Steven Kazella:
Hello, and welcome to episode three of the Tower Genius podcast, my name is Steven Kazella, I’m one of the partners here at Tower Genius LLC, talking with my colleague and business partner, Kevin Donahue. How are you, Kevin?
Kevin Donohue:
Good, Steven.
Steven Kazella:
Good. I hear you loud and clear, wonderful.
Kevin Donohue:
Good.
Steven Kazella:
So, I’m down here in sunny Florida, Kevin is freezing his…
Kevin Donohue:
I’m in New York.
Steven Kazella:
And I’m down here in the lovely Gulf of Mexico.
We’re going to be talking all kinds of questions throughout these series of podcasts. Hopefully we’re going to give you some valuable information that you can use and benefit from. But here’s a very common question, and it has to do with, what is this offer worth? And this is a very typical type of call that we get multiple times a month, sometimes a multiple times a week. So, here’s a scenario, I’m a property owner, I was approached by a small tower company, they offered me $500 a month, they offered me seven percent rental escalations every term, and they actually offered me a 10 year initial term, and they slipped in 17 five year automatic renewals. Is this offer good, Kevin, is it bad, is it ugly? What can you tell me about it, what should I do?
Kevin Donohue:
It’s ugly. Bottom line is they’ll always break out comps, they’ll say that there’s six or seven other towers in the area that they’re paying this amount on. And just because other people took bad deals, doesn’t mean you should. So, the only way to really be able to figure out what a particular site is worth is to figure out what it’s worth to the network that they’re renting space to, these tower companies.
So, you really need to sit down and look at the area, find out where the other towers are, that a particular carrier, or carriers may be utilizing, figuring out what it’s covering, and basically, you’re looking to figure out this proposed site on your property, what piece of the puzzle is this covering? And so you need to take a look at that first off.
And then you have to look at surrounding properties, what zoning is, if there’s a large amount of properties available. If you own all thousand acres in this search ares, they really can’t go anywhere else. But if it’s three buildings sitting next door to you that are of equal height, they may have some other options. That’s why you really need to go to an expert, and it’s not just an expert in leasing value, because these other people will talk about percentages, or per square foot returns, and that’s all nonsense. You need to go to consultant that understand not only the real estate and zoning implications, and impact that it might have on your property, or your neighbors properties, but also you need somebody that can figure to the radio frequency side of it, what the site’s covering, how is it a piece of the puzzle? But when you’re looking at numbers, at seven percent every five year increase, you’re making significantly less than what CPI cost of living is.
Steven Kazella:
Even 10% for the initial term. A 10 year, seven percent for the initial 10 year term that’s not good.
Kevin Donohue:
Yeah, and we’re in high inflationary times right now, so while it was steady at three percent, or just under three percent, so the carriers will give you three percent, it worked out for everybody. But now times are a little more unsure from an economy standpoint, and you have the situation where these guys are trying to drive their annual increases down, well while you may be making more money 10 years down the road with their plan, you are still making less money in that tenth year in buying power, than what your site would have made the first year. If the CPI index is up five percent, or six percent, and they’re offering you seven percent every five years as an increase, it’s kind of crazy.
Also, nobody should encumber their property for that length of time. We always try to keep the numbers down to 25, 30 years max in a deal. Because you don’t know what you want to do with your property, or somebody else that may own that property down the road may have a different vision for it. So, nobody also will know what the value of these towers are down the road.
So, it’s best to have an expert look at it to figure all this stuff out for you.
Steven Kazella:
Kev, one thing, now this particular disruptive tower company, let’s just call it that, they have a certain strategy. These are very common type of proposals that we see, and almost without fail, what do you find when you look at, when you’re a property owner that has gotten an offer like this, what are you finding within spitting distance?
Kevin Donohue:
In many cases, you have some small tower companies that are… When you see these kind of offers, it’s usually one of two things. You have a small tower company that’s trying to get in the business, and grow, and they’re cutting their throats in the deals that they’re doing with the carriers to try to stimulate getting these sites given to them to go build for them, really dirt cheap prices. And they’re hoping to make their money on the second, third, and fourth carrier that may come on the site. But some of them also are, when they say that they’re disruptive, it’s a term I don’t like because usually, to me, when people in business say that they’re just trying to be disruptive, they’re not really coming up with a better mousetrap, better product, really what they’re doing is just trying to make themselves such a pain in the rear end that somebody comes and buys them out, and gets them out the industry.
