By Hugh D. Odom
Thousands of self-storage sites across North America contain some form of telecommunications equipment. The most prevalent situation is one in which a self-storage owner has allowed a telecom carrier (AT&T, Verizon, Sprint or Cricket) or a tower company (Crown Castle International, American Tower Corp., SBA Communications Corp. or Global Tower Partners) to lease a portion of his property for the placement of a cell tower.
Most property owners believe that once theyve signed lease with one of these companies, its true value is simply the rent check they receive each month. Actually, thats not at all the case. This article will provide insight to the true value of your cell-tower lease and guidance to help you take advantage of unrealized options and opportunities in relation to your telecom lease.
Are You Being Paid Correctly?
Thousands of property owners who are currently leasing property to a tower company are not being paid correctly. Yes, I said thousands. Why is this occurring? The simple answer is as much as a cell-tower lease is a real estate transaction, at its heart, its more of a telecommunications transaction.
Most landlords do not have the information they need to truly understand what their property is being used for and whether theyre being paid correctly by a tower company. In most cases, theres no clear description of whos actually using the leased area and whats really being used.
In reality, many property owners are being shortchanged when it comes to their lease. In the event a property owner does contact a tower company to discuss these matters, the company is usually reluctant to share any information regarding their use of the site, claiming it is proprietary.
Before you can truly optimize the value of your cell-tower leasethrough a lease extension, buyout or any type of renegotiationyou have to make sure youre being paid correctly. How do you determine this? Its a little tricky. As previously mentioned, the cell-tower or rooftop lease is more of a telecommunications transaction than a real estate one, so having your real estate attorney review the leaseunless he has experience with telecommunication leaseswill not provide you with what you need.
A more preferred method is to engage a company that not only has legal and real estate expertise but experience in the telecommunications industry, as this will need to be the focus on any tower- or rooftop-lease review. The tower companies have seasoned industry veterans on their side, and the only way to level the playing field is for you to have the same sort of representation. If you dont, it could end up costing you and, truthfully, this is what many tower companies rely on and how they profit.
Lease Extensions: What You Should Know
Many tower companies are now aggressively seeking extensions to their current leases. Self-storage owners, like other property owners, have been contacted out of the blue by tower companies who want to negotiate an extension to their existing agreements. Why are tower companies doing this if theres still time left on the original lease? The answer is simple: time and money.
A tower company needs time to better market the tower site for future subtenants it may be seeking out and, more important, to satisfy existing sublet commitments it may have already made. A tower company also benefits financially from an extension in that securing a tower site long-term calms the nerves of investors, acting as a form of guaranty that a sites revenue stream will not be interrupted. This especially holds true for those companies that are publically traded.
So how should you interpret a tower companys sales pitch? The following are some claims a company will make and what they really mean:
- "Due to the value of the long-term relationship we have with our property owners, we are willing to extend our lease with you. In reality, the tower company needs the extension more than you do.
"The current market rent in your area is X, and we will be willing to raise you current rent to that amount. The tower company is basing market rent solely on what its paying other landlords in the area. Its not taking in account your particular location, the revenue its collecting off the use of your site, and the cost it would incur if it were forced to relocate its tower.
"We are willing to allow the lease to continue to escalate as provided for under the current terms of the lease agreement. This is basically giving you something in which you already have a right. In some cases, the tower company is actually seeking to reduce a property owners annual rent escalations by having him agree to certain things like a consumer price index rent escalation.
"We are willing to pay you a signing bonus if you agree to extend the lease. While a signing bonus is great, its usually only a fraction of what should be offered for the property owners consent to an extension.
- "If you agree to an extension of your lease, youll be securing future payments of rent. In reality, the majority of all cell-tower leases have extremely liberal tenant-termination clauses. As a result, any extension agreed to by a property owner basically provides the tower company with a long-term commitment with no reciprocal agreement.
The decision you make today as it relates to an extension of your current lease may mean hundreds of thousands of dollars over the life of the lease. This is an important negotiation and should not be taken lightly. The decision should be based on the true value of the lease to the tower company and not solely the current rent is under the terms of the lease.
Optimizing a Buyout Offer
Self-storage owners with existing cell-tower leases are constantly contacted by third-party finance companies (Unison, AP Wireless Infrastructure Partners LLC, Landmark Dividend LLC, Wireless Capital Partners LLC, etc.) looking to purchase them. These companies often say they can increase the value of a cell-tower lease by placing additional antennas on the property. Don't be fooled. More than likely, it's just a false come-on, intended only to induce you to discuss the purchase of your lease.
What is their true motivation? They strictly want to buy your existing rent stream, nothing else. These companies buy rents at a discount and leave you with all the obligations of the lease. Be careful if you are approached by one of these companies, as theyve trained sales staff to work on getting the most while giving up the least.
Tower companies are also looking to buy out existing cell-tower leases and have made a dedicated effort to contact property owners with this option. A tower company will typically structure a lease buyout as a simple one-time payment for assigning the self-storage owners remaining rights under the lease and converting the current lease to a long-term or perpetual easement. The motivation is much the same as with a lease extension: A lease buyout allows a tower company to secure the time it needs at the site and secures revenue streams, which makes investors happy.
Why Consider a Buyout?
First, a lease buyout may present an opportunity to a self-storage owner to immediately realize the value of a cell-tower lease. In some cases, if structured correctly, this can be advantageous, as a properly structured buyout can far exceed the present value of the projected rent to be received over the life of the lease. A buyout can also be valuable because most existing cell-tower leases have favorable tenant-termination provisions, so an immediate realization of these rents can eliminate the risk of the revenue stream ceasing to exist in the future.
Second, buyouts can be a beneficial way to maximize the value of a self-storage owners property if hes looking to sell his facility. Again, if the buyout is crafted correctly, it can greatly exceed any value given to an existing cell-tower lease by a prospective self-storage buyer. Even based on the most favorable capitalization-rate valuation, an owner will more than likely receive significantly less for his cell-tower lease than if he disposed of it separately via a lease buyout transaction.
How do you determine if a buyout offer is fair? The only real way is to have an expert in the telecom industry review your lease and the existing tower on your property. True value of any buyout is not based on your current rent but the utility and value of your site to the party leasing it. Just like an extension, a buyout is an important negotiation that should be based on the true value of the lease as determined by multiple factors, including the actual lease and the physical site location and telecom equipment.
Making the Right Decision
There are numerous factors that contribute to the value of a cell-tower lease and site of which the average landowner is not aware. Unfortunately, cell-tower companies have profited and continue to profit from property owners not having this information.
Whether it be a review of your lease to ensure youre paid correctly, a lease extension or a lease buyout, its best to engage an outside party. A third-party consultant should be able to provide you with information about the real estate, legal, financial and telecommunications aspects of a cell-tower lease as well as work on your behalf to ensure youre getting the most while giving up the least in the deal.
Theres a fine art to negotiating a cell-tower lease, as you need to know when and how hard you can push a tower company. Unfortunately, when a self-storage owner is faced with a decision regarding a lease extension or buyout, he often guesses. Many owners dont even realize there are parties out there who can help them with these matters.
Dont guess when making a financial decision on your cell-tower leaseit could cost you hundreds of thousands of dollars over the life of the lease. The tower companies have experts on their side making the best deal for them. Shouldnt you have the same?
Hugh D. Odom is president of Vertical Consultants and Vertical Developments, consulting firms that work with approximately 1,000 self-storage facilities across North America to place telecommunications equipment on these properties and optimize existing telecommunications leases. For more information, call 615.385.2984; e-mail [email protected]; visit www.verticaldevelopments.com or www.vertical-consultants.com.