Financing Strategies Up on the Roof
Most real estate transactions involving telecommunications companies focus on renting space. Indeed, all kinds of properties never before considered for their money-making potential — water towers, rooftops, even church steeples — suddenly are attracting interest. Hordes of personal communications services and cellular companies are scouting the country for wireless antenna sites to keep up with demand for transmissions between paging networks, cellular phones, PCS equipment, and commercial mobile radio services.
But Tom Rohde, CCIM, president of Rohde Realty in San Antonio, discovered a new telecommunications twist in a recent transaction involving the sale of a multifamily building. It entailed the purchase of air rights to provide a source of equity for the new buyers. "I had never heard of this before," Rohde says, but since that time he’s "been thinking about future high spots," as he sees the field for tower and antenna placement continuing to grow.
Since the early 1980s, cellular companies have erected a network of more than 22,000 towers across the United States to provide service. The Telecommunications Act of 1996 led the way for the development of PCS sites to handle a host of ancillary services from smaller phones as well as hand-held devices. To keep up, many cellular services are switching to digital technology, putting up more sites to eliminate dead spots in their service-area grids. Industry sources estimate a need for as many as 200,000 sites and towers in the next five years as more than 100 million users plug into the wireless world. That’s double the number of today’s users.
Location Is Key
Rohde’s deal involved a building that already had been discovered by cellular companies — and with good reason. Constructed in the early 1960s, the property occupies one of the "highest points in San Antonio," Rohde says. "It’s a high-rise building, which is rare in this area, and it’s situated on the first hill coming out of South Texas." It overlooks the CBD and Rohde says, "is probably about 500 to 600 feet taller than the next tallest building — by virtue of its location on top of a hill." The 15-story high-rise was well situated for cellular communications, which require unobstructed locations in high-density population areas. Its location in what Rohde refers to as the "silk-stocking district," also added to its value as a multifamily property.
Having lived in the building for 10 years, Rohde was familiar with it and knew the owner, who decided to sell for estate-planning reasons. At the time of the sale, "The roof had a telecommunications income of about $15,000 a month," Rohde says. "It was full of towers from Sprint, MCI, and others."
A New Type of Real Estate
Such rooftops are among the hottest types of real estate for PCS carriers. Their appeal? They are established sites, so local zoning, building access, and other issues that could hinder development usually are resolved.
Also, situating towers and antennas on rooftops does not attract the public outcry that has slowed the growth of new tower construction nationwide. Recently local communities have become more stringent in their zoning approvals of towers. Most public opposition is based on possible health concerns or unsightliness; some believe they mar the beauty of a natural landscape.
As a result, most PCS companies look for alternatives to building new towers, hiding antennas in church steeples, disguising them as trees, or attaching them to water towers, existing signs, or flagpoles. Most often they prefer to place them on building rooftops, where they are out of sight and out of mind.
Previously, a national investment company that specializes in rooftop communications approached the owner, offering to buy the air rights above the building. The owner, however, didn’t want to deal with the ordinary income that would result from the air rights sale.
But for the group that decided to purchase the building, the sale of the air rights was money in its pocket. "The buyer group sold the air rights to the company in the form of a 99-year lease. It sold the air rights at the closing and received $1.5 million in cash. This gave the group the equity to complete the purchase of the building with very little out-of-pocket cash," Rohde says. The purchasers are now in the process of marketing the units as condominiums.
Up on the Roof
Meanwhile, up on the roof, the company that bought the air rights now can add more antennas and towers, or renegotiate as PCS providers’ needs change. With cellular companies switching to digital technology and with newer and more powerful equipment being brought on line, things won’t be staying the same up there for long, Rohde says. "The types of antennas are changing quickly," he says. "Some of them have been up there for 20 years. So, for example, when MCI or another company comes along and says, ‘We want to replace our old antenna with a newer one,’ the company can renegotiate the lease rate for the space." Although Rohde doesn’t know the number of antennas on the roof now, it isn’t uncommon for as many as 40 structures to be placed on a rooftop. Newer equipment is lighter and more compact, so conceivably that number could grow in the near future.
The company purchasing the air rights determined its price by using a "cap rate of around 10" percent, Rohde says. He believes this deal is unique, since he never before has heard of the air rights being purchased solely for this reason, and he thinks only a few investment companies in the country are involved in purchasing air rights for telecommunications uses.
However, the strategies in telecommunications are as varied as the number of players in the field. These run the gamut from companies that negotiate directly with landlords to lease roof space, to leasing and management companies that act as middle men, signing up landlords with rooftop space to rent and then master-leasing that space to different telecommunications companies. Such firms usually take a cut of 25 percent to 35 percent of the lease rates they negotiate for landlords. Other leasing firms target large property owners, such as hospitality companies, banks, and restaurants, with numerous locations across the country in order to offer a large number of possible sites to PCS carriers.
Widening the market is the fact that providers are looking at a broader selection of properties. PCS and digital technologies do not require buildings 20 stories tall, as was necessary for cellular transmissions. Now 10- and even five-story buildings may work for PCS carriers. More important than height is the "clear view" — a rooftop that is not obstructed by other buildings or trees.
The bottom line to most property owners who have sites that fit the necessary parameters is triple net, with leasing rates that range from $300 to $2,500 a month, with the national average for a PCS antenna about $111. Based on Rohde’s experience, selling the air rights may be another financial strategy open to property owners who want to raise capital for re-investment or property improvements, or for potential buyers looking for equity. Rohde cautions that the tax consequences need to be studied carefully beforehand, but he’s already looking into the possibility of using this strategy with another building in San Antonio. "Air rights will only become more valuable in the future," he says.