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Shopping Centers Today -> April 2002
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TERROR INSURANCE CRISIS HITS MOA
By Dave Bodamer
Efforts to persuade the U.S. government to underwrite commercial real estate terrorism insurance got a boost on news that one of the world’s most prominent malls faces a stark choice: obtain expensive coverage or risk default on its loan.
Simon Property Group, the majority owner of Mall of America, has been told by the mall’s lender, GMAC Commercial Mortgage, that its loan agreement requires terrorism coverage. In late February, Simon, which disputes the interpretation, secured a temporary restraining order from a Minneapolis court preventing GMAC from pulling the loan.
Such a policy as that recommended by GMAC would be prohibitively expensive, Simon claims, costing three times what the firm pays for property insurance on the center.
Industry officials said the dispute underscores the need for Congress to shield insurers from losses in future terror attacks in order to make terrorism coverage affordable.
“The developing legal dispute between Simon and GMAC highlights how the lack of federal terrorism insurance legislation is beginning to negatively affect our industry and the economy as a whole,” said Wayne Mehlman, ICSC’s director of economic issues and government relations. “Without a federal backstop to protect against future terrorist attacks, terrorism insurance will continue to be either unavailable or obtainable only at very high premiums with limited coverage.”
Mehlman added that the Mall of America case may be just the beginning of an industrywide crisis.
“As current insurance policies expire throughout the year, many shopping center owners and developers will find themselves in technical default on existing loans and/or unable to obtain new loans to purchase existing centers or develop future projects,” he said.
The issue goes beyond merely protecting owners and insurance carriers.
“Higher premiums are going to be passed from the property owner down to the retailer and eventually the customer,” said Rebecca Sullivan, ICSC’s vice president for government affairs.
Less than a week after Simon obtained its restraining order, real estate industry officials testified before Congress on the issue. In addition, the U.S. General Accounting Office issued a second study detailing how another terrorist attack could devastate the economy by wiping out healthy insurance companies and exposing property owners to uninsured losses if Congress does not step in and provide backing.
“The GAO report was really well written,” said Eric Schake, managing director, Marsh Real Estate Practice, a New York City-based risk analysis and advisory company, who supports government intervention. “Of course, I thought the one issued last October was well written too, but that didn’t go anywhere.”
It is important that members of Congress and the public not misinterpret the effort for government support, advocates of government underwriting say.
“Unfortunately, this is being viewed by some as a bailout of the insurance industry, but it’s really a capital market solvency issue,” Schake said. “It’s also really no different than when the government has stepped in before to address nuclear issues in the 1960s and riot assistance in the 1970s.”
Developers right now are not getting money from lenders because there is no way to protect the assets from a terrorist attack, he said.
“If lenders can’t protect assets, they are going to increase the interest rates, which is going to hurt jobs and construction,” Schake said. “The market could sort this all out, but at what cost? The government can step in to solidify it right now.”
 | Current Issue November 2008 |