Investment Analysis

Cell Tower Leases

Several factors determine the value of these investments.

Wireless carriers and tower companies own or manage cell towers on land leased from various property owners across the country. Property owners collect ancillary lease income, the amount of which depends on tower location, local population density, and nearby traffic counts, among other things.

Property owners may also sell their tower leases to tower companies, wireless carriers, private investors, or third-party lease buyout companies. The primary lease value factors include remaining lease duration, rent, and rent escalators. However, unlike typical commercial real estate leases, cell tower leases can actually increase in value during the last years of the final lease option term, due to the potential cost of tower deconstruction and relocation if the property owner does not renew the lease.

The quality of the tenant also significantly affects the lease’s value. Currently, Verizon, AT&T, Sprint, and T-Mobile are considered the top-tier wireless carriers and Crown Castle, American Tower, and SBA Communications, the top-tier tower companies. Leases with these companies are generally preferred in the market, as they are all publicly traded and considered safe investments.

Lease Basics

Most leases between property owners and tower companies or carriers are actually ground leases. Tower leases, which are usually subleases to the main ground lease, are between tower owners and carriers for space leased on a tower and may also include adjacent ground space.

In addition to determining rent and escalator clauses, cell tower ground leases also allocate responsibility for items such as government approvals, construction, equipment installation, permits, option periods, option fees, access, termination, assignability, removal, right of first refusal, revenue sharing, collocates, and option areas. They are often drafted with one or two six-month options periods, an initial five- to 10-year lease term, and multiple five-year lease option terms, extending the potential lease to a total term of 30 to 50 years or more.

Most cell tower ground leases also contain early cancellation provisions, designed to permit the lessee to terminate the lease with little notice or penalty. However, cell tower ground lease cancellation occurs infrequently, particularly when more than one tenant occupies a tower.

A cell tower ground lease almost always has a positive effect on a property’s value, but sometimes it reduces the property’s value. The value penalty typically occurs when the cell tower’s lease rights are sold to a third party. The penalty exists largely because the sale of the lease rights does not eliminate current or future landlord responsibilities to the tower tenant — and a cell tower with no income can reduce a property’s value.

Lease Buyout Considerations

When purchasing or selling a cell tower lease, the following considerations can significantly impact current or future lease value, and may also affect the value of the underlying real estate.

Right of First Refusal. A RoFR can affect the sale of the underlying property, lease cash flows, or both. A RoFR should be excluded from the future sale of the underlying real estate, or at least only apply to the future sale of the lease rights if they occur separate from the property.

Rent. In some locations, it may be difficult to determine appropriate rent for the tower location and configuration. Contacting local tower owners with similar configurations and locations may provide rent comparables. Web sites such as antennasearch.com or fcc.gov/cellsites provide tower and antenna locations, and a public records search or a title company can be used to locate owner information. In addition, cell tower lease consultants often have proprietary databases or industry contacts that can provide market rent estimates.

Periodic Escalators. A low rent escalator — usually considered less than 2 percent annually or 10 percent every five years — should be renegotiated at the earliest opportunity as a low escalator can adversely affect a cell tower lease value. It is usually advisable to negotiate consumer price index plus 1 percent with a guaranteed 3 percent minimum annually.

Collocation. Many cell towers have more than one tenant, increasing the tower owner’s profit margins through multiple rents. Collocation also provides a great opportunity for the property owner to receive a portion of the additional rents, assuming the lease includes a revenue sharing clause.

Revenue Sharing. Revenue sharing agreements vary considerably but generally provide a revenue split between the tower owner and the property owner for rents received from tower tenants; however, revenue sharing will ideally occur with one or more current tenants, not just future tenants “potentially” leasing additional ground or tower space.

Expansion Area Option. Carriers sometimes want to acquire additional land on an existing site. Generally speaking, expansions command the same rent on a price per square foot basis as the initial ground lease area, and they are often implemented in conjunction with new collocates. Property owners should seek an option fee for future expansion areas during initial lease negotiations.

Rooftop Antennas. Rooftop antennas historically have been decommissioned at a higher rate than towers, giving them a lower market value in relative terms.

Location. Limited worthwhile tower and rooftop locations exist, especially in high-density urban markets, where space is limited and signal and bandwidth demand is always increasing. Towers and antennas located adjacent to interstates, major intersections, and other high traffic roadways are considered premium locations.

Adjacent Towers. Close proximity of like-kind cell sites can reduce a tower’s desirability. Redundant towers often occur as a result of carrier or tower company mergers or acquisitions and are one of the primary causes of site or tower decommissioning.

Selling Term and Lease Rights. The duration of current and successor lease rights can range from a few years to perpetuity and the lease rights sold can vary greatly. When negotiating the sale of a cell tower lease it is important to consider the total duration of lease term sold and future property objectives, as the sale of cell tower lease rights can restrict a property unnecessarily if not carefully evaluated.

James Kennedy is a cell tower lease consultant to individuals, corporations, and municipalities. Contact him at support@celltowersecrets.com.

James Kennedy

James Kennedy is CEO of SteepSteel, LLC, in The Woodlands, Texas. Contact him at j.kennedy@steepsteel.com

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