Steven Kazella:
Disruptive is what my teachers in third and fourth grade would tell my parents regarding my behavior.
Kevin Donohue:
That doesn’t surprise me. So, some of them also could be parts of something that’s a lease optimization program. 10, 15 years ago, you still get the letters, but people sending out these letter basically threatening, saying that if you don’t lower the rate for AT&T or Verizon or whoever, that they’re going to look to relocate their site. And what they call them is lease optimization letters, but really what it is, is a lease rental reduction letter, trying to scare you into giving them that discount.
Well, I think some of these tower deals are just more sophisticated ways of trying to drive pricing down. We’ve seen sites where they’re established sites that are 25 years old, and the tower companies wish they were paying less on them, than what they are. They’re still making huge profits, but they’re wanting to try and drive the pricing down, and they didn’t like the terms that they were being given when they went for renewals with the landlords. So, what they were doing is they were going out, signing contracts with a landlord down the street for some ridiculously low amount, and telling that landlord that he had a chance at a site. In reality, they did not have any desire to move that site, they were just taking that lease that that landlord has signed, and went back to the original landlord, and said, “Look, we have a site down the street we can move to now.” So, really what they are is more of a lease optimization on somebody else’s property’s lease than really coming to your door, knocking on your door.
Steven Kazella:
Kevin, what do you think about some of these offers that you see, and when you take a look at some of the adjacent properties, you find an existing lattice tower or monopole with a couple carriers on it, and would these tower companies possibly be poaching any of those tenants off of there, is it possible?
Kevin Donahue:
They’re going to try, yeah. If they build a tower, if it’s not just a lease optimization to go back and force that landlord into some sort of rental reduction. If they end up building a tower, that’s their whole goal, they’re not going to make money off it.
Steven Kazella:
What’s the risk to the land owner that has this cell tower offer in their hand, when they’re faced with potentially one of these types of deals? What is the likelihood that they’ll actually wind up with a cell site on the property?
Kevin Donohue:
From what we’ve seen so far, probably less than 15%.
Steven Kazella:
So, the risk is you go out and you spend a boatload of money on an attorney, or even on a consultant without getting the proper guidance, and having the redundantly…. Basically, you want to build in some safety net into that agreement. So, that’s the kind of things that Kevin and I look at, we evaluate the site, and we peel down your back, and figure out what are they thinking, what’s their motivation, and why are they looking at your property? So, we are playing devil’s advocate trying to figure out how to best optimize your lease, and protect you, because they sure as heck aren’t going to tell you what to do.
Kevin Donohue:
A lot of cases, if they’re really hot over the site, they’re wiling to pay some sort of option fee that will at least compensate you for the legal work, or consultants that you brought on. But in some other cases, they’ll try and push it off, saying they have other options. And one of the techniques we came up with was we’d say to them, “Well, if you’re so sure you’re going to build the site here, and the landlord’s going to make money, then just put a provision in there, stating that if you don’t build the site within two or three years, whatever the option length is, the period is, that you’ll then compensate them. If you walk away from that property, you compensate them for that three, four, $5000, whatever it is.” And if they are not willing to do a deal like that, which only happens if they truly don’t build the site they’re telling you they’re going to build, then they really have no interest, they’re using this to try and push down the price of another site.
Steven Kazella:
So, what I tell property owners that I talk to every day, “Your cell tower lease, it’s got to be like an airplane that has two wings. You need two wings to fly, and it’s got to be balanced. If those wings aren’t balanced it’s going to crash and burn. So the same thing, you can get a great rental, great. But if you have lousy provisions it’s not worth a whole heck of a lot in the long run.”
Kevin Donohue:
And if you’re getting off on a bad foot, both parties with each other, not saying that there isn’t always parts of negotiations where maybe things get a little stressful or something, but if it’s going to be a constant fight on every aspect of every provision, things that everybody else in the industry gives as a standard, do you really want to live with this kind of tenant? Is this the kind of person you want to deal with, or entity that you want to deal with to encumber a piece of property that you own for a long period of time when you can’t even get along with them in the first couple of hours of dealing with each other.
Steven Kazella:
It’s kind of like getting married. And you have to look at it as a marriage, because you’re going to be connected to them for a long time.
I think that covered that question, and we’ll see you again on the next episode of the Tower Genius podcast. You can call us at 888-313-9750, like and subscribe, and we would look forward to speaking with you. Schedule a discovery call with one of our receptionists.
We’ll talk to you soon.
Kevin Donohue:
Thank you. Have a good evening.
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