Can We Rent Our Roof?

Roofs can be hassles. They can leak, and they can need constant repair and upkeep. But they can also be a source of easy income. How? The answer: by working with a telecommunications provider (such as AT&T, Metro PCS, Sprint, or Verizon) that is interested in leasing a small portion of your roof (with perhaps a small area

in the basement) to construct a cell phone transmitter/relay site. And now there is a big, local player in the picture, too: the New York City government has engaged Northrop Grumman to acquire several thousand sites on which to place telecommunications and video equipment for use by first responders and other agencies. The city is paying rentals comparable to those of more traditional telecommunications providers. Typically, a telecommunications provider may lease about 150 square feet (some sites with back-up generators will have larger footprints). Annual rentals start in the $25,000 to $30,000 range and include future escalations. Initial terms generally run five to ten years with three to four additional five-year options. It seems like an opportune time for a board to investigate this idea further.

The Things You Do

The telecommunications company usually prepares the lease. This can be negotiated, however. Among the topics which should be given great scrutiny are:

Rent. Most leases provide that the rent is fixed for each five-year term with a step-up every five years along the order of ten percent. It is possible to negotiate an annual increase of about three percent. Over time, and with compounding, the increase in income can be huge.

Terms. Many leases with options will have a potential 25-year term. It is sometimes possible to eliminate the last renewal.

Manner of Installation. This is perhaps the most important provision in the lease as the installation must be performed in a manner that will not damage the property, and in the future to allow for roof/parapet repairs or replacements without the necessity of a costly equipment relocation. The board must engage an engineer. Frequently, the telecommunications company will pay for this.

Equipment Installation. Negotiate a limit on any future expansion of equipment at the site, which may result in an increased rental down the road should the provider wish to expand the facility.

Insurance/Indemnity. Make certain that adequate insurance is provided and that there is a broad form of indemnity.

Utilities. Most leases allow for tying into the building’s electrical system with the carrier paying some additional rent for usage. Where feasible, obligate the carrier to obtain power directly from the energy provider.

Start Date. Leases often provide that neither the term nor the rent will start until the site is up and running. This allows a carrier to indefinitely “bank” a site. Obligate the carrier to start paying rent by a set date, even if the site is not operating.

Termination. Leases typically require that the provider may cancel at any time, for any reason. Termination may be triggered by technological changes, signal interference that cannot be resolved, or consolidations and mergers in the industry. It is generally possible to negotiate a termination payment of six months’ rent.

Provisions for Other Providers. Negotiate the option to simultaneously lease to other telecommunications companies and provide a mechanism for resolving any frequency-interference issues.

Subordination/Non-Disturbance. While only applicable for cooperatives with mortgages, make certain that the lease is expressly subordinated to any present and future mortgages. The provider will probably want a non-disturbance agreement from the cooperative’s mortgage lender. While it is generally routinely approved, it is often not without some legal processing costs. Make the provider pay for those.

$25K into $200K Overnight

A final piece of advice: co-op.condo boards can sit back and over the next 20 years potentially derive between $700,000 to $800,000 per site. However, they can also potentially make much more. There are a number of companies (such as Wireless Capital Partners, Unison Site Management, and CCG) that will buy the co-op.condo’s position as the landlord of the lease in return for a one-time upfront payment that is seven to eight times the present annual rent. The income stream is valued and then further discounted. These companies package the leases and prepare to turn the cash flow into securities for sale to investors. There is clearly money left, and, in the long run, a co-op.condo will do better financially by keeping the lease and deriving the rental income over time.

Nonetheless, such transactions have value for a cash-strapped co-op/condo requiring such capital work as Local Law 10/11 repairs, roof replacements, or elevator upgrades. I recently represented a co-op development in Queens that sold four sites to Wireless Capital Partners, netting almost $1 million at one time. There is a slight risk that the telecommunications provider will walk away during the term, but, on the positive side, there is the possibility that the provider will want to expand its equipment on the existing area, resulting in a renegotiated rent.

One of the most important clauses in such an assignment is the insurance clause. Unless you make appropriate provisions, it is possible that the telecommunications tenant will only have to furnish insurance for the benefit of the assignee of your lease.

Another concern is the possibility that some assignees may require a Subordination and Non-Disturbance Agreement from a cooperative’s mortgage lender. Still other assignees may try to slip in language providing for an easement that effectively gives the assignee control over at least a portion of the building’s roof even after the telecommunications lease expires. Such an easement can act as a road block to the development of or sale of any available development rights.