Cell site landlords across the nation are receiving lease “optimization” demand letters from contractors hired by their wireless cell site tenants effectively threatening early termination unless rent and other concessions are granted.

The reasons given by the tenant can range from “our site on your property is not profitable”; “we have too many cell sites in your area”; “due to 5G, fewer cell sites are necessary and your site in on the chopping block”; all the way to “we need to lower the rent because of industry consolidation.”

These odious letters often include landlord-hostile proposals such as if the landlord agrees to lower the existing lease rate, then the tenant will be willing to extend its lease at the lower rent rate for additional terms. Sometimes the pitch is that if the landlord lowers the rent now, the tenant will agree to forego early termination for 5 to 10 years. But adding worse to bad, these proposals often come with a number of new one-sided terms such as requirements for additional lease space at no additional rent, rights of first refusal, waiver of landlord rights, collocation approvals with no additional rent, and more.

Sometimes the optimization letters offer the landlord a single or structured lump-sum payment in return for the landlord agreeing to allow the cell carrier to remain on the property, rent-free, for a specific period of time (usually in perpetuity). The lump sum payments are commonly considerably below the market value of an arms-length negotiated buy-out.

This is a numbers game: The tenant agents generally have sales quotas to meet. They will reach out to dozens and hundreds of landlords at a time using high-power, scripted scare tactics to induce the landlord to make a quick (and usually awful financial) decision. Oftentimes, the agents will receive a commission based on the amount of rent that they reduce and are paid bonuses depending upon how successfully they negotiate lease amendment terms to the tenant’s advantage. These agents are specifically trained to respond to landlords questioning the legitimacy of the claims.

Most landlords don’t have training and scripts to follow to respond to the rent chisel letters.  Without the industry experience or background to respond to these pressure tactics, landlords will sometimes end up agreeing to these deals without first recognizing the unfair motives and subsequently the consequences that come from their uninformed consents.

Below are some tips landlords should consider when presented with a lease “optimization” letter:

• The cellular carrier has already expended considerable time and expense securing permits and approvals to operate at a landlord’s location.  The equipment on the site can’t just be taken down and reused anywhere.  Think about how much it will “cost” the tenant to relocate if the landlord says “no.” (Hint: In most metropolitan areas, if the tenant does move (presuming that they can find another willing landlord at a lower rent), the cost to move to the new site will easily cost them over $250,000.  You’ll see that it really doesn’t make economic sense to spend $250,000 in current-year capital dollars to save, perhaps, $10,000 per year in future lease dollars!).

 

• If the landlord’s site wasn’t valuable to the cellular carrier, then they would not have bothered to attempt to amend its lease. They would have used an early termination provision found in most existing leases. (Hint: If you’re considering a new wireless lease, also consider an early termination fee provision if they do want the option to leave early).

 

• Although there are certainly advances in technology, these new technologies don’t necessarily result in a reduction of required locations.  For example, 5G will require thousands of new, short range antennas, as well as most existing sites to provide the legacy ‘umbrella’ coverage.

 

• Just because the landlord’s location may be “old,” it doesn’t mean that it has lost any value.  A location does not simply become less “attractive” when there is redevelopment in another part of your city, or when zoning has changed, or even when newer homes are being built on the other side of your freeway.  On the contrary, a cellular location’s attractiveness is determined by engineering needs already baked into their existing network design rather than traditional real estate drivers that might affect a user’s decision to buy a house or rent an office space.

 

• While consolidation in the industry may result in redundancy, such as the recent T-Mobile-Sprint merger, this is true for only a minority of existing sites.  In fact, in my 30 years of wireless sector leasing experience, only one of my client’s cell site leases was terminated for this reason despite all of the mergers that have happened over these three decades.

 

• If the landlord’s site wasn’t that valuable to the carrier and is now allegedly “worth less,” then why is the company still interested in buying it by way of a perpetual easement? (Hint: When you see an offer for a long term or perpetual easement, they are telling you that your property is very important to their long term needs and goals!).

 

• Pay careful attention to the proposed lease amendments as some may violate the terms of the landlord’s existing lender financing on the property or may make lender financing or refinancing the property difficult or impossible in the future.

 

If, as a landlord, you have received one of these rent optimization letters, it is incumbent on you to seek professional advice from a lawyer with experience in the cell site industry before proceeding and agreeing to any new amendments. This really is ‘a big deal.’

 

For more information, please contact Linda Koffman in SGR’s Real Estate practice.