Terror-Insurance Bill
Is Welcomed by REITs
NEW YORK -- A number of real-estate investment trusts stand to be the big winners following the Senate's passage of terrorism insurance legislation.
Many had been facing skyrocketing insurance premiums on some of their properties. In some cases, no coverage was available at all as skittish insurers worried that certain trophy properties could become the next terrorism targets.
Boston Properties Inc., Brookfield Properties Corp., Equity Office Properties Trust, Vornado Realty and Simon Property Group Inc. are among the names expected to benefit most from the legislation once the president signs it into law next week, according to Merrill Lynch analyst Steve Sakwa. The five REITs all own high-profile properties in major markets. And most have been struggling to find affordable and available terrorism insurance.
Ed Linde, president and chief executive of Boston Properties, views the legislation as "a very positive step."
However, he said "the real question now is if insurance companies act responsibly with respect to pricing of insurance to cover terrorism issues."
Indeed, Boston Properties has been among a number of REITs finding it difficult to find affordable and available terrorism insurance.
Earlier this year, Mr. Linde indicated that his company could only get $150 million in terrorism-insurance coverage, and that would have to cover the company's entire portfolio, which includes multibillion dollar properties such as San Francisco's Embarcadero Center. And the cost of this limited coverage would be about $4.5 million -- which is more than half the amount the company already pays for property and casualty insurance for its entire $6 billion portfolio. As a result, Boston Properties was among those that opted to self-insure much of its portfolio for terrorism coverage.
"We've all been very patient" waiting for the legislation, said Mr. Linde.
"It is a very positive development," concurred Sam Zell, chairman of Equity Office Properties. "It should stabilize and normalize the ability of all owners to get appropriate terrorism insurance."
Mr. Zell said the cost and availability of insurance coverage has been "grossly inadequate" over the past year. He said he knew of people who opted not to bid on properties out of concerns that financing, without terrorism insurance, would be challenging.
Indeed, the lack of terrorism insurance had begun to take a toll on the secured-lending and commercial-mortgage-backed securities markets. In a secured financing deal, the loan is backed by a particular property rather than a company's entire portfolio. Some lenders had started to get squeamish about financing or even refinancing an individual property -- especially a high-profile trophy property in a major market -- if that asset wasn't covered by terrorism insurance.
Even Moody's Investor's Service and Fitch Ratings recently downgraded billions of dollars in single-asset CMBS, citing terrorism insurance concerns. If this continued, it could limit a property owner's ability to finance a property or new development, causing real-estate activity to grind to a halt.
Following the Sept. 11 terrorist attacks, insurance companies warned that they may not be able to offer terrorism coverage without some kind of government backing. Or, if they did, coverage would be limited and premiums would skyrocket. In some cases, biological and chemical attacks have been excluded.
On Nov. 19, the Senate passed legislation that calls for the government to pay 90% of insured losses after companies pay a deductible. The president is expected to sign it into law early next week.
The National Association of Real Estate Investment Trusts was part of a coalition of 66 real-estate, transportation, entertainment and construction groups that lobbied hard for government legislation. "We were gratified and thankful" after learning the Senate had passed the legislation," said Steven Wechsler, president and chief executive of Nareit. The coalition said the legislation will "create a temporary backstop that will encourage insurance companies to offer comprehensive, affordable terrorism risk insurance to cover people and property."
With talk escalating about possible terrorist attacks in the wake of the recently unveiled Bin Laden tape, Mr. Wechsler said the legislation comes at a good time.
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