that owns more than 10% of the value of the REIT’s interests is equal to the ratio of (a) the gross income of the REIT from unrelated trades or businesses, determined as though the REIT were a qualified trust, less direct expenses related to this gross income, to (b) the total gross income of the REIT, less direct expenses related to the total gross income. A de minimis exception applies where this percentage is less than 5% for any year. We do not expect to be classified as a pension-held REIT.
          The rules described above under the heading “— Taxation of Stockholders — U.S. Stockholders — Distributions” concerning the inclusion of our designated undistributed net capital gains in the income of our stockholders will apply to tax-exempt entities. Thus, tax-exempt entities will be allowed a credit or refund of the tax deemed paid by these entities in respect of the includible gains.
          Under recently promulgated Treasury regulations, if a stockholder recognizes a loss with respect to the stock of $2 million or more for an individual stockholder or $10 million or more for a corporate stockholder, the stockholder must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Stockholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Non-U.S. Stockholders
          The rules governing U.S. Federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and estates or trusts that in either case are not subject to U.S. Federal income tax on a net income basis who own our stock, which we call “non-U.S. stockholders,” are complex. The following discussion is only a limited summary of these rules. Prospective non-U.S. stockholders should consult with their own tax advisors to determine the impact of U.S. Federal, state and local income tax laws with regard to an investment in the stock, including any reporting requirements.
Ordinary Dividends. Distributions, other than distributions that are treated as attributable to gain from sales or exchanges by us of U.S. real property interests, as discussed below, and other than distributions designated by us as capital gain dividends, will be treated as ordinary income dividends to the extent that they are made out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution will ordinarily apply to distributions of this kind to non-U.S. stockholders, unless an applicable tax treaty reduces that tax. However, if income from the investment in the stock is treated as effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business or is attributable to a permanent establishment that the non-U.S. stockholder maintains in the United States if that is required by an applicable income tax treaty as a condition for subjecting the non-U.S. stockholder to U.S. taxation on a net income basis, tax at graduated rates will generally apply to the non-U.S. stockholder in the same manner as U.S. stockholders are taxed with respect to dividends, and the 30% branch profits tax may also apply if the stockholder is a foreign corporation. U.S. tax will be withheld at the rate of 30% on the gross amount of any dividends, other than dividends treated as attributable to gain from sales or exchanges of U.S. real property interests and capital gain dividends, paid to a non-U.S. stockholder, unless (a) a lower treaty rate applies and the required form evidencing eligibility for that reduced rate is filed with us or the appropriate withholding agent or (b) the non-U.S. stockholder files an IRS Form W-8 ECI or a successor form with us or the appropriate withholding agent claiming that the distributions are effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business.

29

          Distributions to a non-U.S. stockholder that are designated by us at the time of distribution as capital gain dividends which are not attributable to or treated as attributable to the disposition by us of a U.S. real property interest generally will not be subject to U.S. Federal income taxation, except as described below.
Return of Capital. Distributions in excess of our current and accumulated earnings and profits, which are not treated as attributable to the gain from our disposition of a U.S. real property interest, will not be taxable to a non-U.S. stockholder to the extent that they do not exceed the adjusted basis of the non-U.S. stockholder’s stock. Distributions of this kind will instead reduce the adjusted basis of the stock. To the extent that distributions of this kind exceed the adjusted basis of a non-U.S. stockholder’s stock, they will give rise to tax liability if the non-U.S. stockholder otherwise would have to pay tax on any gain from the sale or disposition of our stock, as described below. If it cannot be determined at the time a distribution is made whether the distribution will be in excess of current and accumulated earnings and profits, withholding will apply to the distribution at the rate applicable to dividends. However, the non-U.S. stockholder may seek a refund of these amounts from the IRS if it is subsequently determined that the distribution was, in fact, in excess of our current accumulated earnings and profits.
Capital Gain Dividends. For any year in which we qualify as a REIT, distributions that are attributable to gain from sales or exchanges by us of U.S. real property interests will be taxed to a non-U.S. stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980, as amended. Under this statute, these distributions are taxed to a non-U.S. stockholder as if the gain were effectively connected with a U.S. business. Thus, non-U.S. stockholders will be taxed on the distributions at the normal capital gain rates applicable to U.S. stockholders, subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals. Distributions subject to the Foreign Investment in Real Property Tax Act made to non-U.S. stockholders may also be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder“U.S. person” that is not entitled to a treaty exemption. The appropriate withholding agent will be required by applicable Treasury regulations under this statute to withhold and remit to the IRS 35% of any distribution that we could designate as a capital gain dividend. However, if we designate as a capital gain dividend a distribution made before the day we actually effect the designation, then although the distribution may be taxable to a non-U.S. stockholder, withholding does not apply to the distribution under this statute. Rather, we must effect the 35% withholding from distributions made on and after the date of the designation, until the distributions so withheld equal the amount of the prior distribution designated as a capital gain dividend. The non-U.S. stockholder may credit the amount withheld against its U.S. tax liability.
          If a class of our stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market (e.g., the New York Stock Exchange), a distribution with respect to such class of stock received by a non-U.S. stockholder that does not own more than 5% of that class of stock during the tax year within which the distribution is received will not be treated as gain that is effectively connected with a U.S. business. As such, a non-U.S. stockholder who does not own more than 5% of the relevant class of stock at any time during the applicable taxable year would not be required to file a U.S. Federal income tax return by reason of receiving such a distribution. In this case, the distribution would be treated as a REIT dividend to that non-U.S. stockholder and taxed as a REIT dividend that is not a capital gain distribution as described above, meaning that it will be subject to a 30% withholding tax (or lesser rate as reduced by an applicable treaty) under the circumstances described above. In addition, the branch profits tax would not apply to such distributions. However, there can be no assurance that a particular class of our stock will at any time be regularly traded on an established securities market.
Sales of Stock. Gain recognized by a non-U.S. stockholder upon a sale or exchange of our stock generally will not be taxed under the Foreign Investment in Real Property Tax Act if we are a “domestically controlled REIT,” defined generally as a REIT, less than 50% in value of whose stock is and was held directly or indirectly by foreign persons at all times during a specified testing period. We believe that we will be a domestically controlled REIT, and, therefore, that taxation under this statute generally will not apply to the sale of our stock. However, gain to which this statute does not apply will be taxable to a non-U.S. stockholder if investment in the stock is treated as effectively connected with the non-U.S. stockholder’s U.S. trade or business or is attributable to a permanent establishment that the non-U.S. stockholder maintains in the United States if that is required by an applicable income tax treaty as a condition for subjecting the non-U.S. stockholder to U.S. taxation on a net income basis. In this case, the same treatment will apply to the non-U.S. stockholder as to U.S. stockholders with respect to the gain. In addition, gain to which the Foreign Investment in Real Property Tax Act does not apply will be taxable to a non-U.S. stockholder if the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, or maintains an office or a fixed place of business in the United States to which the gain is attributable. In this case, a 30% tax will apply to the nonresident alien individual’s capital gains. A similar rule will apply to capital gain dividends to which this statute does not apply.

