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Maguire Properties (MPG), the office REIT that bought 24 office properties and 11 development sites from Blackstone (BX) for $2.88 billion at the height of the market, just got a market read on its Orange County holdings. According to the Wall Street Journal, Emmes Holdings in New York recently agreed to buy MGP's stake in a newly constructed office property in Irvine, Calif., for about $160 million, representing a 40% discount to its construction cost.

Maguire's heavy concentration in Orange County gives it exposure to the subprime debacle that probably rivals AIG, given that Orange County was subprime central HQ for many mortgage lenders. This exposure is resulting in an epic struggle to dig out from under the debt incurred in that 2007 purchase.

Making matters even worse, the FDIC's grim reapers are out in full force in Orange County, shuttering bank offices and rejecting leases without the customary remedies afforded to landlords under Chapter 11.

Federal bankruptcy laws are complex, but in general, Chapter 11 default remedies for owner/lessors of commercial real estate typically allow 60 days for bankrupt lessees to affirm or reject their leases. For those leases that are rejected, the properties are thrown back on the market in search of a new lessee, and the owner/lessor receives an unsecured claim limited to three year's worth of rent.

However, The FDIC's authority to reject leases does not fall under Chapter 11 of the Code, and it is even more draconian. If a lease is rejected by the FDIC as receiver, the owner is simply handed the keys and the contract is extinguished with absolutely no claim on the estate of the dearly departed. This obviously makes it tough to pay your friendly banker on the first of every month.

This is exactly what has happened with Quintana, an office property jointly owned by Maguire (20%) and Maquarie Office Trust (80% - ASX: MOF). Maguire announced Monday that the FDIC has rejected the majority of WAMUs lease at Quintana, which is also in Orange County. According to the press release, the FDIC is "not obligated to pay any rent or other compensation in connection with the lease termination".

This brings the occupancy of Quintana to approximately 40%, which is unsustainable in relation to the debt (a now completely underwater $106 million CMBS loan maturing in December 2011). Maguire has commenced discussions with the special servicer, and a deed-in-lieu of foreclosure deal is the most likely outcome. This will probably wipe out all of MGP's equity in the property.

With respect to the sale of the aforementioned newly-constructed property to the Emmes Group, it's noteworthy that financing was provided by EuroHypo, itself a struggling lender. But don't get your hopes up - the loan was not new money. EuroHypo simply allowed Emmes to assume the original construction loan in return for injecting fresh equity.

Until Emmes showed up with its $160 million check, EuroHypo was in about as much distress on this deal as MGP. Last month, Maguire took a $23.5 million first-quarter non-cash impairment charge on the property, following a $50 million non-cash impairment charge on the same property in prior quarter. EuroHypo's $165 million construction loan was set to mature in September 2009, but it will now live on (with principal reduced) as term financing for a brand new borrower.

And the beat goes on!

Disclosure: No positions at the time of publication

Source: Maguire Properties Defaults on Quintana Loan