Tenants in Orange County office buildings being handed over by Maguire Properties Inc. face an interesting remainder of 2009.
Los Angeles-based Maguire said early last week it planned to give back five OC properties, totaling about 3.6 million square feet of office and retail space, to lenders in a bid to save cash.
The Maguire buildings going back include the massive Park Place campus in Irvine, near John Wayne Airport.
Others are the Pacific Arts Plaza in Costa Mesa, the 2600 Michelson tower in Irvine (the Business Journal’s former home), the 500 Orange Tower in Orange and the Stadium Towers Plaza in Anaheim.
The buildings, which had about $860 million of debt tied to them as of June 30, made up almost 60% of the landlord’s OC portfolio.
It’s the first and biggest example of a portfolio of OC offices falling into distress during the downturn.
More local buildings could follow suit in coming months, including others owned by Maguire, according to Horsham, Pa.-based rating agency Realpoint LLC.
Offices being given back by Maguire could see new owners at some point this year. But the speed of sales depends on the lenders involved with each property.
“There are close to 35 buildings in (Maguire’s) portfolio, and not all of them have the same lenders,” said John Combs, founder of Santa Ana-based RiverRock Real Estate Group Inc., a commercial real estate management and leasing company.
Those lending groups all have different strategies for managing and disposing of distressed assets, Combs said.
Timing will depend on whether properties are taken over by special servicers.
Servicers often are called in by lenders when a court appoints a receiver to run a building that is in default.
If the buildings go into receivership,with a third party taking over management,it will be easier for leases to get done. But since leases require court approval, the process can be slow, Combs said.
Special servicers often are focused on preserving cash and dealing with loan issues, rather than completing leases, he said.
After last week, “any tenants who are enamored with a Maguire office have a new set of problems they have to deal with,” said Jeff Manley, managing principal of Newport Beach-based tenant brokerage Cresa Partners.
For many tenants, “They’re in a holding pattern and waiting for someone to negotiate with,” said Randall Parker, managing director for the Newport Beach office of Los Angeles-based brokerage Travers Realty Corp.
LBA
One former Maguire building’s already changed hands. Offices and parking structures on a large part of the Park Place campus near John Wayne Airport,totaling 1.7 million square feet,were turned over to Irvine-based LBA Realty last week.
LBA Realty,founded by local real estate executives Steve Layton and Phil Belling,had bought some $170 million of debt tied to the complex at a discount earlier this year.
Officials from LBA declined to comment on the Park Place deal.
The buildings it’s taking have nearly 500,000 square feet of empty space. Brokers say an undisclosed local company is looking at much of the space.
Until ownership issues are resolved at all the Maguire buildings, there’s likely to be plenty of uncertainty, said Jeff Osborn, managing director for the Anaheim office of CB Richard Ellis Group Inc. and head of the company’s office division in Southern California.
“The first thing a tenant does in a situation like this is to go to your lease,” Osborn said.
Most savvy tenants have non-disturbance agreements in their leases that protect them from eviction by a property’s lender in the event of foreclosure against the landlord.
From a practical standpoint, a new owner in today’s tenant-friendly market would have a hard time filling space with tenants paying higher rents than existing companies, Parker said.
But when it comes to extending expiring leases, it’s a whole new ballgame.
At the 2600 Michelson tower, the average remaining lease term is 2.6 years, while at Stadium Towers Plaza the average remaining lease runs about three years, according to the landlord’s second-quarter data.
Other properties don’t have as much immediate turnover. At the Pacific Arts Plaza, home to Rutan & Tucker LLP,the county’s second largest law firm,the average remaining lease term runs closer to 5.5 years.
For tenants looking to extend leases at those properties, lenders usually will allow deals to get done within a set range of rental rates and concession parameters.
Where things get dicey is for deals “outside the box,” which might include large tenant improvement concessions, Parker said.
Those deals might not get completed until ownership issues are resolved.
Maguire officials said last week they were willing to continue to manage the affected properties until a special servicer is named.
