Are Cell Tower Leases in Your Sight?

Cellular carriers are quietly rolling out a fifth-generation network that will boost internet speeds, ensure seamless coverage for artificial intelligence and self-driving cars, and create opportunities and complexities for commercial real estate practitioners.

G-Force Speeds

The fifth generation of connectivity will offer propulsive internet speeds to support smart cities, homes, and cars and serve high-demand markets such as stadiums and dense metropolitan areas. The current 4G network requires an hour to download a short HD movie; the 5G network will download a full HD movie in a matter of seconds, reports the website Gizmodo.

There are approximately 225,000 cell towers (think Eiffel Tower–like structures on hills) shared by multiple cellular carriers in the United States. Cellular densification arising from the 5G network is expected to grow at a compound annual rate of 36 percent, resulting in 8.5 million small-cell sites (antenna equipment used to transmit cell phone signals) by 2025, according to Rethink Technology Research. The 5G network hardware stealthily blends into surroundings as each small-cell device, varying in size from the dimensions of a bread box to 100 feet in height, extends network coverage by a quarter of a mile. During this time, 2,000 to 8,000 new cell towers will continue to be erected annually, says Ken Schmidt, president of Steel in the Air Inc., a Baldwinsville, N.Y.-based cell tower lease consulting company. As commercial brokers increasingly encounter property with a cell site or tower, here are several key issues to keep in mind that may affect potential transactions.

• Cellular carriers created and dictate the terms of this market, aided by early termination clauses and a lack of transparency, so property buyers should never assume they will be able to obtain ownership or leasing rights to those devices located on property they are interested in.
• Cell tower leases are complex and beyond the scope of most real estate attorneys; consequently, you and your client may be best served by cell tower lease consultants who can assist with valuation.
• The chances that you can contact a cellular carrier and net a cell tower lease for a client are almost nil.

They’ll Call You

The creation of a new cell tower nearly always comes from carriers following a critical mass of complaints of dropped calls. They will farm out the tower site acquisition to a third party, explains Steve Kazella, managing partner with Tower Genius LLC, a wireless leasing consulting firm based in Lewiston, Idaho. “If a broker has a property in a sweet spot—a 10-acre horse property with lousy reception, a hill, and an access road—it could be an ideal location for a cell tower,” and a broker might contact a carrier. Otherwise, forget about it. “Property owners have a 1 in 10,000 chance of getting” a cell tower. Similarly, only 10 percent of small cells will be placed on private property, as carriers have opted for the path of least resistance, preferring to place the devices in the public right of way such as highway overpasses and light poles. “Carriers are cutting deals with utility companies or municipalities that control, for example, 5,000 municipal street lights and stringing up small cells like Christmas lights,” says Kazella. “People will benefit, but probably not residential or commercial property owners.”

It’s Complicated

“A property with a cell tower is really two properties—the real estate and the cell tower lease,” says James Kennedy, CEO and founder of SteepSteel, a company based in The Woodlands, Texas, that is at the forefront of developing an MLS-like cell tower marketplace. “If you are selling properties with cell tower leases, you need to really understand how these leases are valued.” According to Kennedy, brokers either list these properties too high or too little, because they do not know how to value them collectively. Brokers may throw the cell tower lease in or include it at a discount or, conversely, overestimate its value.

“Commercial brokers need to understand that these leases can be sold independently of the real estate, so you can keep your property and sell the lease.” This process, called lease stripping, can sometimes reduce a property’s value and restrict a property’s use for decades, Kennedy explains. Furthermore, tucked in all cell tower and small-cell leases is what he calls “a dirty secret.” According to Kennedy, “All leases have early termination options, and carriers can cancel with little notice and without penalty.”

Steel in the Air’s Schmidt, who is also a lawyer, agrees: “There is an entire cottage industry that has grown up around monetizing these leases.” According to Schmidt, lease buyout companies will buy leases and pay 10 to 15 years of rent up front in order to collect the rent going forward for a period of 30 or 50 years, thereby decreasing a property’s value. A new owner may have a building with a cell site or land with a tower, but without the revenue. He recommends that whenever brokers look at a property with a cell tower, they should ask, “Are you still receiving revenue?” Prospective buyers should ask to see recent rent checks, because the sale of a lease is not typically recorded, he explains. The sale of the lease may be an assignment of the rights to receive the revenue or may be acquired via an easement.

Still, opportunity exists, says Schmidt. For instance, “When clients have purchased a property in foreclosure with a cell tower lease, the lease can be voided and renegotiated; if a lease is set to expire, there’s an opportunity to renegotiate and revalue the lease.”

Just how lucrative are these leases? SteepSteel’s Kennedy says, “They are all over the map, from $50 per month to $20,000–plus per month” in rent. The typical macro cell lease in Steel in the Air’s database averages $1,300 per month, while small cell leases typically garner less, about $300 to $400 per month, adds Schmidt. Given the modest, even paltry, revenue stream from small cell leases, Schmidt notes that some potential hosts, like big-box stores, have decided they don’t want to tie up the property for 25 years and they don’t want small cells on their rooftops.

1031 Exit Plan

One negative prediction about the industry may actually hold some promising opportunities for commercial brokers to help clients. Tower Genius’ Kazella, a former site acquisition consultant for three major carriers, believes cell tower rents will decrease as much as 50 percent in metropolitan areas when small cell deployment reaches critical mass. Carriers can place five or six small-cell sites around an existing macro site, giving them enough leverage to force rent concessions by threatening to decommission the macro site, he notes, in conjunction with early termination clauses. Kazella says those companies that monetize these leases might provide an exit strategy, adding that the window to sell these leases at top dollar will close in five years and recommending that commercial brokers help their clients sell their leases and convert the sales into 1031 like-kind exchange properties. “If brokers can help their clients monetize these leases into brick and mortar, they’ll have done their clients a huge service.”

SteepSteel’s Kennedy agrees that a 1031 is an option, after conferring with a tax professional, in some instances. He also anticipates rents will drop significantly if carriers’ legislatively subsidized small-cell pricing continues to be forced on municipalities unabated, given the overall lack of transparency in the cell tower lease market. “This is a fragmented marketplace, and cell carriers rely on this to strike gold,” Kennedy says.