Contributory Value for Cell Phone Towers

[Phoenix Ashwalker]

I'm working on a private report for a client to assist with the settlement of an estate. It includes a modest house with a total of 200+ acres of agricultural land, which is fine and nothing I haven't tackled before. However, one of the parcels is ~120 acres and includes a cell phone tower. While I've run into this a handful of times, in the past the tower's lease has been bought out and typically is considered a detriment to the property, rather than a benefit. In this case the tower still has an ongoing lease, with the potential for renewing the lease periodically.

My question then is how to properly discount the value of the tower's lease and potential income. For example, lets say the current lease has 5 years remaining, with a payout of $600 per month, and the option to renew for 3 additional 5 year periods. I don't believe I can simply take the current lease ($600 x 12 months x 5 years = $36,000) and give the tower a straight contributory value. And I certainly don't believe it would be correct to take the total potential payout over all renewal periods ($600 x 12 months x 20 years = $144,000).

Any advice? Anyone run into these often enough that they've come up with a way to give an accurate and fair value to them?

Thanks in advance!

 

[BRCJR]

NPV of the cash flow via DCFA.

 

[Ricky LaFleur]

Discounted cash flow as mentioned above. Difficult part might be finding a well-supported discount rate and outgoing cap rate for that type of property.

 

[Phoenix Ashwalker]

Discounted cash flow as mentioned above. Difficult part might be finding a well-supported discount rate and outgoing cap rate for that type of property.

That was my thought exactly.

I don't want to take the easy way out if it's not the correct way, but I know the client said she'd been approached by companies willing to buyer her out of the lease. Would be unreasonable for me to give the tower a contributory value equal to a lease buyout?

 

[Terrel L. Shields]

Cap rates were low. 5%-7% - Now higher due to interest rates now. I personally would use a sinking fund calculation since comparables you can get data on is scarce.

 

[Phoenix Ashwalker]

Cap rates were low. 5%-7% - Now higher due to interest rates now. I personally would use a sinking fund calculation since comparables you can get data on is scarce.
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Would this really be the best method? I've done some preliminary research, which included a phone call to a company who installs and manages cell phone towers. The person I talked to stated that while they may end their contracts due to various reasons, it's highly unlikely due to the high cost required to install a new tower elsewhere which is ultimately not in their best interest. He also stated that a few years prior to the end of the entire initial contract (say 17-years into a 20-year lease), they typically begin renegotiation with the landowner to either sign a new lease or pursue a buyout and obtain a perpetual easement to their equipment.

I'm not super familiar with Hoskold's Premise, but it looks like its typically used with things like mines, which will inevitably become depleted and return 0 value. In the case with a cell phone tower, unless towers become obsolete at some point in the future (totally possible, but unlikely anytime soon), it seems like it holds the potential to generate either monthly income or have the potential for a lump sum buyout.

This brings up the question then of how many years would I even use to calculate a DCF? If there is no foreseeable end to a lease, and the cell tower companies' best interest is to continue paying on a lease and continue renewing a lease, there has to be some reasonable period of time before it becomes obscene to continue granting value to future income. Additionally, would the potential full priced buyout also be included on top of the DCF?

Lastly, and I may be way off, but I want to double check. Is it possible for me to calculate a specific cap rate for this scenario based on the income generated by the tower divided by the value of the land the cell tower easement occupies? i.e., $600 x 12 = $7,200 (NOI)/ $30,000 (the approximate market value of 5 acres) = 0.24

Now, after all this is said and done, if the DCF of the cell tower comes out to be, let's say $25,000, or even $50,000; However, the homeowner says the company has approached them with a $80,000 - $100,000 offer to buy the lease, wouldn't the highest and best (most profitable) use of the tower be selling the lease for a lump sum, and simply give it the contributory value of the buyout?

Thanks for the input so far guys, I really appreciate it. If nothing else its getting my head out of the typical residential box and making me think harder.

 

[Phoenix Ashwalker]

Ok, so I've been doing some more digging and noodling this one around, and again I'm just hoping to rebound some ideas off the community here to see if I'm on track, or way off base and not taking something into consideration.

1). If I recall correct the only essential difference between NPV and DCF is the NPV subtracts an initial cash investment, whereas DCF does not. Now, I could possibly make the argument that the ~5 acres given to the tower's easement is an investment and subtract the $500 per year the acreage could have earned if it was leased to a farmer. But for the sake of this argument, I'm going to consider NPV and DCF the same.

2). From what I can tell you can use a capitalization rate as the discount rate in the NPV formula, if the future income is not expected to grow. Since in my case the income generated by the tower is a constant, then the two rates should be interchangeable.

