Gladstone Commercial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

12 Months Ended

Dec. 31, 2011

Real Estate and Intangible Assets [Abstract]

Real Estate and Intangible Assets

4. Real Estate and Intangible Assets

Real Estate

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


	December 31, 2011			December 31, 2010
Real estate:
Land	$	60,602		$	55,158	⁽¹⁾
Building and improvements		367,605			335,576
Tenant improvements		14,314			10,283
Accumulated depreciation		(53,784	)		(43,659	)

Real estate, net	$	388,737		$	357,358

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

During the year ended December 31, 2011, the Company acquired seven properties, which are summarized below:


Location			Acquisition Date		Square Footage		Lease Term	Renewal Options	Total Purchase Price		Acquistion Expenses		Debt Issued/Assumed		Annualized Straight Line Rent
Hickory, NC				4/4/2011		60,000	9 years	2 (5 years each)	$	10,650	$	59		N/A	$	1,045
Springfield, MO				6/20/2011		78,421	10 years	3 (5 years each)		15,850		55		11,584		1,422
Boston Heights, OH				10/20/2011		25,000	10 years	3 (3 years each)		4,375		56		N/A		377
Parsippany, NJ				10/28/2011		60,111	15 years	1 (3 years)		11,075		390		7,200		1,112
Dartmouth, MA	⁽¹	⁾		11/18/2011		16,340	75 years	N/A		5,802		56		4,352		414
Springfield, MO	⁽²	⁾		12/13/2011		14,560	62 years	N/A		2,650		42		N/A		221
Pittsburgh, PA				12/28/2011		26,080	15 years	2 (5 years each)		4,200		140		N/A		400

⁽¹⁾	Tenant has the right to terminate the lease every 5 years in years 26-75.

⁽²⁾	Tenant has the right to terminate the lease every 5 years in years 19-62.

In accordance with ASC 805, the Company determined the fair value of acquired assets and liabilities assumed related to the seven properties acquired during the year ended December 31, 2011 as follows:


	Land		Building		Tenant Improvements		In-place Leases		Leasing Costs		Customer Relationships		Above Market Leases		Below Market Leases			Premium on Assumed Debt			Total Purchase Price
Hickory, North Carolina	$	1,163	$	5,567	$	1,038	$	736	$	559	$	616	$	971	$	—		$	—		$	10,650
Springfield, Missouri ⁽¹⁾		1,700		11,626		413		1,174		572		702		—		—			(337	)		15,850
Boston Heights, Ohio		449		2,405		605		399		229		288		—		—			—			4,375
Parsippany, New Jersey		1,696		5,980		1,070		1,053		1,103		746		—		(573	)		—			11,075
Dartmouth, Massachusetts		—		4,085		150		671		913		8		—		(25	)		—			5,802
Springfield, Missouri		—		2,228		47		259		307		111		—		(302	)		—			2,650
Pittsburgh, Pennsylvania		281		2,896		267		359		255		142		—		—			—			4,200

	$	5,289	$	34,787	$	3,590	$	4,651	$	3,938	$	2,613	$	971	$	(900	)	$	(337	)	$	54,602

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

Below is a summary of the total revenue and net income recognized on each of the seven properties acquired during the year ended December 31, 2011:


Location	Acquisition Date		Rental revenue for the year ended December 31, 2011		Net income for the year ended December 31, 2011⁽¹⁾
Hickory, NC		4/4/2011	$	693,359	$	309,574
Springfield, MO		6/20/2011		754,670		485,824
Boston Heights, OH		10/20/2011		73,928		30,947
Parsippany, NJ		10/28/2011		203,933		123,934
Dartmouth, MA		11/18/2011		74,124		18,326
Springfield, MO		12/13/2011		16,106		5,609
Pittsburgh, PA		12/28/2011		4,296		2,346

⁽¹⁾	Does not include interest expense or acquisition related costs that are required to be expensed under ASC 805.

The weighted average amortization period for the intangible assets acquired and liabilities assumed during the year ended December 31, 2011, were as follows:


Intangible assets	Years
In-place leases		16.4
Leasing costs		16.4
Customer relationships		19.2
Above market leases		8.8
Below market leases		20.9

All intangible assets		17.1

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses as of December 31, 2011, for each of the five succeeding fiscal years and thereafter is as follows:


Year	Tenant Lease Payments
2012	$	44,948
2013		40,579
2014		36,536
2015		32,573
2016		28,143
Thereafter		197,939

In accordance with the lease terms, substantially all tenant expenses are required to be paid by the tenant; however, the Company would be required to pay property taxes on the respective properties, and ground lease payments on its three properties that are on a ground lease, in the event the tenants fail to pay them. The total annualized property taxes for all properties owned by the Company at December 31, 2011 were $7,284, and the total annual ground lease payments were $411.

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

On May 15, 2011, the Company re-leased its previously vacant building located in South Hadley, Massachusetts for a period of six months, and the tenant had a three-month extension option. . In February 2012, the tenant signed a new lease with a term expiring in January 2013, with a one-year extension option.

On June 23, 2011, the Company extended the lease with its tenant occupying its properties located in Angola, Indiana and Rock Falls, Illinois. The lease covering these properties was extended for an additional three year period, thereby extending the lease until August 2023. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $345. Furthermore, the lease grants the tenant three options to extend the lease for a period of five years each. In connection with the extension of the lease and the modification of certain terms under the lease, the Company provided a tenant allowance of $150, payable over a one year period.

Intangible Assets

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


	December 31, 2011					December 31, 2010
	Lease Intangibles		Accumulated Amortization			Lease Intangibles		Accumulated Amortization
In-place leases	$	24,620	$	(10,181	)	$	17,011	$	(8,362	)
Leasing costs		15,013		(5,663	)		10,764		(4,685	)
Customer relationships		20,725		(6,844	)		17,636		(5,617	)

	$	60,358	$	(22,688	)	$	45,411	$	(18,664	)

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


Year	Estimated Amortization Expense
2012		7,308
2013		3,831
2014		3,546
2015		3,148
2016		2,570
Thereafter		17,267

- Definition

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

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