If you’re a transactional attorney or in-house corporate counsel, you have negotiated a wide range of business, corporate and real estate agreements. But have you ever negotiated a cell tower lease? Before you refer the next one to a colleague, you may want to consider handling it yourself. This discussion should assist you in making that determination, as it analyzes some of the significant issues faced by Lessors when negotiating cell tower leases.
The "Wireless Revolution" continues to steam forward with no end in sight. In order to meet the demand for cellular phones, wireless communications companies, such as Verizon Wireless and Sprint P.C.S., continue to seek out cell tower sites at a frantic pace. And as if demand for cell tower sites wasn’t already sky high, the next wave of wireless technology is already upon us. Wireless modems, for use in everything from laptop computers to personal data assistants (e.g. Palm Pilots), will place an even greater burden on cellular infrastructure and thereby increase the demand for suitable cell tower sites. With the "Wireless Revolution" as our backdrop, a few preliminary thoughts regarding cell tower negotiations are in order. First, before Lessor begins negotiating a cell tower lease, prospective lessees will want to walk the site and conduct some preliminary due diligence. At this very early stage, Lessor will get a sense as to how interested Lessees are in the site and, therefore, how much bargaining power Lessor will have during the negotiations. As you are well aware, determining how much bargaining power you have, and then asserting it, is one of the secrets to getting what you want in a negotiation. Second, as with most other contracts, Lessor’s primary objectives are to maximize revenue and minimize risk, both of which are functions of its bargaining power. In other words, Lessor should seek to lease the smallest parcel for the most rent and to lease only that property which does not impede its ability to effectively operate its business. Further, Lessor should strive to eliminate or shift as many contractual obligations and responsibilities as it can to Lessee. Third, when wireless communications companies negotiate cell tower leases, time is usually of the essence. Lessor should expect the negotiation to move quickly, particularly if the negotiation is near the end of the year when everyone tries feverishly to complete as many deals as possible. And since attorneys who represent wireless communication companies are well-versed in negotiating cell tower leases, Lessor will have to be on its toes all times. The negotiation commences when Lessee submits the initial draft of the lease to Lessor. It is not typically the other way around. The length of this initial draft will depend on Lessee, as some Lessees use short leases, while others use very long ones. Lastly, a cell tower lease is actually made up of several documents. In addition to the lease itself, there will be a memorandum of lease, an SNDA (Subordination, Nondisturbance and Attornment Agreement) and a survey. And depending on the preferences of the parties, there may even be an option agreement.
III. BARGAINING POWER DURING THE CELL TOWER LEASE NEGOTIATION
Make no mistake about it, the balance of bargaining power in cell tower lease negotiations is almost always in favor of Lessor. The reality is that under most circumstances, Lessee simply needs the property more than Lessor needs the rent. The posture and position Lessor takes throughout the negotiations will be based, in large measure, on Lessor’s willingness and ability to assert its bargaining advantage. Throughout the lease negotiations, there will be many opportunities for Lessor to capitalize on its bargaining advantage. In addition to seeking to maximize rent, Lessor can use its bargaining advantage to obtain, for example, co-locating fees, rent escalation clauses and early termination penalties, and to shift obligations, such as elimination of broadcast interference, to subsequent Lessees.
IV CELL TOWER LEASE PROVISIONS
A. Rent/Lease Term
Rent is a function of, among other things, the amount of space Lessee requires to construct the cell tower, as well as the demand for a cell tower on Lessor’s property or in Lessor’s geographic area. Expect Lessee to request between 2,000 and 2,500 square feet of property to construct a cell tower. As for the demand for a cell tower on Lessor’s property or in its area, there is one simple rule: If Lessee is negotiating with Lessor, there is substantial demand for a tower on Lessor’s property. And as far as the amount of rent per month that Lessor should seek, suffice it to say that Lessor should expect thousands rather than hundreds. In addition to the standard monthly rent, Lessor may seek what are referred to as "co-locating" fees. A co-locating fee is a percentage of the rent paid to Lessee in the event that Lessee sublets a portion of the leased property to another wireless communications company. In the event, for example, that Lessee sublets a portion of the leased property, a 40% co-locating agreement means that you, as Lessor, would receive 40% of the sub-rent paid to Lessee every month. As for the term of the lease, Lessee typically requests an initial multi-year term (e.g. 5 years) with several multi-year options. On the one hand, Lessee will desire the certainty of a multi-year term, while on the other hand, seeking the flexibility to extend the lease term at its sole option. If Lessor agrees to, let’s say, an initial 5-year term with four 5 year options, Lessor must remember to make sure that the rent increases either every year or every option period to account for inflation and other economic factors.
