> So the weird part then comes in: are all second level domains that have third level registrations now reserved? Do they stop being reserved if the last third level registration expires without being renewed?

Yes, second level domains that overlap with a registered third level domain have never been available. Under the original proposal, once all the third level domains were dropped, the overlapping second level domains would have been available (first come, first served). I believe current practice is the second level domain becomes available if all of the third level domains expire. Registrants in other threads indicated that there's no process to have an orderly transition from being the only the registrant of a third level domain under a specific second level name to registering that second level domain ... you would have to let your current name expire and hope to catch the second level name.