By Thomas J. Bisacquino - 05/05/14 05:49 PM EDT
Last month’s video of al Qaeda terrorists gathering in Yemen is a solemn reminder that terrorists remain intent on attacking America’s homeland. Unfortunately, they continue to view commercial buildings where large numbers of people gather as primary targets for acts of mass destruction. While we’ve made immense strides in the area of infrastructure protection and homeland security, the threat is still real.
In addition to the lives of American citizens, these acts of terrorism threaten a crucial component of a strong economy and sustained job creation: the commercial real estate industry. But it too could be at risk unless Congress renews the Terrorism Risk Insurance Act (TRIA), which was one of the most innovative, bipartisan and successful legislative responses in the aftermath of 9/11. TRIA is critical to the health of the commercial real estate industry.
In fact, the NAIOP Research Foundation reported that new commercial real estate development contributed more than $303 billion to the U.S. GDP and supported nearly 2.5 million American jobs last year. Yet the industry’s ability to sustain these numbers, and more importantly, grow them, is dependent on the financing of new projects. That’s where TRIA comes in, because in today’s environment, you can’t build a new project without it.
Terrorism insurance is required by almost every bank and financier for developers to obtain credit. Yet without TRIA, insurance companies will certainly not offer policies to fulfill the market need. This would slam the brakes on a host of new projects, because building owners would then be forced to bear all of the financial risk of a terrorist attack. Billions of dollars in new investment and countless jobs would be lost.
In the days following 9/11 and before TRIA was enacted, it was nearly impossible to find any private sector source offering terrorism insurance coverage. And sure enough, the commercial real estate industry was stuck in neutral. Today’s environment is different, but the market dynamics for terrorism insurance are virtually the same, as is the economic disruption that would rip through our economy without a renewal of TRIA.
The clock is ticking. Although TRIA doesn’t expire until December, the economic effects will be felt much sooner. Members of Congress realize this, and in the past few weeks a bipartisan group of senators introduced legislation to extend TRIA for seven years, while a group of House members offered their own proposal. While there are differences in the plans, this still sends a positive signal to the market because many policies are now coming up for renewal before the outcome of the debate on extending TRIA is known.
Already this year, some policyholders have been notified that their terrorism coverage could be altered if the policy expires. The uncertainty raises the prospects that borrowers will be unable to maintain their current levels of insurance coverage, causing them to be in technical default under their loan agreements. This disruption in real estate markets will only serve to hamper any new commercial real estate development, as developers and investors wait until the smoke clears on TRIA. That is a drag on 2014 economic growth we can and should avoid.
TRIA is sound policy for the economy, but it is also good for taxpayers because it places responsibility for the first $100 million in aggregate losses on the insurance industry and private sector capital, not the U.S. Treasury. And even in the exceptional case when financial losses could exceed that threshold, the law includes payback mechanisms so the government can recoup amounts paid to insurers following a terrorist attack. Without this private capital security blanket, the only source for terrorist attack recovery funding would be a much more costly, taxpayer-funded emergency supplemental appropriations bill.
In fact, a new study by RAND’s Center for Catastrophic Risk Management and Compensation, found that eliminating TRIA could increase federal spending by as much as $7 billion in the event of another terrorist attack along the lines of 9/11 or a major natural disaster like Hurricane Katrina.
The bottom line is that TRIA has operated very successfully for more than 12 years, which is why the vast majority of academics, economists, industry leaders and others view it as a critical component of a strong and healthy economy. It helps the markets work in the face of the unpredictability of terrorist attacks and the resulting effects of making the risk of an attack nearly impossible for private insurers to price on their own. It provides a pool of private capital to protect taxpayers in the event of a terrorist attack.
And it enables America’s commercial sector to continue to provide avenues for job creation and economic growth. Congress needs to renew TRIA as soon as possible, and we look forward to working with lawmakers in both chambers to get this done.
Bisacquino is the president and CEO of NAIOP, the Commercial Real Estate Development Association.