Telecom to My House: Renting Roof Space

It's not only about such commercial telecom providers as AT&T, Metro PCS, Sprint or Verizon — now New York City has entered the picture, having engaged Northrop Grumman to acquire several thousand sites on which to place telecom equipment for use by first responders and other agencies.

A telecommunications provider typically leases about 150 square feet — more at sites with back-up generators. Annual rentals start in the $25,000 to $30,000 range and include future escalations. Initial terms generally run five to 10 years with three to four additional five-year options.

Calling All Co-op and Condos
While the telecommunications company usually prepares the lease, many things can be negotiated. Among them:

• Rental Terms

Most leases provide that the rent is fixed for each five-year term, with a step-up every five years along the order of 10 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. Many leases with options have a potential 25-year term. It is sometimes possible to eliminate the last renewal.

• Start and End Dates

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.

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.

• Installation

Installation must be performed in a manner that will not damage the property, and will 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. Make sure to negotiate a limit on any future expansion of equipment at the site — which may clutter the roof, but which on the upside may provide a higher rental down the road.

• Insurance / Indemnity

As always, make certain 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.

• Provisions for Other Providers

Negotiate an option that will allow you to simultaneously lease to other telecommunications companies. Have the lease provide a mechanism for resolving any frequency-interference issues.

• Subordination / Non-Disturbance

While only applicable for co-ops with mortgages, make certain the lease is expressly subordinated to any present and future mortgages. The telecom provider will probably want a non-disturbance agreement from your mortgage lender. While these are routinely approved, it is often not without some legal processing costs. Make the provider pay for those.

Third-party Buy-outs

Co-op and condo boards can sit back and over the next 20 years potentially derive $700,000 to $800,000 per site. However, you can also potentially make much more. A number of companies, such as Wireless Capital Partners, Unison Site Management and Communications Capital Group, will buy your 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. These companies package the leases and prepare to turn the cash flow into securities for sale to investors.

This tells you that there is clearly money left, and so in the long run you'll do better financially by keeping the lease and deriving the rental income over time. Nonetheless, such transactions have value for cash-strapped buildings requiring capital improvements. I recently represented a co-op in Queens that sold four sites to Wireless Capital Partners, netting almost $1 million at once. There is a slight risk that the telecommunications provider will walk away during the term, but then it's also possible the provider will want to expand its equipment, resulting in a renegotiated rent.

One of the most important clauses in such an assignment is the one covering insurance. Unless you make appropriate provisions, the telecom company will only have to furnish it for the benefit of the assignee of your lease, and not for your building as well.

Another concern is the possibility some assignees may require a Subordination and Non-Disturbance Agreement from your mortgage lender. Still other assignees may try to slip in language providing for an easement — effectively giving the assignee control over at least a portion of the building’s roof even after the telecommunications lease expires! That can be a roadblock to the sale of any available air rights.

Eric M. Goidel is a partner at Borah Goldstein Altschuler Nahins & Goidel.

Adapted from Habitat February 2008. For the complete article and more, join our Archive >>