Many self storage owners and operators have fallen in love with an unexpected source of revenue at their self storage facilities. Namely a cell tower and once a cell tower is up and running on your property it is a lot like found money. Assuming you can get a cell tower company to be interested in your property you must be extremely careful to properly negotiate the terms and conditions of the agreement before you simply sign on to a long term agreement. While this is certainly one place where you should not skimp on professional advice, this article serves as a list of some of the considerations our clients have looked at over the years and often need to be better addressed before an agreement can be signed.
1. Lease vs. Option to Lease. Make certain you understand what is being presented to you for signature. It is almost always an option for a lease, not a lease. This means that for a small fee the cell phone company has the right to enter into a lease agreement with you, should they exercise that option. The option agreement does describe the terms and conditions of the lease so the option becomes the lease, if and only if, the cell company decides to exercise the option. Should the cell company drag its feet and decide not to build for a period of time all you are entitled to is the option fee. While an option fee sounds like simple free money even if the cell phone company does not build, the land is encumbered for the life of the option. An encumbrance may affect your ability to sell, lease other parts of the property, refinance, etc., so you should be careful.
2. Options and Automatic Renewals. Watch the length of the option and any automatic renewals of the option which could hold the land “hostage” for a long period of time. There is a reason that these agreements are options exercisable at the cell company’s discretion, there are many things that must be tested and determined as to whether or not the cell lease is actually feasible before the cell company would want to enter into a full fledged lease. Some of these determinations are innocuous, such as a clear RF signal to the area they need service, utility easements, zoning, and etc. Some of the issues that need to be tested are more contentious, such as an environmental survey. This is a bigger issue because the cell tower company finds an environmental problem, you have agreed in the option agreement to remove the environmental hazard in order to allow the cell company to build should they exercise their option. Thus, you will get a notice of an exercise of the option and a notice to remediate the hazardous condition. This can be expensive. However, with the right rate of rent you should eventually get your money back. The bigger problem is that if the cell company notifies you of the hazardous condition but never builds, because you now have knowledge of the hazardous condition and must remediate it before you can sell or refinance because of the warranties you would make in any sale or refinancing of the property.
3. Cooperation. Many of these options/leases provide that you will “cooperate” on a wide variety of issues surrounding installation of the tower. Please make sure you are comfortable with what the term “cooperation” means. Going to one zoning meeting may not be a large burden; going through an entire zoning lawsuit with your company as one of the named parties may be expensive and time consuming. You may want to more clearly define what cooperation means in the option.
4. Amount of Land Leased. If an option ever turns into a lease, understand the amount of land you are really leasing. For example, a lease may be for 2,500 square feet of land, but the lease may actually consume a lot more space. If you look closely at the option/lease the square footage amount stated may be for the fenced area around the footprint of the tower and a control building, if applicable. However you may also be granting an easement that will allow for unimpeded access to the gate of the tower 24 hours a day, 7 days a week and for turn around space for service trucks. Thus, while you may be leasing 2500 square feet, the actual amount of space or land you have to leave open and available for the cell tower may be much more. Remember that certain easements can reduce the property’s value, that is if you or someone else ever wanted to do something else with the property, you/they may not be able to do what is planned because of the various easements you have allowed for the cell tower on your property. This can diminish the sale price potential for a self storage facility.
5. The Parties. Make sure the names of the parties to the contract are correct. First make sure that you, if you are the owner are properly named as the entity that owns the self storage facility. You do not want a situation where a dispute between the cell tower company and your facility becomes personal against you. If you have an entity, make sure the option/lease is with the entity. If you are managing for someone, make sure the ownership is the actual named lessor.
Also notice the name of the company you are doing business with. Often the cell companies have their real estate leases in a separate, for lack of a better term, “shell” entities, which are not the actual cell phone providers. Do not assume there are gigantic deep pockets to pay in the event you have to enforce the lease. Even if you are dealing directly with a cell phone company that you know, remember that these companies merge and divest themselves of assets all the time and change names. Further, you will note that in many of these lease/options the right to transfer this lease to another entity is always available to the cell company. This means that if the cell company really wants to avoid responsibility for the lease they will assign or transfer this lease to an entity where the cell tower can be “dumped” and you may be left holding the bag.
6. Term of Rental. Should your option turn into a lease, these contracts are generally for three 10 year terms or a 5 year term with four 5 year renewals, with a stepped up increases in rent each renewal. These renewals, because of the expense of the cell tower to build, locate, and etc., always automatically renew at the cell phone company’s sole discretion. So you are not able to simply terminate the cell phone tower lease at the end of the first 5 year term. The cell phone company will have the right to be there, if they want to, for 30 years. Often at the end of the entire term we see inconclusive language about what happens to the lease, for example the lease goes month to month, but they do not define an amount of rent. Make sure, if you are entering into one of these agreements, that you have an idea of what is going to happen, even if you do not plan to be around in 30 years, so that anyone looking to buy or refinance the property will have an idea of what happens with the cell tower at the end of the lease term, including an appropriate rate of rent based on the last rent paid for the last renewal term.
7. Interference with the Tenant’s Use of the Property. There are two sections, generally, about interference in every cell phone tower lease. One promises that the cell tower will not interfere with any of your current tenant’s businesses. Cell tower interference is not normally a large issue with your existing storage tenants, unless you have other cell towers. If you have other cell towers you must make certain that this language deals swiftly and appropriately with any interference that may be caused because you will have a penalty clause in your other cell tower lease if you allow someone on the property that interferes with the existing cell tower. This segues perfectly into the second interference clause.
