Despite plummeting prices, distress in check.

Sapped by the recession and a sharp pullback in lending, commercial real estate prices have retreated so sharply since the credit crisis began to take hold in late 2007 that most real estate experts say swaths of Manhattan mortgages now far outsize the value of the office buildings they are tied to.

But aside from just a few spectacular collapses so far during the recession, few buildings have fallen into the hands of their lenders.

There are a myriad of reasons for the lack of distress so far, experts say. Among them, that many deals are being held aloft for the time being by remaining interest reserves.

Experts also say that many lenders are extending expiring debt or arranging more accommodating payback terms even for delinquent mortgages in order to avoid the costs and logistics of taking over the properties.

Still, a sense of mystery hangs over the market whether the current hesitancy among lenders foreclose will last long enough for the debt markets and real estate prices to improve, or if they will begin to more readily liquidate their positions and uncork a wave of fire sales.

Adding to the uncertainty, even buildings that appear to be in especially perilous financial shape are, for the time being at least, still afloat. One property, for instance, that buyers eager to capitalize on potential distress have kept close watch over is 660 Madison Avenue, a building that has hallmarks of a troubled deal.

For one, 660 Madison was purchased by the Zunino Group, a real estate company controlled by the Italian real estate mogul Luigi Zunino, at what many consider the height of the real estate market in October 2007. The company agreed to what is widely held as one of the highest prices ever paid for a commercial real estate asset in the city, about $1,470 psf.

Zunino financed the $375 million acquisition, which was sold by a partnership between the real estate company Broadway Partners and investor Myers Mermel, with a $275 million senior loan from Deutsche Bank and $50 million of high-interest mezzanine financing that is currently held by the real estate company Shorenstein Properties.

The amount of the senior portion of the debt alone equates to nearly $1,100 psf, well in excess, experts say, of the current value of the building. Comparatively, the most recent midtown building sale, last week's announcement that SL Green was arranging to sell a stake in 485 Lexington Avenue, valued the property at about $550 psf. There have been concerns about the building's tenancy.

The first nine floors of 660 Madison Avenue house the flagship location for the tenant the building is probably best known for, the luxury department store Barneys New York, and are owned as a separate commercial condominium interest from the office space above. Floors ten through 23, a roughly 250,000 s/f block, offer a stack of boutique office spaces, many of which come with terraces created by the numerous setbacks of the stepped tower.

Located in midtown's exclusive Plaza District, the building has a prestigious reputation that has attracted small financial firms. But hedge funds and private equity firms, a segment of the market that had been lauded during the real estate boom years for being among the highest paying tenants, but have since suffered mightily amid problems in the financial sector.

Drake Partners, a financial firm, is said to be subleasing its entire 26,000 s/f space. The fashion house Dolce & Gabbana meanwhile is marketing a space it leases in the building, nearly 30,000 s/f. There is also little more than 30,000 s/f of office space being offered directly by the landlord. A source described it as far from dire because most of the available spaces are subleases and that the sub-landlords in those cases continued to pay the Zunino Group rent.

But, judging by its high purchase price, 660 Madison Avenue wasn't acquired for its in place rents but rather the prospect of upgrading its cash flow by doing high priced deals. Such lucrative leasing deals have been hard to arrange in recent months. The rental market in Manhattan has fallen precipitously since peaking a year ago, wiping out the lofty rental projections that many real estate investors used during the overheated market to justify peak real estate values.

Adding to the leasing difficulties at 660 Madison Avenue is the uncertainty regarding the stability of ownership brokers familiar with the building say. Risanamento SPA, an Italian real estate company that is a subsidiary of the Zunino Group, has been scrambling to restructure its billions of dollars of debt to avoid bankruptcy and Luigi Zunino was forced to step down as the company's chief executive in July.

Last year, Zunino tried to market 660 Madison Avenue for sale through the sales brokerage Eastdil Secured, but pulled the building from the market when it became clear that it wouldn't receive nearly as much as it paid.

So far however, according to sources, the owner is current on its debt service, although that may be because it still has the ability to draw on previously arranged interest reserves to fund its payments. Still, it's not clear what will happen at the tower.

The building's lenders may not be eager to take the property from Zunino because its obstacles are those being experienced across the market. Even Shorenstein, a lender and real estate operator who sources say has the infrastructure and ability to take properties under its control, may be hesitant because it would then have to assume the building's large senior mortgage.

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