10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2004.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from                     to                    .

Commission File Number 001-11290

COMMERCIAL NET LEASE REALTY, INC.

(Exact name of registrant as specified in its charter)

Maryland	56-1431377
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employment Identification No.)

450 South Orange Avenue, Orlando, Florida 32801
(Address of principal executive offices, including zip code)

(407) 265-7348
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

51,970,276 shares of common stock, $0.01 par value, outstanding as of October 29, 2004.

CONTENTS

Part I
Item 1.	Financial Statements:	Page
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Earnings	2
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	36
Part II
Other Information		38
Signatures		43

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

	September 30,			December 31,
	2004			2003
ASSETS
Real estate, held for investment:
Accounted for using the operating method, net of accumulated depreciation and amortization of $58,481 and $48,863, respectively	$	966,775		$	887,124
Accounted for using the direct financing method		105,597			102,970
Real estate, held for sale, net of accumulated depreciation of $82 and $246, respectively		63,521			45,822
Investments in and other receivables from unconsolidated affiliates		31,997			39,606
Line of credit and accrued interest receivable from related party, net of unamortized loan origination fees of $17 and $70, respectively		26,983			16,530
Mortgages, notes and accrued interest receivable, net of allowance of $903 and $979, respectively		62,287			68,423
Cash and cash equivalents		16,921			5,335
Receivables, net of allowance of $840 and $1,564, respectively		6,730			4,740
Accrued rental income, net of allowance of $1,413 and $1,320, respectively		28,478			25,322
Debt costs, net of accumulated amortization of $7,771 and $6,714, respectively		4,218			3,776
Other assets		13,029			11,596
Deferred tax asset		1,296			2,534
Total assets	$	1,327,832		$	1,213,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Line of credit payable	$	28,000		$	27,800
Mortgages payable		160,745			149,861
Notes payable, net of unamortized discount of $871 and $530, respectively, and an unamortized interest rate hedge gain of $4,057 and $288, respectively		343,186			289,758
Financing lease obligation		26,041			—
Accrued interest payable		5,436			3,820
Other liabilities		9,691			11,508
Total liabilities		573,099			482,747
Minority interest		1,937			277
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series A, 1,781,589 and 1,781,645 shares issued and outstanding, at September 30, 2004 and December 31, 2003, respectively; stated liquidation value of $25 per share		44,540			44,541
Series B convertible, 10,000 shares issued and outstanding, at September 30, 2004 and December 31, 2003; stated liquidation value of $2,500 per share		25,000			25,000
Common stock, $0.01 par value. Authorized 190,000,000 shares; 51,883,754 and 50,001,898 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		518			500
Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding		—			—
Capital in excess of par value		722,380			691,704
Accumulated dividends in excess of net earnings		(35,778	)		(28,167	)
Deferred compensation		(3,864	)		(2,824	)
Total stockholders’ equity		752,796			730,754
	$	1,327,832		$	1,213,778

See accompanying notes to condensed consolidated financial statements.

1

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Rental income from operating leases	$	25,454		$	22,756		$	75,027		$	59,862
Earned income from direct financing leases		2,780			2,727			8,353			8,227
Real estate expense reimbursement from tenants		899			1,562			3,927			2,519
Gain on disposition of real estate, held for sale		2,413			—			4,162			2,066
Interest and other income from real estate transactions		1,893			735			5,441			1,194
		33,439			27,780			96,910			73,868
Operating expenses:
General and administrative		5,848			5,552			17,151			15,382
Real estate		2,854			2,473			9,098			3,995
Depreciation and amortization		4,403			3,440			12,807			9,337
Dissenting shareholders’ settlement		—			—			—			2,413
Transition costs		52			—			3,252			—
		13,157			11,465			42,308			31,127
Earnings from operations		20,282			16,315			54,602			42,741
Other expenses (revenues):
Interest and other income		(1,238	)		(573	)		(3,057	)		(2,665	)
Interest expense		8,594			6,763			23,802			19,992
		7,356			6,190			20,745			17,327
Earnings from continuing operations before provision for income taxes, minority interest and equity in earnings of unconsolidated affiliates		12,926			10,125			33,857			25,414
Provision for income taxes		642			922			1,824			2,275
Earnings from continuing operations before minority interest and equity in earnings of unconsolidated affiliates		13,568			11,047			35,681			27,689
Minority interest		(1,342	)		27			(1,009	)		27
Earnings from continuing operations before equity in earnings of unconsolidated affiliates		12,226			11,074			34,672			27,716
Equity in earnings of unconsolidated affiliates		1,155			1,580			3,694			3,462
Earnings from continuing operations		13,381			12,654			38,366			31,178
Earnings from discontinued operations:
Real estate, held for investment		862			1,489			2,546			3,361
Real estate, held for sale, net of provision for income taxes		2,762			1,241			5,096			3,343
		3,624			2,730			7,642			6,704
Net earnings		17,005			15,384			46,008			37,882
Series A preferred stock dividends		(1,002	)		(1,002	)		(3,006	)		(3,005	)
Series B convertible preferred stock dividends		(418	)		(84	)		(1,256	)		(84	)
Earnings available to common stockholders — basic		15,585			14,298			41,746			34,793
Series B convertible preferred stock dividends		—			84			—			84
Earnings available to common stockholders — diluted	$	15,585		$	14,382		$	41,746		$	34,877

See accompanying notes to condensed consolidated financial statements.

2

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Net earnings per share of common stock:
Basic:
Continuing operations	$	0.23	$	0.26	$	0.66	$	0.68
Discontinued operations		0.07		0.06		0.15		0.16
Net earnings	$	0.30	$	0.32	$	0.81	$	0.84
Diluted:
Continuing operations	$	0.23	$	0.26	$	0.66	$	0.67
Discontinued operations		0.07		0.06		0.15		0.16
Net earnings	$	0.30	$	0.32	$	0.81	$	0.83
Weighted average number of common shares outstanding:
Basic		51,672,012		44,368,735		51,288,732		41,755,975
Diluted		51,969,340		45,403,830		51,590,336		42,259,338

See accompanying notes to condensed consolidated financial statements.

3

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Nine Months Ended
	September 30,
	2004			2003
Cash flows from operating activities:
Net earnings	$	46,008		$	37,882
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		660			855
Depreciation and amortization		13,613			9,707
Amortization of notes payable discount		99			108
Amortization of deferred interest rate hedge gain		(379	)		(444	)
Equity in earnings of unconsolidated affiliates, net of deferred intercompany profits		(3,954	)		(3,691	)
Minority interest		1,660			132
Gain on disposition of real estate held for investment		(1,138	)		(287	)
Deferred income taxes		1,238			(228	)
Transition expense		3,252			—
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Additions to real estate, held for sale		(58,728	)		(51,954	)
Proceeds from disposition of real estate, held for sale		56,033			36,413
Gain on disposition of real estate, held for sale		(14,930	)		(5,474	)
Decrease in real estate leased to others using the direct financing method		2,038			1,770
Increase in mortgages, notes and accrued interest receivable		(1,490	)		(2,591	)
Increase in receivables		(1,973	)		(1,453	)
Increase in accrued rental income		(3,068	)		(4,095	)
Increase in other assets		(938	)		(186	)
Decrease in accrued interest payable		1,587			773
Decrease (increase) in other liabilities		(1,254	)		2,959
Net cash provided by operating activities		38,336			20,196
Cash flows from investing activities:
Proceeds from the disposition of real estate, held for investment		19,674			25,138
Additions to real estate held for investment accounted for using the operating method		(80,036	)		(187,128	)
Investment in unconsolidated affiliates		—			(9,362	)
Distributions received from unconsolidated affiliates		7,207			3,483
Increase in mortgages and notes receivable		(1,767	)		(2,891	)
Mortgage and notes payments received		9,339			1,178
Increase in mortgages and other receivables from unconsolidated affiliates		(89,500	)		(84,900	)
Payments received on mortgages and other receivables from unconsolidated affiliates		79,100			92,000
Business combination, net of cash acquired		1,068			—
Payment of lease costs		(1,427	)		(2,685	)
Consideration due to the dissenting shareholders in connection with the merger of Captec Net Lease Realty, Inc. (“Captec”) in December 2001		—			(13,278	)
Other		(192	)		(872	)
Net cash used in investing activities		(56,534	)		(179,317	)

See accompanying notes to condensed consolidated financial statements.

4

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Nine Months Ended
	September 30,
	2004			2003
Cash flows from financing activities:
Proceeds from line of credit payable		280,800			257,000
Repayment of line of credit payable		(280,600	)		(168,200	)
Repayment of mortgages payable		(5,180	)		(2,185	)
Proceeds from notes payable		149,560			—
Proceeds from forward starting interest rate swap		4,148			—
Repayment of notes payable		(100,000	)		—
Payment of debt costs		(1,450	)		(2,674	)
Proceeds from financing lease obligation		26,041			—
Proceeds from issuance of Series B preferred stock		—			25,000
Proceeds from issuance of common stock		10,251			102,897
Payment of Series A preferred stock dividends		(3,006	)		(3,007	)
Payment of Series B convertible preferred stock dividends		(1,256	)		(84	)
Payment of common stock dividends		(49,382	)		(40,671	)
Stock issuance costs		(142	)		(5,957	)
Net cash provided by financing activities		29,784			162,119
Net increase in cash and cash equivalents		11,586			2,998
Cash and cash equivalents at beginning of period		5,335			2,025
Cash and cash equivalents at end of period	$	16,921		$	5,023
Supplemental disclosure of cash flow information — interest paid, net of amount capitalized	$	23,856		$	19,842
Supplemental disclosure of non-cash investing and financing activities:
Issued 204,711 and 76,407 shares of restricted common stock in 2004 and 2003, in pursuant to the Company’s 2000 Performance Incentive Plan, including grants in connection with transaction costs	$	1,965		$	1,141
Common and preferred stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec	$	—		$	1
Acquisition of real estate held for investment and assumption of related mortgage payable	$	6,952		$	—
Disposition of real estate held for sale and transfer of related mortgage payable	$	2,251		$	—
Issued 953,551 shares of common stock in 2004 in exchange for a partnership interest	$	17,450		$	—
Mortgage note accepted in connection with the sale of real estate	$	—		$	2,605
Note accepted in connection with the termination of a lease	$	—		$	286

See accompanying notes to condensed consolidated financial statements.

5

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2004 and 2003

1.	Basis of Presentation:
	Organization and Nature of Business — Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “Company” includes, unless otherwise noted, Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualified REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (“TRS”) Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”).
	The Company’s operations are divided into two primary business segments: real estate held for investment and real estate held for sale. The real estate held for investment is operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries (collectively, “NNN”). NNN directly, and indirectly through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail and office properties that are generally leased to established tenants under long-term commercial net leases. As of September 30, 2004, NNN owned 352 properties, located in 38 states, that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, Jared Jewelers, OfficeMax, The Sports Authority and the United States of America. The real estate held for sale is operated through Services. Services acquires and develops real estate directly and indirectly through investment interests primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property (“Section 1031”) or to other purchasers with different investment objectives.
	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2004, may not be indicative of the results that may be expected for the year ending December 31, 2004. Amounts as of December 31, 2003, included in the condensed consolidated financial statements, have been derived from the audited consolidated financial statements as of that date and have been restated to include the consolidated financial information of Services. Services is included in the consolidated financial statements due to the implementation of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended (see “Principles of Consolidation”).
	These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 2003.
	Principles of Consolidation — Effective January 1, 2004, the Company implemented FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”) and under the guidelines of this interpretation, Services met the criteria of a variable interest entity which requires consolidation by NNN. Accordingly, effective January 1, 2004, NNN consolidated Services and all prior period comparable condensed consolidated financial statements have been restated to include Services as a consolidated subsidiary. The adoption of

6

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

1.	Basis of Presentation — continued:
	this interpretation did not have a significant impact on the financial position or results of operations of the Company.
	The condensed consolidated financial statements include the accounts of NNN and Services, including each of the respective majority owned and controlled affiliates. All significant intercompany account balances and transactions have been eliminated. The Company applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by the Company due to the significance of rights held by other parties.
	The Company holds a variable interest in, but is not the primary beneficiary of CNL Plaza Ltd. and CNL Commercial Finance, Inc., both of which are variable interest entities. The Company’s maximum exposure to loss as a result of its involvement with CNL Plaza Ltd. and CNL Commercial Finance, Inc. as of September 30, 2004, is $6,297,000 and $26,983,000, respectively.
	A wholly-owned subsidiary of Services, CNLRS Equity Ventures, Inc. and its wholly-owned subsidiary (“Equity Ventures”), develops real estate through various joint venture development affiliate agreements. Equity Ventures consolidates the joint venture development entities listed in the table below, eliminating significant intercompany balances and transactions and recording a minority interest for its partners’ ownership percentage. The following table summarizes each of the investments as of September 30, 2004:

Date of			Equity Ventures’
Agreement	Entity Name	Agreement Type	Ownership %
November 2002	WG Grand Prairie TX, LLC	Limited Liability Company		90	%
December 2002	Jackson Property Associates, GP	Partnership		50	%
February 2003	KK-Seminole FL, LLC	Limited Liability Company		40	%
February 2003	Centres Florence, LLC	Limited Liability Company		40	%
February 2003	Gator Pearson, LLC	Limited Liability Company		50	%
April 2003	MAC Boise ID, LLC	Limited Liability Company		60	%
June 2003	CNLRS WG Grapevine TX, LLC	Limited Liability Company		60	%
January 2004	CNLRS WG Crowley TX, LLC	Limited Liability Company		60	%
February 2004	CNLRS Yosemite Park CO, LLC	Limited Liability Company		50	%
September 2004	CNLRS Bismarck ND, LLC	Limited Liability Company		50	%

Real Estate Held for Sale — Services acquires, develops, and currently owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by Services. Services records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by Services includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Rental income is recognized without regard to future potential rent increases and the asset is not depreciated. When real estate held for sale is disposed of, the related costs are removed from the accounts and gains and losses from the dispositions are reflected in earnings. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Services classifies its real estate held for sale as discontinued operations when rental revenues are generated (see

7

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

1.	Basis of Presentation — continued:
	Note 2). When such real estate held for sale has not generated rental revenues, gains on disposition are reflected as operating revenues.
	Investment in Unconsolidated Affiliates — The Company accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 3). The Company exercises significant influence over these unconsolidated affiliates, but does not control them.
	Income Taxes — Effective January 1, 2001, NNN elected for Services to be treated as a TRS pursuant to the provisions of the REIT Modernization Act. As a TRS, Services is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. Certain activities of the Company which occur within Services are therefore subject to federal and state income taxes (See “Real Estate Held for Sale”).
	Income taxes arising from Services are accounted for under the asset and liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the temporary differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
	Earnings Per Share — Earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net earnings available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods.

