What would the value of a Cell tower be?

Question

I have a client who has a piece of property that has a 99 year triple net lease and generates currently $20K a year.   Amount of income can go up based upon more cell carriers using the cell tower.  Still, this is his base net income.  All other expenses are paid for by 100% tenant including property taxes.   Any thoughts on how much it could be worth?

Andy Collins · Answer

In the long run the real question is what will the demand for cell towers be in the future.  For several years the tower companies had more business than they could handle, I know I lease tower space for radio stations from time to time, you couldn't even get them to return your calls.

Consolidation is changing that, yes there is still demand for tower space, but its not growing the way it was.  If you have the only tower and only place to put a tower in an area,,your probable good, but  the technology is changing quickly, and the cell phones will end up all being Voice Over Internet Protocol in the not to distant future, which will mean they only need antennas for delivering internet service to your phone/device,,will that drive down the value of cell towers, who knows, but the person selling that tower may know

Joel Owens · Answer

Hi Darren,

I have listed a few of these before.

Darren have you reviewed the cell tower lease yet? That will show increases at what interval 5 or 10 years typically and by how much. Typically the lease has a short guaranteed term and then OPTIONS on each 5 year or 10 year block until reaching total number of years for the lease with primary and options.

I have not reviewed the lease but can almost guarantee it has options in it and not a true 99 year term that is not cancellable.

The problem with cell towers is a few.

The height of the tower is an issue. If it's smaller than other ones in the area carriers will jump off that tower to other ones with more coverage and reception. Also as some carriers merge with buy outs they will eliminate spots from other towers. For instance if T-Mobile and Verizon joined together they would have too many towers in one area etc.

There are companies that specifically buy out cell tower leases based on the CPI index. Sellers typically want 50% of the total lease value but cell tower buyers won't come close to that. The reason is technology is constantly changing and so are the towers. Nobody knows what the future holds with other technologies. They offered 10 then 15% and then 20%. I couldn't get them up to a point where the seller is comfortable. For the lease buyer they have to hedge risk versus return. They could pay 50% of a 99 year lease and only see 30 years of it and lose money. The benefit is the seller is getting 20 to 30% advanced value including options with cash today rather than waiting for years and years.

So if the total lease over 99 years is say 400,000 expect to get offers of up to 100,000 today. Some leases have really crappy provisions in them by these go betweens for the carriers.

Sometimes the cell lease buyer if they want the tower bad enough might buy the land parcel of course at a discount for a package deal if it is prime for development. If the land is anywhere else they do not want it. Sounds like you might do better to find a buyers wanting the land for development and the tower as  second consideration. You might can just separate out the cell tower on it's own land and the seller keeps that and sells the remaining land for development.

Hard to say without knowing the sellers plans.

Wayne Brooks · Answer

Use cap rate instead of ROI.  In other words, ignore financing. Plus, not likely a lender will lend against an "income stream" assuming the underlying property value is much lower.  The cell tower operator could BK tomorrow.

Jerry K. · Answer

Darren, I see now. The great thing about cell towers and billboards is that they usually don't count as taxable improvements in terms of real estate taxes - although sometimes there is a small structure alongside a cell tower that may be taxed. In my lien investing I sometimes run across vacant land that has either a billboard or cell tower and the county lists the parcel as "vacant" and having "no improvements".

In considering the value of the land one thing to check in the lease is about what the cell tower company will remove if the tower is taken down before the end of the 99 years.  Many leases specify only ground level and structures above ground.  That leaves foundations and possibly several feet of solid concrete below grade level that supported the tower.  That can be expensive for the landowner to remove for other development.

Bill Jacobsen · Answer

I don't use leverage unless it will enhance my return.  For instance if my cost of money is 6% then I want 3 percentage points higher for my return.  Thus I would want 9%.  The value would become $20,000/.09 or $222,222.  My return is now 18% on my money.  It all depends on how much profit you want.

Just my opinion.  Hope that helps.

Bill

Nick Foster · Answer

Hi Darren,

The lease may be for 99 years but if you review the termination language in the lease it likely says the tenant may terminate within 30 to 60 days. So the security of a long term tenant is not likely there which makes selling the cell tower lease attractive.

I would need to take a look at the lease to provide you an exact value however as others have mentioned above you are looking in the $200K+ range. There are many ways to structure the transaction.

Let me know if you have any further questions.

Best regards,

Nick Foster

Darren Sager · Answer

Great question @Jerry K. .  What I'm trying to figure out is what extra value the tower brings to the property.  My thoughts would be to approach it in a similar way that I did to signage revenue on buildings in NYC.   A building that was generating cash flow from signs, like those in Times Square, have a higher value than those that did not because of the extra revenue they generate.   So to answer your question it probably would be based upon the value of the lease.

Jerry K. · Answer

@Darren Sager  For my clarification, are you asking what the value of the property is or the value of the cell tower lease?  The property itself is probably still classified as vacant land - and would be valued as such.  The lease is valued separate from the property.  There are many consulting companies that do appraisals of the cell tower leases.  If you use one, look for real experience with cell tower valuation.

Darren Sager · Answer

Thanks for responding both @John Rooster & @Bill Jacobsen .  The lease parcel of land is in a very prime location next to a major highway.  The lease is actually signed by a separate company that put up the tower and then it leases space to companies like T-Mobile, etc.  They made the investment hence the long lease.

Doing some quick math, if one was looking to get a 10% ROI then a $200,000 value would actually produce close to a 20% ROI based upon putting down 25% on the $200,000 and financing the remaining 75%.  So, if a 10% ROI is what someone would like guaranteed  then is a $270,000 value fair?

Bill Jacobsen · Answer

I know nothing about cell tower investing.  I do know that an asset should be worth all the future cash flows discounted back to the present.

The question really is what is the proper discount rate?  It is defined as the weighted cost of capital or the required rate of return.

This seems like a relative risk free investment for the land owner.  Remember, I know nothing about the nature of the investment.

I would probably want, at least, a 10% return on my money.  Therefore the value would be $20,000/.10 or $200,000.

I will follow this thread to see what the answers from experts will be.

The best to you.

Bill

What would the value of a Cell tower be?

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