B. Commencement of Lease Term
Lessee will always seek to delay the actual commencement of the term for as long as possible in order to postpone the payment of rent. Typically, Lessee will request that the term commence only upon: (1) the expiration of a due-diligence period, (2) the receipt of all necessary permits or (3) breaking ground. If Lessor agrees to any of these options, keep in mind that it may be several months before Lessor sees the first rent payment. Rather than placing the receipt of rent within Lessee’s discretion, Lessor should insist that Lessee commence payment of the rent immediately upon execution of the lease. After all, one of your primary objectives is to generate an income stream that begins as soon as possible, which, in this case, is upon the execution of the lease. There is no reason to condition receipt of the rent upon a future event that may never occur.
As opposed to a traditional sale of real property, where the seller typically provides the purchaser with the survey, in the case of cell tower leases, it is standard for Lessee to provide and pay for the survey. An accurate survey is crucial for both parties and necessary to complete the transaction. It will clearly identify the location of the cell tower site relative to the larger parcel 1 and provide a legal description, which will be incorporated into the lease itself. Further, the survey will identify the location of any easements, including access and utility easements, which may be required by Lessee. Unless the leased parcel is accessible directly from a public roadway, Lessee will require an access easement to insure that there is an unobstructed path, through the larger parcel to the cell tower site, for construction and maintenance purposes. Lessee may also require utility easements, if they do not exist already, in order to provide power and phone service to the cell tower site.
D. Use Provision
The lease should contain a concise use provision to insure that the property is used solely to construct, maintain and operate a cell tower. This provision will serve not only to bind Lessee as to the use of the property, but to also bind any future assignees or subtenants of the leased property.
The lease should restrict installation to only that equipment and those structures which are necessary for the operation of a cell tower. And to the extent feasible and practical, Lessor should monitor construction of the cell tower. One way of doing so is to require that Lessee provide partial and final waivers for all materials purchased and construction services provided during the construction process. In addition, Lessor may want to go the extra mile and require performance and payment bonds.
Lessee will always require 24-7 access to the leased property in order to maintain and repair its cell tower. By agreeing to this request, without condition, Lessor risks jeopardizing the security and integrity of its larger parcel and exposing itself to potential liability and litigation. This is particularly so where Lessor operates a business on the larger property and/or fences the larger parcel and stores items outdoors. Consider a scenario where Lessor operates a car dealership on site and stores automobiles outdoors within the fenced-in perimeter. Lessee’s cell tower site is also located within the fenced-in area. Granting Lessee 24-7 access, without prior notification to, and supervision by, Lessor could compromise the security and integrity of Lessor’s facility, business, and property. What happens if, for example, Lessee’s cell tower requires emergency repairs at 2 o’clock on a Sunday morning? If Lessee fails to properly secure the premises (i.e. lock the gate) after it has completed the repairs, Lessor’s dealership becomes vulnerable to trespass, theft, and vandalism. In order to satisfy Lessee’s requirement of 24-7 access to the site, while also addressing Lessor’s security concerns, Lessor should strive for middle ground. To do this, Lessor must first frame site access in terms of a matrix, comprised of emergency/non-emergency situations during business/non-business hours (see the "Site Access Matrix," below). During business hours in non-emergency situations, Lesssor should require at least 48 hours’ notice prior to entry, but grant Lessee unsupervised entry and access. During business hours in emergency situations, Lessee is also entitled to unsupervised entry and access to the site. Lessee is required to provide prior notice to Lessor, however. This is not 48 hour notice, as in non-emergencies during business hours; rather, it is notice upon either the occurrence of the event which precipited the emergency or upon Lessee dispatching the repair crew to the site. In either case, as long as Lessor has prior notice, it has the option and opportunity to supervise the project, while Lessee is not prohibited from entry and access if Lessor choses not to do so. In case of non-emergencies during non-business hours, it may not be practical for Lessee to wait until the security service arrives on site. You may consider granting Lessee access the property, unsupervised, as long as the security company is contacted prior to entry and only if Lessee agrees to remain on site until the security company arrives, walks the entire property to insure that it is secure and properly locks-up. In either case, Lessee should bear all costs of the security company’s services. See Site Access Matrix at right.
There are many insurance-related items that need to be addressed in a cell tower lease. To start, Lessee must provide adequate insurance for the cell tower site, including both property and liability insurance. Lessee must also provide Lessor with a certificate of insurance upon execution of the lease, naming Lessor as an additional insured and loss payee. Remember, too, that all policies are to be in full force and effect throughout the entire term of the lease and until all equipment and structures have been removed and the leased property is returned to its original condition. Of course, Lessor should always check with its own insurance carrier to confirm that the limitations and coverages provided in the lease are adequate and to address any other insurance-related concerns. In addition, Lessor should make sure that Lessee indemnifies Lessor, its agents, and its assigns as to any and all claims, injuries, and damages which result from Lessee’s use of the property, again, for the entire term of the lease and until the leased property is returned to its original condition. Typically, these provisions are mutual, so that you will be asked to reciprocate by providing Lessee with a similar indemnification as to the actions of Lessor and its agents.
