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Selling a Lease

Let’s say I have decided to sell. Are all lease buyout companies equal?

All lease buyout companies are not the same. Each has their own “spin” that they put on their product to try to make it more attractive. Some will try to emphasize that they can market your property better. Others will suggest that they will take a lesser share of any future revenue they bring to the property. Some require you to pay higher fees in conjunction with the sale of the lease, while others do not. Some are more willing to agree to shorter term purchases than others. Not all of the buyers value each of the leases the same. A few lease buyout companies have more onerous financing and thus are more restrictive in their purchase agreements and take longer to complete their due diligence. Unfortunately, some are more willing to back out of a signed deal than others. You only know what they can and can’t do when you’ve worked with each of them multiple times (like we have).


How are leases valued by the lease buyout company?

The industry refers to buyouts on the basis of a “multiple of monthly rent” to compare offers. For instance, if the landowner is receiving $1k/month and they receive an offer of $100k to buy the lease, the multiple of monthly rent is 100 or “100x.” To determine what they are willing to pay, each company has a complex return on investment (ROI) tool. The tool calculates various factors to determine how much they can offer for a given lease.

Not all leases are valued equally. Some are more valuable than others. For example, a Verizon lease is more valuable than a Clearwire lease because the industry believes that the Verizon lease is less likely to be terminated. Some types of sites are more valuable to the lease buyout companies because they have a greater probability of being around in 10 or 20 years. An example would be towers with multiple wireless carriers collocating (sharing space) on the tower. With multiple users on the tower, the chance that the underlying lease would be terminated decreases.

Landowners might be surprised that their own credit-worthiness (or lack thereof) can impact pricing. Since some leases can be voided if the underlying property is foreclosed upon, buyers of these leases check to see whether there are loans or mortgages that are secured by the property. If there are and the seller has bad credit, the risk is higher to the buyout company that they could lose the purchase rent stream. As a result, if you have lower credit AND the property upon which the cell site sits is mortgaged, the buyers will discount their offers to account for the higher risk. When we assess the value of a lease for a landowner, we take these factors into consideration.

Language in the lease can also impact the valuation. If your lease has a right of first refusal clause in it – whereby the tenant of the lease has the right to match any offer to sell the property or the lease – the buyout companies won’t be as aggressive because they know that all their efforts would be in vain if the tenant exercises the right of first refusal. If the lease is set to expire in the near term, the lease buyout company may place a greater value on the lease because they know they can negotiate higher lease rates with the carrier. Lastly, external factors can influence the value of your lease. If your tower or rooftop is in a unique location, the probability of future revenue from additional tenants can impact the purchase price.


When I sell, how long will the transaction take?

The typical buyout transaction takes approximately 60 days from start to finish. This is an average; some deals take as few as 45 days, and some can take up to 180 days to close. Some buyout companies promise quicker turnarounds – but if the company hasn’t done their due diligence (typically a 30+ day process), it is rare they can close until they complete it. It is important to establish a realistic timeframe within any letter of intent and purchase agreement that you sign.


Is there a better time to sell?

The lease buyout market fluctuates alongside the general economy. You can assume that when interest rates increase, lease buyout companies will make less substantial offers unless they have locked-in the cost of their capital. This occurred in 2008 when the economy tanked and the lease buyout industry almost shut down. You can also assume that offers will decrease when a material event occurs in the industry. An example of this is when AT&T and T-Mobile announced their merger in 2011; the lease buyout industry hiccupped for a few months while trying to figure out how to gauge the risk of future terminations due to the consolidation of both sets of cell sites. Fortunately for almost all landowners, the merger was not approved by the FCC and Department of Justice, and as a result, offers climbed back to their normal rates.

Right now (4Q 2012), we believe that the market is as high as it is likely to ever get. There is currently a confluence of events occurring all together that are driving offers to amounts that haven’t been seen previously. It is definitely a seller’s market these days and Steel in the Air is well situated to help you take advantage of this unique market.


What are the tax ramifications of a lease buyout transaction?