30

          If we do not qualify as a domestically controlled REIT, tax under the Foreign Investment in Real Property Tax Act would apply to a non-U.S. stockholder’s sale of our stock, unless our stock is regularly traded on an established securities market at the time of such sale and such non-U.S. stockholder does not own more than 5% of our stock at any time during a specified period. This period is generally the shorter of the period that the non-U.S. stockholder owned the stock sold or the five-year period ending on the date when the stockholder disposed of the stock. If tax under this statute applies to the gain on the sale of our stock, the same treatment would apply to the non-U.S. stockholder as to U.S. stockholders with respect to the gain, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals.
          In any event, a purchaser of our stock from a non-U.S. stockholder will not be required under the Foreign Investment in Real Property Tax Act to withhold on the purchase price if the purchased class of stock is regularly traded on an established securities market and the seller did not own more than 5% of such class of stock at any time during the taxable year or if we are a domestically controlled REIT. Otherwise, under the Foreign Investment in Real Property Tax Act, the purchaser of our stock may be required to withhold 10% of the purchase price and remit that amount to the IRS.
Backup Withholding and Information Reporting. If you are a non-U.S. stockholder, you are generally exempt from backup withholding and information reporting requirements with respect to:
•dividend payments and
•the payment of the proceeds from the sale of our stock effected at a U.S. office of a broker,
as long as the income associated with these payments is otherwise exempt from U.S. Federal income tax, and:
•the payor or broker does not have actual knowledge or reason to know that you are a U.S. person and you have furnished to the payor or broker:   
•a valid IRS Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-U.S. person, or  
•other documentation upon which it may rely to treat the payments as made to a non-U.S. person in accordance with U.S. Treasury regulations, or  
•you otherwise establish an exemption.
          Paymentrecipient. Payments of the proceeds from the salea disposition or a redemption of our stock effected atthat occurs outside the U.S. by anon-U.S. stockholder made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting (but not backup withholding) generally will apply to such a salepayment if the broker has certain connections with the U.S. unless the broker has documentary evidence in its records that demonstrates that the beneficial owner is anon-U.S. stockholder and specified conditions are met or an exemption is otherwise established. Payment of the proceeds from a disposition of our stock that is effected atby a foreignnon-U.S. stockholder made by or through the U.S. office of a broker will begenerally is subject to information reporting and backup withholding if:
•the proceeds are transferred to an account maintained by you in the United States,
•the payment of proceeds or the confirmation of the sale is mailed to you at a U.S. address, or
•the sale has some other specified connection with the United States as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to knowunless thenon-U.S. stockholder certifies under penalties of perjury that you are a U.S. person and the documentation requirements described above are met or you otherwise establish an exemption.
          In addition, a sale of our stock will be subject to information reporting if it is effected at a foreign office of a broker that is:
•a U.S. person,
•a controlled foreign corporation for U.S. tax purposes,
•a foreign person 50% or more of whose gross income is effectively connected with the conduct of a U.S. trade or business for a specified three-year period, or
•a foreign partnership, if at any time during its tax year:

31

•one or more of its partners are “U.S. persons,” as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or
•such foreign partnership is engaged in the conduct of a U.S. trade or business,
unless the broker does not have actual knowledge or reason to know that you are a U.S. person and the documentationsatisfies certain other requirements, described above are met or you otherwise establishestablishes an exemption. Backup withholding will apply if the sale is subject toexemption from information reporting and the broker has actual knowledge that you are a U.S. person.backup withholding.
 You generally may obtain a refund of any
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules that exceed your actualmay be refunded or credited against the stockholder’s federal income tax liability if certain required information is furnished to the IRS. Stockholders should consult their own tax advisors regarding application of backup withholding to them and the availability of, and procedure for obtaining an exemption from, backup withholding.
For taxable years beginning after December 31, 2012, a U.S. withholding tax at a 30% rate will be imposed on dividends and proceeds of sale in respect of our stock received by filing(i) U.S. stockholders that own their stock through foreign accounts or foreign intermediaries and (ii) certainnon-U.S. stockholders if, in either case, certain disclosure requirements related to U.S. accounts or ownership are not satisfied. If payment of withholding taxes is required,non-U.S. stockholders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect to such dividends and proceeds will be required to seek a refund claim withfrom the IRS.IRS to obtain the benefit of such exemption or reduction. We will not pay any additional amounts in respect of any amounts withheld.
Tax Aspects of ourOur Investments in Our Operating Partnership and Subsidiary Partnerships
We currently hold, directly and indirectly, all of the ownership interests in our Operating Partnership
and our other subsidiaries; therefore, our Operating Partnership and our other subsidiaries (other than any taxable REIT subsidiaries) currently are disregarded for federal income tax purposes. See “— Requirements for Qualification as a REIT — Qualified REIT Subsidiaries” and “— Requirements for Qualification as a REIT — Other Disregarded Entities and Partnerships” above. If additional partners or members are admitted to our Operating Partnership or any of our other subsidiaries, as applicable, we intend for such noncorporate entity to be treated as a partnership for federal income tax purposes. The following discussion summarizes certain federal income tax considerations that would be applicable to our direct or indirect investments inif our Operating Partnership and any subsidiaryor other subsidiaries were treated as partnerships or limited liability companies that we form or acquire (eachfor federal income tax purposes, each individually referred to as a “Partnership” and, collectively, as the “Partnerships”).“Partnerships.” The following discussion does not coveraddress state or local tax laws or any federal tax laws other than income tax laws.
 
