LNR's land and residential holdings may also be sinking the company. "They are, unfortunately, involved in one of the most volatile property niches in the market-land,'' says Dan Fasulo, managing director of Real Capital Analytics in New York City. "Given the property value decline in that sector, it's not surprising at this point that they are looking at bankruptcy protection as a way to move forward."

In January, Bloomberg reported that LNR enlisted Lazard Ltd. and law firm Dewey LeBoeufLLP to help restructure nearly $1 billion of debt and prepare for a possible bankruptcy filing. Calls placed to Dewey LeBoeuf were not returned, while representatives from Lazard and LNR declined to comment.

According to Bloomberg, Oaktree Capital Management, LNR's largest creditor, is also seeking advice on restructuring the firm's debt Oaktree Capital and a handful ofLNR's other bondholders are considering a takeover, sources tell DAI. Those same sources, who wish to remain anonymous, say LNR's majority stakeholder, Cerberus Capital Management LP, is now running its operations. Calls to Cerberus were not returned.

Some observers suspect an investor will snap up LNR's special servicing branch much like Warren Buffett's Berkshire Hathaway Inc. and Leucadia National Corp. did with Capmark's servicing business back in December. More recently, Centerline Holding Co. siphoned off its special servicing and debt fund management businesses to Island Capital Group LLC's C- III Capital Partners for $110 million last month.

LNR's troubles came to light last November, when Moody's Investors Service downgraded the firm's credit rating to Ca from B3 because of the "rapid deterioration in LNR's liquidity profile." This affected some $900 million of the firm's debt LNR, the ratings agency said, is under mounting pressure from declines in cash interest income from its devalued CMBS investments. What's more, the protracted credit crunch in the commercial real estate market has delayed collection of its special servicing resolution fees.

"Every time a property comes back to the special servicer it creates a liquidity issue because the servicer doesn't have any real method to create liquidity, except through the disposition of assets,'' Schecher says. A series of asset sales may seem like the obvious solution, but with a fiduciary duty to protect bondholders in the capital stack, it's not that simple.

"Special servicers are hired just like an independent contractor and they have to work in the best interest of the trust,'' says William Campbell, a partner at Stroock & Stroock & Lavan LLP in New York City. "Many investors feel, however, that because specials are conflicted, they'll seek to just take action to prevent their affiliates from taking losses. So they'll extend loans rather than foreclose them. This concern may be exaggerated."

Indeed, some wary observers of this practice question whether there is an inherent conflict of interest in having a B-piece buyer service its own loan. "There have been allegations toward some special servicers that they've been over zealous in their servicing of mortgages,'' says Anthony Sanders, professor of finance in the School of Management at George Mason University in Virginia.

But Campbell observes, "The value of special servicing has risen as their affiliates' investments have fallen, and to avoid lawsuits and rating agency downgrades, specials may be more vigilant in upholding their duties to the trust then some predict."

Still, Sanders points out that special servicers have been accused of unduly calling performing loans or collecting fraudulent fees. Senior bondholders have also been known to sue special servicers if they are unhappy with the servicers course of action.

Appaloosa Management, for example, filed a motion in March alleging CWCapital Management, the special servicer for Stuyvesant Town/Peter Cooper Village, violated its fiduciary duty by seeking to foreclose on the property-exposing the trust to "wholly avoidable losses, risks and injuries,'' like double transfer taxes.

Like many of its competitors, LNR Partners has been brought to court for breach of contract, though there are no recorded judgments against the special servicer. With LNR's current crisis, some question how a bankruptcy filing may affect its special servicing business.

Stephanie Petosa, a senior analyst at Fitch, says bankruptcy courts generally protect the interests of the filing entity with regard to its special servicing business. Including the special servicing arm in bankruptcy could jeopardize its agency ratings.

A reorganization of LNR may result in a surge of distressed commercial assets sales. "IfLNR files for bankruptcy, it is going to need liquidity. So it sounds

to me that it would probably want to be auctioning some of the loans in the portfolio,'' says John Garth, partner and managing director of originations for the East Coast for the Pembrook Group.

Recovery rates for resolved CMBS loans are lower than the historical average, according to Fitch. But the agency's most recent data show that LNR had a 90.7% recovery rate as of the end of Q3 2009. That number, however, may be a bit deceiving since LNR has the largest portfolio ofloans in special servicing, and at the time had resolved just 119 of its 1,000-plus loans.

Loan extensions may be too costly an endeavor for LNR to continue in earnest. A torrent of asset transfers, like LNR has experienced, can be a crushing expense if monthly base fees or resolution fees are only trickling in. Special servicers may handle appraisal costs, legal fees and other expenses, with the hopes of reimbursement.

To cover operating expenses, Schecher points out special servicers typically borrow money from line lenders, which require haircut equity. But he says, "The amount of foreclosed properties that are coming into the CMBS default arena creates a liquidity crisis for the special servicer"

He continues, "You can't continue bringing in bad assets and not sell them and continue to borrow to pay the advances on real estate taxes, insurance and interest payments, this is a losing proposition."

LNR's $ l-billion senior credit facility is set to mature in 2011. Moody's suspects the company, likely unable to refinance, will default on its credit obligations. Schecher suggests this line lender turmoil may create problems for other special servicers, ifLNR defaults.

"The uncertainty of this could cast a pall on the industry for some time, and that means the velocity of transactions will remain static,'' he says.

A month after Moody's took action, Fitch Ratings downgraded the special servicing entity, LNR Partners, because of its parent company's financial trials. With 1,107 loans valued at $18.6 billion as of January, LNR has been named special servicer for the largest amount of CMBS debt, according to Trepp.

Were LNR Property to file for bankruptcy, those loans would continue to be serviced, says Sanders. "Even if the worst happens and they start moving toward a process of liquidation, the servicing rights will just be sold to other servicers. And there are still plenty of players out there,'' he says.

What's more concerning, Sanders adds, is how this situation reflects on the state of commercial real estate. "It's sending a signal out that there are some serious structural issues going on in the commercial market." Petosa says, "All servicers are stressed and most of them are under financial pressure. The whole special servicing landscape is going to change this year, whether that's through consolidation or the purchase of existing servicers."

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