Despite six months of news reports and industry discussions about the looming crisis of commercial real estate loans coming due, many of us in the services world aren't seeing much change, especially among the assets we know should be considered distressed. While firms like ours have created internal structures to handle this work based upon our history with previous downturns, we all see a distress-tracking list that seems only to get larger.

The reason is that many assets going into receivership or bankruptcy end up being sold for 50% lower than the loan amount. The inclination is to hold onto those assets longer and see how long the borrower can pay some portion of the debt service and whether or not he can at least cover the operating expenses each month. Many problems can be ignored for a while, but that may not solve any real issues with the real estate.

This kick-the-can scenario, which is happening in more than 90% of the loans that we're following, is a problem for three reasons and we think special servicers could do better by engaging experts in both management and leasing to help them solve the challenges.

First, remember that tenants have boatloads of opportunities to move.

A special servicer or master servicer's first priority on an asset should be value preservation, which means retaining tenants. If your building is less than

50% leased, you have larger issues, but if it's more than 50% occupied, you need that cash flow and activity level to keep it as healthy as possible. Make sure that your management team is doing all it can to engage and retain tenants.

Second, if your borrower has a history in the business, special servicers should put more faith in them. Many borrowers were hit with the economy's double-whammy of job losses and a capital freeze. Those who are good operators should not be handcuffed without the ability to make improvements to preserve the asset. If cash flow is an issue, the borrowers need to have access to capital to continue to make the building appealing and safe for tenants. Things like leaking roofs and tired exteriors will make tenants start to think twice about staying and send up a red-flag for prospective tenants.

As the market continues to find the bottom for rent and occupancy, tenants will start to become more confident in their ability to find better options. During the past 12 months, most firms were struggling to stay in business and rarely had the opportunity to review their leasing situation. In most markets, tenants have gone through the tough decisions of right-sizing their staff and revising business plans. Those businesses that remain are well-positioned for improvements in the economy and will start to look at how to improve their business's position with real estate. With rental rates decreasing in most markets in all or most property types, a common trend that we see coming is tenants starting to trade up in class, moving from class C space to class B or relocating closer to "Main and Main." Will your borrower have his building ready for those prospects?

Finally, we recommend that special servicers review the piles of loans on their desks and find the best real estate in that list. They can find the best team to help repair the value of that asset. With the loan in limbo, the asset value will continue to decrease. Each of those piles on every special servicer's desk holds a number of jewels. Rather than waiting to focus on those later because they may not be as distressed as others, an effort must be made to find those jewels now and assemble smart professionals who can assess the situation. Perhaps the asset really should be sold.

With lots of capital sitting on the sidelines, we know that many investors are looking for solid, stable real estate in select markets. Each investor has different goals, but many will see the crown jewels as great additions to their portfolios as they try to find safe places for their capital to go. Many of these ideas contradict what we see happening at the special-servicing level. Until the strategies change, the log-jam will continue, and with nothing coming to the market, our industry will take much longer to stabilize.

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