Classification as Partnerships. Partnerships
We willare required to include in our income our distributive share of each Partnership’s income and we willto deduct our distributive share of each Partnership’s losses but only if such Partnership is classified for federal income tax purposes as a partnership, (or an entity that is disregarded for federal income tax purposes if the entity has only one owner or member), rather than as a corporation or an association taxable as a corporation. An organizationunincorporated entity with at least two owners or members, as determined for federal income tax purposes, will be classified as a partnership, rather than as a corporation, for federal income tax purposes if it:
 • is treated as a partnership under the Treasury regulations relating to entity classification, (the “check-the-box regulations”);or the“check-the-box regulations;” and
 
 • is not a “publicly traded”traded partnership.”
Under thecheck-the-box regulations, an unincorporated entity with at least two owners or members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity fails todoes not make an election, it generally will be treated as a partnership for federal income tax purposes. Each Partnership intends to be classified as a partnership for federal income tax purposes (or an entity that is disregarded for federal income tax purposes if the entity has only one owner or member), and no Partnership will elect to be treated as an association taxable as a corporation under the check-the-box regulations.
 
A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. A publicly traded partnership will not, however, be


44

generally is treated as a corporation for anyfederal income tax purposes, but will not be so treated if, for each taxable year ifbeginning after December 31, 1987 in which it was classified as a publicly traded partnership, at least 90% or more of the partnership’s gross income for such year consistsconsisted of certain passive-typespecified passive income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends, (theor the “90% passive income exception”).
exception.” The U.S. Treasury regulations (the “PTP regulations”)Regulations provide limited safe harbors from the definition oftreatment as a publicly traded partnership. Pursuant to one of those safe harbors, (the “private placement exclusion”), interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (1) all interests in the partnership were issued in a transaction or transactions that were not required to be registered under the Securities Act of 1933, as amended, and (2) the partnership does not have more than 100 partners at any time during the partnership’s taxable year. In determining the number of partners in a partnership, a person owning an interest in a partnership, grantor trust, or S corporation that owns an interest in the partnership is treated as a partner in such partnership only if (1) substantially all of the value of the owner’s interest in the entity is attributable to the entity’s direct or indirect interest in the partnership and (2) a principal purpose of the use of the entity is to permit the partnership to satisfy the 100-partner limitation. We currently intend that eachIf any Partnership willdoes not qualify for any safe harbor and is treated as a publicly traded partnership, we believe that such Partnership would have sufficient qualifying income to satisfy the private placement exclusion.90% passive income exception and, therefore, would not be treated as a corporation for federal income tax purposes.
 
We have not requested, and do not intend to request, a ruling from the Internal Revenue ServiceIRS that any of the Partnerships is or will be classified as partnershipspartnership for federal income tax purposes. If, for any reason, a Partnership were taxable as a corporation, rather than as a partnership, for federal income tax purposes, we likely wouldmay not be able to qualify as a REIT.REIT, unless we qualify for certain relief provisions. See “— Gross Income Tests” and “— Asset Tests.” In addition, any change in a Partnership’s status for tax purposes might be treated as a taxable event, in which case we might incur tax liability without any related cash distribution. See “— Annual Distribution Requirement.Requirements.” Further, items of income and deduction of such Partnership would not pass through to its partners,us, and its partnerswe would be treated as stockholdersa stockholder for federal income tax purposes. Consequently, such Partnership would be required to pay income tax at corporate rates on its net income, and distributions to its partnersus would constitute dividends that would not be deductible in computing such Partnership’s taxable income.

32

Income Taxation of the Partnerships and Their Partners
 
Partners, Not the Partnerships, Subject to TaxTax..  A partnership is not a taxable entity for federal income tax purposes. Rather, we are required to take into account our allocable share of each Partnership’s income, gains, losses, deductions, and credits for anyeach taxable year of suchthe Partnership ending withinwith or withwithin our taxable year, without regard to whethereven if we have received or will receive anyno distribution from suchthe Partnership for that year or a distribution that is less than our share of taxable income. Similarly, even if we receive a distribution, it may not be taxable if the distribution does not exceed our adjusted tax basis in our interest in the Partnership.
 
Partnership AllocationsAllocations..  Although a partnership agreement generally will determine the allocation of income and losses among partners, such allocations maywill be disregarded for tax purposes if they do not comply with certainthe provisions of the federal income tax laws governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. We expect that each Partnership’s allocations of taxable income, gain, and loss will be respected for U.S. federal income tax purposes.
 
Tax Allocations With Respect to Contributed PropertiesProperties..  Income, gain, loss, and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for federal income tax purposes in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution.contribution (the “704(c) Allocations”). The amount of such unrealized gain or unrealized loss, (“built-inreferred to as “built-in gain” or “built-in loss”)loss,” at the time of contribution is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at that time, referred to as a book-tax difference. A book-tax difference attributable to depreciable property generally is decreased on an annual basis as a result of the timeallocation of contribution (a “book-tax difference”). Such allocationsdepreciation deductions to the contributing partner for book purposes, but not for tax purposes. The 704(c) Allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The U.S. Treasury


45

Department has issued regulations requiring partnerships to use a “reasonable method” for allocating items with respect to which there is a book-tax difference and outlining several reasonable allocation methods.
 Under our Operating Partnership’s partnership agreement, depreciation or amortization deductions of the operating partnership generally will be allocated among the partners in accordance with their respective interests in
If our Operating Partnership exceptwere to the extent that our Operating Partnership is required under theadmit additional partners and therefore be treated as a partnership for federal income tax laws governingpurposes, the properties owned by the Operating Partnership would be deemed to have been contributed to a partnership allocationsfor federal income tax purposes, which could result in future 704(c) Allocations to use a method for allocating tax depreciation deductions attributable to contributed properties.us. In addition, gain or loss on the salecarryover basis of a property that has beenany properties actually contributed in whole or in part, to our Operating Partnership willby an additional partner, under certain reasonable methods available to us, including the “traditional method,” (i) would cause us to be specially allocated lower amounts of depreciation deductions for tax purposes than would be allocated to us if all contributed properties were to have a tax basis equal to their fair market value at the time of the contribution and (ii) in the event of a sale of such properties, could cause us to be allocated taxable gain in excess of the economic or book gain allocated to us as a result of such sale, with a corresponding tax benefit to the contributing partnerspartners. An allocation described in (ii) above might cause us to recognize taxable income in excess of cash proceeds in the extentevent of any built-in gaina sale or lossother disposition of property, which might adversely affect our ability to comply with respect to such property for federal income tax purposes.the REIT distribution requirements and may result in a greater portion of our distributions being taxed as dividends.
 
