Cell Tower Lease Questions

[Sam Schrimsher]

Hello BP,

For folks who have any experience in cell tower leases. I have an opportunity to purchase significant acerage with several cell towers on it. The rents on the cell towers are below market and locked up that way until 2030, at which point I'll try and get them up to market and I believe I've got a good chance at success as the towers have already been built, and they are already on the highest piece of land in the area. I was initially going to purchase the acerage because it had  some lots on it I could have sold off to try and pull my investment back out, then just collecting rent from the towers without any money tied up in the deal. 

I've recently discovered that several key lots I was counting on are actually in a designated wetland and basically worthless (the remainder of the property is very steep and could really only be used for recreation, maybe a couple hill side homes but nothing substantial. So rather than purchase a bunch of unusable land and paying property taxes on that I would like to see if the owner will sell just the cell tower leases to me. 

1) Can I own those leases and not the land? 

2) If I do that are the cell companies likely to want to continue on with us after the lease expires?

3) Is there a formula for calculating the value of a cell tower lease based on the rental income of the towers? I'm thinking it probably has to be a higher return to mitigate the risk as there is no guarantee against cell company mergers or the cell company moving to another location. Thoughts on this?

[Greg Scharlemann]

@Sam Schrimsher There is an entire industry out there that does this. They offer 50+ year leases to buy the rights to the cell tower leases/cashflow and any additional leases they can do (I've seen this on roofs of commercial buildings and have to imagine it happens on land plays as well). In the Bay area they offer pricing based on a 6-6.5 cap rate and they are taking all of the risk. Meaning if the tower is Sprint tower and they merge with T-Mobile and shutdown that tower they still pay the landowner. Doesn't mean you can't do this just know the competition is out there.

[Greg Dickerson]

@Sam Schrimsher there are companies that buy cell tower leases and billboard leases all over the country.

Pricing depends on the land, the market and demand. There are consultants that will give an idea of the value of the lease but you need to lock up the purchase contract first so they do not go direct to the owner. 

It's a CAP rate play so end of the day it's all based on what you consider a good return on your cash. You can pay whatever works for you.

[Sam Schrimsher]

Thank you @Greg Scharlemann and @Greg Dickerson, very useful information!

Greg Scharlemann, when you say they offer 50+ year leases to buy the rights to the cell tower leases/cashflow. What are the mechanics of that? Does the company offering the 50+ year leases agree to pay the current building owner a certain rent amount for 50 years for the rights indefinitely? If so, I assume that 6-6.5 cap they offer to the building owner is significantly less than the rent the cell phone company was paying them so they can make a profit on the difference and mitigate their risk. Do I have that right?

If the land owner and I are able to agree on a price how do we lock up the deal? I'm assuming a real estate agent doesn't come into play and we would simply need an attorney who does contracts. Any advice on that?

[Greg Scharlemann]

@Sam Schrimsher the guys that by the revenue stream from the cell lease will offer a lump sum. As an example, let's say the cell tower pays $1,000/month or $12k/year and there's some term remaining on the lease. They will offer a buy out of the lease of say $200k (12,000/.06; e.g. 6 cap). They pay you 200k today and get whatever revenue the existing lease and renewals generate for the next 50 years. They also take a risk that the tower doesn't shutdown or not renew. It's kind of like a ground lease.

Cell tower owners have caught onto this and added language to their leases to give them the right to buy first or restrict deals like this. So check the lease to be sure there's no limiting language. There's also more value in 3% annual escalations vs 2% and cell towers have really been pushing for lower escalations.

If this is something you're considering engage a lawyer to help you lock it up with an option to purchase. Once under contract you can negotiate a sale of the cell tower income. Just know that any financing you may get will want a portion of whatever payment you get or will change how they underwrite the financing of the purchase.

[Sam Schrimsher]

Got it, thanks for the clarification on that @Greg Scharlemann!

[Greg Scharlemann]

@Sam Schrimsher it occurred to me you may want to know a few companies that buy the cell tower leases. Here are a few. I'm sure there are others.

Landmark dividend

Crown castle

Blackdot

Good luck!

[Sam Schrimsher]

Great info. to have, thanks again @Greg Scharlemann!

[Joe Norman]

Just wanted to jump in and say Thank You - this was great info!

[Roni E.]

First off cell leases do not sell for 6% Cap rate it is much higher. Usually what we would do is is own the land and generator land (very small parcel) and have an easement to enter upon the land for maintenance. I would look at the age of the tower, who are the tenants(carriers). Also I would research the tech. as with 5g things are changing.

[Brett Reall]

@Sam Schrimsher, I just joined BP, and saw your post. If you have't closed on this property yet, I'm in this industry and I can give you some further insight. @Greg Scharlemann gave you some great details also.
If you have any questions, feel free to reach out.