As always, the tax treatment of the proceeds from any transaction should be carefully considered. We are NOT tax experts, certified public accountants, or tax advisors. We strongly recommend that you consult your tax advisor before entering into any such transaction. The primary question from most of our clients is whether proceeds from the lease buyout transaction will be taxed as capital gains or ordinary income. In some circumstances, clients have hired a qualified intermediary to set up an IRS Code Section 1031 exchange. They use the proceeds from the sale of an easement under the lease area to purchase or invest in another income producing real property asset. In these instances, our clients sell a perpetual easement (as opposed to a shorter 30 or 40 year term), as their tax advisors have determined that such a sale constitutes the sale of an interest in real property which is required to qualify for a 1031 exchange. You should consult your tax advisor for advice on whether this option is available to you.


What is a Non-Disturbance Agreement (NDA) and why is the lease buyout company asking for one?

A bank will typically record a mortgage or deed of trust instrument on real property when a loan is taken by the property owner to purchase or refinance real estate. To secure the bank’s interest in the property, the lender records a mortgage instrument in the records of the county where the property is located.

In the event of a borrower default on the mortgage, the lender may elect to foreclose on the property in an attempt to recover some or all of its losses from the unpaid loan balance. The act of foreclosing on the property will cause most other property interests (e.g. easements, assignments of rent, etc.) recorded after the date of the loan to be voidable at the bank’s discretion. This means that the bank may choose to keep the property interests in place or it may elect to void the junior interests in the property.

When a lease buyout company purchases your cell site lease or an easement under the cell site on your property, they often pay many years of monthly rent up front. If there is a mortgage on the property, the lease buyout company is concerned that the bank (lender) could foreclose in the event that the property owner (borrower) fails to pay the mortgage. In such instance, a bank would likely elect to void the lease assignment or easement interest purchased by the lease buyout company so that the bank could then begin to receive the cell site rent. Such action by the lender would leave the lease buyout company holding the proverbial empty bag, no longer entitled to receive the monthly rent for which it bargained in the lease buyout transaction.

The Non-Disturbance Agreement (“NDA”) (sometimes referred to as an “SNDA” or Subordination, Non-Disturbance, and Attornment Agreement) is used to preserve the lease buyout company’s interest in the property in the event a lender forecloses on a property. Typically an NDA is signed by the lender, property owner and lease buyout company. It is a contract that provides the bank will agree not to disturb (remove or extinguish) the lease buyout company’s interest provided that the lease buyout company is not in default at the time of the foreclosure. In most lease buyout transactions where there is debt on the property, the lease buyout company will require your lender to sign an NDA. If you are unable to provide one, the buyout company typically reserves the right to reduce the purchase price. Thus, it is important to inquire about an NDA with your lender before you sign a letter of intent, not after.


What happens after the sale of my lease?

During the first or second month after the sale of your lease, you can expect to continue to receive monthly rent checks, since it usually takes 30-60 days for the carrier to redirect the payment of rent to the lease buyout company. Typically, the lease buyout company will deduct the first two months of rent from the purchase price at closing to account for the likelihood that you will continue to receive up to two months of rent after the sale transaction closes. In the event that you do not receive one or both payments of rent from the carrier, the lease buyout company should be obligated to pay you as the property owner for the rent not received from the carrier. This may take an e-mail or phone call to the lease buyout company to inform them that the deducted rent was not received. Most of the lease buyout companies have been fairly responsive in paying the property owner the redirected rent payments. Make sure you include a provision to capture the reimbursement of such payment in the event the carrier redirects payment for one or both months to the purchaser of your lease(s).


Will the lease buyout company sell my lease?

After your cell site lease buyout transaction is completed, depending on the acquiring company, many lease buyout companies hold onto the assignment and easement for a period of months until they have a portfolio of leases that are able to be resold or re-traded on the open market. The buyout companies like to aggregate leases and securitize them as a package, and then sell the package. Thus, it is unlikely that the company you are dealing with will be the eventual owner of the lease.