By Hugh D. Odom
A prevalent question asked by self-storage owners who have a cell tower on their property is, What is the true value of my cell-tower lease? Unfortunately, there isnt a universal answer, as every property is unique, and every cell-tower location and lease has a distinct market value. Whether youre trying to calculate fair market rent on a current cell-tower lease or looking to buy or sell a property that has one, the true value is ultimately tied to the worth of the site to the cell-tower company.
A common misconception held by self-storage owners, real estate brokers and appraisers is a cell-tower lease is a real estate asset, when in reality, its a telecom asset. Consequently, in determining the value of a lease, you must evaluate the asset from the perspective of a telecom insider, not a real property owner, broker or appraiser.
How do you determine the value of a cell-tower lease? Following are some factors that come into play.
Utility of Leased Site
The most important factor in determining the value of a cell-tower lease is the utility of the site in question to the cell-tower tenant, which is founded on two variables: the importance of the site to a telecom carriers wireless network and the revenue being produced from the site. If the tenant is a wireless carrier (for example, AT&T, Verizon, Sprint, etc.), the first priority of the site is how it serves the needs of the wireless network in the immediate area. The secondary interest is any revenue the wireless carrier can derive from subleasing space on the tower to other similar wireless carriers.
Conversely, if youre leasing your land to a cell-tower company (for example, Crown Castle International, American Tower Corp., SBA Communications, etc.), the only interest of these tenants is subleasing space on the tower to wireless carriers. The more carriers they can lease to, the more valuable the site is. The problem for you is neither a wireless carrier nor a cell-tower company will ever disclose the true value of a cell-tower site to a landlord.
Location of Leased Site
If you're looking at factors such as population density or even ground elevation when attempting to determine the value of your site to a cell-tower tenant, you'll miss the mark. While these factors influence value, the major contributors to the worth of a cell-tower site and lease are the alternatives a telecom tenant has in the immediate area. These options are usually tied directly into local zoning and permitting restrictions.
While you might believe a cell-tower site in Salt Lake City, for example, could never be worth that of a similar site in Chicago, you'd be surprised. A Salt Lake City area in which a telecom tenant is restricted from relocating or placing antenna equipment on similar sites could have exceptional value. It could even have greater value than what a real estate broker or appraiser would estimate based on real property values. If you rely solely on property values to determine the worth of your cell-tower lease, you could be taking a costly misstep in the wrong direction.
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 tenants 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 isnt 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. Theres 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 thats 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 youre 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 youre looking to optimize the value of a current cell-tower lease, its 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, shouldnt 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.