8

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

1.	Basis of Presentation — continued:
	The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Weighted average number of common shares outstanding used in basic earnings per share		51,672,012		44,368,735		51,288,732		41,755,975
Effect of dilutive securities:
Common stock options		297,328		1,035,095		301,604		503,363
Weighted average number of common shares outstanding used in diluted earnings per share		51,969,340		45,403,830		51,590,336		42,259,338

The following represents the number of shares of potentially issuable common stock which were not included in computing diluted earnings per common share because their effects were antidilutive:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Common stock options		—		398,500		—		514,700
10,000 shares of Series B convertible preferred stock		1,293,996		—		1,293,996		—

9

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

1.

Basis of Presentation — continued:

Stock-Based Compensation — The Company has a stock-based employee compensation plan. Prior to 2003, the company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee and director awards granted, modified, or settled after January 1, 2003. Awards under the Company’s plan vest over periods ranging from two to six years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net earnings available to common stockholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data):

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Net earnings available to common stockholders — basic, as reported:	$	15,585		$	14,298		$	41,746		$	34,793
Add: Stock-based employee compensation expense included in reported net earnings		5			6			15			19
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards		(19	)		(10	)		(58	)		(32	)
Pro forma net earnings available to common stockholders — basic	$	15,571		$	14,294		$	41,703		$	34,780
Net earnings available to common stockholders — diluted, as reported:	$	15,585		$	14,382		$	41,746		$	34,877
Add: Stock-based employee compensation expense included in reported net earnings		5			6			15			19
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards		(19	)		(10	)		(58	)		(32	)
Pro forma net earnings available to common stockholders — diluted	$	15,571		$	14,378		$	41,703		$	34,864
Earnings available to common stockholders per common share as reported:
Basic	$	0.30		$	0.32		$	0.81		$	0.84
Diluted	$	0.30		$	0.32		$	0.81		$	0.83
Pro forma earnings available to common stockholders per common share:
Basic	$	0.30		$	0.32		$	0.81		$	0.83
Diluted	$	0.30		$	0.32		$	0.81		$	0.82

Use of Estimates — Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of

10

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

1.	Basis of Presentation — continued:
	America. Significant estimates include asset reserves, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates.
	Reclassification — Certain items in the prior year’s condensed consolidated financial statements and notes to condensed consolidated financial statements have been reclassified to conform with the 2004 presentation. These reclassifications had no effect on stockholders’ equity or net earnings.
2.	Real Estate Held for Sale:
	Real estate held for sale consisted of the following (dollars in thousands):

	September 30,		December 31,
	2004		2003
Inventory:
Land	$	14,683	$	13,644
Building		16,099		16,883
		30,782		30,527
Under construction:
Land		12,066		7,226
Work in process		20,673		8,069
		32,739		15,295
	$	63,521	$	45,822

The following table summarizes the number of properties sold and the corresponding gain recognized on the disposition of real estate held for sale included in earnings from continuing and discontinued operations of (dollars in thousands):

	Quarter Ended								Nine Months Ended
	September 30,								September 30,
	2004				2003				2004				2003
	# of				# of				# of				# of
	Properties		Gain		Properties		Gain		Properties		Gain		Properties		Gain
Continuing operations		1	$	2,413		—	$	—		6	$	4,162		2	$	2,066
Discontinued operations(1)		5		7,394		7		1,070		8		10,768		15		3,408
		6	$	9,807		7	$	1,070		14	$	14,930		17	$	5,474

⁽¹⁾ Includes the effects of intersegment eliminations.

3.

Investments in Unconsolidated Affiliates:

In September 1997, the Company entered into a partnership, Net Lease Institutional Realty, L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees (“CTA”). Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and, based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February

11

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

3.	Investments in Unconsolidated Affiliates — continued:
	2004 in exchange for CTA’s 80 percent limited partnership interest, increasing the Company’s ownership in the Partnership to 100 percent. Net income and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest during the Partnership’s term.
	The Company received $116,000 in distributions from the Partnership during the nine months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, the Company recognized earnings of $26,000 and $205,000, respectively. The Company recognized earnings of $65,000 during the quarter ended September 30, 2003. The Company managed the Partnership and pursuant to a management agreement, the Partnership paid the Company $17,000 and $142,000 in asset management fees during the nine months ended September 30, 2004 and 2003, respectively. The Partnership paid the Company asset management fees of $46,000 during the quarter ended September 30, 2003. The Company did not recognize earnings or receive asset management fees from the Partnership subsequent to increasing its ownership in the Partnership to 100 percent in February 2004.
	Since June 2001, the Company has entered into five limited liability company (“LLC”) agreements with CNL Commercial Finance, Inc. (“CCF”), a related party. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. The Company holds a non-voting and non-controlling interest in each of the LLCs ranging from 36.7 to 44.0 percent and accounts for its interests using the equity method of accounting. During the nine months ended September 30, 2004 and 2003, the Company received $6,959,000 and $2,850,000, respectively, in distributions. For the nine months ended September 30, 2004 and 2003, the Company recognized $3,886,000 and $3,282,000 of earnings, respectively, $1,235,000 and $1,262,000 of which was recognized during the quarters ended September 30, 2004 and 2003, respectively, from the LLCs. In 2003, in connection with a loan to CCF, the Company pledged a portion of its interest in two of the LLCs as partial collateral for the loan.
	In May 2002, the Company purchased a combined 25 percent partnership interest for $750,000, in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”). The remaining partnership interests in Plaza are owned by affiliates of James M. Seneff, Jr., and Robert A. Bourne, each a member of the Company’s board of directors. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. The Company has severally guaranteed 41.67 percent of a $15,500,000 unsecured promissory note on behalf of Plaza. The maximum obligation to the Company is $6,458,000, plus interest. Interest on the note accrues at a rate of LIBOR plus 200 basis points per annum on the unpaid principal amount. This guarantee shall continue through the loan maturity in November 2004. The fair value of the guarantee is $73,000. During the nine months ended September 30, 2004 and 2003, the Company received $248,000 and $224,000 in distributions from Plaza. For the nine months ended September 30, 2004 and 2003, the Company recognized a loss of $169,000 and $137,000, respectively, of which a loss of $56,000 and $40,000 was recognized during the quarters ended September 30, 2004 and 2003, respectively.
	Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, other affiliates of James M. Seneff, Jr., a director of the Company, also lease office space from Plaza. The Company and other affiliates lease an aggregate of 64 percent of the 346,000 square foot office building. During the nine months ended

12

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

3.	Investments in Unconsolidated Affiliates — continued:
	September 30, 2004 and 2003, the Company incurred rental expenses in connection with the lease of $760,000, and $748,000, respectively, $254,000 and $251,000 of which was incurred during the quarters ended September 30, 2004 and 2003, respectively. The Company has the option to renew its lease with Plaza for three successive five-year periods subject to similar terms and conditions as the initial lease. In May 2000, the Company subleased a portion of its office space to affiliates of James M. Seneff, Jr. During the nine months ended September 30, 2004 and 2003, the Company earned $266,000 and $252,000, respectively, in rental and accrued rental income from these affiliates, $87,000 of which was earned during each of the quarters ended September 30, 2004 and 2003, respectively.
4.	Mortgages Payable:
	In October 1997, the Partnership entered into a long-term, fixed rate loan for $12,000,000. The loan bears interest at a rate of 7.37% per annum with monthly principal and interest payments of $103,000 and the principal balance due in September 2007. The loan is secured by a first mortgage lien on certain of the Partnership’s properties. As of September 30, 2004, the aggregate carrying value of these properties totaled $28,998,000. The outstanding principal balance as of September 30, 2004, was $8,755,000.
	In July 2002, Services entered into a long-term, fixed rate loan for $2,340,000. The loan bore interest at a rate of 7.42% per annum with monthly principal and interest payments of $18,000 and the principal balance due in July 2012. The loan was secured by a first mortgage lien on one property. In August 2004, the Company disposed of the property at which time the buyer assumed the loan.
	In February 2004, the Company acquired a property subject to a mortgage securing loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2016. As of September 30, 2004, the aggregate carrying value of the property was $12,511,000. The outstanding principal balance as of September 30, 2004, was $6,753,000.
5.	Notes Payable:
	In June 2004, the Company filed a prospectus supplement to its $600,000,000 shelf registration statement and issued $150,000,000 of 6.25% notes due June 2014 (the “2014 Notes”). The 2014 Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The 2014 Notes were sold at a discount for an aggregate purchase price of $149,560,000 with interest payable semi-annually commencing on December 15, 2004. The discount of $440,000 is being amortized to interest expense over the term of the debt obligation using the effective interest method. In connection with the debt offering, the Company entered into a forward starting interest rate swap agreement in February 2004 which fixed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. The effective interest rate of the 2014 Notes, including the effects of the discount and swap gain, is 5.91%. The 2014 Notes are redeemable at the option of the Company, in whole or in part, at a redemption

13

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

5.	Notes Payable — continued:
	price equal to the sum of (i) the principal amount of the 2014 Notes being redeemed plus accrued interest thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 5 dated June 18, 2004, for the 2014 Notes. The terms of the indenture include financial covenants, which provide for the maintenance of certain financial ratios.
	In connection with the debt, the Company incurred debt issuance costs totaling $1,275,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt issuance costs have been deferred and are being amortized over the term of the 2014 Notes using the effective interest method.
	The Company used the proceeds of the 2014 Notes to pay down outstanding indebtedness of the Company’s credit facility, including amounts incurred by the Company to repay the outstanding principal on the 8.125% $100,000,000 notes that were due in June 2004.
6.	Financing Lease Obligation:
	In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased the properties back under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66 “Accounting for Sales of Real Estate,” the Company has recorded this transaction as a financing transaction. The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and matures in June 2014 unless either the put or call option is exercised. The five properties have a monthly base rent of $158,000 and a carrying value of $18,557,000 as of September 30, 2004.
7.	Transition Costs:
	During the quarter and nine months ended September 30, 2004, the Company recorded transition costs of $52,000 and $3,252,000, respectively, including costs such as severance, accelerated vesting and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. James M. Seneff, Jr. remained as Chairman of the Board of Directors.
8.	Income Taxes:
	For income tax purposes, NNN has one TRS, Services, in which certain real estate activities are conducted. Services treats depreciation expense and certain other items differently for tax than for financial reporting purposes. In the aggregate, Services has an excess of available future deductible items over future taxable items and, as such, may benefit from these items when the taxable subsidiary produces a greater level of taxable income.
	The principal differences between Services’ effective tax rates for the quarters and nine months ended September 30, 2004 and 2003, and the statutory rates relate to state taxes and nondeductible expenses such as meals and entertainment expenses.

14

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

8.	Income Taxes — continued:
	The components of the net deferred tax asset consist of the following (dollars in thousands):

	September 30,			December 31,
	2004			2003
Temporary differences:
Depreciation	$	(241	)	$	(249	)
Stock based compensation		(49	)		13
Other		162			(97	)
Net operating loss carryforward		1,424			2,867
Net deferred tax asset	$	1,296		$	2,534

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Services has 15 to 17 years, depending on the year the net operating loss was incurred, to use the net operating losses and eliminate the deferred tax asset created since inception. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all of the benefits of these deductible differences that existed as of September 30, 2004. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

15

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

8.	Income Taxes — continued:
	The income tax (expense) benefit has been allocated to earnings (loss) from continuing operations and to earnings (loss) from discontinued operations for the quarters and nine months ended September 30, 2004 and 2003. The income tax (expense) benefit consists of the following components for the quarters and nine months ended September 30, 2004 and 2003 (dollars in thousands):

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Net loss from continuing operations of Services before income taxes	$	(1,691	)	$	(2,428	)	$	(5,108	)	$	(5,993	)
Provision for income taxes:
Current:
Federal		—			—			—			—
State and local		—			—			—			—
Deferred:
Federal		540			776			1,536			1,915
State and local		102			146			288			360
Total provision for income taxes		642			922			1,824			2,275
Services’ net loss from continuing operations	$	(1,049	)	$	(1,506	)	$	(3,284	)	$	(3,718	)
Net earnings from discontinued operations of Services before income taxes	$	4,452		$	2,000		$	8,214		$	5,389
Provision for income taxes:
Current:
Federal		—			—			—			—
State and local		—			—			—			—
Deferred:
Federal		(1,423	)		(639	)		(2,625	)		(1,723	)
State and local		(267	)		(120	)		(493	)		(323	)
Total provision for income taxes		(1,690	)		(759	)		(3,118	)		(2,046	)
Services’ net earnings from discontinued operations	$	2,762		$	1,241		$	5,096		$	3,343
Total Services’ net earnings (loss)	$	1,713		$	(265	)	$	1,812		$	(375	)

16

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

9.