Basis in Partnership InterestInterest..  Our adjusted tax basis in ourany partnership interest in our Operating Partnershipwe own generally will be equal to:be:
 • the amount of cash and the basis of any other property contributed by uswe contribute to our Operating Partnership;the partnership;
 
 • increased by our allocable share of our Operating Partnership’sthe partnership’s income (including tax-exempt income) and any increase in our allocable share of indebtedness of our Operating Partnership;the partnership; and
 
 • reduced, but not below zero, by our allocable share of our Operating Partnership’sthe partnership’s loss and(excluding any non-deductible items), the amount of cash and the basis of property distributed to us, and by constructive distributions resulting from aany reduction in our allocable share of indebtedness of our Operating Partnership.the partnership.
          If the allocationLoss allocated to us in excess of our distributive share of our Operating Partnership’s loss would reduce the adjusted tax basis of ourin a partnership interest below zero,will not be taken into account for federal income tax purposes until we again have basis sufficient to absorb the recognitionloss. A reduction of such loss will be deferred until such time as the recognition of such loss would not reduce our adjusted tax basis below zero. To the extent that our Operating Partnership’s distributions, or any decrease in our share of thepartnership indebtedness of our Operating Partnership, which is consideredwill be treated as a constructive cash distribution to the partners,us, and will reduce our adjusted tax basis. Distributions, including constructive distributions, in excess of the basis below zero, such distributionsof our partnership interest will constitute taxable income to us. Such distributions and constructive distributions normally will be characterized as long-term capital gain.
 
Depreciation Deductions Available to Our Operating Partnership. To the extent that our Operating Partnership acquires its properties in exchange for cash, its initial basis in such properties for federal income tax purposes generally will be equal to the purchase price paid by our Operating Partnership. Our Operating Partnership generally plans to depreciate each depreciable property for federal income tax purposes under the alternative depreciation system of depreciation (“ADS”). Under ADS, the Operating Partnership generally will depreciate buildings and improvements over a 40-year recovery period using a straight-line method and a mid-month convention and will depreciate furnishings and equipment over a 12-year recovery period. Our Operating Partnership’s initial basis in properties acquired in exchange for units in our Operating Partnership should be the same as the transferor’s basis in such properties on the date of acquisition by our Operating Partnership. Although the law is not entirely clear, our Operating Partnership generally will depreciate such property for federal income tax purposes over the same remaining useful lives and under the same methods used by the transferors. Our Operating Partnership’s tax depreciation deductions will be allocated among the partners in accordance with their respective interests in our Operating Partnership, except to the extent that our Operating Partnership is required under the federal income tax laws governing partnership allocations to use a method for allocating tax depreciation deductions attributable to contributed properties.

33

Sale of a Partnership’s Property
Property.  Generally, any gain realized by a Partnership on the sale of property held by the Partnership for more than one year will be long-term capital gain, except for any portion of suchthe gain that is treated as depreciation or cost recovery recapture. Any gain or loss recognized by a Partnership on the disposition of contributed properties will be allocated first to the partners of the Partnership who contributed such properties to the extent of their built-in gain or loss on those properties for federal income tax purposes. The partners’ built-in gain or loss on such contributed properties will equal the difference between the partners’ proportionate share of the book value of those properties and the partners’ tax basis allocable to those properties at the time of the contribution. Any remaining gain or loss recognized by the Partnership on the disposition of the contributed properties, and any gain or loss recognized by the Partnership on the disposition of the other properties, will be allocated among the partners in accordance with their respective percentage interests in the Partnership.
Our distributive share of any Partnership’s gain realized by a Partnership onfrom the sale of any property held by the Partnership as inventory or other property held primarily for sale to customers in the ordinary course of the Partnership’s trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. SuchIncome from a prohibited transaction income also may have an adverse effect uponon our ability to satisfy the gross income tests for REIT status. See “— Gross Income Tests.” We however,presently do not presently intend to acquire or hold, or to allow any Partnership to acquire or hold, any property that representsis likely to be treated as inventory or other property held primarily for sale to customers in the ordinary course of our, or suchany Partnership’s, trade or business.
Sunset of Reduced Tax Rate Provisions
Several of the tax considerations described herein are subject to a sunset provision. The sunset provision generally provides that for taxable years beginning after December 31, 2010, certain provisions that currently are in the Code will revert back to an earlier version of those provisions. Those provisions include provisions related to the reduced federal income tax rates for taxpayers taxed at individual rates as to ordinary income, long-term capital gains and qualified dividend income, and certain other tax rate provisions described herein. The impact of this sunset is not discussed herein. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of sunset provisions on an investment in our stock.


46

State and Local Taxes
 
We and our stockholdersand/or you may be subject to taxation by various states and localities, including those in which we or our stockholders transacta stockholder transacts business, ownowns property or reside.resides. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, stockholdersyou should consult theiryour own tax advisersadvisors regarding the effect of state and local tax laws uponon an investment in the common shares.our stock.

