Negotiating Leases

Lease Negotiations
Key Issues
By Rusty Monroe

What should I be asking for in rent for a cell site on municipal property and how long should the lease be for? What have other communities in the State gotten recently?

We hear this question all the time. First, it’s not, or should not be, as simple as knowing what someone else has (recently) negotiated, unless all you want is ‘a number’ so you can get the matter off your plate, as opposed to negotiating a good lease. There are several key pieces of information that are needed before a reasonable number can be determined. At the very least, anyone negotiating a wireless lease needs to know the following.

HOW much more should I expect to get out of negotiations? Historically, we have been able to get anywhere from 50% to 200% more than the lessee said it was willing to pay.

WHY do they need the site? Is it for coverage, capacity or is it a technological upgrade to allow new types of service or merely to gain a competitive advantage? Normally, today, it’s for 2 reasons; a combination of capacity and a technological upgrade. With many leases approaching their expiration nowadays it’s also often to extend the lease.

WHAT specific services will the facility actually be used for in the near term? This makes a BIG difference, since not all sites provide the same services. Because of the additional services provided in today’s world, a facility providing 4G LTE normally makes significantly more money than a 3G site and there’s no reason the lessor shouldn’t share in the increased revenue. If it’s to be used for 5G in the future, it’s worth even more.

SHOULD a lease be negotiated as a real estate issue or as simply a business [use] issue? It’s almost never in a lessor’s best interest to allow the matter to be dealt with as a real estate matter. Instead it should be negotiated like any other business deal. Real estate brings into play potentially limiting factors such as ‘prevailing rates’, matters related to real estate law, market value, etc. As strictly a business deal the only limitation is what the lessee is willing to pay and the lessee is able to take into account myriad beneficial factors, including but far from being limited to the projected/anticipated revenue of the lessee and increases in the revenue, the term, tax issues, future modifications to the facility, rent escalators, subletting and periodic review and renegotiation (especially for any matters that weren’t anticipated during or didn’t exist at the time of the initial negotiations), all of which can accrue to the lessor’s benefit.

WHY do they want to renegotiate now? If it’s to renegotiate an existing lease and there are more than 5 years remaining on the current lease, the assertion that “We want to simply get it done and out of the way now” is normally a disingenuous and less than truthful answer. There’s a specific reason and you need to know the real reason.

WHEN do they need the lease signed by and WHY do they need it signed by then? This knowledge usually provides significant negotiating leverage that you should never enter negotiations without.

WHAT is the lease worth to the lessee in real dollars over the next 5 years? Five years is about as far as anyone can project anything in the wireless industry and remember that wireless revenue will be significantly increasing over that period by as much as at least twice today’s revenue.

The answers to these questions can make a HUGE difference and, since the lessee knows all the answers, are critical to fair and equitable negotiations. If you don’t know the answers to all of these, the playing field is sloped severely in the lessee’s favor, since to a great extent the companies rely on the Lessor’s negotiator not knowing. That’s how they get the better of (most) lessors the vast majority of the time, whether the lessor is a public entity or a private person or entity.

Because of the potential value to the lessor, and the lessor’s lack of the requisite knowledge of the issues and potential benefits to the lessor, even the largest business entities retain expert assistance to negotiate wireless leases, including such sophisticated business entities as NASCAR and large retail chains. They realize they don’t even know what it is they don’t know, but need to and don’t have the time to learn, before negotiating. Consequently, they do what most successful professionals do; they get expert help.

Rhetorical Questions to Think About:
Why do the carriers insist on redacting the amount of the lease payment when providing copies of leases, e.g. in an application for a permit? Why don’t they want you to know what they’re paying, unless it’s a low lease rate?

Why won’t they give copies of leases we have negotiated to other potential lessors?

Why do they try to convince you that you’re limited to what they claim are the ‘prevailing’ lease amounts in your area? Note: This is a 'camouflaged trap' all-too-frequently used against local officials.

Some Final Thoughts
If the person doing the negotiating doesn’t know what it’s actually worth in dollars and cents to the other party they don’t know what it can/should be worth to themselves, and won’t get what they should/could get, i.e. what it’s really worth, over the term of the lease. and what the Company is prepared to pay if it has to, but of course will not tell you. Often, even their negotiator doesn’t know that number.

Also, while the lessee would prefer the matter to be treated as a real estate matter, it is does not have to be, and should not be allowed to be treated as such. Nor should it have anything to do with what they’ve paid elsewhere. It should be strictly a business/financial negotiation based on the financial value to both parties, and nothing else. By the way, if they’re renewing an existing lease, don’t be afraid of them threatening to go elsewhere, e.g. for reasons of the amount of an increase in the rent, as there’s an easy way to virtually eliminate that threat/tactic, and it’s not by requiring the use of municipal or county property.

Most people don’t know that over just the last 5 years carriers’ revenue has grown substantially and is projected by the industry’s experts to continue to increase over the next decade. There are a number of ways to get the maximum (true) value for the community; not simply a simply a dollar amount with a periodic escalator. As such revenue opportunities don’t come along every day, lessors should be prepared to use the opportunity to create win-win situations. Carpé Diem!

Also, most people don’t understand that different forms of leverage are best and most effectively utilized for different issues.

The bottom line is that most communities probably have a lot more potential negotiating ‘leverage’ than they realize, assuming it’s used by someone who knows how to use it at the right time and for the right issue.