Earnings from Discontinued Operations:

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the revenues and expenses related to its 14 investment properties sold during each of the nine months ended September 30, 2004 and 2003, respectively, as discontinued operations. In addition, the Company has classified one leasehold interest that expired during the nine months ended September 30, 2004 as discontinued operations. Revenues and expenses related to all real estate held for investment which was sold subsequent to December 31, 2001, the effective date of SFAS No. 144, have been classified as discontinued operations.

	Quarter Ended					Nine Months Ended
	September 30,					September 30,
	2004			2003		2004			2003
Revenues:
Rental income from operating leases	$	573		$	963	$	1,378		$	3,158
Earned income from direct financing leases		—			43		—			187
Real estate expense reimbursement from tenants		1			2		4			9
Interest and other income from real estate transactions		47			27		190			39
		621			1,035		1,572			3,393
Operating expenses:
General and administrative		(9	)		3		(6	)		15
Real estate		6			6		29			33
Depreciation and amortization		15			107		141			370
		12			116		164			418
Other expenses (revenues):
Interest and other income		—			—		—			(99	)
		—			—		—			(99	)
Earnings before gain on disposition of real estate		609			919		1,408			3,074
Gain on disposition of real estate		253			570		1,138			287
Earnings from discontinued operations from real estate held for investment	$	862		$	1,489	$	2,546		$	3,361

For the nine months ended September 30, 2004 and 2003, the Company has classified the revenues and expenses related to eight (out of a total of 14) and 15 (out of a total of 17), respectively, of its held for sale properties, which were sold subsequent to December 31, 2001, the effective date of SFAS No. 144 and which generated rental revenues, as discontinued operations. In addition, the Company also classified revenues and expenses related to its 12 properties that were held for sale and generated rental revenues as of September 30, 2004, as discontinued operations.

17

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

9. Earnings from Discontinued Operations — continued:

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Rental income from operating leases	$	604		$	773		$	1,753		$	2,237
Real estate expense reimbursement from tenants		78			6			168			11
Gain on disposition of real estate held for sale		7,394			1,070			10,768			3,408
Interest and other income from real estate transactions		—			—			81			15
		8,076			1,849			12,770			5,671
Operating expenses:
General and administrative		17			—			23			1
Real estate		84			14			242			25
Depreciation and amortization		1			(216	)		1			—
		102			(202	)		266			26
Other expenses:
Interest expense		149			51			645			256
		149			51			645			256
Earnings before provision for income taxes and minority interest		7,825			2,000			11,859			5,389
Provision for income taxes		(1,690	)		(759	)		(3,118	)		(2,046	)
Minority interest		(3,373	)		—			(3,645	)		—
Earnings from discontinued operations from real estate held for sale	$	2,762		$	1,241		$	5,096		$	3,343

10.	Derivatives:
	SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
	The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments of a forecasted issuance of debt.

18

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

10.	Derivatives — continued:
	For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. As of September 30, 2004, no derivatives were designated as fair value hedges. Additionally, the Company does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges.
	The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
	When hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time.
	In June 2004, the Company terminated its forward-starting interest rate swaps with a notional amount of $94,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate swaps when terminated was an asset of $4,148,000, which had been deferred in other comprehensive income. The hedged forecasted interest payments that were designated in the hedging relationships are still probable of occurring and therefore, the Company reclassified the $4,148,000 gain that was deferred in other comprehensive income as the hedged forecasted interest payments affect earnings. During the quarter and nine months ended September 30, 2004, the Company reclassified $78,000 and $91,000 respectively, to interest expense from unamortized interest rate hedge gain. The Company has no derivative financial instruments outstanding at September 30, 2004.
11.	Related Party Transactions:
	For additional related party disclosures see Note 3 — Investments in Unconsolidated Affiliates.
	In August 2004, a subsidiary of the Company facilitated the disposition of a property for an affiliate of James M. Seneff Jr. and Robert A. Bourne, each a member of the Company’s board of directors. In connection therewith, the Company received a $75,000 fee.
	In March 2004, the $35,000,000 line of credit agreement between a subsidiary of the Company and CCF was extended until March 31, 2005. In May 2004, the line of credit agreement was amended to temporarily increase the available credit to $45,000,000 until September 2004, at which time the available credit decreased to $35,000,000. As of September 30, 2004, the $35,000,000 line of credit had an outstanding balance of $27,000,000, resulting in $8,000,000 available for future borrowings under the line of credit. During the nine months ended September 30, 2004 and 2003, the Company recognized $1,325,000 and $665,000, respectively, of interest and fee income in connection with the line of credit, of which $559,000 and $197,000 was recognized during the quarters ended September 30, 2004 and 2003, respectively.

19

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

11.	Related Party Transactions — continued:
	An affiliate of James M. Seneff, Jr., a director of the Company, provided certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $769,000 and $1,024,000 in fees relating to these services during the nine months ended September 30, 2004 and 2003, respectively, $242,000 and $322,000 of which was paid during the quarters ended September 30, 2004 and 2003, respectively.
	The Company holds four mortgage loans with an original aggregate principal balance totaling $8,514,000 with affiliates of James M. Seneff, Jr., and Robert A. Bourne, each a member of the Company’s board of directors. The mortgage loans bear interest at a weighted average of 8.92%, with interest payable monthly or quarterly. As of September 30, 2004, the aggregate principal balance of the four mortgage loans, included in mortgages, notes and accrued interest on the balance sheet was $2,576,000. In connection therewith, during the nine months ended September 30, 2004 and 2003, the Company earned $187,000 and $213,000, respectively, of interest that is included within interest and other income from real estate transactions. The Company earned $62,000 and $69,000 of interest that is included within interest and other income from real estate transactions during the quarters ended September 30, 2004 and 2003, respectively.

20

COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Nine Months Ended September 30, 2004 and 2003

12.

Segment Information:

The Company has identified two primary financial segments: (i) NNN, which primarily derives earnings from real estate held for investment and (ii) Services, which primarily derives earnings from real estate held for sale. The following tables represent the segment data and a reconciliation to the Company’s condensed consolidated totals for the quarters ended September 30, 2004 and 2003 (dollars in thousands):

									Condensed
						Eliminations			Consolidated
	NNN		Services			(Intercompany)			Totals
2004
External revenues	$	31,305	$	3,372		$	—		$	34,677
Intersegment revenues	$	1,327	$	—		$	(1,327	)	$	—
Net earnings	$	17,005	$	1,713		$	(1,713	)	$	17,005
Total assets	$	1,323,258	$	113,291		$	(108,717	)	$	1,327,832
2003
External revenues	$	27,435	$	918		$	—		$	28,353
Intersegment revenues	$	533	$	124		$	(657	)	$	—
Net earnings	$	15,384	$	(265	)	$	265		$	15,384
Total assets	$	1,150,239	$	97,401		$	(88,965	)	$	1,158,675

The following table represents the segment data and reconciliation to the Company’s condensed consolidated totals for the nine months ended September 30, 2004 and 2003 (dollars in thousands):

									Condensed
						Eliminations			Consolidated
	NNN		Services			(Intercompany)			Totals
2004
External revenues	$	93,843	$	6,125		$	—		$	99,968
Intersegment revenues	$	2,663	$	—		$	(2,663	)	$	—
Net earnings	$	46,008	$	1,812		$	(1,812	)	$	46,008
Total assets	$	1,323,258	$	113,291		$	(108,717	)	$	1,327,832
2003
External revenues	$	72,131	$	4,402		$	—		$	76,533
Intersegment revenues	$	2,404	$	462		$	(2,866	)	$	—
Net earnings	$	37,882	$	(375	)	$	375		$	37,882
Total assets	$	1,150,239	$	97,401		$	(88,965	)	$	1,158,675

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as “believe,” “expect” and “may.” The term “Company” includes, unless otherwise noted, Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualified real estate investment trust (“REIT”) subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (“TRS”) Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”). Although the management believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause a difference include the following: the ability of the Company to qualify as a real estate investment trust for federal income tax purposes; the ability of tenants to make payments under their respective leases, including the Company’s reliance on certain major tenants and the ability of the Company to re-lease properties that are currently vacant or that become vacant; the ability of the Company to locate suitable tenants for its properties; changes in real estate market conditions; changes in general economic conditions; the ability of the Company to repay debt financing obligations; the ability of the Company to refinance amounts outstanding under its credit facilities at maturity on terms favorable to the Company; continued availability of proceeds from the Company’s debt or equity capital; the availability of other debt and equity financing alternatives; market conditions affecting the Company’s equity capital; ability to sell properties at an attractive return; changes in interest rates under the Company’s current credit facilities and under any additional variable rate debt arrangements that the Company may enter into in the future; the ability of the Company to be in compliance with certain debt covenants; the inherent risks associated with owning real estate (including: local real estate market conditions, governing laws and regulations and illiquidity of real estate investments); the ability of the Company to integrate office and industrial properties into existing operations that historically have been primarily focused on retail properties; the loss of any member of the Company’s management team; the ability of the Company to successfully implement its selective acquisition strategy or fully realize the anticipated benefits of renovation or development projects; the ability of the Company to integrate acquired properties and operations into existing operations; and recent changes in tax legislation provide favorable treatment for dividends for regular companies, but not generally dividends from real estate investment trusts. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. Management of the Company currently knows of no trends that will have a material adverse effect on its liquidity, capital resources or results of operations.

Overview

Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated REIT formed in 1984. Amounts as of December 31, 2003, included in the condensed consolidated financial statements, have been derived from the audited consolidated financial statements as of that date and have been restated to include the consolidated financial information of Services. Services is included in the consolidated financial statements due to the implementation of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended.

The Company’s operations are divided into two primary business segments: real estate held for investment and real estate held for sale. The real estate held for investment (the “Investment Properties”) and structured finance investments (included in mortgages and notes receivable on the balance sheet), are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries (collectively, “NNN”). NNN directly, and indirectly through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail and office properties that are generally leased to established tenants under long-term commercial net leases. As of September 30, 2004, NNN owned 352 Investment Properties, located in 38 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, Jared Jewelers, OfficeMax, The Sports Authority and the United States of America. In addition to the Investment Properties, as of September 30, 2004, the

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Overview — continued:

Company has $46,663,000 in structured finance investments. The real estate held for sale is operated through Services. Services, directly and indirectly through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property (“Section 1031”) or to other purchasers with different investment objectives.

The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for NNN include such items as: the composition of NNN’s portfolio of Investment Properties and structured finance investments (such as tenant, geographic and industry classification diversification); the occupancy rate of NNN’s portfolio of Investment Properties; certain financial ratios; and industry trends and performance compared to that of the Company. The key indicators for Services include such items as: certain profitability measures; transaction pipeline measures; and returns NNN receives on its invested capital in Services.

Liquidity

General. Historically, the Company’s demand for funds has been primarily for (i) payment of operating expenses and dividends, (ii) property acquisitions, structured finance investments, capital expenditures and development, either directly or through investment interests, (iii) payment of principal and interest on its outstanding indebtedness and (iv) other investments.

Contractual Obligations and Commercial Commitments. The information in the following table summarizes the Company’s contractual obligations and commercial commitments outstanding as of September 30, 2004. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of September 30, 2004. As the table incorporates only those exposures that exist as of September 30, 2004, it does not consider those exposures or positions which arise after that date.

	Expected Maturity Date
	(dollars in thousands)
	Total		2004		2005		2006		2007		2008		Thereafter
Long-term debt(1)(2)	$	554,786	$	21,052	$	4,407	$	51,998	$	9,006	$	101,406	$	366,917
Operating lease		13,383		287		1,165		1,200		1,236		1,273		8,222
Total contractual cash obligations(3)	$	568,169	$	21,339	$	5,572	$	53,198	$	10,242	$	102,679	$	375,139

(1)	Includes amounts outstanding under the revolving credit facility, mortgages and notes payable and financing lease obligation and excludes unamortized note discounts and unamortized interest rate hedge gain.
(2)	Financing lease obligation includes a call and put option.
(3)	As of September 30, 2004, the Company does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, the Company has two series of preferred stock with cumulative preferential cash distributions (see “Liquidity — Dividends”).

In connection with its acquisition of two office buildings and a related parking garage located in Arlington, Virginia (the Washington, D.C. metropolitan area), in August 2003, the Company has agreed to fund $27,244,000 for building, tenant improvements and other costs related to the lease, of which $22,024,000 had been funded as of September 30, 2004. These costs will be capitalized to building and improvements upon completion which is anticipated to occur, for the most part, by December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility. For a description of the acquisition, see “Results of Operations — Property Analysis — Real Estate Held for Investment” below.