34

PLAN OF DISTRIBUTION
 
Offering and Sale of Securities
We may sell the securities through underwriters or dealers, through agents, or directlybeing offered hereby, from time to time, in one or more purchasers. offerings, on a continuous or delayed basis, by one or more of the following methods:
• to or through underwriting syndicates represented by managing underwriters;
• through one or more underwriters without a syndicate for them to offer and sell to the public;
• to or through dealers, brokers, placement agents or other agents; and
• to investors directly in negotiated sales or in competitively bid transactions.
One or more prospectus supplements will describe the terms of the offering of the securities, including:
 • the name or names of any underwriters, dealers or agents, if any;
 
 • the purchase price of the securities and the proceeds we will receive from the sale;
 
 • any over-allotment options under which underwriters may purchase additional securities from us;
 
 • any agency fees or underwriting discounts and other items constituting agents’ or underwriters’ compensation;
 
 • any public offering price;
 
 • any discounts or concessions allowed or reallowed or paid to dealers; and
 
 • any securities exchange or market on which the securities may be listed.
          Each prospectus supplement filed with respect to any offered securities, to the extent applicable, will describe the number and termsThe distribution of the securities to which such prospectus relates, the name or names of any underwriters or agents with whom we have entered into arrangements with respect to the sale of such securities, the public offering or purchase price of such securities and the net proceeds we will receive from such sale. Only underwriters named in the prospectus supplement are underwriters of the securities offered by the prospectus supplement.
          If underwriters are used in the sale, they will acquire the securities for their own account and may resell thembe effected from time to time in one or more transactions at a fixed public offering price. The obligations of the underwriters to purchase the securitiestransactions:
• at fixed prices which may be changed;
• at market prices prevailing at the time of the sale;
• at varying prices determined at the time of sale; or
• at negotiated prices.
Each prospectus supplement will be subject to the conditions set forth in the applicable underwriting agreement. We may offer the securities to the public through underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. Subject to certain conditions, the underwriters will be obligated to purchase all the securitiesmanner and terms of the series offered by the prospectus supplement. Any publican offering price and any discounts or concessions allowed or reallowed or paid to dealers may change from time to time. We may use underwriters with whom we have a material relationship. We will describe in the prospectus supplement, naming the underwriter, the nature of any such relationship.
          We may sell securities directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of securities and we will describe any commissions we will pay the agent in the prospectus supplement.including:
 Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment. However, no prospectus supplement shall fundamentally change the terms that are set forth in this prospectus or offer a security that is not registered and described in this prospectus at the time of its effectiveness.
• the number and terms of the securities to which such prospectus relates;
• the name or names of any underwriters or agents with whom we have entered into arrangements with respect to the sale of such securities;
• the rules and procedures for any auction or bidding process, if used; and
• the public offering or purchase price of such securities and the net proceeds we will receive from such sale.
          We may authorize agents or underwriters to solicit offers by certain types of institutional investors to purchase securities from us at the public offering price set forth in the prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. We will describe the conditions to these contracts and the commissions we must pay for solicitation of these contracts in the prospectus supplement.
We may enter into derivative transactions with third parties or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the related prospectus supplement so indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the related prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock and may use securities


47

received from us in settlement of those derivatives to close out any related open borrowings of stock. The third party in such sale transactions will be an underwriter and, if not identified in this prospectus, will be identified in the related prospectus supplement (or a post-effective amendment).
 
Sales Through Underwriters
If underwriters are used in the sale, they will acquire the securities for their own account and may resell them from time to time in one or more transactions at a fixed public offering price. The obligations of the underwriters to purchase the securities will be subject to the conditions set forth in the applicable underwriting agreement. We may offer the securities to the public through underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. Subject to certain conditions, the underwriters will be obligated to purchase all of the securities of the series offered by the prospectus supplement. Any public offering price and any discounts or concessions allowed or reallowed or paid to dealers may change from time to time. We may use underwriters with whom we have a material relationship. We will describe in the prospectus supplement, naming the underwriter, the nature of any such relationship.
Sales Through Agents
We may sell securities directly or through agents that we designate from time to time. We will name any agent involved in the offering and sale of securities, and we will describe any commissions that we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.
Securities bought in accordance with a redemption or repayment under their terms also may be offered and sold, if so indicated in the accompanying prospectus supplement, in connection with a remarketing by one or more firms acting as principals for their own accounts or as agents for us. Any remarketing firm will be identified, and the terms of its agreement, if any, with us and its compensation will be described in the prospectus supplement. Remarketing firms may be deemed to be underwriters in connection with the securities remarketed by them. If so indicated in the applicable prospectus supplement, we may authorize agents, underwriters or dealers to solicit offers by certain specified institutions to purchase securities at a price set forth in the prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on a future date specified in the prospectus supplement. These contracts will be subject only to those conditions set forth in the accompanying prospectus supplement, and the prospectus supplement will set forth the commissions payable for solicitation of these contracts.
Direct Sales
We may authorize agents or underwriters to solicit offers by certain types of institutional investors to purchase securities from us at the public offering price set forth in the prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. We will describe the conditions to these contracts and the commissions that we must pay for solicitation of these contracts in the prospectus supplement.
General Information
We will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under the Securities Act, if we enter into any material arrangement with a broker, dealer, agent or underwriter for the sale of securities through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer. Such prospectus supplement will disclose:
• the name of any participating broker, dealer, agent or underwriter;
• the number and type of securities involved;
• the price at which such securities were sold;
• any securities exchanges on which such securities may be listed;


48

• the commissions paid or discounts or concessions allowed to any such broker, dealer, agent or underwriter where applicable; and
• other facts material to the transaction.
We may provide agents and underwriters with indemnification against certain civil liabilities, including liabilities under the Securities Act, or contribution with respect to payments that the agents or underwriters may make with respect to such liabilities. Agents and underwriters may engage in transactions with, or perform services for, us in the ordinary course of business.
 
Our shares of common stock are principally tradedtrades on the NasdaqNASDAQ Global Market.Select Market under the symbol “GOOD.” Our 7.75% Series A Cumulative Redeemable Preferred Stock trades on the NASDAQ Global Select Market under the symbol “GOOD.P” and our 7.50% Series B Cumulative Redeemable Preferred Stock trades on the NASDAQ Global Select Market under the symbol “GOOD.O.” Our senior common stock is not listed on an exchange. All securities that we offer, other than common stock or senior common stock, and other than securities issued upon a reopening of a previous series, will be new issues of securities with no established trading market. Any underwriters may make a market in these securities but will not be obligated to do so and may discontinue any market making at any time without notice. We cannot guarantee the liquidity of the trading markets for any securities.

