If Terrain Perimeter cannot be selected in the Convert Polyline dialog, there are two possible reasons.
The first is that a Terrain Perimeter is already present, in which case you can simply delete it and then convert your imported polyline to replace it.
The other possibility is that the imported polyline is not completely closed. You can confirm this on General panel of its Polyline Specification dialog. An open polyline will read 'Not closed' under the Area heading, while a closed polyline will show a value. Only a closed polyline can be converted into a Terrain Perimeter.