In connection with the development of four properties by Services, the Company has agreed to fund construction commitments of $25,918,000, of which $21,234,000 has been funded as of September 30,

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Liquidity — continued:

2004. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility.

The Company has also guaranteed 41.67 percent of a $15,500,000 promissory note on behalf of an unconsolidated affiliate. The maximum obligation to the Company is $6,458,000 plus interest, and the guarantee shall continue through the loan maturity in November 2004.

Many of the Investment Properties are recently constructed and are generally net leased, therefore management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. The leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company’s leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company’s Investment Properties, including the two office buildings acquired during 2003, are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with the Company’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. The Company may be required to borrow under the Company’s revolving credit facility or use other sources of capital in the event of unforeseen significant capital expenditures.

The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. As of September 30, 2004, the Company owns 15 vacant, unleased Investment Properties, which account for three percent of the total gross leasable area of the Company’s portfolio of Investment Properties. Additionally, two percent of the total gross leasable area of the Company’s portfolio of Investment Properties is leased to three tenants which have each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the tenants has the right to reject or affirm its leases with the Company.

Dividends. NNN had made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. NNN generally will not be subject to federal income tax on income that it distributes to its stockholders, providing it distributes at least 90 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If NNN fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company’s income and its ability to pay dividends.

One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the nine months ended September 30, 2004 and 2003, the Company declared and paid dividends to its common stockholders of $49,382,000 and $40,672,000 respectively, or $0.965 and $0.960 per share of common stock. In October 2004, the Company declared dividends to its common shareholders of $16,890,000 or $0.325 per share of common stock, payable in November 2004.

Holders of the 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”) are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). For the nine months ended September 30, 2004 and 2003, the Company declared and paid dividends to its Series A Preferred Stock stockholders of $3,006,000 and $3,005,000, respectively, or $1.6875 per share of stock.

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Liquidity — continued:

Holders of the 6.70% Non-Voting Series B Preferred Cumulative Convertible Perpetual Preferred Stock (the “Series B Convertible Preferred Stock”) are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference per annum (equivalent to a fixed annual amount of $167.50 per share). For the nine months ended September 30, 2004 and 2003, the Company declared and paid dividends to its Series B Convertible Preferred Stock stockholders of $1,256,000 and $84,000, respectively, or $125.625 and $8.375 per share of stock.

Capital Resources

Generally, cash needs for property acquisitions, structured finance investments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, from internally generated funds. Cash needs for other items have been met from operations. Potential future sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations.

Indebtedness. In February 2004, the Company acquired a property subject to a mortgage securing loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2016. As of September 30, 2004, the aggregate carrying value of the property was $12,511,000. The outstanding principal balance as of September 30, 2004, was $6,753,000.

Debt. In June 2004, the Company filed a prospectus supplement to its $600,000,000 shelf registration statement and issued $150,000,000 of 6.25% notes due June 2014 (the “2014 Notes”). The 2014 Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The 2014 Notes were sold at a discount for an aggregate purchase price of $149,560,000 with interest payable semi-annually commencing on December 15, 2004. The discount of $440,000 is being amortized to interest expense over the term of the debt obligation using the effective interest method. In connection with the debt offering, the Company entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. The effective interest rate of the 2014 Notes, including the effects of the discount and swap gain, is 5.91%. The 2014 Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the 2014 Notes being redeemed plus accrued interest thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 5 dated June 18, 2004 for the 2014 Notes. The terms of the indenture include financial covenants which provide for the maintenance of certain financial ratios.

In connection with the debt, the Company incurred debt issuance costs totaling $1,275,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt issuance costs have been deferred and are being amortized over the term of the 2014 Notes using the effective interest method.

The Company used the proceeds of the 2014 Notes to pay down outstanding indebtedness of the Company’s credit facility, including amounts incurred by the Company to repay the outstanding principal on the 8.125% $100,000,000 notes that were due in June 2004.

In November 2001, the Company entered into an unsecured $70,000,000 term note, due November 30, 2004, to finance the acquisition of Captec Net Lease Realty, Inc. and for the repayment of indebtedness and related expenses in connection therewith. As of September 30, 2004, the term note had an

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Liquidity — continued:

outstanding principal balance of $20,000,000. The Company anticipates it will use proceeds from its revolving credit facility to satisfy the note in November 2004.

Financing Lease Obligation. In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased the properties back under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66 “Accounting for Sales of Real Estate,” the Company has recognized this as a financing transaction. The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and matures in June 2014 unless either the put or call option is exercised. The five properties have a monthly base rent of $158,000 and a carrying value of $18,557,000 as of September 30, 2004. The Company used the proceeds from two properties to reinvest in real estate and the remaining proceeds to pay down outstanding indebtedness of the Company’s credit facility.

Compensation Plan Equity Issuances. The Company believes that equity-based or equity-related compensation is an important element of overall compensation for the Company. Such compensation advances the interest of the Company by encouraging, and providing for, the acquisition of equity interests in the Company by directors, officers and other key associates, thereby aligning their interests with stockholders and providing them with a substantial motivation to enhance stockholder value. During the nine months ended September 30, 2004, the Company issued 204,711 shares of restricted stock to certain officers and key associates of the Company.

Pursuant to the Company’s 2000 Performance Incentive Plan, the Company has granted and issued shares of restricted stock to certain officers and directors of the Company. The following information is a summary of the 2004 activity for restricted stock:

					Number of	Shares are
				Annual	Years for	100% Vested
	Shares			Vesting Rate	Vesting	on
Officers:
April 2004		100,000		20%	4	January 1, 2008
April 2004		35,000		20%	5	January 1, 2009
April 2004		50,211		14.3%	6	January 1, 2010
September 2004		15,000		14.3%	6	January 1, 2011
Total issued		200,211
June 2004		(28,926	)
July 2004		(1,000	)
Total cancelled		(29,926	)
Directors:
August 2004		4,500		50%	2	January 1, 2006
Total issued		4,500

Investments in Unconsolidated Affiliates. In September 1997, the Company entered into a partnership, Net Lease Institutional Realty, L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees (“CTA”). Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and, based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA’s 80 percent limited partnership interest, increasing the Company’s direct or indirect

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Liquidity — continued:

ownership in the Partnership to 100 percent. Net income and losses of the Partnership are to be allocated to the partners in accordance with their respective percentage interest in the Partnership.

The Company recorded $116,000 in distributions from the Partnership during the nine months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, the Company recognized earnings of $26,000 and $205,000, respectively. The Company recognized earnings of $65,000 during the quarter ended September 30, 2003. The Company managed the Partnership and pursuant to a management agreement, the Partnership paid the Company $17,000 and $142,000 in asset management fees during the nine months ended September 30, 2004 and 2003, respectively. The Partnership paid the Company asset management fees of $46,000 during the quarter ended June 30, 2003. The Company did not recognize earnings or receive asset management fees from the Partnership subsequent to increasing its ownership in the Partnership to 100 percent in February 2004.

Shelf Registration Statement. On June 5, 2003, the Securities and Exchange Commission declared effective the Company’s shelf registration statement relating to the future offering of up to an aggregate of $600,000,000 of common stock, preferred stock, depositary shares, debt securities and warrants exercisable for common stock. The Company believes the shelf registration statement provides the Company with more efficient and immediate access to capital markets when considered appropriate. As of September 30, 2004, $409,168,000 remained available for issuance under the shelf registration statement.

Results of Operations

Property Analysis — Real Estate Held for Investment

General. Real estate held for investment is operated through NNN. As of September 30, 2004, NNN owned 352 Investment Properties that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, Jared Jewelers, OfficeMax, The Sports Authority and the United States of America. Approximately 97 percent of the gross leasable area of NNN’s portfolio of Investment Properties was leased at September 30, 2004. The following table summarizes NNN’s portfolio of Investment Properties:

	September 30,			December 31,			September 30,
	2004			2003			2003
Investment Properties Owned:
Number		352			348			348
Total gross leasable area (square feet)		8,250,000			7,907,000			7,336,000
Investment Properties Leased:
Number		337			337			338
Total gross leasable area (square feet)		7,965,000			7,669,000			7,133,000
Percent of total gross leasable area		97	%		97	%		97	%
Weighted average remaining lease term (years)		10			11			11

The Company regularly evaluates its (i) portfolio of Investment Properties, (ii) financial position, (iii) market opportunities and (iv) strategic objectives and, based on certain factors, may decide to acquire or dispose of a given property or portfolio of properties.

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Results of Operations — continued:

Property Acquisitions. Property acquisitions are typically funded using funds from the Company’s revolving credit facility, proceeds for debt or equity offerings and to a lesser extent, proceeds generated from like-kind exchange transactions. The following table summarizes the Investment Property acquisitions:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Acquisitions:
Number of properties		11		4		20		13
Gross leasable area (square feet)		130,000		598,000		502,000		841,000
Tenant improvements Number of properties		—		5		1		6
Total dollars invested	$	30,067,000	$	153,883,000	$	84,129,000	$	189,485,000

In August 2003, the Company acquired two office buildings and a related parking garage located in Arlington, Virginia (the Washington, D.C. metropolitan area). Pursuant to the lease agreement, the Company has agreed to fund $27,244,000 for building, tenant improvements and other costs related to the lease, of which $22,024,000 had been funded as of September 30, 2004. These costs will be capitalized to building and improvements upon completion which is anticipated to occur, for the most part, by December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company’s credit facility. The properties include two office buildings containing an aggregate of 555,000 rentable square feet (505,000 usable square feet for purposes of calculating rent) and a two-level garage with 1,079 parking spaces.

During the nine months ended September 30, 2004, the Company invested in $1,767,000 of structured finance investments, with a weighted average interest rate of 13.5%.

Property Dispositions. The Company evaluates anticipated property dispositions to determine whether to use anticipated sales proceeds to either (i) pay down the outstanding indebtedness of the Company’s credit facility or (ii) acquire additional properties and structure the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. The following table summarizes the properties held for investment disposed of by the Company:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Number of properties		5		5		14		14
Net sales proceeds	$	5,670,000	$	12,194,000	$	19,674,000	$	25,023,000
Net gain (loss)	$	253,000	$	570,000	$	1,138,000	$	161,000
Gross leasable area		21,000		247,000		92,000		345,000

The Company used the proceeds from the dispositions to pay down the outstanding indebtedness of the Company’s revolving credit facility during the quarters and nine months ended September 30, 2004 and 2003. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified its 14 properties sold during each of the nine months ended September 30, 2004 and 2003, as discontinued operations. In addition, the Company has classified one leasehold interest that expired during the nine months ended September 30, 2004 as discontinued operations. All properties sold subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified to discontinued operations.

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Results of Operations — continued:

Property Analysis — Real Estate Held for Sale

General. The Company’s real estate held for sale is operated through Services, which directly and indirectly through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate in the 1031 exchange or other markets. As of September 30, 2004 and 2003, Services owned 25 and 21 properties, respectively, that were held for sale (“Inventory Properties”). The Inventory Properties consisted of 13 completed inventory properties, 6 properties under construction, five land parcels and one ground lease as of September 30, 2004, and 14 completed inventory properties, six properties under construction and one land parcel as of September 30, 2003.

Property Acquisitions. Inventory Property acquisitions are typically funded using funds from the Company’s credit facility and proceeds from debt or equity offerings.

The following table summarizes the Inventory Property acquisitions:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Acquisitions:
Number of properties		8		4		23		21
Dollars invested	$	8,476,000	$	4,257,000	$	32,484,000	$	33,071,000
Completed construction:
Number of properties		4		2		4		4
Dollars invested	$	11,762,000	$	12,076,000	$	11,762,000	$	15,473,000
Total dollars invested in real estate held for sale	$	15,924,000	$	16,630,000	$	56,917,000	$	57,741,000

Property Dispositions. The following table summarizes the number of properties sold and the corresponding gain recognized on the disposition of real estate held for sale included in earnings from continuing and discontinued operations of (dollars in thousands):

	Quarter Ended								Nine Months Ended
	September 30,								September 30,
	2004				2003				2004				2003
	# of				# of				# of				# of
	Properties		Gain		Properties		Gain		Properties		Gain		Properties		Gain
Continuing operations		1	$	2,413		—	$	—		6	$	4,162		2	$	2,066
Discontinued operations(1)		5		7,394		7		1,070		8		10,768		15		3,408
		6	$	9,807		7	$	1,070		14	$	14,930		17	$	5,474

⁽¹⁾ Includes the effects of intersegment eliminations.

During the quarters and nine months ended September 30, 2004 and 2003, the Company used the proceeds from the sale of the Inventory Properties to pay down the outstanding indebtedness of the Company’s credit facility.

Revenue From Operations Analysis

General. During the quarters and nine months ended September 30, 2004, the Company’s rental income increased primarily due to the acquisition of two office buildings in August 2003 (See “Results of Operations — Property Acquisitions”) and maintaining an occupancy rate of 97 percent at September 30, 2004 and 2003. The Company anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions over the next several years.