35

 
Any underwriter may engage in overallotment,over-allotment, stabilizing transactions, short covering transactions and penalty bids in accordance with Regulation M under the Exchange Act, as amended. OverallotmentAct. Over-allotment involves sales in excess of the offering size which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Short covering transactions involve purchases of the securities in the open market after the distribution is completed to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are purchased in a covering transaction to cover short positions. Those activities may cause the price of the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.
 
Any underwriters who are qualified market makers on The Nasdaq Stockthe NASDAQ Global Select Market may engage in passive market making transactions in the securities on The Nasdaq Stockthe NASDAQ Global Select Market in accordance with Rule 103 of Regulation M under the Exchange Act as amended, during the business day prior to the pricing of the offering and before the commencement of offers or sales of the securities. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker’s bid, however, the passive market maker’s bid must then be lowered when certain purchase limits are exceeded.
 
Some of the underwriters, dealers and agents and their affiliates may engage in transactions with or perform services for us and our affiliates in the ordinary course of business. Underwriters have from time to time in the past provided, and may from time to time in the future provide, investment banking services to us for which they have in the past received, and in the future may receive, customary fees.
 In compliance with guidelines of the Financial Industry Regulatory Authority, or FINRA, the maximum consideration or discount to be received by any FINRA member or independent broker dealer may not exceed 8% of the aggregate amount of the securities offered pursuant to this prospectus and any applicable prospectus supplement.
EXPERTSLEGAL MATTERS
 
Certain legal matters regarding the shares of common stock offered hereby will be passed upon for us by Bass, Berry & Sims PLC, Memphis, Tennessee, and certain matters with respect to Maryland law will be passed upon by Venable LLP.
EXPERTS
The financial statements and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) incorporated in this prospectus by reference to the Annual Report onForm 10-K for the year ended December 31, 20062009 have been so incorporated in reliance on the reportsreport(s) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.


49

LEGAL MATTERSWHERE YOU CAN FIND MORE INFORMATION
 The validity
We are a public company and file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549. You may request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at1-800-SEC-0330 for more information about the operation of the public reference room. Our SEC filings are also available to the public at the SEC’s website athttp://www.sec.gov. We also make available free of charge through our website our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as well as our definitive proxy statement and Section 16 reports on Forms 3, 4 and 5. Our website address ishttp://www.GladstoneCommercial.com. However, the information located on, or accessible from, our website is not, and shall not be deemed to be, except as described below, a part of this prospectus or any accompanying prospectus supplement or incorporated into any other filings that we make with the SEC.
This prospectus comprises only part of a registration statement onForm S-3 that we have filed with the SEC under the Securities Act and, therefore, omits some of the information contained in the registration statement. We have also filed exhibits and schedules to the registration statement which are excluded from this prospectus, and you should refer to the applicable exhibit or schedule for a complete description of any statement referring to any contract or other document. You may inspect or obtain a copy of the registration statement, including the exhibits and schedules, as described in the previous paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This prospectus is part of a registration statement that we have filed with the SEC. The SEC allows us to “incorporate by reference” the information that we file with it which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to comprise a part of this prospectus from the date we file that document. Any reports filed by us with the SEC after the date of this prospectus and before the date that the offering of the securities by means of this prospectus is terminated will automatically update and, where applicable, supersede any information contained in this prospectus or incorporated by reference in this prospectus.
We previously filed the following documents with the SEC, and such filings are incorporated by reference into this prospectus.
• Annual Report onForm 10-K for the fiscal year ended December 31, 2009, filed February 24, 2010 (including portions of our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders incorporated therein by reference);
• Quarterly Report onForm 10-Q for the fiscal quarter ended March 31, 2010, filed May 3, 2010;
• Quarterly Report onForm 10-Q for the fiscal quarter ended June 30, 2010, filed August 3, 2010;
• Current Report onForm 8-K filed March 19, 2010;
• Current Report onForm 8-K filed April 29, 2010;
• Current Report onForm 8-K filed May 7, 2010;
• Current Report onForm 8-K filed June 10, 2010;
• Current Report onForm 8-K filed July 8, 2010;
• Current Report onForm 8-K filed July 26, 2010;
• Current Report onForm 8-K filed August 11, 2010;
• Current Report onForm 8-K filed August 16, 2010;
• Current Report onForm 8-K filed August 27, 2010;


50

• Current Report onForm 8-K filed September 9, 2010;
• The description of our common stock contained in our Registration Statement onForm 8-A filed August 12, 2003, as updated through subsequently filed reports;
• The description of our 7.75% Series A Cumulative Redeemable Preferred Stock contained in our Registration Statement onForm 8-A filed January 19, 2006, as updated through subsequently filed reports; and
• The description of our 7.50% Series B Cumulative Redeemable Preferred Stock contained in our Registration Statement onForm 8-A filed October 19, 2006, as amended in our Registration Statement onForm 8-A/A filed on October 23, 2006, as updated through subsequently filed reports.
We also incorporate by reference into this prospectus additional documents that we may file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, from the date of this prospectus until all of the securities offered by this prospectus have been sold or we otherwise terminate the offering of these securities, including all filings made after the date of the initial filing of the registration statement of which this prospectus is a part and prior to the effectiveness of the registration statement; provided, however, that information “furnished” under Item 2.02 or Item 7.01 ofForm 8-K or other information “furnished” to the SEC which is not deemed filed is not incorporated by reference in this prospectus and any accompanying prospectus supplement. Information that we subsequently file with the SEC will be passed upon for automatically update and may supersede information in this prospectus, any accompanying prospectus supplement and information previously filed with the SEC.
You may request a copy of these filings (other than exhibits, unless the exhibits are specifically incorporated by reference into these documents) at no cost by writing or calling Investor Relations at the following address and telephone number:
Investor Relations
Gladstone Commercial Corporation by Cooley Godward Kronish LLP, Reston, Virginia. Legal counsel to any underwriters or agents may pass upon legal matters for such underwriters or agents.
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5893

36
51

$300,000,000
(GLADSTONE COMMERCIAL LOGO)
Common Stock
Senior Common Stock
Preferred Stock
Debt Securities
Depositary Shares
Subscription Rights
PROSPECTUS
          , 2010

