Real Estate Industry Awaits Vote on Terrorism Risk Act Extension
As of August 1, 2014, the U.S. House of Representatives stands divided on whether to extend the Terrorism Risk Insurance Act of 2002 (as amended, “TRIA”), which is set to expire on December 31, 2014. This split in the House exist, notwithstanding the overwhelming vote of the U.S. Senate (by a vote of 93 to 4) to reauthorize TRIA for a seven year extension with a few minor changes to the current law. TRIA has been widely credited with stabilizing the market for terrorism insurance and, consequently, the market for financing of commercial real estate following 9/11. Given the potential impact the expiration of TRIA may have on the real estate industry, there is little doubt that anxiety among developers, owners and lenders of commercial real estate will be heightened considerably should the House of Representatives fail to agree on an extension promptly following the return of congressional representatives from their August recess.
Following the September 11, 2001 terrorist attacks, developers and owners of properties, particularly in metropolitan areas, suddenly found their projects uninsurable (or only insurable at unaffordable rates) due to the immense costs that insurance companies could be potentially exposed to by a terrorist attack. At the same time, lenders insisted that borrowers maintain terrorism insurance, essentially making mortgage financing unavailable for many commercial properties. TRIA was approved in response to this inability of developers and owners to obtain terrorism insurance in the wake of this divergence in the insurance market. In general, the law was designed to keep a lid on commercial building owners’ insurance cost by mandating that the federal government be responsible for a large portion of the cost incurred in excess of $100 million as a result of a terrorist attack. With the federal government acting as a “back-stop” for the insurance industry under TRIA, insurance companies have been able to offer developers and owners lender-required terrorism insurance at economically viable rates.
For real estate owners, developers and lenders in metropolitan areas or near other terrorism targets (e.g., stadiums, transportation hubs, power plants), the impact of not having TRIA extended may be considerable. Without the extension, the market for terrorism insurance for these properties could come to a standstill, just as it did in 2001.
TRIA’S Uncertain Future
We anticipate that typical politics and legislative wrangling will need to play out before the bill extending TRIA, currently before the House, is put to a vote. The outcome remains uncertain, but as the clock ticks closer to December 31st without an extension, the real estate industry may no longer be able to ignore the potential expiration, and owners, developers and lenders may be forced to consider the impact of TRIA’s expiration in their underwriting and investment plans accordingly.
We will continue to monitor the situation and communicate any material developments that arise with respect to TRIA’s extension.
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