ORLANDO, Fla. -- The terrorism buzz achieved only a low pitch at the MBA CREF Conference this week in Orlando. The reason? Attendees, speakers and panelists were already marching on to the next deal, armed with strategic safety nets and a 9/11-induced sangfroid. The tragedy has become another blip on the radar screen and newly callused investors are back to business.

"Issues today are more economic-related than they are terrorist-related in terms of underwriting real estate going forward," Brian Stoffers, COO and executive managing director of L.J. Melody & Co., said in a Feb. 5 MBA panel discussion on the subject. The panel, which covered the gamut of perspectives from investor to special servicer, also included Joe Franzetti, VP at Salomon Smith Barney, Henry Bieber, senior VP at GMAC Commercial Mortgage Corp., Larry Duggins, president and COO of ARCAP REIT Inc., Tad Phillip, managing director at Moody’s Investors Service, Bernard Brown, president of Insurance Advisors LLC and Jan Sternin, senior VP at Midland Loan Services Inc.

According to the panel, the financing market is still moving after 9/11 — the only casualty being single-asset, large-loan deals. "We’re working on conduits and floaters," Phillip said. "We won’t be looking at the large, single-asset loans until the terrorist issues have been somewhat solved."

Insurance concerns

But other deals continue to move forward. Lack of terrorism coverage only affects a small minority of properties. "There was a lot of talk about ‘no terrorism coverage,’ but from our experience about 95-98% do have coverage, it’s only the trophy properties that are having trouble," Brown said. "That’s going to continue. There’s not going to be any federal regulation. No one’s going to bail out one of the richest industries in the world. The real issue right now is premiums going up."

The average policy offers $150 million in coverage, and the only markets currently offering stand-alone terrorism insurance are Lloyd’s of London and AIG Lexington Insurance Co., Brown said. "There’s a lot of pressure on the borrower to tell their insurance broker and agent, ‘Tell me I can’t get terrorism insurance so I can tell the lender that it’s not available."

But existing coverage is also as full of holes and gaps as Swiss cheese, including variations in the actual situations covered, and conflicting state laws governing exclusion of terrorist acts. In New York and California, it is forbidden for insurers to exclude terrorist attacks. In other states, such as Texas, the exclusions are permitted. And after 9/11, many insurers have shifted the burden of proof to the insured. The panel’s popular opinion was that the U.S. government will remain uninvolved, in spite of industry lobbying efforts.

While trophy property deals are the only ones frozen by the tenuous state of terrorism insurance, the real estate finance community as a whole will feel the impact once the issues are solved permanently, Franzetti said. "If coverage is available only with very expensive premiums, we’ll see a massive redistribution of wealth. The value of property will move to the insurance company or to somebody who’s going to clean the existing borrower’s clock and take the property out at a very high cap rate. The uncertainty will create opportunity for some players."

Proving ground
Another effect of 9/11 was the resulting trial-by-fire for the CMBS (commercial mortgage-backed securities) market, Phillip said. "CMBS structures were put to the test. Now, we know they work. I didn’t believe there was a way to get all the CMBS deals lined up in November and December 2001 done by the end of the year in this climate but it happened. It’s a testimony to the depth of the investor base for CMBS that you could take such an enormous surge of deals and go into 2002 with such a clean slate."

One 9/11 side effect that may not seem as positive to borrowers is the lenders’ stepped-up surveillance process. "We’re spending more time than ever on the underlying financial statements including borrower’s statements and rent rolls," Duggins said. "We’re going to stop buying from people who don’t follow through with the information we need on an ongoing basis to monitor the transactions." According to Duggins, ARCAP and many other investors are holding a loan’s ultimate originator responsible for timeliness and number of statements collected on a transaction.

The U.S. military has predicted a 100% chance of a major terrorist attack on United States soil in the coming 12 months, and the real estate finance community is already preparing for it. But they’re not letting it slow business. "Originators tend to be optimistic," Stoffers said. "And there are not a lot of them losing sleep over when the next shoe will fall."

— Brannon Boswell, Managing Editor