 

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
 
ITEM 14.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimatedvarious expenses to be incurred in connection with the registration and sale of the sharessecurities being registered hereby, all of which will be paidborne by Gladstone Commercial Corporation. All of the registrant:amounts shown are estimated except the SEC registration fee:
     
SEC registration fee $9,210 
FINRA filing fee $30,500 
Printing and duplicating expenses* $10,000 
Legal fees and expenses* $10,000 
Accounting fees and expenses* $5,000 
Miscellaneous expenses* $10,000 
Total $74,710 
 
     
Securities and Exchange Commission Fee(1) $  
Printing and Engraving Expenses* $10,000 
Legal Fees and Expenses* $20,000 
Trustee and Transfer Agent Fees* $10,000 
Accounting Fees and Expenses* $4,500 
     
Total $ 
     
*Does not include expenses of preparing prospectus supplements and other expenses relating to offerings of particular securities.
 
Estimated pursuant to instruction to Item 511 of Regulation S-K.(1)To be filed by pre-effective amendment.
Item 15. Indemnification of Directors and Officers.
ITEM 15.INDEMNIFICATION OF DIRECTORS AND OFFICERS
       Maryland lawThe MGCL permits a Maryland corporation to include in its articles of incorporationcharter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty which is established by a final judgment and which is material to the cause of action. Our articles of incorporation containcharter contains such a provision which eliminates directors’ and officers’ liability (except for liability resulting from an intentionally wrongful, willful or malicious act which is established by a final judgment and which is material to the cause of action) to the maximum extent permitted by Maryland law.the MGCL. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
 Our articles of incorporation authorize us, to the maximum extent permitted by Maryland law, to obligate the Company to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, real estate investment trust, limited liability company, joint venture, trust, employee benefit plan or other enterprise as a director, officer, member or director, from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service as a present or former director or officer of the Company and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, real estate investment trust, limited liability company, joint venture, trust, employee benefit plan or other enterprise as a director, officer, member or director and who is made a party to the proceeding by reason of his service in that capacity from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service as a present or former director or officer of the Company and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding.
The articles of incorporation and bylaws also permit the Company to indemnify and advance expenses to any individual who served a predecessor of the Company in any of the capacities described above and any employee or agent of the Company or a predecessor of the Company.
     Maryland lawMGCL requires a corporation (unless its articles of incorporation providecharter provides otherwise, which the Company’s articles of incorporation docharter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he is made a party by reason of his service in that capacity. Maryland lawThe MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. that:
• an act or omission of the director or officer was material to the matter giving rise to the proceeding and:
• was committed in bad faith; or
• was the result of active and deliberate dishonesty;
• the director or officer actually received an improper personal benefit in money, property or services; or
• in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.
However, under Maryland law,the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland lawthe MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.of:
• a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and


II-1

 

Item 16. Exhibits.
• a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
Our charter obligates us, to the fullest extent permitted by Maryland law, to indemnify and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
 See
• any director or officer, whether serving us or at our request any other entity; or
• other employees and agents (including our advisors) to the extent authorized by our board of directors or bylaws and permitted by law.
The partnership agreement of our Operating Partnership provides that we, as general partner of our Operating Partnership, and our directors and officers are indemnified to the fullest extent permitted by law.
ITEM 16.EXHIBITS.
The Exhibit Index followingfiled herewith and appearing immediately before the signature page in this Registration Statement, which Exhibit Indexexhibits hereto is hereby incorporated herein by reference.reference herein.
Item 17. Undertakings.
ITEM 17.UNDERTAKINGS.
The undersigned registrant hereby undertakes:
 (1) 
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
 
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
 
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
 
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
 
Provided, howeverthat:
, that paragraphs (1)(i), (1)(ii) and (1)(iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
 (2) 
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
 (3) 
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
 (4) 
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
 (i) If the registrant is relying on 430B:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and


II-2

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.Provided, however,, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
 Or
          (ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

II-2

     (5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
 
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
 
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
 
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
 
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
 (6) That,
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in thethis registration statement shall be deemed to be a new registration statement relating to the securities offered therein,herein, and the offering of the securities at that time shall be deemed to be the initialbona fideoffering thereof.
 (7) 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Exchange Act and will be governed by the final adjudication of such issue.
     (8) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
     (9) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.


II-3

 

SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrantRegistrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing onForm S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of McLean, Commonwealth of Virginia, on December 5, 2007.September 9, 2010.
GLADSTONE COMMERCIAL CORPORATION
GLADSTONE COMMERCIAL CORPORATION
 By: /s//s/  David J. Gladstone
David J. Gladstone 
Chairman of the Board of Directors and
Chief Executive Officer 
David J. Gladstone
Chairman of the Board of Directors and
Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned does hereby constitute and appoint David J. Gladstone, Terry Lee Brubaker and Terry L. Brubaker,Michael B. LiCalsi, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubmission to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that the attorney may deem necessary or advisable under the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission in connection with this registration statement registration, including specifically, but without limiting the generality of the foregoing, the power and authority to sign his or her name, in his or her respective capacity as a member of the board of directors or officer of the registrant, the registration statementand/or any other form or forms as may be appropriate to be filed with the Securities and Exchange Commission as any of them may deem appropriate in connection therewith, to any and all amendments thereto, including post-effective amendments, to such registration statement, to any related Rule 462(b) registration statement and to any other documents filed with the Securities and Exchange Commission, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue of this prospectus.
 
