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New York’s commercial real estate market is facing a threat that could rock its foundations: the loss of federal “terrorism insurance.”
The Terrorism Risk Insurance Act, enacted a year after the 9/11 attacks, makes American taxpayers the backstop for private insurance companies in the event of such catastrophes. The legislation comes up for renewal in 2014.
If Congress fails to extend the insurance program, it will become increasingly difficult for building owners to get new policies. That would raise the already steep cost of doing business in the post-9/11 world — in particular for the owners of iconic skyscrapers and hotels in New York that are logical terrorist targets — by raising premiums and affecting building values.
“Waiting to take legislative action until the scheduled 2014 year-end sunset would be a mistake,” said Jeffrey DeBoer, the CEO of lobbying group the Real Estate Roundtable. “Starting in the next few months, as policies roll and terror coverage becomes less certain, increasing numbers of large and small transactions across the country will be delayed or canceled.”
Congressman Michael Grimm (R-Staten Island), who introduced a bill in February to extend TRIA by five years, said the real estate industry is pushing for an early extension.
“We are moving as quickly as we can, and hopefully we will have the first hearing before summer,” Grimm said, adding that he is fairly confident the TRIA will be extended at the beginning of next year.
Still, SL Green Realty says its terrorism insurance expires on Dec. 31, 2013, and industry experts fret that insurance may not be available at that time if the legislation isn’t already extended beyond Dec. 31, 2014.
Congressman Bennie Thompson (D-Miss.) has also introduced a second bill this month to extend the program by 10 years.
Before the attacks on the Twin Towers, insurers didn’t charge for terrorism insurance, but now reinsurers believe they cannot price the risk. In 2002, Congress stepped up with a three-year program — which has been renewed twice — guaranteeing 85 percent of losses due to terrorism attacks, with insurers picking up the first $100 million.
When the TRIA was last extended in 2007, it passed the House by a margin of 312 to 110. But renewing it in its current form is not a given even after the Boston Marathon bombings.
“President Obama called for changes in the program that would have had the effect of scaling back the coverage for terrorist attacks,” according to an April report from the Congressional Research Service.
Ratings firm Fitch this month predicted a “tough legislative battle that will directly influence the future cost and availability of insurance coverage, particularly in large urban areas.”
While Congress debates, New York building operators are conducting business as usual.
The Empire State Building, in its offering document to convert into a real estate investment trust, or REIT, says it has terrorism coverage of $1.5 billion, although the building is worth $2.5 billion.
Bud Perrone, a spokesman for Silverstein Properties, which will soon open 4 World Trade Center and has Nos. 2 and 3 in the pipeline, said, “We have secured terrorism insurance for all our buildings through the construction period and are confident it will be available when we open each building.”