Contributory Value for Cell Phone Towers

[jay trotta]

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.


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.


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?

Here they do, had to get/give assistance for both a cell tower and water tower on res. property........many years back when we did work directly for most lenders

 

[George Hatch]

Anyways, one way you could value the lease would be to find some sales of properties that were listed as including the lease and then finding non-cell-lease comps for each. Extract the difference in the pricing. Divide the added value / the monthly or annual income. Rinse and repeat over a handful of such sales, however many it takes to identify the trend. Apply that factor to your subject's current lease payment and that's your adjustment for your non-cell-lease comps in your SC.

 

[Ricky LaFleur]

Cap rates were low. 5%-7% - Now higher due to interest rates now

most investors don't even understand what exactly a cap rate or a discount rate actually means anyway

I've been seeing a number of larger multi-family sales running in the 4.5-5% cap range. Some duplexes listed in the area are throwing off a whopping 3.7% cap. Who don't want some of that action?

 

[George Hatch]

Low cap rates for most properties indicate to aggressive expectations for increases in either the rents/income or the resale price later on.

Let's say a property was financed with a 70% LTV @ 7%

.70mtg x .07interest = 0.0490 (4.9%). If the property is selling at a 4.9% cap rate the 30% equity position (aka the borrower) is earning 0% return. It the property is selling at 4.5% cap rate the equity position is cash-flow negative (before we get into any tax considerations). The property is costing the property owner every month unless/until they get the income up. Or resell for more than their (acquisition+losses).

In the abstract these numbers look small, but when applied to $10,000 or $100,000 or $500,000 worth of net income the results add up really quickly. If using (for example) a $50k net income,

$50,000 / 4.9% = $1,020,000
$50,000 / 4.5% = $1,111,000
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$90,591. That's not an insignificant variance in a $1M valuation.​

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[Ricky LaFleur]

Mortgage/Equity would appear detached from reality unless you assume they are fine with 0% return (or less) on equity. But why, when short term treasuries are above 5%, would one accept that? The only other possibly way this could work out is exactly as you said, expected increase on rent or asset price. That's a bold strategy, Cotton.

 

[Terrel L. Shields]

Would this really be the best method?

Name a better one. How much money does your client want to spend? Give me $50,000 and I'll search the whole US for "sales" that I can extract a "cap rate" from. Otherwise, you are spinning your wheels like a blind man looking in a dark room for a black cat that isn't there.

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

I can show you at least 3 such leases that they allowed to expire.

Would be unreasonable for me to give the tower a contributory value equal to a lease buyout?

Maybe maybe not

Rinse and repeat over a handful of such sales, however many it takes to identify the trend.

So how many such sales and how long will it take to develop those. I mean again give me unlimited budget and I will find sales. But for an estate appraisal? For one thing, big investors will pay different prices for things that they see as an advantage, but that's the tower itself, not the lease thereof. Using Inwood or Hoskold's premise allows you to adjust - as the income is fixed by the contract. 2 years ago someone giving a cap rate of 3-5% beat the heck out of T bills. Now, one has to raise that rate period. You need 4% at a minimum to return a "safe rate". Then the "risk rate" has to be higher, right? Even if a low 2x the safe rate, we are talking 12% cap rate. The old saw was that an investor invests a dollar. They want the return of that dollar, a return on that dollar, and a return for the risk of spending that dollar. The old 3:1 rule isn't obsolete among unsophisticated investors nor is it lost upon the pro investors that these are only guesses -DCF or wild *** guess.

So analyze that say 6% return that was expected when T bills paid 1.5%. The investor expected 1.5% safe, and 4.5% risked (3x the safe rate) Use it. Do the simple sinking fund. Otherwise you will spend endless hours trying to develop a direct cap rate searching for unicorn sales.

Who don't want some of that action?

Zackly - When a T bill is going to make more and zero risk... well, so.