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
       
Date: December 5, 2007
Signature
 By:
Title
 /s/ David J. Gladstone
Date
 
     
/s/  David J. Gladstone

David J. Gladstone		 
Chief Executive Officer and Chairman of the Board of Directors
and Chief Executive Officer
(principal executive officer)		 September 9, 2010
     
Date: December 5, 2007
/s/  Danielle Jones

Danielle Jones		 By:Chief Financial Officer
(principal financial and accounting officer)		 /s/ Harry T. Brill, Jr.September 9, 2010
     
/s/  Terry Lee Brubaker

Terry Lee Brubaker		 Vice Chairman, Chief Operating Officer and Director Harry T. Brill, Jr.
Chief Financial Officer
(principal financial and accounting officer)September 9, 2010
     
Date: December 5, 2007
/s/  George Stelljes III

George Stelljes III		 By:President, Chief Investment Officer and Director /s/ Terry L. BrubakerSeptember 9, 2010
     
Terry L. Brubaker
/s/  David A. R. Dullum

David A. R. Dullum		 Director 
Date: December 5, 2007By:/s/ George Stelljes III
George Stelljes III
Director
Date: December 5, 2007By:/s/ David A.R. Dullum
David A.R. Dullum
Director
Date: December 5, 2007By:/s/ Anthony W. Parker
Anthony W. Parker
DirectorSeptember 9, 2010


II-4

 

       
Date: December 5, 2007
Signature
 By:
Title
 /s/ Michela A. English
Date
 
     
Michela A. English
/s/  Anthony W. Parker

Anthony W. Parker		 Director September 9, 2010
     
Date: December 5, 2007
/s/  Michela A. English

Michela A. English		 By:Director /s/ Paul W. AdelgrenSeptember 9, 2010
     
/s/  Paul W. Adelgren

Paul Adelgren		 Director September 9, 2010
     
Date: December 5, 2007
/s/  John Outland

John Outland		 By:Director /s/ Maurice W. CoulonSeptember 9, 2010
     
Maurice W. Coulon
/s/  Gerard Mead

Gerard Mead		 Director 
Date: December 5, 2007By:/s/ John H. Outland
John H. Outland
Director
Date: December 5, 2007By: /s/ Gerard Mead
Gerard Mead
DirectorSeptember 9, 2010


II-5

 

EXHIBIT INDEX
     
Exhibit
  
Number
 
Exhibit Description
 
 1.1† Form of Underwriting Agreement
 4.1 Articles of Amendment and Restatement to Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement onForm S-11 (FileNo. 333-106024), filed June 11, 2003
 4.2 Articles of Amendment to Articles of Amendment and Restatement of Articles of Incorporation, incorporated by reference to Exhibit 3.1.1 to the Quarterly Report onForm 10-Q, filed July 30, 2009
 4.3 Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Current Report onForm 8-K, filed March 19, 2010
 4.4 Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.3 ofForm 8-A (FileNo. 000-50363), filed January 19, 2006
 4.5 Articles of Amendment to Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 99.1 ofForm 8-K, filed on April 13, 2006
 4.6 Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.5% Series B Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.4 ofForm 8-A (FileNo. 000-50363), filed October 19, 2006
 4.7 Articles Supplementary (Senior Common Stock), incorporated by reference to Exhibit 3.1 to the Current Report onForm 8-K, filed on September 9, 2010
 4.8 Articles Supplementary, incorporated by reference to Exhibit 3.2 to the Current Report onForm 8-K, filed on September 9, 2010
 4.9 Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement onForm S-11 (FileNo. 333-106024), filed June 11, 2003
 4.10 First Amendment to Bylaws, incorporated by reference to Exhibit 99.1 of the Current Report onForm 8-K, filed July 10, 2007
 4.11 First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 of the Current Report onForm 8-K, filed February 1, 2006
 4.12 Amendment to First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 of the Current Report onForm 8-K, filed April 29, 2010
 4.13 Gladstone Commercial Limited Partnership Schedule 4.2(a)(2) to First Amended and Restated Agreement of Limited Partnership; Designation of 7.50% Series B Cumulative Redeemable Preferred Units, incorporated by reference to Exhibit 10.1 of theForm 8-K, filed October 25, 2006
 4.14 Gladstone Commercial Limited Partnership Schedule 4.2(a)(3) to First Amended and Restated Agreement of Limited Partnership; Designation of Senior Common Units, incorporated by reference to Exhibit 10.2 of theForm 8-K, filed April 29, 2010
 4.15 Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 ofForm 8-A (FileNo. 000-50363), filed January 19, 2006
 4.16 Form of Certificate for 7.5% Series B Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.2 ofForm 8-A (FileNo. 001-33097), filed October 19, 2006
 4.17 Form of Certificate for Common Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 to the Registration Statement onForm S-11 (FileNo. 333-106024), filed August 8, 2003
 4.18 Indenture
 4.19† Form of Debt Security
 4.20† Form of Guarantee of Debt Security
 4.21† Form of Deposit Agreement
 4.22† Form of Subscription Right
 5.1 Opinion of Venable LLP as to the legality of the securities being registered

     
Exhibit
  
Number
 
Exhibit Description
 
 8.1 Opinion of Bass, Berry & Sims PLC as to certain tax matters
 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (incorporated herein by reference to Exhibit 12 to the Quarterly Report onForm 10-Q, filed August 3, 2010)
 23.1 Consent of PricewaterhouseCoopers LLP
 23.2 Consent of Venable LLP (included in Exhibit 5.1)
 23.3 Consent of Bass, Berry & Sims PLC (included in Exhibit 8.1)
 24.1 Power of Attorney (included on the Signature Page of this Registration Statement)
 25.1†† Statement of Eligibility of Trustee onForm T-1
†To be filed by amendment to the registration statement or as an exhibit to a Current Report onForm 8-K in reference to the specific offering of securities, if any, to which it relates, and incorporated herein by reference.
 
Exhibit††Description
3.1Amended and Restated Articles of Incorporation, incorporated by referenceTo be filed separately pursuant to Exhibit 3.1 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003.
3.2Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003.
3.3First Amendment to Bylaws, incorporated by reference to Exhibit 99.1Section 305(b)(2) of the Current Report on Form 8-K (File No. 000-50363), filed July 10, 2007.
4.1Specimen CertificateTrust Indenture Act of Common Stock, incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003.
5.1Opinion of Cooley Godward Kronish LLP1939, as to the validity of the shares being offered.
8.1Opinion of Cooley Godward Kronish LLP as to certain tax matters.
12.1Statement of Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
23.1Consent of PricewaterhouseCoopers LLP.
23.2Consent of Cooley Godward Kronish LLP (included in the opinions filed as Exhibits 5.1 and 8.1 to this registration statement).
24.1Power of Attorney (included on the signature page of this registration statement).amended.