Added Costs of Enhanced Security Part of Future Lease Negotiations

NEW YORK CITY-Eight AM real estate conferences at the Waldorf-Astoria didn’t use to require photo IDs for entry. That was pre-Sept. 11 and things have changed.

More than 250 professionals in attendance today at a GVA Williams-sponsored conference on “Security and the Effects of Terrorism on Real Estate and the Workplace” felt first-hand the new realities in public security that building owners must adapt in this post-terrorism climate.

From a real estate perspective, the primary issue will be who pays for the added expense of more secure buildings. “How to apportion the increased operating costs between landlord and tenant will be a factor of market dynamics, of who has more leverage in negotiations,” said Robert L. Freedman of GVA Williams, which sponsored this morning’s event. “Security will also become a human resources issue since the more sophisticated companies will balk at relocating to buildings they consider less secure.” Freedman said that building owners and tenants must wage a “war of vigilance in the nation’s workplace” without unduly compromising personal freedoms.

Companies must recognize a threat exists but not fear it, according to James A. Francis of Kroll Schiff & Associates, a New York City-based security firm. “Business recovery is a major aspect of what you need to think about,” he said. “Become advocates of security, a noble cause.” Francis said building owners must have sound perimeter controls to know who and what is coming into buildings: “Insurers will be looking more diligently at security in place to decide if a building is insurable.”

Insurance companies face payouts of $35 billion to $58 billion from the attacks, according to John F. Kelly of Frenkel & Co., an international insurance brokerage company, but the industry has $300 billion in capital including $200 billion on commercial side and will be able to pay the claims.

Looking ahead, reinsurers will exclude terrorism coverage in the future, and premiums are likely to escalate in all commercial lines of insurance, he said. “In real estate insurance coverage, all risk will not mean all risk,” Kelly commented. “Deductibles and waiting periods will be significantly increased. Lawyers will need to draft leases to accommodate insurance available today, and tenants should start the renewal process very early. Don’t be forced to make a decision on the final day of a lease.”

Recounting his firm’s experience as a former tenant in the World Trade Center, Joseph Philip Forte, a partner in the Manhattan-based law firm Thacher Proffitt & Wood, advised companies to keep copies of important documents handy. “We didn’t have a copy of our lease or checks to write,” he said. Companies should think through the location of redundant office space and foresee the unforeseeable. “Do not have backup offices at 1700 Pennsylvania Ave., which is what we have,” he warned. “Our building has been evacuated four times.”