3). To develop the cap rate, I can take the NOI / market value. Or annual income generated by the lease / estimated value of 5 acres the tower's easement occupies, which is $7,200 / $30,000 = 0.24

4). To determine the number of years that may be appropriate, I could make the argument that the average length of home ownership in the US is 13.2 years (13 rounded).

5). To determine the NPV value I can take the:
Initial investment of $0 (or possibly $6,500 = $500 x 13 years, which is what the 5 acres could have generated under a farming lease.
Discount rate of 24%
13 Years of cash flow
And I get $21,669 to $28,169 depending on the initial investment.

Lastly however, as I was asking in my last post. If the owner maintains he option to the lease as a lump sum to the tower management company and grant them a perpetual easement to the equipment for say $80,000 to $100,000, or shoot even $50,000, wouldn't that fall into the realm of highest and best use? Based on the tower's current NPV vs the lump sum payout, the most profitable option would easily be the payout.

 

[Ricky LaFleur]

I know the client said she'd been approached by companies willing to buyer her out of the lease. Would be unreasonable for me to give the tower a contributory value equal to a lease buyout?

Would be useful as a market reaction to see how your analysis compares. I.e. multiple offers of 80k+ but your analysis comes up around 25k. Reviewing real offers can be at least a good indicator of market reaction, but it's still sort of speculative in that it never took place, IMO.

From what I can tell you can use a capitalization rate as the discount rate in the NPV formula, if the future income is not expected to grow. Since in my case the income generated by the tower is a constant, then the two rates should be interchangeable.

I believe there's a "rule of thumb" that the cap rate + NOI growth = discount rate, but I'm not certain it's always that way.

3). To develop the cap rate, I can take the NOI / market value. Or annual income generated by the lease / estimated value of 5 acres the tower's easement occupies, which is $7,200 / $30,000 = 0.24

Maybe someone else can chime in, but that seems off to me. Probably because you're assuming the market value of the bare 5ac with no lease in place. It looks like your mixing income production of an improvement over the value of the land, which would not reflect a cap rate for anything meaningful, I believe. There is a band of investments model that includes Land + Building cap rates, is that what you had in mind?

Interesting project, for sure! In Michigan, do they not require a CG for non-residential HBU?

 

[BRCJR]

Amazon.com: Capitalization Theory and Techniques: 9781935328001: Akerson, Charles B., Lennhoff, David C.: Books

Amazon.com: Capitalization Theory and Techniques: 9781935328001: Akerson, Charles B., Lennhoff, David C.: Books

www.amazon.com

 

[George Hatch]

Apologies in advance, but I'm just going to say it: you're in over your head on this one. Sorry. This is not the kind of assignment to be trying to learn how to value a lease or get into discounting.

All RE is local, but in this region the pricing for cell towers when included with the RE transaction is much lower than the pricing when the lease is sold off separately to a 3rd party. If you look around enough you'll see sales (of various property types) where the lease was included, and can then compare those to their respective comps to see what the effect on value was of the cell tower lease. That's one way to develop the adjustment via sales comparison.

The leases themselves are *often*, but not always, written as a 5-yr lease plus a number of 5-yr options. One reason for that is that the cell companies themselves engage in mergers and acquisitions that render certain sites as redundant and obsolete. It's also not uncommon for a lessee to sublet to other cell companies, sometimes the lessor is informed and compensated for that and sometimes they aren't. Another quirk is the early-out clause in some leases which allow the lessee to unilaterally terminate with just a 90day or 120day notice. The general gist of these leases is to tie up the lessor's options, not those of the lessee.

The most common underwriting for these by the mortgage lenders includes accepting the income from the current lease plus the next 5-yr option period as being what a buyer or seller could reasonably expect. Another method I've seen is using a simple gross income multiplier; because really, most investors don't even understand what exactly a cap rate or a discount rate actually means anyway - all they see is the number that's being used.

You would also want to consider the effect on marketability and exposure time of having a cell lease onsite. Again, you can't do that without looking for sales of properties that sold inclusive of those leases. They don't have to be local, they don't have to involve the same property type, and they don't really even need to be that recent. But unless you're going to get into building a cap rate or discount rate off a mortgage/equity buildup - which basically none of the market participants act that way - the only other way to do it is to find sales of properties with cell leases.

If it is your intention to submit a competent workproduct at the end of your assignment, and depending on whatever your starting point is right now on that competency, you are probably going to end up taking a real beating on this fee because it will likely take you an excessive amount of time/energy to connect the dots. Remember, the benchmark for performance on this assignment is what an appraiser would do who already knows how to do it. Not what an appraiser does who isn't competent at it by the time they submit the report.