NEW YORK CITY—Add CMBS to the key aspects of commercial real estate that would be undermined by a Congressional failure to maintain the present level of the Terrorism Risk Insurance Program Reauthorization Act, which provides federal reinsurance for large-scale claims related to terrorism and which expires at year's end. So says Standard & Poor's in a new report, which says that although Congress is expected to reauthorize TRIPRA, it's possible that there will be significant changes, including scaled-back coverage.

“If history is any guide, CMBS credit and liquidity issues could develop if TRIPRA is not renewed or is cut back substantially,” writes Larry Kay, primary credit analyst at S&P. “Either could cause a property's insurance premium to jump, leading to declines in property net operating income and value.” He adds that the longer a cloud of uncertainty hangs over renewing TRIPRA, the greater the perceived risk of “unaffordable or unavailable insurance increases,” which could negatively affect property valuations.

Not only could a scaled-back or defunct TRIPRA potentially shrink a CMBS loan's underlying collateral value and triggering a negative credit event, liquidity issues could also develop, Kay writes. “This could arise if a borrower fails to maintain the required insurance coverage and the master servicer decides to force-place the insurance.”