Posted by Ben on May 15, 2007 at 12:40:22:
I agree strongly with Ray’s last comment. While I have not dealt directly with cell tower leases I have done some research and it is my understanding that they often contain escape clauses. They want to be able to get out of the lease if something changes, i.e. a tall building goes up in front of their tower reducing the effectiveness of it.
In this case your income could dry up overnight and will not be able to be replaced as the site is no longer attractive to any provider.
Cell Tower Income - Posted by Bob
Posted by Bob on May 14, 2007 at 15:27:28:
Ray, how do you handle cell tower income for an apartment building? Do you count it or not. In some of the buildings I’ve seen, it can be pretty substantial.
Re: Cell Tower Income - Posted by ray@lcorn
Posted by ray@lcorn on May 15, 2007 at 09:45:38:
Bob,
That’s an interesting wrinkle.
With most ancillary income, such as that from laundry and vending machines, the problem is in using the same cap rate as the rental income. Usually the valuation of such income is at such a high cap that its discounted altogether.
But a cell tower lease is typically long-term, includes a corporate guarantee, and has a provision for removal of the tower at the end of the lease. That’s a valuable asset, and could conceivably be sold separately from the building. I don’t know the going rate for tower leases, but I know it is a competitive market. My guess is the valuation would be close to ground lease rates (~5% to 6%) IF the terms are equal to a credit tenant lease.
Sooo… if the numbers on the deal will work without counting the income, the lease is pure profit and a source of upside if you were to sell it. If you do have to count the income to make the deal work, but can capitalize it at the rental income rate (say above 8%), then you still have some upside from the potential sale value.
All that said, don’t make any assumptions without analyzing the lease. If it is short-term, loaded with escape clauses, weak default terms, no removal provision and no guarantee, then in my mind none of the above would apply.
ray
Re: Cell Tower Income - Posted by Terry (Houson)
Posted by Terry (Houson) on May 19, 2007 at 21:13:07:
Ray,
This is Terry Wygal in Houston. We met at a Glazer KEnnedy speakers workshop.
Could you email me please? I have a question about the Dealmakers course.
Terry