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Results of Operations — continued:

The following summarizes the Company’s revenues (dollars in thousands):

	Quarter Ended September 30,										Nine Months Ended September 30,
	2004					2003					2004					2003
			Percent of					Percent of					Percent of					Percent of
			Total					Total					Total					Total
Rental income(1)	$	28,234		84.4	%	$	25,483		91.7	%	$	83,380		86.0	%	$	68,089		92.2	%
Real estate expense reimbursement from tenants		899		2.7	%		1,562		5.6	%		3,927		4.1	%		2,519		3.4	%
Gain on disposition of real estate held for sale		2,413		7.2	%		—		—			4,162		4.3	%		2,066		2.8	%
Interest and other income from real estate transactions		1,893		5.7	%		735		2.7	%		5,441		5.6	%		1,194		1.6	%
Total operating revenue from continuing operations	$	33,439		100	%	$	27,780		100	%	$	96,910		100	%	$	73,868		100	%

⁽¹⁾ Includes rental income from operating leases and earned income from direct financing leases from continuing operations (“Rental Income”).

Revenue From Operations Analysis by Source of Income. Breaking down revenues into the Company’s two primary operating segments of revenue reveals similar trends. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has identified two primary sources of revenue: (i) NNN, which primarily derives earnings from real estate held for investment and (ii) Services, which primarily derives earnings from real estate held for sale. The following table summarizes the operating revenues from continuing operations (dollars in thousands):

	Quarter Ended September 30,										Nine Months Ended September 30,
	2004					2003					2004					2003
			Percent of					Percent of					Percent of					Percent of
			Total					Total					Total					Total
NNN	$	30,918		92.5	%	$	27,241		98.1	%	$	92,570		95.5	%	$	71,190		96.4	%
Services		2,521		7.5	%		539		1.9	%		4,340		4.5	%		2,678		3.6	%
Total operating revenue from continuing operations	$	33,439		100	%	$	27,780		100	%	$	96,910		100	%	$	73,868		100	%

The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

Comparison of Quarter and Nine Months Ended September 30, 2004 to Quarter and Nine Months Ended September 30, 2003. Rental Income increased 22.5 percent for the nine months ended September 30, 2004, as compared to the nine months ended September 30, 2003, due to the addition of an aggregate gross leasable area of 1,702,000 square feet to the Company’s portfolio resulting from the acquisition of 33 Investment Properties and the completed construction of one Investment Property since September 30, 2003.

Rental Income increased 10.8 percent for the quarter ended September 30, 2004 as compared to the quarter ended September 30, 2003, due to the addition of an aggregate gross leasable area of 1,702,000 square feet to the Company’s portfolio resulting from the acquisition of 33 Investment Properties and the completed construction of one Investment Property since September 30, 2003.

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Results of Operations — continued:

Real estate expenses reimbursed by tenants increased for the nine months ended September 30, 2004, primarily due to the addition of real estate expenses reimbursed by tenants from the two office buildings and a related parking garage located in Arlington, Virginia acquired by the Company in August 2003 (See “Property Analysis — Real Estate Held for Investment”).

The gain on disposition of real estate held for sale included in continuing operations, increased primarily due to the timing of sales of Inventory Properties. The Company disposed of three land parcels and two land parcels and one property with a gross leasable area of 13,650 square feet during the nine months ended September 30, 2004 and 2003, respectively. The Company disposed of one land parcel during each quarter ended September 30, 2004 and 2003, respectively.

Interest from real estate transactions increased for the quarter and nine months ended September 30, 2004, primarily due to the interest earned on the $45,200,000 structured finance investments entered into since September 30, 2003.

Expense Analysis

General. During the quarters and nine months ended September 30, 2004 and 2003, operating expenses increased with the acquisition of additional properties but remained generally proportionate to the Company’s total revenue. The following summarizes the Company’s expenses (dollars in thousands):

	Quarter Ended September 30,										Nine Months Ended September 30,
	2004					2003					2004					2003
			Percent of					Percent of					Percent of					Percent of
			Total					Total					Total					Total
General and administrative	$	5,848		44.4	%	$	5,552		48.4	%	$	17,151		40.5	%	$	15,382		49.4	%
Real estate		2,854		21.7	%		2,473		21.6	%		9,098		21.5	%		3,995		12.8	%
Depreciation and amortization		4,403		33.5	%		3,440		30.0	%		12,807		30.3	%		9,337		30.0	%
Dissenting shareholders’ settlement		—		—			—		—			—		—			2,413		7.8	%
Transition costs		52		0.4	%		—		—			3,252		7.7	%		—		—
Total operating expenses from continuing operations	$	13,157		100	%	$	11,465		100	%	$	42,308		100	%	$	31,127		100	%

Comparison of Quarter and Nine Months Ended September 30, 2004 to Quarter and Nine Months Ended September 30, 2003. In general, operating expenses increased 35.9 percent for the nine months ended September 30, 2004, over the nine months ended September 30, 2003, and increased as a percentage of total revenues by 1.5 percent to 43.7 percent. During the quarters ended September 30, 2004 and 2003, operating expenses increased 14.8 percent, but decreased as a percentage of total revenues by 2.0 percent to 39.3 percent.

General and administrative expenses increased 11.5 percent for the nine months ended September 30, 2004, but decreased as a percentage of total revenues by 3.1 percent to 17.7 percent. General and administrative expenses increased 5.3 percent for the quarters ended September 30, 2004, but decreased as a percentage of total revenues by 2.5 percent to 17.5 percent. General and administrative expenses increased for the quarter and nine months ended September 30, 2004, primarily as a result of increases in expenses related to personnel. For the quarter and nine months ended September 30, 2004, this increase is partially offset by a decrease in state taxes paid by the Company. In addition, expenses related to professional services provided to the Company decreased for the nine months ended September 30, 2004.

Real estate expenses increased for the quarter and nine months ended September 30, 2004, primarily due to the August 2003 acquisition of two office buildings and a related parking garage in the Washington D.C. metropolitan area. Real estate expenses increased as a percentage of total revenue by 4.0 percent to

31

Results of Operations — continued:

9.4 percent, for the nine months ended September 30, 2004; however, real estate expenses as a percentage of revenue decreased by 0.4 percent to 8.5 percent for the quarter ended September 30, 2004 (See “Property Analysis — Real Estate Held for Investment”).

Depreciation and amortization expense increased 37.2 percent for the nine months ended September 30, 2004, and increased 0.6 percent to 13.2 percent of total revenues for the nine months ended September 30, 2004. Depreciation and amortization expense increased 28.0 percent for the quarter ended September 30, 2004, and increased 0.8 percent to 13.2 percent of total revenues for the quarter ended September 30, 2004. The increase in depreciation and amortization expense for the quarter and nine months ended September 30, 2004, is primarily attributable (i) the depreciation on the acquisition of 33 additional Investment Properties and the completed construction of one Investment Property since September 30, 2003, (ii) the amortization of loan costs related to the amended credit facility and (iii) the amortization of additional lease costs. The increase is partially offset by the disposition of 15 and 14 Investment Properties during each of the nine months ended September 30, 2004 and 2003, respectively.

During the nine months ended September 30, 2003, the Company recorded a dissenting shareholders’ settlement expense of $2,413,000 related to the lawsuit that arose as a result of the merger with Captec Net Lease Realty, Inc. in December 2001.

During the quarter and nine months ended September 30, 2004, the Company recorded a transition cost of $52,000 and $3,252,000, respectively, including severance, accelerated vesting and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. James M. Seneff, Jr. remained as Chairman of the Board of Directors.

Analysis of Other Expenses and Revenues

General. During the quarters and nine months ended September 30, 2004 and 2003, interest and other income and interest expense increased with the acquisition of additional properties but remained generally proportionate to the Company’s total revenue and expenses. The following summarizes the Company’s other expenses (revenues) from continuing operations (dollars in thousands):

	Quarter Ended September 30,												Nine Months Ended September 30,
	2004						2003						2004						2003
				Percent of						Percent of						Percent of						Percent of
				Total						Total						Total						Total
Interest and other income	$	(1,238	)		(16.8	)%	$	(573	)		(9.3	)%	$	(3,057	)		(14.7	)%	$	(2,665	)		(15.4	)%
Interest expense		8,594			116.8	%		6,763			109.3	%		23,802			114.7	%		19,992			115.4	%
Total other expenses (revenues) from continuing operations	$	7,356			100	%	$	6,190			100	%	$	20,745			100	%	$	17,327			100	%

Comparison of Quarter and Nine Months Ended September 30, 2004 to Quarter and Nine Months Ended September 30, 2003. In general, other expenses (revenues) increased 19.7 percent for the nine months ended September 30, 2004, over the nine months ended September 30, 2003, but decreased as a percentage of total revenues by 2.1 percent to 21.4 percent. During the quarters ended September 30, 2004 and 2003, other expenses increased 18.8 percent, but decreased as a percentage of total revenues by 0.3 percent to 22.0 percent.

Interest and other income increased 14.7 percent for the nine months ended September 30, 2004, but decreased as a percentage of total revenues by 0.4 percent to 3.2 percent. Interest and other income increased 116.1 percent for the quarter ended September 30, 2004, and increased as a percentage of total revenues by 1.6 percent to 3.7 percent. Interest and other income increased for the quarter and nine months ended September 30, 2004, primarily as a result primarily as a result of fee income received in the

32

Results of Operations — continued:

nine months ended September 30, 2004 and increased borrowing levels on the line of credit between the Company and a related party.

Interest expense increased 19.1 percent for the nine months ended September 30, 2004, but decreased as a percentage of total revenues by 2.5 percent to 24.5 percent for the nine months ended September 30, 2004. Interest expense increased 27.1 percent for the quarter ended September 30, 2004, and increased as a percentage of total revenues by 1.3 percent to 25.7 percent for the quarter ended September 30, 2004. The increase in interest expense for the quarter and nine months ended September 30, 2004, was primarily attributable to the addition of the $95,000,000 fixed rate mortgage loan entered into in November 2003. The Company entered into the mortgage loan as a means of reducing floating interest rate risk. However, the increase in interest expense was partially offset by a lower average debt outstanding on the Company’s variable interest rate debt.

Unconsolidated Affiliates

During the nine months ended September 30, 2004 and 2003, the Company recognized equity in earnings of unconsolidated affiliates of $3,694,000 and $3,462,000, respectively, $1,155,000 and $1,580,000 of which was recognized during the quarters ended September 30, 2004 and 2003, respectively. The increase in equity in earnings of unconsolidated affiliates was primarily attributable to the income earned on the affiliates’ investments in mortgage loans.

Earnings from Discontinued Operations

The Company has recorded discontinued operations by the defined Company segments: (i) real estate held for investment and (ii) real estate held for sale. As a result, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified the revenues and expenses related to its 14 investment properties sold during each of the nine months ended September 30, 2004 and 2003, as discontinued operations. In addition, the Company has classified one leasehold interest that expired during the nine months ended September 30, 2004 as discontinued operations. For the nine months ended September 30, 2004 and 2003, the Company has classified the revenues and expenses related to the eight (out of a total of 14) and 15 (out of a total of 17), respectively, of its held for sale properties as discontinued operations. In addition, the Company also classified the revenues and expenses related to its 12 properties held for sale that had generated rental revenues as discontinued operations. The Company has reclassified the revenues and expenses related to all held for investment properties and Services’ properties which generated rental revenue as discontinued operations. Also, the Company has classified all revenues and expenses from properties that were held for sale and have generated rental revenues as discontinued operations.

During the quarters and nine months ended September 30, 2004 and 2003, the Company recognized earnings from discontinued operations of (dollars in thousands):

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Real estate, held for investment	$	862	$	1,489	$	2,546	$	3,361
Real estate, held for sale		2,762		1,241		5,096		3,343
	$	3,624	$	2,730	$	7,642	$	6,704

The Company occasionally sells investment properties and may reinvest the proceeds of the sales to purchase new properties. The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

33

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to interest changes primarily as a result of its variable rate credit facility and its long-term, fixed rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt.

The Company entered into a forward starting interest rate swap in February 2004 and terminated the swap effective June 2004 for a swap gain of $4,148,000. The Company had no outstanding derivatives as of September 30, 2004 and December 31, 2003.

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information in the table below summarizes the Company’s market risks associated with its debt obligations and interest rate derivatives outstanding as of September 30, 2004 and December 31, 2003. The table presents principal cash flows and related interest rates by year of expected maturity for debt obligations and interest rate derivatives outstanding as of September 30, 2004. The variable interest rates shown represent the weighted average rates for the credit facility at the end of the periods. As the table incorporates only those exposures that exist as of September 30, 2004 and December 31, 2003, it does not consider those exposures or positions which could arise after those dates. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates.

Debt Obligations	2004			2005			2006			2007			2008			Thereafter			Total
Variable rate credit facility	$	—		$	—		$	28,000		$	—		$	—		$	—		$	28,000
Average interest rate		—			—			(1	)		—			—			—
Variable rate term note	$	20,000		$	—		$	—		$	—		$	—		$	—		$	20,000
Average interest rate		(2	)		—			—			—			—			—
Fixed rate mortgages	$	1,052		$	4,407		$	23,998		$	9,006		$	1,406		$	120,876		$	160,745
Average interest rate		6.25	%		6.24	%		6.04	%		5.96	%		5.89	%		6.97	%
Fixed rate notes	$	—		$	—		$	—		$	—		$	100,000		$	220,000		$	320,000
Average interest rate		6.90	%		6.90	%		6.90	%		6.90	%		6.82	%		6.54	%
Financing lease obligation(3)	$	—		$	—		$	—		$	—		$	—		$	26,041		$	26,041
Average interest rate		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%

(1)	Interest rate varies based upon a tiered rate structure ranging from 70 basis points above LIBOR to 135 basis points above LIBOR based upon the debt rating of the Company.
(2)	Interest rate varies based upon a tiered rate structure ranging from 155 basis points above LIBOR to 225 basis points above LIBOR based upon the debt rating of the Company.
(3)	In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased the properties back under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease.

