The difficulty of obtaining terrorism insurance is no longer a theoretical problem for the real estate industry. According to The Bond Market Association, some $7 billion in large loans have been put on hold, and major property deals are stalling because investors cannot obtain adequate, affordable policies.

Industry leaders say that unless the Senate joins the House in passing legislation to provide federal assistance for terrorism insurance, the real estate business, which is already struggling with the effects of economic recession, could suffer a further slide. A group of 87 executives warned in a recent letter to Senate leaders Tom Daschle, (D-S.D.) and Trent Lott, (R-Miss.), that, without terrorism insurance, many office buildings, hotels and malls can't be sold and new projects won't be started — creating a drag on the whole economy.

“Because of this insurance crisis, an increasing number of buildings throughout the U.S. are either uninsured or underinsured against a future terrorist attack,” the letter states. “Moreover, many construction projects and acquisitions have been cancelled or delayed due to an inability to acquire sufficient terror coverage.”

David Twardock, president of Newark, N.J.-based Prudential Mortgage Capital Corp. and George Emmons, an executive vice president and national manager at Cleveland-based KeyCorp, are two of the lenders and property owners urging Congress to enact a short-term program “to ensure that terrorism insurance is both available and affordable.”

“This is an issue that is creeping its way into the real estate capital markets,” says Twardock. “It hasn't shut the markets down, but there are some deals that are having problems.” Emmons worries that the problem “is going to put a damper on new construction.”

The Dilemma

According to a recent report from New York-based Jones Lang LaSalle, owners are paying anywhere from 40% to 500% more for terrorism insurance — depending on the perceived risk of the property — than before the Sept. 11 attacks.

The highest rates are for high-profile, “trophy” buildings in major cities, some of which may now be impossible to sell. In May, for example, California real estate mogul Marvin Davis withdrew his $335 million offer for 450 Lexington Ave. in Manhattan and cited the high cost of terrorism insurance as a major obstacle to completing the deal.

Todd Smith, vice president of capital markets for Jones Lang LaSalle and a co-author of the report, estimates the annual insurance premium for a high-profile office building could increase by about $1 per sq. ft. — representing a hike of about $1.5 million per year for a 1.5 million sq. ft. office tower.

The issue is creating some heated battles between lenders and owners. When Indianapolis-based Simon Property Group, owner of the 4.2 million sq. ft. Mall of America in Bloomington, Minn., was unable to find affordable terrorism insurance, the lender holding the debt — GMAC Commercial Mortgage Corp. — bought terrorism coverage and billed Simon for the cost. When Simon refused to pick up the tab, GMAC took the company to court. The two sides settled in March after Simon purchased an insurance policy with a $100 million limit in damage coverage. Simon has declined to disclose the premium it is paying on the policy.

Help on the Way?

Real estate executives are calling on the Senate to follow the lead of the House by passing terrorism legislation. The House passed a bill in November, but the measure stalled in the Senate. The letter from the real estate executives urges Congress to provide a “temporary federal backstop for terrorism insurance.” In the bill passed by the House, the federal government would reimburse businesses for 90% of losses after the first $10 billion in damages from terrorism acts. Insurance companies would pick up the remaining 10%.

“In the short run, we have a vacuum in which underwriters aren't willing to underwrite the risk,” says Frank McDowell, president of BRE Properties Inc., a San Francisco-based apartment developer.

Adds Twardock: “The industry needs some sort of assurance that coverage will be available.”