Mr. and Mrs. Smith were offered the opportunity to have a tower built on their unused land by a tower developer. Excited about the potential to generate income, they engaged with the developer and signed a contract without consulting industry experts or attorneys. This oversight led to critical provisions in the lease that may not be favorable to property owners. Although I’m not an attorney, based on my experience reviewing leases, I can identify provisions that may not benefit property owners. Here’s what I’ve observed in a recent lease review:
This provision allows for the Lessee/Tenant to have the ability to purchase an easement with 90 days’ notice at any time during the term for 14 times the then-current rent. Mr. and Mrs. Smith overlooked this and assumed they’d always collect monthly rent. While a tower developer most likely won’t exercise this option, you don’t know who will eventually have this lease in the future. In my opinion, this tower developer will sell their towers and assign those ground leases to one of the bigger cell tower companies. Then it’s not about if, but rather when the tower company exercises their right in the lease to convert the monthly payment to a lump sum cash payment.
Inserting this language into the contract is appealing for the tower developer as it becomes more attractive to buyers of their overall portfolio. It wouldn’t shock me if 25% of their portfolio has this language making it easier for the acquiring company to secure that portion of towers via a perpetual easement. For the tower companies, a deal that’s 14x probably nets the tower company an IRR of over 11% which is a phenomenal return when doing volume.
The average buyout multiple from a long-term ground lease is probably between 17-19x right now. The main factor that determines this multiple is the lease escalation. If you have a 1% yearly escalation, you may be closer to 15-16x. However, when interest rates fall back down, they will probably range from 18-22x. At $500 per month and 8x that annual payment, you could be leaving ~$48,000 on the table. Regardless of the delta, this legal provision doesn’t benefit the property owner no matter how you evaluate it.
If you know someone who is in this situation, please give them advice to get in touch with a professional to ensure they don’t make a long-term mistake. Unfortunately, many people have already made this mistake and one day they are going to be kicking themselves for not spending the money to protect their rights.