 

[George Hatch]

Like I said, the fees that appraisers charge for new-to-them appraisal problems almost invariably result in them taking a savage beating when compared to spending that time on what they normally do. Now we might be amenable to taking a beating on a fee in order to support the client/appraiser relationship with a good client, but we're usually not going to volunteer to take the beating for a 1-time client.

If you have the data to develop the mortgage rate and the equity rate specific to this property type then you already have the data it takes to extract a cap rate or an income multiplier. Meaning, you *might* be able to get a mortgage rate from a lender for this deal but you will virtually never get an opinion of the equity return from the market participants outside of the context of the cap rate or discount rate or GIM they thought they were buying. In which case you can just use that rate directly.

I know this should go without saying, but many people who don't deal with the IA on a regular basis don't necessarily realize that different property types and different locations result in different rates of return-of/return-on investment capital. And not by a little, either. The rates that go with multi-family don't apply outside of multi-family. That's what makes using Mtg/Equity buildups so dodgy outside of the context of institutional investment grade properties.

 

[Terrel L. Shields]

but you will virtually never get an opinion of the equity return from the market participants outside of the context of the cap rate or discount rate or GIM they thought they were buying

That's why I favor using a Hoskold's Premise for equalized incomes. You can readily develop the safe rate. And you can use a multiple of that rate as a common practice. Most investors vary their investment requirements based upon whether it beats the local CD or a T Bill rate for a similar holding period. Yes, there is an element of uncertainty developing a multiple of the safe rate, but equally so is uncertainty in polling an investor or relying upon a published cap rate. I know people who insisted they get a 10% return on their investment... regardless if T bills were 3% or 6%...didn't make sense to me, but it happens. But the reversionary value is usually not considered by some investors (almost always in oil properties) because they assume the mineral is worthless at the end of the well life. Same with cell leases. I'd hate to rely upon them using the site forever, especially if not on high ground where there is a range advantage to the site.

 

[Phoenix Ashwalker]

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

I'm not certain to be honest. This particular report is for a private client, not through a lender and anything subject to Fannie/Freddie requirements. It's to assist with both the settlement of the current estate and will involve a retrospective value as of the DoD, as well as a current value of a portion of the estate to assist with possible marketing. The client has already indicated they may end up splitting the cell tower away from the property and selling the rest separate, while keeping the tower and income for themselves. If it wasn't for the retrospective, I could probably ignore the tower and and only deal with the rest of the property. But alas, tis not so.

 

[Phoenix Ashwalker]

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.

I get it, I feel a bit in over my head as well. I've appraised one other property for a bank in the past that included a cell tower, and when I came to a similar conclusion, I told them I could either ignore any contributory value awarded by the tower, or they'd need to find a commercial appraiser. They opted for the former. This one is for a private client, who is in no rush to have the report delivered because they have other aspects to of the estate to settle first. I realize that I won't be ahead of the game fee-wise, but my thought process is I can use this opportunity to expand my knowledge, work file repertoire, and experience. Maybe I'm weird, but I've done the same thing in the past with complicated reports for things like agricultural vacant land, land conservancies, vacant lakefront on a nearly fully developed lake, and more and they have proven to be an asset and tool for me.

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.

This isn't a terrible idea. I'll have to do some research and see if I get lucky. I know as an alternative, but possibly similar feature there are windmills in the subject's general market area which may give me more possibilities to research. However, in general from my experience there are few sales at any given time that include cell towers, and many people split that portion of their acreage off to maintain the lease and income.

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 client's lease sound similar to what you're describing.

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.

Good to know, thanks.

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.

Yes, I'll undoubtably have to expand a search well beyond the subject general market area to come up with comparable sales.

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.

I understand, but as I said above, I feel like taking a hit on the front end here could prove useful. If I was my old supervisory appraiser who has 40+ years of experience and is about to leave the workforce, then I probably would have walked away from this a long time ago and recommended someone else. However, I'm relatively new into the career and even if the report simply teaches me, never do this again, something is learned. If I feel like I can come to a defensible conclusion and provide the client with a quality and competent report, then I'll have this tool in my box to use at some point in the future.