	September 30, 2004							December 31, 2003
	(dollars in thousands)							(dollars in thousands)
			Weighted							Weighted
			Average							Average
			Interest			Fair				Interest			Fair
Debt Obligations	Total		Rate			Value		Total		Rate			Value
Variable rate credit facility	$	28,000		2.51	%	$	28,000	$	27,800		2.41	%	$	27,800
Variable rate term note	$	20,000		3.03	%	$	20,000	$	20,000		3.01	%	$	20,000
Fixed rate mortgages	$	160,745		6.27	%	$	160,745	$	149,861		6.68	%	$	149,861
Fixed rate notes(1)	$	320,000		7.37	%	$	353,006	$	270,000		7.71	%	$	295,488
Financing lease obligation	$	26,041		5.00	%	$	26,041	$	—		—		$	—

(1) Excludes unamortized note discount and unamortized interest rate hedge gain.

35

ITEM 4. CONTROLS AND PROCEDURES

Quarterly Evaluation. The Company carried out an evaluation as of September 30, 2004, of the effectiveness of the design and operation of its disclosure controls and procedures, which the Company refers to as disclosure controls. This evaluation was done under the supervision and the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the Securities and Exchange Commission (“Commission”) require that the Company present the conclusions of the CEO and CFO about the effectiveness of the Company’s disclosure controls as of the end of the period covered by this report.

CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q are forms of “Certification” of the Company’s CEO and CFO. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly Report on Form 10-Q which you are currently reading is the information concerning the evaluation referred to in the Section 302 certifications. This information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures and Internal Control over Financial Reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s CEO and CFO, and effected by the Company’s board of directors (the “Directors”), management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management or the Directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements.

Limitations on the Effectiveness of Controls. Management, including the Company’s CEO and CFO, do not expect that our disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some person, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions,

36

ITEM 4. CONTROLS AND PROCEDURES

or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions. Based upon the evaluation, the Company’s CEO and CFO have concluded that, as of September 30, 2004 and subject to the limitations noted above, the Company’s disclosure controls and procedures were effective at the reasonable assurance level to ensure that material information relating to the Company and its consolidated subsidiaries is made known to management.

During the nine months ended September 30, 2004, there were no significant changes in the Company’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, the Company’s internal control for financial reporting.

37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings. Not applicable.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
Item 3.	Defaults Upon Senior Securities. Not applicable.
Item 4.	Submission of Matters to a Vote of Security Holders.
	On August 5, 2004 and September 16, 2004, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”). At the Annual Meeting seven proposals were considered.
	First, the following nominees were elected to the Board of Directors of the Company: Messers. Robert A. Bourne (47,189,874 for and 2,195,574 withheld), Kevin B. Habicht (47,175,730 for and 2,209,718 withheld), Clifford R. Hinkle (47,493,156 for and 1,892,291 withheld), Richard B. Jennings (48,935,549 for and 449,899 withheld), Ted B. Lanier (47,480,484 for and 1,904,964 withheld), Robert C. Legler (48,925,658 for and 459,790 withheld), Craig Macnab (48,839,916 for and 545,532 withheld), Robert Martinez (48,735,050 for and 650,398 withheld) and James M. Seneff, Jr. (48,476,302 for and 909,146 withheld).
	Second, the amendment to the Company’s Articles of Incorporation to eliminate supermajority voting requirements for the stockholders to approve certain transactions was approved (34,630,004 for, 1,768,432 against and 491,757 withheld).
	Third, the amendment to the Company’s charter to permit the Board of Directors to increase the number of authorized shares of common stock was approved (40,800,839 for, 8,163,005 against and 421,532 withheld).
	Fourth, the amendment to approve the Company’s Bylaws to conform the definition of “independent” director to recently adopted corporate governance rules in accordance with current “best practices” in corporate governance was approved (48,505,749 for, 494,953 against and 384,745 withheld).
	Fifth, the amendment to the Company’s Bylaws to modify the procedure for filling vacancies on the board of directors in accordance with current “best practices” in corporate governance was approved (34,775,720 for, 1,613,722 against and 500,752 withheld).
	Sixth, the amendment to the Company’s Bylaws to modify the requirements for stockholder approval of amendments to the bylaws in accordance with current “best practices” in corporate governance was not approved (33,628,524 for, 2,834,173 against and 427,497 withheld).
	Finally, other matters were approved (33,674,168 for, 14,768,234 against and 943,014 withheld).
Item 5.	Other Information. Not applicable.
Item 6.	Exhibits.

(a) The following exhibits are filed as a part of this report.

3. Articles of Incorporation and By-laws

38

3.1	First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Registration Statement No. 333-64511 on Form S-3 and incorporated herein by reference).
3.2	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (9% Series A Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
3.3	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
3.4	Amended and Restated Bylaws of the Registrant (filed as Exhibit 3 to the Registrant’s Current Annual Report on Form 8-K dated July 15, 2004 and incorporated herein by reference).
3.5	Second Amended and Restated Bylaws of the Registrant (filed herewith).
3.6	Articles of Amendment to First Amended and Restated Articles of Incorporation of the Registrant (filed herewith).

4. Instruments defining the rights of security holders, including indentures

4.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).
4.2	Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.3	Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.4	Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
4.5	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).

39

4.6	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).
4.7	Form of Supplement Indenture No. 4 dated May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.8	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.9	Form of Supplement Indenture No. 5 dated June 19, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.10	Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.11	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.12	Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.13	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.14	Investment Agreement between the Registrant and The County Employees’ and Officers’ Annuity & Benefit Fund of Cook County dated August 12, 2003 (filed as Exhibit 2 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.15	Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).

40

10. Material Contracts

10.1	Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference).
10.2	2000 Performance Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).
10.3	Third Renewal Promissory Note dated as of April 1, 2001, by Commercial Net Lease Realty Services, Inc. in favor of Registrant relating to an $85,000,000 line of credit (filed as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.4	Third Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of April 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.5	Fourth Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of July 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference).
10.6	Seventh Amended and Restated Line of Credit and Security Agreement, dated May 9, 2003, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $225,000,000 loan (filed as Exhibit 10.11 to the Registrant’s Current Report on Form 8-K dated July 11, 2003, and incorporated herein by reference).
10.7	Real Estate Purchase Contract, dated as of July 23, 2003, by an between MCI WorldCom Network Services, Inc. and the Company (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference).
10.8	U.S. Government Lease for Real Property, dated as of December 17, 2002, between MCI WorldCom Network Services, Inc. and the United States of America (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference).

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31. Section 302 Certifications

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32. Section 906 Certifications

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

42

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED this 4^th day of November, 2004.

COMMERCIAL NET LEASE REALTY, INC.

By:  /s/ Craig Macnab
Craig Macnab
Chief Executive Officer and President

By:  /s/ Kevin B. Habicht
Kevin B. Habicht
Chief Financial Officer and Director

43

EX-3.5

Exhibit 3.5

SECOND AMENDED AND RESTATED

BY-LAWS

OF

COMMERCIAL NET LEASE REALTY, INC.

(adopted on September 16, 2004)

ARTICLE I

OFFICES

     Section 1. Registered Office. The registered Office of Commercial Net Lease Realty, Inc. (the “Corporation”) shall be 300 East Lombard Street, Baltimore, Maryland 21202. The registered agent of the Corporation at such address is The Corporation Trust Incorporated.

     Section 2. Additional Offices. The Corporation may also have offices at such other places, both within and without the State of Maryland, as the board of directors of the Corporation (the “Board of Directors”) may from time to time determine or the business of the Corporation may require.

ARTICLE II

MEETING OF STOCKHOLDERS

     Section 1. Time and Place. Meetings of the stockholders of the Corporation (the “Stockholders”) shall be held at such places, either within or without the State of Maryland, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof.

     Section 2. Annual Meeting. The Annual Meeting of Stockholders for the election of directors and the transaction of other business shall be held, in each year, commencing with the year 1995, after delivery of the annual report referred to in Section 12 of this Article II, on such date and at such time and location as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Failure to hold the Annual Meeting does not invalidate the Corporation’s existence or affect any otherwise valid acts of the Corporation.

     Section 3. Special Meetings. The Chairman of the Board, the Chief Executive Officer or a majority of the members of the Board of Directors may call a Special Meeting of the Stockholders. A Special Meeting shall also be called by the Secretary of the Corporation upon the written request of the Stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. The Secretary shall inform such Stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment by such Stockholders to the Corporation of such costs, the Secretary shall give notice to each Stockholder entitled to notice of the meeting. Unless requested by Stockholders entitled to cast a majority of all votes entitled to be cast at such meeting, a Special Meeting need not be called to consider any matter which is substantially the same as a matter voted on at any meeting of the Stockholders held during the preceding twelve (12) months.

     Section 4. Notice. Written notice of any meeting of Stockholders stating the place, date and hour of the meeting shall be given to each Stockholder entitled to vote thereat, either personally or by mail, not less than ten (10) nor more than ninety (90) days before the date of the meeting, unless a greater period of notice is required by statute in a particular case. In the case of a Special Meeting, the notice shall also state the purpose or purposes for which the meeting is called. If mailed, such notice shall be deemed to have been given when deposited in the United States mail, postage prepaid, directed to the Stockholder at the Stockholder’s address as it appears on the records of the Corporation.

     Section 5. Corporate Records and Stockholder Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and keep, or cause to have prepared and kept, as part of the books and records of the Corporation, a list of the names and addresses of all Stockholders of the Corporation. Inspection of all the books and records of the Corporation by Stockholders shall be permitted to the extent provided by the Maryland General Corporation Law.

     Section 6. Quorum; Adjournments. Unless otherwise provided by statute or the Articles of Incorporation, at a meeting of Stockholders, the presence in person or by proxy of Stockholders entitled to cast a majority of all the votes entitled to be cast at a meeting of Stockholders shall constitute a quorum. If, however, such quorum shall not be present or represented at any meeting of the Stockholders, the Stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without further notice to a date not more than one hundred twenty (120) days after the original record date. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.

     Section 7. Voting. A plurality of all votes cast at a meeting of Stockholders duly called and at which a quorum is present shall be sufficient to elect a Director. Each share of stock may be voted for as many individuals as there are Directors to be elected and for whose election the shares of stock are entitled to be voted. When a quorum is present at any meeting, the vote of the holders of a majority of the votes cast shall decide any other question brought before such meeting, unless more than a majority of the votes cast is required herein or by statute or by the Articles of Incorporation.

     Section 8. Voting Procedure. Unless otherwise provided in the Articles of Incorporation, each Stockholder shall, at every meeting of the Stockholders, regardless of class, be entitled to one (1) vote in person or by proxy for each share of stock held by such Stockholder.

     Section 9. Proxies. A Stockholder may cast the votes entitled to be cast by the share of stock owned of record by the Stockholder either in person or by proxy executed by the Stockholder or by the Stockholder’s duly authorized agent in any manner allowed by law. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy.

     Section 10. Voting of Stock By Certain Holders. Shares of stock of the Corporation registered in the name of a corporation, partnership, limited liability company, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner, a manager, a managing member or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a by-law or a resolution of the governing board of such corporation or other entity or agreement of the partners of the partnership or agreement of the members of the limited liability company presents a certified copy of such by-law, resolution or agreement, in which case such person may vote such stock. Any trustee or other fiduciary may vote stock registered in such person’s name as such fiduciary, either in person or by proxy.

     Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares of stock entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares of stock at any given time.

     The Directors may adopt by resolution a procedure by which a Stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the Stockholder are held for the account of a specified person other than the Stockholder. The resolution shall set forth the class of Stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Directors consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the Stockholder of record of the specified shares of stock in place of the Stockholder who makes the certification.

     Section 11. Inspectors. At any meeting of Stockholders, the Chairman of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares of stock represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the Stockholders.

     Each report of an inspector shall be in writing and signed by the inspector or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares of stock represented at the meeting and the results of the voting shall be prima facie evidence thereof.

     Section 12. Reports to Stockholders. The Directors shall submit to the Stockholders at or before the Annual Meeting of Stockholders a report of the business and operations of the Corporation during such fiscal year, containing a balance sheet

and a statement of income and surplus of the Corporation, accompanied by the certification of an independent certified public accountant, and such further information as the Directors may determine is required pursuant to any law or regulation to which the Corporation is subject. Within the earlier of twenty (20) days after the Annual Meeting of Stockholders or one hundred twenty (120) days after the end of the fiscal year of the Corporation, the Directors shall place the annual report on file at the principal office of the Corporation and with any governmental agencies as may be required by law and as the Directors may deem appropriate.

     Section 13. Nominations and Proposals by Stockholders.

          (a) Annual Meetings of Stockholders.

               (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the Stockholders may be made at an Annual Meeting of Stockholders: (A) pursuant to the Corporation’s notice of meeting; (B) by or at the direction of the Directors; or (C) by any Stockholder of the Corporation who was a Stockholder of record both at the time of giving of notice provided for in this Section 13(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 13(a).

