Owners of commercial real estate, regardless of the property type, try to utilize every aspect of their property to maximize revenue and create additional value. For example, many landlords often look at building rooftops and other generally “unused” areas on their property to generate additional rental income by leasing those areas to tenants with “specialized space needs.” Any income generated from the roof or any unused portion of property is often considered by the property owner to be “found money” and the terms of those “specialized space” leases (including the rental income generated by these leases) are often not analyzed and negotiated by the owner with the same attention to detail as the owner would analyze and negotiate the rental of more conventional space within a typical office building, industrial warehouse or retail center (as the case may be). This more relaxed approach may cause the owner to leave a lot of money on the table and, in many cases, may restrict the property owner’s use of the property and/or income stream from the property if these leases are not structured and properly analyzed. The leasing of cell site towers, for example, without experienced advice and guidance can lead to a variety of complications for a property owner.
It is highly important that a property owner undertake some long-term planning on its property before signing a cell site lease. If it’s possible that the owner may wish to redevelop the property during the initial term of the cell site lease or any extension option, or believes it may want to sell the property to a party that may wish to redevelop the property, these are issues the owner will want to discuss with a potential communications lessee during the letter of intent stage of their discussions.
A recent case of mine will more clearly illustrate the point. I recently represented a sophisticated real estate company that owned a property containing multiple retail buildings. Among the leases the client inherited from its predecessor in interest was a lease agreement pursuant to which a cell carrier leased 400 square foot of space on the roof of one of the buildings for use as a mobile/wireless communications facility. The lease was for an initial term of five years with five additional 5-year renewal options. The client asked me to analyze the lease documents and consult with them about how best to position the property for a future sale.
The tenant was in one of its renewal terms when my client determined that the highest and best use of the property was to redevelop and upgrade the buildings on the property -including the building that had the mobile/wireless communications facility installed on the roof. The parties mutually agreed to temporarily relocate the cell site to another portion of the property during redevelopment and upgrade of the building on which the cell site was located. By mutual agreement, the cell site would be relocated back onto the new upgraded building after construction. However, the cost of the initial move of the communications facility from the rooftop of the building that was being redeveloped to another location on my client’s property was approximately the same amount of the total rent the wireless carrier paid to my client and its predecessor in interest under the lease from lease commencement through the initial lease term and the portion of the renewal term combined!
In this case (and in most cases), termination of the lease was not an option. Most wireless carriers will not grant an owner the right to terminate the lease under any circumstances. Telecommunications companies are often very sensitive to any provision which would allow a landlord to terminate their rights under the lease. A landlord should expect strong push back if he or she requests any right to terminate the lease for any reason other than default by the tenant after notice and the opportunity to cure. Unlike other commercial leases, the termination of a telecommunications lease interferes with countless end users. Locating a cell site is heavily reliant on detailed engineering and analysis and unlike other types of tenant users there are not many alternative locations that will work equally well for wireless carriers. A wireless carrier will always cite the significant amount of money they invest in each location (from obtaining the initial permits and approvals, building outvthe tower, roof top or other location and installing and operating the antennas and other equipment) and continuity of service to its customer as reasons they cannot accept any provision that would give the landlord the right to terminate the lease. In other words, the ability to continuously operate is a sacrosanct provision to any wireless carrier.
Communications leases are frequently structured with an initial 5 year term and multiple 5-year options to extend but a landlord should consider the long term nature of these communication facilities before it enters into negotiations with a cellular carrier. If there is any possibility that the landlord will want to redevelop the property in a manner that may interfere with the cell site installation during the term of that lease or may want to sell the property to a party that may want to redevelop the property in a manner that may interfere with the cell site installation, it is imperative that the landlord fully explore those options and discuss them with the communications carrier before it signs the lease.
For example, in the situation of my client that wanted to redevelop its multi-building retail center, the landlord did not have the right to terminate the lease in the event it wished to upgrade the building and the parties never discussed a mutually agreeable plan in the event the landlord later wished to redevelop its property. In the absence of such a negotiated provision, the cellular carrier could have held up redevelopment of the site until the expiration of the initial term and exercise of the multiple 5-year extension options. In a large development project, this would be the tail (a 500 square foot cell site) wagging the dog (the entire site owned by the landlord). Had the initial landlord discussed the possibility of redevelopment at the outset, the parties could have negotiated an exit plan (such as a termination fee, sufficient notice of termination, or relocation to another location on the property) or decided that termination or relocation was not an option for this property for the entire term of the cell site lease, after exercise of all extension terms.
If you are considering a lease to a communications carrier, make sure to plan ahead and consider the implications as redevelopment may be more difficult in the long-term than you initially anticipated.