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REAL ESTATE : BofA set to seize Maguire property : Irvine tower is among the first losses of what may be a wave as the office market bottoms.

November 17, 2009|Roger Vincent

Maguire Properties Inc., one of the region's largest commercial landlords, has been hit with a legal complaint by Bank of America Corp. seeking to foreclose on one of Maguire's prime Irvine office buildings.

The bank's bid to appoint a receiver to sell the 16-story tower near John Wayne Airport wasn't surprising because Maguire said in August that it would stop making payments on it and six other properties.

Still, the move to foreclose is significant in that it is among the first of a wave of defaults, write-downs and workouts anticipated as part of a long-awaited bottoming out of the commercial real estate market, industry observers say.

After being stuck in place for nearly 18 months, the business of buying and selling properties such as offices, warehouses and shopping centers is expected to begin a purge in the months ahead as owners and lenders accept losses and move on.

Office and retail properties will take the biggest hit as worried consumers curb spending and companies delay rehiring, according to a study released this month by consulting firm PricewaterhouseCoopers and the Urban Land Institute, a real estate industry trade group and think tank. The pain could spread far enough to be a fresh drag on the nation's economy.

Maguire, based in Los Angeles, missed $1.68 million in payments from August through October on a $95-million loan against the property at 2600 Michelson Drive, the bank said in a complaint filed Nov. 10 in Superior Court in Santa Ana. The real estate investment trust is defaulting on loans worth more than $1 billion.

Maguire hopes that by giving back the keys to properties for which it overpaid at the peak of the last boom it can cut debt enough to keep the company solvent, Chief Executive Nelson Rising said in August.

Maguire Properties, then under the direction of founder Robert F. Maguire, acquired the Michelson Drive building in 2007 as part of a $3-billion purchase of 24 office buildings in Orange and Los Angeles counties. Borrowing money for the heavily leveraged purchase was fairly easy at the time with capital markets still flush with cash.

The bold move greatly expanded Maguire Properties' presence in Orange County, but the obligations turned into a financial millstone. The hot Orange County market cooled dramatically, leaving Maguire and other landlords to struggle with high vacancy rates and falling rents.

Rising replaced Maguire as CEO in May 2008 and soon announced his intention to reduce the company's debt. Cutting loose some of the buildings it bought at the top of the market was part of the strategy.

"In the short term, this is good news for Maguire," analyst Craig Silvers, president of Bricks & Mortar Capital, said Monday. "It shows they are completing their strategic plans."

The decision to allow foreclosures could hurt the company in the long term, though, because the new owners of the buildings will become Maguire's competitors, said Silvers, who owns stock in the company.

"New owners can come in with much lower rents and still make money," Silvers said.

Analyst Michael Knott also expects the building to trade at a deep discount to the mortgage value of $350 a square foot, which he says reflects the "incredibly aggressive" pricing of the market peak a few years ago. Two comparable buildings in Orange County recently traded for less than $200 per square foot.

Bank of America is acting as a trustee for owners of commercial mortgage-backed securities that were sold to fund the loan, said Jefferson George, a bank spokesman.

Maguire shares rose 13 cents to $2.30.


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