               (ii) For nominations or other business to be properly brought before an Annual Meeting by a Stockholder pursuant to clause (C) of paragraph (a) (i) of this Section 13, the Stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by Stockholders. To be timely, a Stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 120th calendar day before the first anniversary of the date of the Corporation’s proxy statement released to Stockholders in connection with the preceding year’s Annual Meeting; provided, however, that in the event that the date of the current year’s Annual Meeting has been changed by more than thirty (30) days from the date of the preceding year’s meeting or if the Corporation did not hold an Annual Meeting the preceding year, notice by the Stockholder to be timely must be so delivered within a reasonable time before the Annual Meeting begins to print and mail its proxy materials. In no event shall the public announcement of a postponement or adjournment of an Annual Meeting to a later date or time commence a new time period for the giving of a Stockholder’s notice as described above. Such Stockholder’s notice shall set forth: (A) as to each person whom the Stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (B) as to any other business that the Stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such Stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the Stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: (i) the name and address of such Stockholder, as it appears on the Corporation’s books, and of such beneficial owner; and (ii) the number of each class of shares of the Corporation which are owned beneficially and of record by such Stockholder and such beneficial owner.

               (iii) Notwithstanding anything in the second sentence of paragraph (a) (ii) of this Section 13 to the contrary, in the event that the number of Directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for Director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first anniversary of the preceding year’s annual meeting, a Stockholder’s notice required by this Section 13(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

          (b) Special Meetings of Stockholders. Only such business shall be conducted at a Special Meeting of Stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a Special Meeting of Stockholders at which Directors are to be elected: (i) pursuant to the Corporation’s notice of meeting; (ii) by or at the direction of the Board of Directors; or (iii) provided that the Board of Directors has determined that Directors shall be elected at such Special Meeting, by any Stockholder of the Corporation who was a Stockholder of record both at the time of giving of notice provided for in this Section 13(b) and at the time of the Special Meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 13(b). In the event the Corporation calls a Special Meeting of Stockholders for the purpose of electing one or more Directors to the Board of Directors, any such Stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation’s notice of meeting, if the Stockholder’s notice containing the

information required by paragraph (a) (ii) of this Section 13 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such Special Meeting and not later than the close of business on the later of the 90th day prior to such Special Meeting or the 10th day following the day on which public announcement is first made of the date of the Special Meeting and of the nominees proposed by the Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a Special Meeting to a later date or time commence a new time period for the giving of a Stockholder’s notice as described above.

          (c) General.

               (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 13 shall be eligible to be elected as Directors and only such business shall be conducted at a meeting of Stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 13. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 13 and, if any proposed nomination or business is not in compliance with this Section 13, to declare that such nomination or proposal shall be disregarded.

               (ii) For purposes of this Section 13, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

               (iii) Notwithstanding the foregoing provisions of this Section 13, a Stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 13. Nothing in this Section 13 shall be deemed to affect any rights of Stockholders to request inclusion of proposals in, nor the right of the Corporation to omit a proposal from, the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

     Section 14. Informal Action by Stockholders.

          (a) Any action by Stockholders may be taken without a meeting, if a majority of shares of stock entitled to vote on the matter (or such larger proportion of shares of stock as shall be required to take such action) consent to the action in writing and the written consents are filed with the records of the meetings of Stockholders.

          (b) In order that the Corporation may determine the Stockholders entitled to consent to action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any Stockholder of record seeking to have the Stockholders authorize or take action by written consent shall, by written notice to the Secretary of the Corporation, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days of the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received and no prior action by the Board of Directors is required by applicable law, the record date for determining Stockholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Maryland, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of Stockholders meetings are recorded, in each case to the attention of the Secretary of Corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received and prior action by the Board of Directors is required by applicable law, the record date for determining Stockholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action.

     Section 15. Voting by Ballot. Voting on any question or in any election may be by voice unless the presiding officer shall order or any Stockholder shall demand that voting be by ballot.

ARTICLE III

DIRECTORS

     Section 1. Number. The number of directors (“Directors”) which shall constitute the whole Board shall be no fewer than three (3) and no more than twelve (12). Such numbers may be altered (but not to less than three (3)) by amendment to this By-law.

     Section 2. Selection. The Directors shall be elected at the Annual Meeting of the Stockholders, except as provided in Section 5 of this Article, and except that the first Directors of the Corporation were named in the Articles of Incorporation, each Director elected shall hold office until the next Annual Meeting of the Stockholders and until the Director’s successor is elected and qualified, or until the Director’s earlier resignation or removal.

     Section 3. Composition. A majority of the members of the Board of Directors shall, except during the period of a vacancy or vacancies therein, be “Independent Directors,” as such term is defined or construed from time to time in the Exchange Act and the rules and regulations of the Securities and Exchange Commission, the rules and regulations of any stock exchange or automated interdealer quotation system on which any shares of stock of the Corporation are listed or quoted, and other laws and regulations applicable to the Corporation.

     Section 4. Resignation; Removal. Any Director may resign at any time upon written notice to the Corporation. Any Director may be removed, with or without cause, by the vote or written consent of the holders of a majority of the outstanding shares of Common Stock then entitled to vote for the election of Directors.

     Section 5. Vacancies. If for any reason any or all the Directors cease to be Directors, such event shall not terminate the Corporation or affect these By-laws or the powers of the remaining Directors hereunder (even if fewer than three Directors remain). Subject to the rights of holders of one or more classes or series of preferred shares then outstanding, any vacancy on the Board of Directors (including a vacancy created by an increase in the number of Directors) shall be filled by a majority of the remaining Directors or, if the remaining Directors fail to act or there is no remaining Director, by the votes of holders of at least a majority of the shares of stock entitled to vote thereon and present in person or by proxy at any meeting of the Stockholders called for that purpose. Any individual so elected as Director shall hold office for the unexpired term of the Director he or she is replacing.

     Section 6. Chairman of the Board. The Board of Directors may elect from among the Directors a Chairman of the Board of Directors by affirmative vote of a majority of the full Board of Directors taken at any regular or special meeting of Directors. The Chairman of the Board shall act as chairman at all meetings of the Stockholders at which the Chairman of the Board is present and shall preside at all meetings of the Board of Directors at which the Chairman of the Board is present. In the absence of the Chairman of the Board, the duties of the Chairman of the Board shall be performed and the authority of the Chairman of the Board may be exercised by the Vice Chairman of the Board.

     Section 7. Vice Chairman of the Board. The Board of Directors may elect from among the Directors a Vice Chairman of the Board of Directors by affirmative vote of a majority of the full Board of Directors taken at any regular or special meeting of Directors. The Vice Chairman of the Board shall, in the absence of the Chairman of the Board, act as chairman at all meetings of the Stockholders at which the Vice Chairman of the Board is present and shall preside at all meetings of the Board of Directors at which the Vice Chairman of the Board is present.

     Section 8. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-laws directed or required to be exercised or done by the Stockholders. A Director shall be an individual at least twenty-one (21) years of age who is not under legal disability. In case of failure to elect Directors at an Annual Meeting of Stockholders, the Directors holding over shall continue to direct the management of the business and affairs of the Corporation until their successors are elected and qualify.

     Section 9. Place of Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Maryland at such place or places as the Board may from time to time designate (in the case of regular meetings) or as shall be specified in the notice of such meeting (in the case of special meetings).

     Section 10. Regular Meetings. The Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution.

     Section 11. Special Meetings. Special meetings of the Board may be called by the Chairman or the Chief Executive Officer; special meetings shall also be called by the Chairman or Secretary pursuant to the written request of a majority of the Directors.

     Section 12. Notice. Notice of any special meeting of the Board shall be given by written notice delivered personally, telegraphed, facsimile-transmitted, mailed electronically or mailed to each Director at the Director’s business or residence address. Personally delivered or telegraphed notices shall be given at least two (2) days prior to the meeting. Notice by mail shall be given at least five (5) days prior to the meeting. Telephone, facsimile-transmitted or electronically mailed notice shall be given at least twenty-four (24) hours prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Telephone notice shall be deemed given when the Director is personally given such notice in a telephone call to which the Director is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address previously given by the Director to, and on file with, the Corporation. Facsimile-transmission notice shall be deemed given upon completion of the transmission of the message to the number previously given by the Director to, and on file with, the Corporation and receipt of a completed transmission report confirming delivery. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Directors need be stated in the notice, unless specifically required by statute or these By-laws.

     Section 13. Quorum; Voting.

          (a) At all meetings of the Board, a majority of the total number of Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless statute, the Articles of Incorporation or these By-laws require a greater proportion.

          (b) If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present.

          (c) The Directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum.

     Section 14. Telephone Meetings. Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

     Section 15. Action by Written Consent. Unless otherwise restricted by the Articles of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board consent thereto in writing, and if the writing or writings are filed with the minutes of proceedings of the Board.

     Section 16. Compensation; Financial Assistance. Directors shall not receive any stated salary for their services as Directors but, by resolution of the Directors, may receive compensation per year and/or per meeting and for any service or activity they performed or engaged in as Directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Directors or of any committee thereof; and for their expenses, if any, in connection with any other service or activity performed or engaged in as Directors; but nothing herein contained shall be construed to preclude any Directors from serving the Corporation in any other capacity and receiving compensation therefor.

     Section 17. Loss of Deposits. No Director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or shares have been deposited.

     Section 18. Surety Bonds. Unless required by law, no Director shall be obligated to give any bond or surety or other security for the performance of any of the Director’s duties.

ARTICLE IV

COMMITTEES

     Section 1. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the Directors of the Corporation and the Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee; provided, however, that the majority of the members of the Corporation’s audit committee,

and at least one (1) member of each and any other committee, except during the period of a vacancy or vacancies therein, shall be Independent Directors. Any such committee, to the extent provided in the resolution, and subject to any restrictions imposed by statute, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, except the power to (i) declare dividends or distributions of stock; (ii) issue stock, except in accordance with resolution of the Board or by adoption of a stock option or other plan; (iii) recommend to the Stockholders any action which requires Stockholder approval; (iv) amend these By-laws; (v) approve any merger or share exchange which does not require Stockholder approval; or (vi) take such other action which may be from time to time prohibited by the Maryland General Corporation Law. Such committee or committees may also authorize the seal of the Corporation to be affixed to all papers which may require it.

     Section 2. Meetings. Each committee may designate a chairman of such committee. Meetings of any committee may be called by or at the request of the chairman of the committee, the Chief Executive Officer or by a majority of the members of the committee. The person or persons authorized to call meetings of any committee may fix any place, either within or without the State of Maryland, as the place for holding any meetings of the committee called by them. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

     Section 3. Notice of Committee Meetings. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors.

     Section 4. Quorum for Committee Meetings. The presence of a majority of the total membership of any committee shall constitute a quorum for the transaction of business at any meeting of such committee and the act of a majority of those present shall be necessary and sufficient for the taking of any action at such meeting.

     Section 5. Vacancies, Removal and Dissolution. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternative members to replace any absent or disqualified member, or to dissolve any such committee.

     Section 6. Telephone Meetings. Members of a committee may participate in a committee meeting by means of a conference telephone or similar communications equipment if all persons participating in the committee meeting can hear each other at the same time. Participation in a committee meeting by these means shall constitute presence in person at the committee meeting.

     Section 7. Informal Action by Committees. Any action required or permitted to be taken at any committee meeting may be taken without a committee meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of the committee.

     Section 8. Minutes of Committees. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

ARTICLE V

WAIVER OF NOTICE

     Section 1. Waiver. Whenever any notice is required to be given under the provisions of any applicable statute or of the Articles of Incorporation or of these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting of Stockholders, Directors, or a committee of Directors, shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Stockholders, Directors, or members of a committee of Directors need to be specified in any written waiver of notice unless so required by the Articles of Incorporation or these By-laws.

ARTICLE VI

OFFICERS

     Section 1. Number; Qualification. The officers of the Corporation shall be chosen by the Board of Directors and shall include a Chief Executive Officer, a President, a Treasurer, and a Secretary. The officers of the Corporation may also include the Chairman of the Board, one or more Vice Presidents and one or more Assistant Treasurers or Assistant Secretaries. In addition, the Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. Any number of offices may be held by the same person unless the Articles of Incorporation or these By-laws provide otherwise, but the President may not serve concurrently as Vice President.

     Section 2. Election. The officers of the Corporation shall be elected annually by the Board of Directors, except that the Chief Executive Officer or President may from time to time appoint one or more Vice Presidents (not designated as Executive Vice President or Senior Vice President), Assistant Treasurers and Assistant Secretaries or other officers. Each officer shall hold office until the officer’s successor is elected and qualifies or until the officer’s death, resignation or removal in the manner hereinafter provided. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.

     Section 3. Compensation. The salaries of all officers and agents of the Corporation shall be fixed by or in the manner prescribed by the Board of Directors.

     Section 4. Removal and Resignation. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board if, in its judgment, the Board finds that the best interests of the Corporation will be served, but such removal shall be without prejudice to the contractual rights of any person so removed. Any officer may resign at any time upon written notice to the Corporation. Any officer appointed by either the Chief Executive Officer or the President may be removed by either the Chief Executive Officer or the President if, in such officer’s judgment, the officer finds that the best interests of the Corporation will be served, but such removal shall be without prejudice to the contractual rights of any person so removed. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation.

     Section 5. Vacancy. Any vacancy occurring in any office of the Corporation shall be filled by or in the manner prescribed by the Board of Directors.

