Many owners and operators have fallen in love with an unexpected source of revenue at their self-storage facilities: a cell tower. Once it’s up and running on your property, it may seem like easy street. Getting there, though, can be a different story.
Assuming you can entice a cell-tower company to take interest in your property, the real challenge becomes carefully negotiating the terms and conditions of an agreement before you sign a long-term commitment. Bear in mind you should not skimp on professional advice. This two-part article simply provides an overview of the related issues my clients have faced and addressed over the years.
Part I, below, discusses leases, options to leases, automatic renewals, cooperation, land leased, involved parties, terms of rental and interference of property. Part II (found in next month’s issue) will focus on issues of utilities, expansion, equipment renewal, fencing, antenna repairs, access, real estate taxes, covenants and warranties, right to assign and, finally, tips to find a cell-tower company to work with in the first place.
Lease vs. Option to Lease
Make sure you understand the difference between a “lease” and “option for a lease,” the latter of which means that for a small fee, the cell-phone company has the right to enter into a lease agreement with you, should it choose to do so. The option agreement describes lease terms and conditions, but it gives the cell company the ability to waver on whether it will build on the site. Should the company decline to actually erect a tower, you are only entitled to the option fee.
While an option fee may sound like simple, free money, the land is encumbered for the life of the option, even if the cell company does not build. An encumbrance may affect your ability to sell, lease other parts of the property, refinance, etc., so you should enter into an option cautiously.
Options and Automatic Renewals
Watch the length of the option and any automatic renewals that could hold the land “hostage” for a long time. These options are usually exercisable at the cell company’s discretion. Many tests must be conducted to determine whether the cell lease is feasible before the company would enter a full-fledged agreement.
Some of these determinations are innocuous, such as a clear signal to the area for phone service, utility easements, zoning, etc. Some issues are more contentious, such as an environmental survey. This is a bigger problem because if the cell company unearths an environmental concern, you have agreed in the lease option to remove the hazard for a tower to be built. This can be expensive.
On the other hand, a good cell-tower rental can quickly earn your money back. The bigger problem might be in the case of the cell company notifying you of a hazardous condition and then declining to build on the site. Once you have knowledge of the hazard, you must remediate it before you can sell or refinance the property at any time.
Many of these options/leases state you will “cooperate” on a wide variety of issues surrounding installation of the tower, but make sure you are comfortable with what the term “cooperation” means. Going to one zoning meeting may not be a large burden, but going through an entire zoning lawsuit with your company as one of the named parties may be expensive and time-consuming. You may want to clearly define what cooperation means in the option.
If an option ever turns into a lease, understand the amount of land you are really renting. For example, a lease may be for 2,500 square feet of land, but may actually consume a lot more space if the square footage is for the fenced area around the footprint of the tower and control building. You may also be granting an easement for unimpeded 24/7 gate access to the tower and turnaround space for service trucks.
Thus, while you may be leasing 2,500 square feet, the actual amount of space or land you have to leave open and available for the cell tower may be much more. Remember that certain easements can reduce the property’s value if they encumber the space and restrict it from other planned uses. You could unknowingly diminish a future sale price should you decide to sell.
Make sure the names of the parties to the contract are correct. First, ensure the rightful owner is properly named as the entity that owns the self-storage facility. If you have an entity, make sure the option/lease is with the entity. If you are managing for someone, make sure the ownership is the actual named lessor.
Also notice the name of the company with which you are doing business. Cell companies often have their real estate leases in separate, for lack of a better term, “shell” entities, which are not the actual cell-phone providers. Don’t assume deep pockets exist to pay if you ever have to enforce the lease. Even if you’re dealing directly with a recognizable cell company, remember these companies frequently merge and divest themselves of assets as well as change names.
Further, many of these lease/options allow the right to transfer the lease to another entity. So if the cell company really wants to avoid responsibility for the lease, it can assign or transfer it to an entity that allows it to “dump” the tower, and you may be left holding the bag.
Term of Rental
Options that turn into leases are generally for three 10-year terms, or a five-year term with four five-year renewals and stepped-up increases in rent. Because of the expense to build and locate a tower, options will automatically renew at the cell-phone company’s sole discretion. You can’t simply terminate the lease at the end of the first five-year term; the cell company will have the right to be there for 30 years.
Typically, I see inconclusive language about what happens to the lease at the conclusion of a term. For example, the lease may go month-to-month, without a defined rent amount. If you are entering one of these agreements, clarify end-of-term language so you know what to expect or can provide that conclusive information to persons buying or refinancing the property.
Interference of Property
You’ll usually find two sections about interference in every cell-tower lease. One promises the cell tower will not interfere with any of your existing tenants’ businesses. Cell-tower interference is not normally a large issue with current customers, unless you have other cell towers. If you do, make certain this language deals appropriately with any interference, because you most likely have a penalty clause in your other cell-tower lease binding you to responsibility. This segues perfectly into the second interference clause.
The bigger interference clause implies you, as operator/owner, will not allow anyone on or in the property to conflict with the cell tower once it is built. This mostly deals with the interference of signal. Unless you’re an engineer, it may be difficult to determine causes of interference. Provisions in the agreement may give you a certain number of hours to rectify the problem or be subject to a per-day penalty. Failure to comply could lead to termination of the lease at the cell company’s discretion.
You need to build into your agreement a reasonable amount of time to detect what is causing the interference and correct it before incurring penalty, or the right to terminate the lease should come into play. You may also want to negotiate a cooperation clause with the cell-phone company to have its specialist assist in determining the source of the interference. These companies often have the means to determine interference more expediently than your resources may allow.
Next month, I’ll continue this article on cell-tower leases and self-storage. As stated earlier, I’ll address the issues of utilities, expansion, equipment renewal, fencing, antenna repair, access, real estate taxes, covenants and warranties, right to assign and, finally, tips for attracting the interest of a cell-tower company.
This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.
Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati. He primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail firstname.lastname@example.org.