9-11 Still Has Impact on New York's CRE Market

Two different litigation situations involving servicers on sticky wickets, brought about by post-9-11 developments, are moving along, with one having been resolved.

Litigation involving terrorism insurance, or the lack of it, on Four Times Square in Midtown Manhattan has been quietly settled, as a spokesman for the Durst Organization has confirmed, although he would not disclose the terms of the settlement.

A $430 million commercial mortgage on the property, the 47-story Conde Nast Building in New York's Times Square, was securitized into the commercial mortgage-backed securities market. Ken Ferraro, a CIGNA spokesman, would not talk about the terms of the settlement except to say that all the parties would bear their own litigation costs and that "satisfactory insurance is in place" on the property.

The litigation - initiated by the Durst Organization, the borrower on the mortgage, against LaSalle, the trustee on the CMBS securitization, Bank of New York, the servicer, and CIGNA, the special servicer on the loan - was being heard in the New York State Supreme Court. The Court in a decision earlier this year had held that the servicers could not declare Four Times Square in default under the mortgage and also that they could not use the lender's loan lock box account. A final decision on the case was awaited in about a year.

The outcome of the other case, involving GMACCM and Larry Silverstein, is not so clear. Mr. Silverstein, the New York City real estate developer who was thrust into center stage following the collapse of the World Trade Center towers on which he had bought a 99-year lease (partly financed with a $563 million mortgage loan from GMACCM), has received a major setback in his efforts to get an insurance payout of about $7.2 billion on the property.

The United States Court of Appeals for the Second Circuit has not bought Mr. Silverstein's argument that the terrorist attacks on the World Trade Center constitute two occurrences for insurance purposes and should lead to a $7.2 billion payout, based on insurance per occurrence of $3.6 billion. The case will now go to a jury, which will decide the matter.

Of the 24 insurers who had provided the insurance on the property, three who were responsible for about 3% of the coverage were specifically exempted from the two-occurrence argument since they had signed a "Wilprop" form that provided a specific definition of an insurable occurrence, under which the WTC attacks constitute one occurrence. And according to Swiss RE, one of the major insurers on the property, all of the insurers are governed by the Wilprop form, rather than a separate Travelers policy that was issued on Sept. 14 - after the attacks. Mr. Silverstein still remains optimistic though.

Howard J. Rubenstein, a Silverstein spokesman, said, "We are fully confident that a jury hearing all of the evidence will reject the insurers' attempts to avoid paying for the cost of rebuilding the World Trade Center." According to him, Swiss RE was provided a copy of the Travelers policy form on July 23, 2001, "three days before it finally agreed to participate in the coverage." And SCOR, the French insurer responsible for about 10% of the coverage, "was also provided a copy of the Travelers form before it bound", he said.

Mr. Silverstein proposes to use the insurance proceeds to rebuild at the WTC site and it is not clear how the funding for rebuilding will be raised if, as appears more likely now, Mr. Silverstein does not collect the insurance payout he is targeting. And what impact all this might have on the CMBS investors who had bought into the $563 million securitization of the GMACCM loan is not clear.

GMACCM has filed a case, in the Supreme Court of New York, against the Silverstein interests and the Port Authority of New York and New Jersey to protect the interests of the bondholders, in its capacity as servicer on the securitization. GMACCM is concerned that the business income claims submitted by the Silverstein interests and the uncertainty regarding the outcome of the insurance-related litigation put the bondholders at risk.

The servicer expects that the Court's recent adjournment on the case will give the defendants time to come up with "a proposal to resolve the dispute." According to reports in The New York Times, the Port Authority and Mr. Silverstein are seeking to negotiate a payoff of the GMACCM loan. A payoff on this loan, combined with the Port Authority's recent $140 million buyout of Westfield America's interest in the WTC retail space, would make for fewer interests, and resulting complications, in the process of rebuilding at the WTC site.

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