A rapidly evolving connectivity frontier is shaping the future of cell tower lease sales and encouraging many commercial property owners who rent space to tower companies to sell their leases at values at the top of the market. Telecom carriers have considerably slowed their buildouts for 5G networks and are already preparing for 6G mobile networks, expected to roll out around 2024. Brokers are seeking to amend and renegotiate old cell tower leases in the face of predicted wireless infrastructure obsolescence and connectivity innovations, which may negate some physical infrastructure needs entirely.
The key to maximizing sale proceeds in this landscape is to secure landlord-friendly terms and ensure clarity in a new lease or renewal. Among other elements, building owners must insist on strong insurance indemnities and well-defined subordination, non-disturbance and attornment (SDNA) in the amended agreements.
But no landlord demand may be more important to future value than denying the tenant a right of first refusal to purchase the lease, says David Moore, CEO and principal of NAI Global Wireless, a Redlands, California-based national wireless real estate brokerage that represents landlords.
Cell tower leases in which tenants don’t have right of first refusal are more appealing to buyers, a group primarily made up of 13 organizations ranging from tower company operators to private equity firms, adds Amber Brandhagen, COO and principal of NAI Global Wireless. Today those buyers are paying 220 to 250 times monthly rent for cell tower leases — or the equivalent of a capitalization rate of around 5 percent — up from 135 times monthly rent nearly a decade ago, she says. If the tower company holds a right of first refusal, however, the value of that lease can drop by as much as 25 percent, notes Moore.
“We’re going to see a significant uptick in the sale of cell tower leases,” he declares. “But a right of first refusal is the kiss of death every time because buyers know that the tower companies are going to flex that right.” Hence, new contracts and renegotiated leases need to be built with this reality in mind.
Timely Cash
Since 2006, about 20 percent of the cell towers in the U.S. have been sold to third parties, Moore states, and it’s not hard to see why. Because tower leases often have terms with options of 20 to 40 years — and in some cases even 90 to 100 years — a sale can generate a generous chunk of cash. In this today’s market environment, that could prove quite timely.
For-profit building owners can reinvest the proceeds into another asset as part of a 1031 exchange, although executing such a deal is difficult in the current high-interest rate market marked by a bid-ask spread, Moore reports. But those sellers and their non-profit counterparts can also plow the cash into liquid money market accounts and other fixed-income securities that are currently yielding close to 5 percent.
Alternatively, owners can use the funds to renovate or expand their properties. Yet disposing of a cell tower lease may prove most valuable to property owners who have seen the value of their assets fall and have a loan coming due in the near term, he explains.
“In a lot of cases, property owners are going to have to bring cash to the table to refinance debt,” Moore adds. “Selling their tower lease is a way for owners to raise that cash.”
Downside Avoidance
What’s more, such a sale does not harm the lender’s collateral because cell tower tenants can typically terminate the leases at will, which effectively makes them month-to-month agreements, he points out. Transferring that risk to a different party is another reason that the sale of a cell tower lease makes sense for owners.
Additionally, Moore says, satellite-based internet access options (including the still-developing Starlink), have the capacity to connect people worldwide without any cell sites. Such a radical change in technology may come into play as the United States pursues its “Internet for All” program, providing $65 billion to expand high-speed internet access infrastructure. This effort may galvanize satellite-based internet services to connect low-population states with technology that may soon be more pragmatic and more flexible than building new physical cell towers.
This technical evolution is a consideration that property owners with cell tower leases should incorporate into their calculations, especially given the fact that Brandhagen expects prices for the agreements to retreat by early next year, if not sooner. Therefore, time is of the essence, Moore asserts.
“What’s the likelihood that the tower installation on your building’s roof is going to be there in five, 10, 15 or 20 years?” he asks. “There are massive changes afoot, and by selling your lease today, you’re essentially receiving years or even decades of prepaid rent.”
— By Joe Gose. This article was written in conjunction with NAI Global, a content partner of REBusinessOnline. For more articles from and news about NAI Global, click here.