Lessee will always want the right to terminate the lease if the cell tower is damaged or destroyed during the lease term. This desire for flexibility is comparable to Lessee’s need for several multi-year options. The problem for Lessor is that the right to terminate upon the occurrence of a casualty, regardless of how minor, places far too much discretion in the hands of Lessee. One solution is to make termination due to casualty conditioned upon a pre-set damage estimate, with an incentive for Lessee to repair the damage and continue operation of the cell tower. If, for example, the damage estimate is less than the pre-set limit, then Lessee would be required to repair the facility and continue operation of the cell tower. On the other hand, if the damage estimate is greater than the pre-set limit, then Lessee could terminate the lease, but only if it pays a termination fee (e.g. 12 months’ rent) and returns the leased property to its original, pre-lease, condition.
The issue of Lessee’s right to assign or sublease is critical for both Lessor and Lessee. Again, Lessee wants flexibility in assigning or subleasing, in that it can do so without having to obtain Lessor’s consent. Remember, to generate cash flow and offset the rent it has to pay, Lessee will often sublease a portion of the leased premises to other wireless communication companies, particularly if there is great demand for cell tower sites in Lessor’s geographic area.2 In order to control risk, Lessor, on the other hand, will want to retain as much control over assignments and subleases as possible. Lessor should always require that Lessee obtain Lessor’s written consent prior to any assignment or sublease. However, if Lessor is in a compromising mood, it can consider limiting the inquiry to certain pre-defined standards. For instance, when considering a prospective assignee or subtenant, Lessor should, at a minimum, ask the following questions: (1) Is the assignee or subtenant in good standing in Illinois? (2) Is it licensed by the F.C.C.? (3) Is it able to meet its financial obligations under the lease? (4) Is it willing to assume all obligations under the Lease? If answers to any of the following questions are "no," then Lessor should have serious reservations as to the prospective assignee or subtenant and therefore have the right to refuse consent. However, affirmative answers to each of the foregoing inquiries should provide Lessor with a modicum of comfort and thereby obligate it to consent to the assignment or sublease, absent any extraordinary circumstances.
Rental payments are typically structured on a "net," rather than a "gross," basis. This means that monthly rent will not include Lessee’s share of the utilities, real estate taxes or other costs attendant to the operation of the cell tower. Thus, in addition to paying the rent, Lessee will also be responsible for these costs. The utilities necessary to operate a cell tower include electricity and telephone service. Lessor’s objective is to insure that the cell tower site is separately metered for electricity and that Lessee receives a separate bill for telephone service. As to real estate taxes, Lessor should require that Lessee obtain a tax division of the leased property at Lessee’s expense so that separate tax bills for the leased property will be sent directly to Lessee.
K. Environmental Provisions
During the negotiation, Lessee will ask Lessor to make certain warranties or representations as to the environmental condition of the leased property. If Lessor agrees to make warranties or representations of any kind, it should do so only after conducting appropriate due diligence, including a review of all environmental reports relating to the leased property. In addition, Lessee will request that Lessor indemnify and hold Lessee harmless from any damages, claims or injuries arising out of environmental contamination to the leased property. If Lessor agrees to indemnify Lessee in this manner, Lessor should require reciprocal indemnifications from Lessee.
L. Lease Termination
It is common for Lessee to seek an early termination clause. Lessee’s mantra is that it needs the right to terminate the lease prior to lease term in order to account for unforeseen permitting and zoning problems, as well as the ever-changing consumer demand for wireless technology. In response, Lessor can either: (1) reject such a request altogether; (2) agree to an early termination clause, but only if Lessee pays a termination penalty; or (3) agree to a termination clause in exchange for a rent premium to account for the risk of Lessee exercising its right to terminate.
M. Equipment Removal
Another important issue to be addressed is Lessee’s obligation to return the leased property to its original, pre-cell tower, condition. Lessor should require that this occur either prior to the lease termination date or within a fixed number of days afterward. If the parties agree to the second alternative, Lessee should be required to pay rent until it has completed the restoration. In either case, Lessee should provide final waivers and sworn statements from all contractors, subcontractors, and material suppliers and remove any mechanic’s liens placed against Lessor’s property. An equipment removal issue that may arise is the extent to which the concrete footings that hold the cell tower in place will be removed at lease term. Some Lessees may question the need to remove the portions of the concrete footings buried more than a few feet below ground level. They will argue that it is either too expensive or too time-consuming to warrant doing so. Lessee should be required to either (1) remove all footings; (2) remove the first five to ten feet of footings below ground level; or (3) pay Lessor the cost for removal of the concrete footings upon lease termination.
