The vast majority of cell tower leases are not guaranteed and can be terminated by the tenant with minimal notice. This is why most banks will not lend against a single cell tower lease. What are the risks of a cell site lease?
Risks of Owning a Cell Site Lease
Unfortunately, a cell site lease is not a dependable or guaranteed source of income. If you try and use it as collateral, for example, banks will not accept it due to the inherent risks. What are the risks of a cell site lease?
1. New and Competing Technologies
The technology in the wireless industry is constantly evolving. Remember the first cell phone? Now we have small, lightweight smart phones with more memory than a computer. The wireless industry is doing the same for cell sites. Carriers are building more efficient and innovative sites to provide better and faster service to their subscribers. As a result, new technologies threaten to replace traditional cell sites (towers and rooftops) because new innovations have allowed for more cellular data to be transmitted over longer distances.
2. Industry Consolidation
In the early days of the wireless industry, there were over 10 wireless service providers in the 1980’s. Today, mergers and acquisitions reduced the number of carriers to four main players – Verizon, AT&T, T-Mobile and Sprint. Carriers actively look for ways to reduce operating expenses and gain market share. To achieve this, carriers might merge in an attempt to cut costs and reduce prices to consumers. If a merger or acquisition occurs, landlords of redundant cell sites are at risk of decommissioning.
3. Competition between Wireless Service Providers (Carriers)
The wireless industry is extremely competitive. Carriers actively look for ways to reduce infrastructure spend on cell sites to allow them to offer less expensive plans to subscribers and grab market share. As a result, tenants search for ways to reduce rent of current cell site leases by seeking rent reductions or finding nearby landlords to build new sites with more favorable lease rates.
4. Demand for less expensive cell site locations
The design and location of cell sites is constantly changing and as a result, it is virtually impossible to predict which sites will be decommissioned. Similar to the competitiveness in the wireless industry, tenants are searching for lower rent locations in similar areas and if they find a different landlord willing to agree to less rent, the current site becomes less in demand.
5. Increased Data Demand
Is the current cell site able to meet the increasing demand for data? Is there a more efficient method to provide services to the area vs. a traditional cell tower site? Thanks to new and emerging technologies, carriers are developing new ways to provide faster and more cost effective service to their subscribers. While increased data demand would seem to mean better security for your cell site, it doesn’t always work that way.
Managing Risk – Safety in Numbers
If owning a Cell Site lease can be risky, Why do companies want to buy them?
Similar to the mortgage or insurance industry, companies interested in buying cell site leases provide an investment bundle that is attractive to investors—large and small. For investors seeking risk adjusted returns on investment, having exposure to large number of cell site leases bundled together can be very attractive—especially, when those bundles are diversified. Diversification allows for a good mix of tenants, geographic locations, cell site structures, technologies, etc.
Unlike a single lease, if a cell site is decommissioned there would be substantial loss to the landlord. In contrast, investors buying hundreds or thousands of leases bundled together ensure that the gains of some of the leases in the bundle will absorb any losses of the other leases in the bundle. Effectively spreading the risk across the large portfolio of cell sites.
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