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ORLANDO-The danger of not being able to finance new projects after Dec. 31 is posing a serious threat to commercial real estate developers. Major insurance carriers are warning policyholders their coverage against acts of terrorism will be cancelled, curtailed or charged a new sky-high premium.

“In the system as we know it now, if you can’t get terrorism insurance, you can’t build buildings,” Raymond T. O’Keefe, co-chair of the Real Estate Board of New York’s Economic Development Committee, tells GlobeSt.com Northeast Bureau Chief Glen Thompson.

“People are saying this could bring construction to a halt,” says O’Keefe. “This could be a tremendous block in real estate activity.” O’Keefe is also a regional managing director at Grubb & Ellis Co.

He says a scenario in which insurers refuse to provide terrorist coverage “will be a real problem, because in order to build buildings, you have to secure financing. And in order to secure financing, you have to have insurance.”

The problem could be resolved partly by having “new entities stepping up that would be willing to give additional insurance coverage to fill in the gap not filled by regular insurance carriers,” O’Keefe tells GlobeSt.com’s Thompson.

Another resolution would be for lenders to provide loans without terrorism coverage at stiff premium rates. “In either case, it increases the cost of the building,” O’Keefe says.

That situation will have a domino effect, the Grubb & Ellis executive says. Developers will factor their higher insurance rates into their rents. The tenants then will pass along their increased rents to clients or consumers who will pay more for the services or products. “It all gets passed onto consumers at the end of the day,” O’Keefe says.

Developers and property owners are urging the Congress to create a federally subsidized program that would allow the major insurance carriers to continue offering terrorism coverage to the real estate industry at rates acceptable by policyholders.

“I think the government could step in,” O’Keefe tells Thompson. “But then all citizens of the United States are paying for insurance. That’s a public policy decision whether it’s a proper use of public money.”

He says, “You can argue both sides, but there is precedent for that kind of thing.”

In Chicago, GlobeSt.com Midwest Bureau Chief Mark Ruda reports Douglas Crocker of Equity Residential Properties, the largest residential REIT in the country, says insurance rates were at astronomical levels, even before the Sept. 11 tragedies in New York and Washington, D.C.

Crocker told a recent gathering of the Gerald Fogelson Forum on Real Estate that terrorism coverage costs are shredding net operating income volume and reducing the value of some properties.

In Florida, for example, insurance costs were less than $70 per unit before Sept. 11, Crocker says. After the attacks, renewal premiums were citing $400 per unit. Nationwide, premiums rose to $85 per unit.

John M. Stone, chairman, John M. Stone Co., Dallas, agrees the new wave of terrorism insurance coverage will be expensive, possibly too expensive for some developers to absorb.

“You’re dealing with a bottomless pit,” Stone tells GlobeSt.com Southwest Bureau Chief Connie Gore. “You don’t know the extent of the damage or the re-occurrence.”

Another Southwest real estate executive, Mark Baldwin, tells Gore terrorist insurance riders haven’t become an issue with the deals now on his lending table.

“However, I can see it becoming an obstacle when our work involves high-profile trophy assets,” he says. Baldwin is founder/managing director, capital markets group, Henry S. Miller Commercial, Dallas. “If lenders decide they must have terrorist coverage and insurance companies won’t provide it, federal intervention may be necessary.”

In Florida, George D. Livingston, founder/president, Realvest Partners Inc., Maitland, FL sees the insurance industry’s ultimatum to the real estate industry on terrorist coverage as a pure marketing play.

“The insurance companies see this as an opportunity to push margins and profits up,” Livingston tells GlobeSt.com. “They are now positioning for advantage and not sure how to price it.”

But the developer doesn’t think insurance companies will stop writing terrorism coverage. “I believe that in the end, they will write it,” says Livingston, a longtime committee member of FIABCI, the international corporate real estate organization based in Paris.

However, if the carriers follow through on their threat to stop writing terrorism coverage altogether, “it will affect deals,” either pending or in the near future, Livingston tells GlobeSt.com.

How the insurance firms will structure their terrorism coverage premiums is “too early to say,” the developer says. “My guess is that everyone will adjust and it will be business as usual.”

Livingston says the terrorism coverage topic is “mostly a lender issue.” But “the perceived risk (to developers and owners) will matter” because they will wonder if they are “a likely target or not.”

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