By Hugh D. Odom
There are thousands of cell-tower and rooftop leases on self-storage properties throughout North America, but how many of these leases are smart? What does this mean? The answer is pretty simple, but for some reason, it has been ignored by self-storage companies of all types and sizes until now.
A smart cell-tower lease is one that looks beyond the immediate future and allows for a structure that will maximize the value of the lease, not only on day one, but throughout the entire term. At the same time, it minimizes the negative impact the agreement can have on a self-storage facility's development, disposition or even financing.
The Lease Value
So why is it important to have a smart cell-tower lease when it comes to lease value? The first question almost every self-storage owner asks when it comes to a new cell-tower lease or a lease extension is how much the rent should be. However, most of them are focusing on the amount the rent should be on day one rather than how to construct a lease that gives them value throughout its entirety, which can be upward of 30 years.
Self-storage owners rely on annual or renewal term-rent escalators to maintain lease value throughout its term. However, all these escalators really do is keep your lease on track with inflation, which means at the end of the lease, youre basically being paid the same amount you were being paid on day one.
The cell-tower companies have done a masterful job of getting property owners to agree to lease terms that are almost a fixed expense while giving themselves the ability to increase the profitability of a cell-tower site by adding subtenants or upgrading it with new technology. Simply put, the cell tower on your property could be the most valuable in your city, state or even the country and you wouldnt see one more dime over the term of the lease than what you originally agreed. If you want evidence, look at the numbers, they dont lie.
In 2012, the largest tower companies averaged more than $2 billion in revenue. This is impressive, but whats more remarkable is the extreme profit margin from this revenue. The tower companies continue to rely on property owners entering or extending leases based not only on incorrect or outdated methods of determining initial rent but, more important, agreeing to a structure that will ensure the tower companies' continual profit growth.
A Bigger Paycheck
How do you make sure you have a smart cell-tower lease when it comes to value? The answer is simple but can be difficult to implement if youre not familiar with the industry. You should have a lease that provides for rent to be determined based on value of the lease to the cell-tower company and not on the value of the property being leased.
A cell-tower lease should also be crafted to allow for re-entry points in the lease for the landlord, based on whos using your property and the utility they get from that use. You should see more rent every time a new subtenant enters the site and every time there's a site upgrade that allows the tenant or subtenant to get more value from the location.
The cell-tower companies rely on property owners viewing a cell-tower lease as a simple real estate transaction and not understanding its really a telecom transaction. That's where the value lies to them and, if youre smart, to you as well.
A Flexible Agreement
The second step in making sure you have a smart cell-tower lease is recognizing that as important as it is to get the most when it comes to rent, its just as important not to give up too much in return. Much like a good magic trick where the magician uses misdirection to perform the trick, a cell-tower company will rely on a property owner being focused on rent and not paying attention to the overall terms of the lease.
Remember, a typical cell-tower lease is binding on you, your company and your property for decades, with almost no way for you to terminate. Think about that for a moment. How many agreements will you or your company sign that will commit you to 30 or more years with no way for you to even renegotiate? Even if you enter into a bad long-term financing deal, you can refinance. Youre not so lucky with a cell-tower lease, so you better get it right the first time.
Most self-storage owners think the cell-tower lease only affects a small portion of their property and presume it cannot do them much harm. The truth is the terms of new leases and amendments to existing ones are now being structured in a manner that can have a negative impact on your property and business.
You need to review any agreement with an eye on the probabilities as well as the possibilities relating to your property and the lease. Again, were talking about an agreement thats going to last for decades. Are you 100 percent certain what your business or property is going to look like in five or 10 years, much less 30? You want a lease that provides flexibility to adapt to changing conditions.
This can include changes such as the need to relocate the cell tower, tower access or utility easements. It can mean a need to have liability, environmental, insurance and other sections of the lease that account for an ever-changing world. You want to make sure you don't enter an agreement that limits your ability to assign, sell or otherwise transfer the cell-tower lease or the parent parcel, in which the lease is a part. Believe it or not, a cell-tower lease can put you in breach of your current financing terms or limit a potential facility buyer in obtaining certain financing.
You can have a smart cell-tower lease, but you must realize that this is a telecom transaction, not a real estate transaction. The cell-tower companies want self-storage operators to look at these leases the same way they have since the late 1980s, and why not? It continues to be extremely profitable for them. A smart cell-tower lease is your way to start leveling the playing field between you and the cell-tower companies.
Hugh D. Odom is president of Vertical Consultants, a telecommunications-consulting firm currently working with approximately 1,200 self-storage facilities across North America to place telecommunications equipment and optimize existing leases. Mr. Odom has more than 15 years of legal and telecom experience, including representing AT&T as an attorney for more than 10 years. For more information, call 877.456.7552; visit www.vertical-consultants.com .