Telecom Equipment on the Leased Site
A cell-tower lease is more of a telecom transaction than a real estate one. Part of the value of a cell-tower lease to a telecom tenant is the investment the company has made in the site, including the construction cost of the tower and the antennas installed. A tenant will spend up to and possibly more than $100 per vertical foot on the construction of a cell tower, but this is only part of the cost. There's also the constant upgrading of actual telecom equipment, which can add up to an extremely significant capital investment.
A telecom tenant’s investment in a site is not only calculated by what it takes to develop it, but by what it would cost to decommission or remove the tower if the lease expires or is terminated. This cost varies not only on the tower but the cost to migrate the antennas to another location. In addition, a telecom tenant must engage a “cell tower on wheels,” or "COW," as a temporary substitute for the decommissioned tower, which can be extremely costly.
The bottom line is the greater the overall investment a telecom tenant has in a site or the more costly it will be to relocate it, the more valuable the corresponding lease will be. The trick is knowing how to accurately determine these costs.
Optimize Your Purchase or Sale of a Property
On review of many self-storage facility dispositions, a self-storage owner will often be better served to dispose the cell-tower lease separately. Why? The simple answer is the value of a cell-tower lease isn’t tied into the value of the real property but the utility of the site for telecom purposes. If a self-storage owner treats his cell-tower rent like everything else at the property, he may be severely undervaluing that asset.
That said, a self-storage owner must be careful to determine true value. If you decide to sell your cell-tower lease separately, don't base your sales price entirely on the rent you're receiving. Again, the value of a cell-tower lease lies in the value of the site for telecom purposes. You can have two cell-tower sites with exactly the same rent, in the same city, with the same tenant, and those leases can be drastically different based on utility, location or cost.
On the other hand, a self-storage buyer should also be careful how he values a property with a cell-tower lease. Many times, you see broker listings for self-storage sites stating they have a long-term cell-tower lease (20 to 30 years) garnering “X” in rent each month. What the buyer must understand is most cell-tower leases are structured with very pro-tenant termination clauses, essentially making them month-to-month contracts. There’s really no guarantee of how long rent revenue will be received via that asset. A buyer, just like a seller, should consider the factors listed above to determine the true value of the cell-tower lease that’s part of the transaction.
When considering the value of a cell-tower lease, keep these things in mind:
- Inaccurate valuation of a cell-tower lease could mean the loss of hundreds of thousands of dollars.
- The cell-tower lease value is tied to the utility of the site for telecom purposes, not the value of the real property on which the cell tower is located.
- A correct valuation of your cell-tower lease can be immensely beneficial, whether you’re faced with a possible an extension of your current lease, a proposed buyout of your lease, or the purchase or sale of a property with an existing cell-tower lease.
If you’re looking to optimize the value of a current cell-tower lease, it’s helpful to get counsel from someone familiar with the telecom industry, as only he will you truly know the value of that asset. If you, your broker or even your appraiser continue to rely on the traditional means of equating cell-tower lease value to that of real estate worth, you risk losing significant revenue. The telecom companies have dedicated industry experts valuing these assets on their side, shouldn’t you?
Hugh D. Odom is president of Vertical Consultants and Vertical Developments, telecommunications consulting firms that currently work with approximately 1,000 self-storage operations across North America to place telecommunications equipment and optimize existing telecommunications leases. For more information, call 615.385.2984; visit www.vertical-consultants.com or www.verticaldevelopments.com.