No landlord ever wants to receive a rent reduction letter. On the face, it’s scary and doesn’t put a great feeling in your stomach.
These letters are solely used to improve margins at unprofitable and profitable cell tower sites. Below is some great information if you ever receive a rent reduction letter.
There are 3 different situations in which rent reduction letters would be sent out by companies that own these towers. These situations are cold steel towers, negative cash flow sites with an existing tenant and sites with lots of term (assumption of all renewal terms to be exercised) remaining.
1. Cold steel towers are tough as these companies are not making any money and depending on the ground rent being paid, the landlord’s tower could very well be in jeopardy of a takedown. However, if the company is paying less than $1,000 per month, it’s less likely to be taken down as one collocation (AT&T, Verizon, TMO, and Dish) hit can land the site back into positive cash flow territory. It all comes down to the ground lease financials and the future lease up potential of these assets.
2. Negative cash flow sites are even more tricky. They can fall into the bucket of a cold steel tower but for the purpose of this exercise, these sites have at least one tenant on the tower. In these situations, the owner/manager of the tower are paying greater rent to the landlord than what they’re receiving from their customers. It’s important to note that wireless carriers don’t like to move off towers as it can impact their network balance which can help a landlord that has one of these negative cash flow sites. In a lot of cases, these companies will carry negative cash flow sites to keep the wireless carriers happy and to provide service in a specific market that is lacking. You’ll find most of these sites in California where rent asks are extremely high but so are property values. It’s not uncommon for single tenant sites in this geographic area to have negative cash flow.
3. The final situation is sites with term. Keep in mind these sites are normally profitable, and term may have been extended in the past. It’s my belief that landlords need to be diligent in understanding which tenants are on their tower. This will help arm you in discussions with third party vendors if you are ever contacted. Keep in mind, these third-party vendors are extremely skilled in pitching the why on taking a rent reduction. These companies have been around for a couple of decades and provide the companies they work for with a lot of current and future value.
In many cases these companies don’t want to take towers down as once a tower is taken down there’s no lease up opportunity. There’s nothing more embarrassing than taking down a tower and then getting a colocation hit after it’s been removed. Companies will typically have sales associates in geographic areas around the country that will be relied upon to give opinions on future lease up opportunities.
Third Party Vendor companies are used to help with the volume of these transactions. These deals usually involve a couple hundred dollars of monthly rent reduction and even an escalation reduction in other cases. As you can imagine, if these companies do that hundreds of times a year it ends up having massive savings as those savings compound annually. The effect these rent reductions have can be immense for the landlord if you ever go to sell your lease. Your lease value is based upon a multiplier of your annual ground rent received and any revenue share. By reducing your rent, it can impact your lease asset by tens of thousands of dollars if not hundreds of thousands of dollars. It’s also an opportunity for the company owning the tower steel to clean up legal language that favors them over the landlord. If there isn’t a Right of First Refusal (ROFR) in the underlying agreement, it’s almost certain it will be included in the draft unless the landlord has pushed back during their negotiations. If you are negotiating a rent reduction, it doesn’t mean you are exempt from negotiating. A wise negotiating ploy is to include a rent guarantee provision and/or future revenue share provision that helps you recoup back what you’ve reduced and then some. However, that won’t stop these companies from coming back to you. If you’ve reduced rent once, you are more likely to be targeted again since you were previously an effective target.
Where your tower is in the United States could impact your ability to negotiate. On the East and West coasts, it’s becoming more difficult to build towers. Many residents are pushing back on towers being built in their towns and cities. This gives more leverage to these existing cell tower landlords as many jurisdiction moratoriums are in effect. Knowing the political landscape of towers in your community can be crucial in your rebuttal back on a rent reduction letter. If you are told a tower can be built elsewhere, it might not be that easy. If there’s a moratorium on cell towers, good luck building a new one. Even if there isn’t, the zoning process can be 2-3 years and surely folks in the neighborhood will fight it at town meetings.
In conclusion, if you ever receive a rent reduction letter, you should consult with an expert. The more you know about your tower site, the better you’re armed to deal with these letters and calls. As always, if you have any questions, don’t hesitate to reach out to me.