N. Provisions Related to Other Towers Located On-Site
Suffice it to say that if one wireless communications company is interested in Lessor’s property, other companies with similar interests cannot be far behind. Assuming that the initial Lessee is in place, a subsequent Lessee will then have the option of either leasing space directly from Lessor or subleasing it from the initial lessee. If Lessor has structured the initial lease to include the right to collect co-locating fees from the initial Lessee, then Lessor finds itself in a money-making position regardless of whether the subsequent Lessee leases directly from Lessor or subleases from the initial Lessee. In either case, Lessor will generate additional revenue from the subsequent lease transaction. With that in mind, Lessor should strongly consider rejecting any attempts by the initial Lessee to limit Lessor’s ability to lease other cell tower sites. The initial Lessee may try, for example, to require Lessor to obtain its consent prior to doing so. The initial Lessee may also try to require Lessor to eliminate "broadcast interference" caused by subsequent cell towers. If Lessor agrees to such restrictions, it should at least try to limit their impact. For instance, if Lessor agrees to eliminate interference caused by subsequent cell towers to the initial Lessee’s transmissions, Lessor should require a clear, concise definition of "broadcast interference," as well as an objective standard by which it is to be eliminated. Further, Lessor should shift the burden of eliminating broadcast interference to subsequent Lessees via their leases.
V. OTHER DOCUMENTS INCLUDED
IN THE CELL TOWER LEASE NEGOTIATION
It is common for Lessee to try to delay the initial payment of rent until Lessor provides Lessee with Subordination, Nondisturbance and Attornment agreements ("SNDA’s") from lenders that have mortgages secured against the leased property. If Lessor agrees with this request, it faces the risk that a lender will either refuse to execute the SNDA or will delay completing it (inadvertently or otherwise) until after the commencement date. In order to insure against such delays in rent payments, Lessor should negotiate SNDA’s while it negotiates the lease and should have its lenders execute SNDA’s prior to lease execution.
B. Memorandum of Lease
It is standard practice for the parties to execute and record a memorandum of lease. The purpose of a memorandum of lease is to place the public on notice that there is a leasehold interest in the property. It should identify the leased property, access easements, and utility easements by legal description, and state the initial term of the lease and any options to extend the term. However, Lessor should never amend, change or alter the lease, via the memorandum of lease, in any way. In fact, it should provide that in the event of a conflict between the lease and the memorandum of lease, the provisions of the lease will control.
An accurate survey is crucial to a cell tower lease negotiation because it identifies the leased property and the access/utility easements. It will include the legal descriptions that will be incorporated into the lease. The survey should be provided and paid for by Lessee.
D. Option Agreement
Lessee will try to condition the payment of rent upon the occurrence of a future event, such as receipt of the building and operating permits or upon completion of construction of the cell tower. It will do so by either seeking the right to terminate the lease prior to term, as has been previously discussed, or by trying to structure the transaction with an option agreement. With an option agreement, Lessee will pay Lessor an agreed-upon option price, up front, and then attempt to obtain the requisite permits during the option period. Lessee will only exercise the lease option, thereby activating the lease, if it obtains the permits during the option period. If the parties agree, in concept, to structure the transaction using an option agreement, they will then negotiate the option term and option price. A typical option term is between three to six months. A simple rule of thumb for determining the option price is to multiply the option term by the monthly rent.
The insatiable demand for wireless products and services has placed the burden on wireless communication companies to strengthen and expand their wireless infrastructures by finding suitable cell tower sites. Property owners and their attorneys must be prepared to effectively negotiate cell tower leases in order to make the most of these lucrative opportunities. A working knowledge of the documents and key lease provisions, as well as an understanding of the balance of bargaining power between the parties, will help to insure that Lessor maximizes cash flow and minimizes risk.
1 This assumes that the leased property is part of a larger parcel owned by Lessor.
2 This assumes that the initial lease does not prohibit Lessee from assigning or subletting and does not restrict Lessor from leasing directly to subsequent Lessees.
Alex Olsansky is an in-house attorney and Director of Corporate Real Estate for a 110 year-old Illinois corporation located in Buffalo Grove, Illinois. Mr. Olsansky specializes in commercial real estate and business transactions. He earned his LL.M. in Real Estate Law, with Honors, from The John Marshall Law School in 1999.