LEASE BUYOUTS: 5 KEYS TO SUCCESS
Perhaps the hottest topic today in the wireless industry is cell site lease buyouts. Cell site leases are long-term real estate leases whereby the landlord grants a property right in the form of a lease and easements to the cell site tenant. The most common tenants are the large wireless carriers such as Verizon and AT&T and the large tower companies such SBA and Crown Castle. The basic structure of the lease is tenant pays landlord rent monthly for a long term. The tenant utiltizes the leased space for the installation of its facilities and connections to utilities.
Lease buyouts are structured as the purchase by a company of certain assets and pre-payment of the rent due to the landlord under the cell site lease. In most cases, the company making the offer is not the tenant. Offers are typically based on a multiple of the current rent paid to the landlord and may be impacted by several factors. For example, the more rent the landlord gets today means a higher buyout offer.
Landlords need to know five important facts in evaluating buyout offers.
- 1. What’s in our lease? Understanding the details of the original lease and subsequent lease amendments is a crucial initial step to a successful lease buyout. For example, it is common that the lease has been assigned from one tenant to another. There may also be significant changes to the original lease in amendments. Collecting and carefully reviewing all documentation regarding the lease must occur before proceeding with a lease buyout.
- 2. Is this a good financial decision? Suddenly receiving a large sum of money can certainly be a good thing. However, landlords must fully explore the impact of this in terms of accounting and taxes. In addition to these important factors, non-profit organizations such as churches must also consider the responsibility of trading an increasing revenue stream for a lump sum payment. Getting solid advice on such matters early in the process helps to fully analyze the buyout as a financial decision.
- 3. What asset(s) are we selling? Besides the price, this is perhaps the most important factor in a lease buyout. The landlord’s rights under the original lease include the right to receive an increasing rental payment during the lease term. However, most lease buyout companies seek to acquire more than the assignment of the rent. Landlords must be concerned about unknowingly selling additional property rights and selling rent assignments beyond the original lease term. Accurately determining the assets for sale impacts the price and structure of the transaction.
- 4. Is the price fair and reasonable? Properly calculating the value of cell site leases requires experience with negotiating and drafting such leases, expertise in contract law and real estate law, understanding of how lease buyouts work, and local knowledge about the landlord and cellAs discussed above, perhaps the most important factor in valuing the leases is determining what is actually being sold. In arriving at a fair price, it is advisable to seek multiple bids on terms acceptable to the landlord. Using an experienced attorney or other licensed professional can also help achieve better results since they are aware of other recent transactions establishing market pricing.
- 5. Who is the buyer? In some ways, all lease buyout companies are alike. They all want the same result and tend to deal with landlords similarly. An important initial distinction is whether the person representing the buyer is a broker. Brokers set up deals that are then passed along, for a fee, to the buyout company. It is advisable to work directly with the authorized in-house representatives of the firm buying the assets. Please note that the buyout firms are themselves intermediaries for the institutional investor funding the buyouts. However, they have direct contact with their investors and are not brokeringUnderstanding the buyout company’s history, goals, and tactics are useful tools in evaluating them. If all other aspects of a sale are equal, intangible factors may be the only differences. Landlords should work only with timely, professional and ethical buyer representatives.
Lease buyouts are typically portrayed by buyers as simple, quick and easy. Many buyer representatives are aggressive and dishonest. Some are just plain unethical. Success in negotiating and closing a cell site lease buyout requires carefully considering five key elements. Seeking professional representation pays dividends in these unique and sometime complex transactions.