Commercial Servicer: Insurance Issues Cloud Aftermath Of September 11 Terrorist Attacks.(Brief Article)

The events of Sept. 11 have left their mark on the commercial real estate world, as on everything else. Of course the attack on the World Trade Center towers - targeting prime commercial real estate in New York City, a bastion of capitalism - left its mark literally. There are also some other consequences. GMAC Commercial Mortgage, the master servicer on the $563 million World Trade Center-backed bonds, has got caught up in a complicated situation. And going forward, there is some uncertainty regarding the availability of insurance against acts of terrorism for commercial real estate.

With the collapse of the World Trade Center towers, the CMBS bonds, of course, don't have any cash flow coming in. What complicates the situation for GMAC is that Larry Silverstein the developer who last year won a 99-year lease on the property is now involved in a legal imbroglio with the insurers of the property. He would prefer to view the attacks on the WTC towers as two separate incidents - two separate attacks by two separate planes - which would make for insurance proceeds of up to $7.2 billion. The insurers would prefer to view it as a single incident and hold down the payout to $3.6 billion. How does the servicer handle the interest payments on the CMBS bonds during the course of the potentially long drawn out legal wrangle?

Roy Chun, director of CMBS surveillance, Standard & Poor's, noted, "Probably the biggest issue is, because of the level of destruction, trying to coordinate the whole insurance package and trying to deal with the borrower and the insurer to try to straighten everything out. On a more long-term basis, it is really making a decision on what to do for the bondholders if they have not got insurance proceeds yet, they have to make a decision whether they should advance to the bondholders and they have to make a determination on advancing whether it is recoverable."

Mr. Chun said that GMAC has made the interest payments on the bonds for October. The payments were made through a "lock box" arrangement that was part of the initial CMBS securitization, supplemented by funds from Mr. Silverstein, according to Mr. Chun. So GMAC did not have to come up with advances, he said. To make future interest payments, if the insurance proceeds are not received in ...