Cell Tower Cap Rates

[Kathleen Hayes]

Hi all,

Wondering if there is any general "rule of thumb" for cell tower cap rates? I drive by them, as we all do, and wonder how they are valued. If anyone has input and/or experience I would be interested in what you have to say.

Thanks,
KH

 

[Deleted member 126639]

Hi all,

Wondering if there is any general "rule of thumb" for cell tower cap rates? I drive by them, as we all do, and wonder how they are valued. If anyone has input and/or experience I would be interested in what you have to say.

Thanks,
KH

I'm dealing with a reappraisal of a property that has cell towers on it. There is no consensus that I'm aware of.

The general rule is this however: real estate investors with millions of dollars to spare know that technology can change at any time. The risk rate you use cannot be similar to the location of land that in general will remain desirable for a long time to come.

 

[Pittsburgh Pete]

I'm dealing with a reappraisal of a property that has cell towers on it. There is no consensus that I'm aware of.

The general rule is this however: real estate investors with millions of dollars to spare know that technology can change at any time. The risk rate you use cannot be similar to the location of land that in general will remain desirable for a long time to come.

But might not that risk be mitigated by the lack of expenses? Income comes in with little or no muss and fuss. While the technology might change, wouldn't the desirable location for such towers remain a constant?

There might be consistency among such cap rates but I have limited experience with cell towers--can't comment.

 

[hastalavista]

There are brokers (large national and regional companies) that specialize in the packaging and selling of cell tower leases.
I've had some good luck using them as a resource when I've had an assignment with a CT lease.

There are a number of moving parts that need to be considered. Get as much information as you can about the lease before you call the brokers. Sometimes I'll get one of their reps who is in the field driving to a site; most seem very willing to talk to me while they are driving ("hands free" of course! :new_smile-l.

Good luck!!

 

[Deleted member 126639]

But might not that risk be mitigated by the lack of expenses? Income comes in with little or no muss and fuss. While the technology might change, wouldn't the desirable location for such towers remain a constant?

There might be consistency among such cap rates but I have limited experience with cell towers--can't comment.

The long-term trend is for many lower-power transmitters in urban and suburban areas, and satellite elsewhere. It hasn't worked out that way with respect to the latter, but that was one of the original goals.

What this means is that the priority of certain locations - like the high point of a town in the instance of the property I am working on now - become less important over time.

10 years ago, you still had analog cellphone service, which did have large radio towers. What if you were valuing such a tower in say 2000? And had capped that income into perpetuity? By 2010, such a tower would largely have been worthless.

But, I was unaware national brokers specialize in such things. If they don't agree, do what they say! They are the market, not me. I learned the above from some local investors however, so some are smart and know something about it.

 

[George Hatch]

Yeah, they've got brokers who specialize on those. In reading their commentary there are a lot of moving parts to those leases and some competing ideas on valuations, including the use of GRMs or existing lease term + the next 5-yr option for those leases that are structured that way.

Some carriers are perceived to be better bets as lessees than others, so that sometimes affects the values, too.

The contributory values of the leases when included with the remainder of the property interest is often very different than when sold off independent of the realty.

 

[Kathleen Hayes]

Interesting input...it seems that obsolescence is major factor. The GRM approach sounds interesting. Is the GRM methodology the same as say in a 204 family....it makes sense and is current...of course the important link is the data points. Has anybody utilized a GRM recently for a cell tower recently?

 

[sail143]

Technology is a factor. I know of a situation where, after investing the time and money over several years to gain approvals, the location was no longer needed. Tower has never been erected.

 

[George Hatch]

They're saying the two big factors are technology and business consolidation. A lease where the lessee's business is struggling isn't worth as much as one where the lessee is one of the big players.

It's one reason leases are commonly written as a series of 5yr options - any time an existing lease gets too far out in front of the market rents or the location becomes superfluous the lessee simply waits out the existing option term and calls it a day.


Another common thing the brokers were talking about is how often the lessees were violating the terms of their leases by entering into sublease arrangements with other carriers and siting additional antennae onsite without telling the lessor or passing those rents along. Some leases allow for the lessor to add more cell tenants and some don't, but most leases don't allow the lessee to make their own deals. one broker estimated that at almost 25% of all leases, which I find pretty hard to believe; then again, maybe that's so.


One common method of valuation the mortgage lenders like is simply tabulating the rents from the remainder of the current lease and the next 5 yr term and that's it - no discounting and no consideration of successive terms. As it happens, that method often results in about the same value as the contributory value of a cell lease (in this region) when it's sold with the realty.

Speaking of which, in this region properties with cell towers onsite often sell with the cell lease, so you can actually extract the contributory value from some of those transactions - call the broker and ask, or simply pull the cell income out of the operating income and cap the realty income at the prevailing rate. It's not pretty, but it's often fairly consistent. It's one method the mortgage lenders seem to really like.

Around here, many religious use properties have cell leases onsite - often more than one. Cell leases are almost always mentioned in listings when they're present.

I'm somewhat of two minds on this one because the cell brokers are saying one thing when they sell the leases separately, whereas the cell-goes-with-realty transactions often demonstrate a very different result.

 

[NachoPerito]

I haven't done cell towers individually, but they are often a part of a larger development. I recent researched an industrial comp sale where the cell lease was 5% of the income. In this case the buyer just lumped it into the income with the entire building with the same cap rate. I imagine if the cell tower lease is a larger part of the income the cap rate would be higher and possibly would require a DCF rather than a GRM or cap rate.