"The last thing the owner wants is to have the lender show up to announce, 'Your note is coming due, and we're not going to renew it without full coverage of our lending dollars. If you can't come up with the insurance, you'll have to pay off the note'," suggests a report written by capital markets vice president Todd R. Smith and vice president of risk management Janice Ochenkowski.
Insurance premiums have risen from 40% to 500% in the wake of the Sept. 11 terrorist attacks, property owners related to the authors. Where it once took an owner two providers to cover an extremely valuable building, it now takes 20, according to the report. Rather than the four weeks it used to take one REIT to arrange insurance coverage, the process now takes four months.
A federal response is necessary, say Smith and Ochenkowski, and they suggest a model from the UK's Pool Reinsurance Co. Ltd. adopted in the wake of an Irish Republican Army bombing of a London building in 1993.
"Opportunistic capital" has entered the insurance market, according to the report, noting off-shore companies began offering quotes two months ago. However, those companies are offering too little coverage at too high a cost, according to Jones Lang LaSalle. For instance, property owners may have to pay up to $1 million for $100 million in coverage, even though they need to insure assets worth $1 billion.
"The limited overall capacity that insurers are willing to commit to terrorism policies means that, when one owner is able to secure adequate coverage, proportionately less remains available to others," according to the report.
Some lenders are weighing financing deals differently, according to Jones Lang LaSalle, ruling out high-profile trophy properties located in Central Business Districts such as Manhattan, but also considering if other potential mortgages would be on properties near potential targets or are rented to high-risk tenants such as federal agencies or embassies.
A group of 15 New York real estate companies recently met with Chicago-based Aon Corp. to explore setting up their own property insurance company.
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