     Section 6. Chief Executive Officer. The Directors may designate a Chief Executive Officer from among the elected officers. The Chief Executive Officer shall direct, coordinate and control the Corporation’s business and activities and its operating expenses and capital expenditures, and shall have general authority to exercise all the powers necessary for the chief executive officer of the Corporation, all in accordance with basic policies established by and subject to the control of the Board of Directors. The Chief Executive Officer may employ and discharge employees and agents of the Corporation, except such as shall be appointed by the Board, and the Chief Executive Officer may delegate these powers. The Chief Executive Officer shall have general authority to execute bonds, deeds and contracts in the name and on behalf of the Corporation.

     Section 7. President. In the absence of a designation of a Chief Executive Officer by the Directors, the President shall be the chief executive officer. The President shall have general authority to execute bonds, deeds and contracts in the name and on behalf of the Corporation, except in cases where the execution thereof shall be expressly delegated by the Directors or by these By-laws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Directors from time to time.

     Section 8. Vice President. In the absence of the President, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order of seniority designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The Vice President shall generally assist the Chairman of the Board and the President and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. The Directors may designate one or more Vice Presidents as Executive Vice President, Senior Vice President or as Vice President for particular areas of responsibility.

     Section 9. Secretary. The Secretary shall attend all meetings of the Board of Directors and meetings of the Stockholders and shall record all the proceedings of the meetings of the Stockholders and of the Board of Directors in a book to be kept for that purpose. The Secretary shall give, or cause to be given, required notice of all meetings of the Stockholders and the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors. The Secretary shall have

custody of the stock certificate books and Stockholder records and such other books and records as the Board of Directors may direct. The Secretary shall have custody of the corporate seal of the Corporation and shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the Secretary’s signature. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by the Secretary’s signature.

     Section 10. Treasurer. The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors and shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all the Treasurer’s transactions as treasurer and of the financial condition of the Corporation. If required by the Directors, the Treasurer shall give the trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Directors for the faithful performance of the duties of the office and for the restoration to the Corporation, in case of the Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in the Treasurer’s possession or under the Treasurer’s control belonging to the Corporation. The Treasurer shall perform such other duties and have such other powers as the Board of Directors or Chairman may from time to time prescribe.

     Section 11. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or Treasurer, respectively, or by the Chief Executive Officer or the Directors. The Assistant Treasurers shall, if required by the Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Directors.

ARTICLE VII

CERTIFICATES OF STOCK

     Section 1. Form and Number. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board, the President or the Vice President and countersigned by the Treasurer, the Secretary or an Assistant Treasurer or Assistant Secretary certifying the number of shares owned by the holder in the Corporation. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation as if the officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of issue. Each certificate representing shares of stock which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Corporation may set forth upon the face or back of the certificate a statement that the Corporation will furnish to any Stockholder, upon request and without charge, a full statement of such information.

     Section 2. Lost Certificates. The Board of Directors may direct that a new stock certificate or certificates be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner’s legal representative, to give the Corporation a bond in such sum as it may direct as Indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

     Section 3. Transfer of Shares. Certificates shall be treated as negotiable, and title thereto and to the shares they represent shall be transferred by delivery thereof to the same extent as those of a Maryland stock corporation. No transfers of shares of the Company shall be made if (i) void ab initio pursuant to any provision of the Articles of Incorporation, (ii) the Board of Directors, pursuant to any provision of the Articles of Incorporation or other written agreement between or among any Stockholder(s) and the Corporation, shall have refused to permit the transfer of such shares, or (iii) the shares have not been registered under the Securities Act of 1933, as amended (the “Act”), or under applicable state blue-sky or securities laws, unless exemptions from the registration requirements of the Act and applicable state blue-sky or securities laws are, in the opinion of counsel, satisfactory to the Corporation, for the transferor, available. Permitted transfers of shares of the Corporation shall be made on the stock records of the Corporation only upon the instruction of the registered holder thereof,

or by the registered holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares accompanied by proper evidence of authority to transfer, as to any transfers not prohibited by any provision of the Articles of Incorporation or by action of the Board of Directors thereunder, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

     Section 4. Fixing Record Date. In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, to receive payment of any dividend or other distribution or allotment of any rights, to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not be more than ninety (90) nor less than ten (10) days before the date of a Stockholders’ meeting, nor more than ninety (90) days prior to the payment of such dividends, the distribution or exercise of such rights or the taking of any other lawful action.

     In lieu of fixing a record date, the Directors may provide that the stock transfer books shall be closed for a stated period but not longer than twenty (20) days. If the stock transfer books are closed for the purpose of determining Stockholders entitled to notice of or to vote at a meeting of Stockholders, such books shall be closed for at least ten (10) days before the date of such meeting.

     If no record date is fixed and the stock transfer books are not closed for the determination of Stockholders, (a) the record date for the determination of Stockholders entitled to notice of or to vote at a meeting of Stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of Stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Directors, declaring the dividend or allotment of rights, is adopted, but the payment or allotment may not be made more than sixty (60) days after the date on which the resolution is adopted.

     When a determination of Stockholders entitled to vote at any meeting of Stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than one hundred twenty (120) days after the record date fixed for the original meeting, in either of which case a new record date shall be determined set forth herein.

     Section 5. Registered Stockholders. The Corporation shall be entitled to treat the record holder of any shares of stock of the Corporation as the owner thereof for all purposes, including all rights deriving from such shares, and except as required by law shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares, on the part of any other person, including, but without limiting the generality thereof, a purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such purchaser, assignee, transferee or other person becomes the record holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such purchaser, assignee, transferee or other person. Except as required by law, no such purchaser, assignee, transferee or other person shall be entitled to receive notice of the meetings of Stockholders, to vote at such meetings, to examine a complete list of the Stockholders entitled to vote at meetings, or to own, enjoy, and exercise any other property or rights deriving from such shares against the Corporation, until such purchaser, assignee, transferee or other person has become the record holder of such shares.

     Section 6. Fractional Shares; Issuance of Units. The Directors may issue fractional shares or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Articles of Incorporation or these By-laws, the Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Directors may provide that for a specified period securities of the Corporation issued in such units may be transferred on the books of the Corporation only in such units.

ARTICLE VIII

INDEMNIFICATION OF OFFICERS AND DIRECTORS

     Section 1. Right to Indemnification. To the maximum extent permitted by Maryland law in effect from time to time, the

Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his or her service in that capacity. To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation.

     Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the By-laws or Articles of Incorporation of the Corporation inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

     Section 2. Indemnification of Employees and Agents of the Corporation. With the approval of the Board of Directors, the Corporation shall, to the maximum extent permitted by the Maryland law in effect from time to time, and to such further extent as it shall deem appropriate under the circumstances, provide such indemnification and advancement of expenses as described in Section 1 above, to any employee or agent of the Corporation or a predecessor of the Corporation.

     Section 3. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, manager, member, trustee, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the specified statutory authority, the Articles of Incorporation or the provisions of this Article.

     Section 4. Reliance on Certain Information. In performing a Director’s duties, a Director shall be entitled to rely on any information, opinion, report or statement, including any financial statement or other financial data, in each case prepared or presented by any of the following:

               (a) One or more officers or employees of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented.

               (b) A lawyer, certified public accountant or other person as to matters which a Director reasonably believes to be within the person’s professional or expert competence.

               (c) A committee of the Board of Directors upon which the Director does not serve, as to matters within its designated authority, which the Director reasonably believes to merit confidence; provided however that a Director shall not be considered to be acting in good faith if the Director has any knowledge concerning the matter in question that would cause the Director’s reliance to be unwarranted.

ARTICLE IX

MISCELLANEOUS

     Section 1. Fiscal Year. The fiscal year of the Corporation shall be from January 1 through December 31.

     Section 2. Deposits; Checks. The Corporation shall establish a bank account for deposit of the funds of the Corporation and the drawing of checks or drafts thereon. All checks or drafts drawn on such account shall require the signature of such officer or officers, agent or agents of the Corporation in such manner as shall from time to time be determined by the Directors. The appointment of additional signatories of the bank account and the opening of additional bank accounts shall require the approval of the Board of Directors or such officers of the Corporation as shall from time to time be determined by the Directors.

     Section 3. Contracts. The Directors may authorize any officer or agent to enter into any contract or to execute and

deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Directors or by an authorized person shall be valid and binding upon the Directors and upon the Corporation when authorized or ratified by action of the Directors.

     Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Maryland.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE X

[Reserved]

ARTICLE XI

AMENDMENTS

     Section 1. Articles of Incorporation. Subject to the terms of the Articles of Incorporation of the Corporation, these By-laws may be repealed or amended, or new By-laws adopted, by the Board of Directors; provided, however that the Board of Directors shall have no power or authority to modify, alter or repeal Section 3 or Section 5(a) of Article III, Section 1 of Article IV or this Article XI, and that the affirmative vote of that portion of the then outstanding Common Stock entitled to vote generally in the election of directors necessary to approve an amendment to the Corporation’s Articles of Incorporation pursuant to the Maryland General Corporation Law shall be required to approve such modification, alteration or repeal.

EX-3.6

Exhibit 3.6

ARTICLES OF AMENDMENT

TO

FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

COMMERCIAL NET LEASE REALTY, INC.

Commercial Net Lease Realty, Inc., a Maryland corporation having its principal office in Baltimore, Maryland (hereinafter, the “Corporation”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:

FIRST: The First Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) are hereby amended by renaming Article XI “AMENDMENT AND CERTAIN EXTRAORDINARY ACTIONS” and deleting Article XI in its entirety and inserting the following new Article XI:

     Section 1. Amendment

The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in its Charter and any other provisions authorized by the laws of the State of Maryland at the time in force may be added or inserted in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other person whomsoever by and pursuant to this Charter in its present form or as hereafter amended are granted subject to the rights reserved in this Article XI, provided, however, that any amendment or repeal of Articles VIII, IX or this Article XI of this Charter shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. Subject to the provisions of any class or series of Preferred Stock at the time outstanding, this Charter may be amended by the affirmative vote of the holders of not less than a majority of the Common Stock then outstanding and entitled to vote thereon.

     Section 2. Consolidation, Merger, Share Exchange or Transfer of Assets

Subject to the provisions of any class or series of Preferred Stock at the time outstanding, the Board of Directors shall have the power to (i) consolidate the Corporation with one or more other entities into a new entity, (ii) merge the Corporation into another entity, (iii) effect a share exchange with another domestic or foreign corporation or other entity or (iv) sell or otherwise dispose of all or substantially all of the Corporation’s assets; provided, however, that such action shall have been approved by the holders of not less than a majority of the Common Stock then outstanding and entitled to vote thereon.

SECOND: The total number of all classes of capital stock which the Corporation has authority to issue immediately prior to this amendment is two hundred ten million (210,000,000) shares consisting of (i) ninety million (90,000,000) shares of common stock, par value $0.01 (the “Common Stock”); (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.01 (the “Preferred Stock”); and one hundred five million (105,000,000) shares of excess stock, par value $0.01 (the “Excess Stock”). The aggregate par value of all of the authorized shares of all classes of capital stock having a par value is $2,100,000.

THIRD: The Articles of Incorporation are hereby amended by deleting Article VI, Section 1 in its entirety and inserting the following new Article VI, Section 1: The total number of shares of all classes of capital stock that the Corporation has authority to issue is four hundred ten million (410,000,000) shares consisting of (i) one hundred ninety million (190,000,000) shares of common stock, par value $0.01 (the “Common Stock”); (ii) fifteen million (15,000,000) shares of preferred stock, par value $0.01 (the “Preferred Stock”); and (iii) two hundred five million (205,000,000) shares of excess stock, par value $0.01 (the “Excess Stock”). The aggregate par value of all of the authorized shares of all classes of capital stock having a par value is $4,100,000.

FOURTH: The information required by subsection (b)(2)(i) of Section 2-607 of the Maryland General Corporation Law will not be changed by these Articles of Amendment; and

FIFTH: The amendments to the Articles of Incorporation as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation.

IN WITNESS WHEREOF, Commercial Net Lease Realty, Inc. has caused these presents to be signed in its name and on its behalf by its Executive Vice President and Chief Operating Officer and attested by its Assistant Secretary on September 23, 2004.

THE UNDERSIGNED, Executive Vice President and Chief Operating Officer of Commercial Net Lease Realty, Inc., who executed on behalf of said corporation, the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information, and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury.

ATTEST:	Commercial Net Lease Realty, Inc.
/s/Kella W. Schaible Kella W. Schaible Assistant Secretary	/s/Julian E. Whitehurst Julian E. Whitehurst Executive Vice President and Chief Operating officer

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Craig Macnab, Chief Executive Officer of Commercial Net Lease Realty, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Commercial Net Lease Realty, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 4, 2004		/s/ Craig Macnab
Date	Name:	Craig Macnab
	Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin B. Habicht, Chief Financial Officer of Commercial Net Lease Realty, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Commercial Net Lease Realty, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 4, 2004		/s/ Kevin B. Habicht
Date	Name:	Kevin B. Habicht
	Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Craig Macnab, Chief Executive Officer, certifies that (1) this Quarterly Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of September 30, 2004 and December 31, 2003 and its results of operations for the quarters and nine months ended September 30, 2004 and 2003.

November 4, 2004		/s/ Craig Macnab
Date	Name:	Craig Macnab
	Title:	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Kevin B. Habicht, Chief Financial Officer, certifies that (1) this Quarterly Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of September 30, 2004 and December 31, 2003 and its results of operations for the quarters and nine months ended September 30, 2004 and 2003.

November 4, 2004		/s/ Kevin B. Habicht
Date	Name:	Kevin B. Habicht
	Title:	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.