Centerline was indeed under financial strain, having also taken tremendous write-downs on the values of its investments, according to Fitch. The agency downgraded Centerline's servicer rating from CSS1 to CSS2 back in December citing "significant financial challenges facing the parent company." The management and operations of the servicing group, however, did not contribute to the downgrade. As of the end of February, Centerline had been named special servicer on 533 loans valued at $7.7 billion, according to Trepp. Centerline declined to comment, while calls to Island Capital were not returned by press time.

"It's the investment piece of the special servicers that has created the biggest problem for Centerline," observes Frank P. Liantonio, EVP of capital markets at Cushman & Wakefield in New York City. "It's really the B-pieces in the capital stack that they either bought or originated that placed it under water. The actual servicing business is profitable, and that's why there has been a separation of the two."

Island Capital, which is run by Andrew Farkas of Insignia fame, basically split Centerline into two companies: one private and one public. The special servicing and debt fund management functions were transformed into a private entity. That entity was then snapped up by an Island Capital affiliate, C-III Capital Partners LLC, for $110 million. Liantonio suspects that "the debt fund could be an attractive platform, from which one could move into the distressed debt business."

C-III also picked up a 40% interest in the public portion, which will continue to be called Centerline Capital Group and retain the origination, asset management and agency mortgage-loan business. Island Capital essentially reprised the old structure of CharterMac and ARCap—Centerline's predecessor. Island Capital had been working to recapitalize Centerline since last year.

The endeavor has helped Centerline rid itself of roughly $1.6 billion of aggregated liabilities and contingent exposures. It has also provided more than $100 million of new equity by restructuring a hefty portion of Centerline's outstanding debt. For Island Capital, the transaction has positioned it to benefit from what is shaping up to be a windfall in special servicing.

"Special servicing is a very solid, safe business that's going to be expanding over the next two or three years," says David R. Soares, president and CEO of Lexden Capital in New York City. "Revenues should go up as more loams start to balloon and are not paid off, which automatically send them to special servicing." Most money managers and expanding financial companies, he adds, are looking to take a very conservative approach, like this one, over the next few years.

Acting as a coordinator for bondholders with commercial-asset debt also offers special servicers dibs on the distressed properties they manage. And opportunistic plays is nothing new for Farkas, who made a name for himself in the '90s investing in general shares of limited partnerships. Soares says he was accused of depressing prices of those partnerships to buy out his partners on the cheap. And there's been speculation that Farkas trying to get a hold of assets through the special servicing arm.

But that's highly unlikely, says Soares. "It would be illegal to as a trustee not be acting in the best interest of the bondholders. You can't play around with that stuff," he says. Calls to Island Capital were not returned.