The bigger interference clause is the one that says you as the operator/owner will not allow anyone on or in the property that will interfere with the cell tower once it is built. This mostly deals with the interference of signal. Since you may not be an engineer it may be difficult to figure out where interference is coming from. Often these provisions start out in a very draconian manner, that is if there is interference you have “x” hours to fix the interference or a per day penalty starts or the lease may be terminated solely at the cell tower owner’s discretion. You need to build in to your agreement a reasonable amount of time to detect what is causing the interference and correct the interference before any penalty or the right to terminate the lease comes into play. Quite simply, you are self storage operators and may not be able to determine the source of interference with 2 hours notice, like a cell phone company might be able to. You may also want to negotiate a cooperation clause with the cell phone company to have them assist in determining the source of the interference provision so that you can move as quickly as possible.
8. Easements for Utilities and Where the Utilities Actually End Up. Most of the options/leases say that the cell phone company will try to get individual utilities to the tower, but if not that you will agree that you will allow them to use your utilities and bill the cell phone company for those utilities. There are many concerns with this provision, not the least of which is how you allocate a singular utility bill into cell phone tower use and your use; a formula should be included so that you are not guessing an amount. There are often also provisions that require that you bill the cell phone company promptly for utilities or waive your claim to billing so you must follow these requirements carefully. However, often the cell phone company then takes 90 days to pay you and you become the bank for the cell phone company on its utility bill. Since this is problematic, you may want to negotiate a shorter pay time or some sort of finance charges if not paid within a certain period of time.
Also, you need to understand if there are separate utilities, where these utilities are going to run? Keep in mind that just because a cell company tells you where they think the utilities are going to run does not mean that the utility company is going to show up and put the utility where expected. Since you, in the option agreement, will grant the cell phone company an easement to run the utility (you may also have to grant the utility company and easement separately before they will come out and work on the property), you need to have some sort of provision in the option/lease that allows you to back out should the utilities not run where expected such that it will cause damage or diminishment to your business. For example, one client of mine thought the utilities would run underground along the south edge of their property line. Instead the utility company determined that the best way to run the utility line was to install about 6 utility poles in 6 RV parking spots to run the power to the south edge of the property. Once the 6 utility poles were in, that made the 6 RV spaces less usable because of the loss of space. The owner got rent from the cell tower, but lost almost the equivalent amount of rent in the RV spaces because the spaces became useless for large boats or vehicles for storage.
You also want to understand where any trenching may occur. You may think trenching will occur on the outside of your fence, but if the utility company decides to trench on the inside of your fence and you have 100 RVs in the way, this could pose a serious short and long term problem for this easement.
Speaking of the long term consequences of the easement, make sure everyone is in agreement that if the easement is going to run through your property, that you are allowed to continue to conduct the business over the easement. Many of the option/lease/easements call for 24 hour, 7 day a week access to both the tower and any power lines or underground lines that service the tower within the easement area. If you are going to run an easement through 50 RV parking spots back to the cell tower, it needs to be clear in your agreement that you are allowed to continue to park RV’s over the easement area and include a formula in the contract and get a plan in your mind about what you are going to do if the cell tower company needs to get to the underground wires under the 50 RV’s in a hurry. Obviously, your rental agreement must also be written to deal with this possibility as well.
9. Expansion. Many option agreements state that they have the right to expand their antenna facilities. Generally these agreements state that if the antenna facilities on the ground expand, rent will proportionally increase. This can be a problem because the cell tower may take an additional $40.00 per month for their space, but knock out 2 $100.00 per month RV parking spots. This is obviously not a good result and should be contemplated early in the negotiation process. Further, the cell tower company generally will not pay extra when they increase the height, unless you negotiate such an arrangement into your agreement. Normally an increase of height is done to allow other cell companies to use the tower. This puts you in an odd position because the new cell company may only need space on the tower and not any space on the ground. The new cell tower company moves in, paying rent to your cell tower company without you receiving any additional benefit, but you have all of the additional burdens of additional companies coming on to your property. This should be anticipated and negotiated into the option/lease agreement that any new tower user also results in a rent increase to you.
10. Equipment Removal. Probably one of the most important things you can negotiate in this agreement is clear requirements on the equipment removal. In all circumstances a right to remove the antenna should become the obligation to remove the antenna and equipment and return the land to its original condition, after any termination, even if it is termination is caused by your breach, you cannot collect enough rent to cover the cost of dismantling the 100 foot cell tower and disposing of all of the assorted ground based equipment. While you can negotiate any clause you want, it may still happen that you end up paying to get rid of the tower if the cell phone company really wants to, as discussed above.
11. Fencing. Many of these option agreement/leases say that the cell phone company has the right to fence the area around the cell tower. You want fencing to be an obligation.
12. Repairs to the Antenna. Watch the provisions that discuss what happens if the antenna is damaged or destroyed. Some of these clauses say that if the antenna is damaged or destroyed, the lease simply terminates. You want to try to negotiate a requirement to repair or replace, rather than a right to walk away, and again, you want to make certain that, if nothing else, the tower and equipment is properly and completely removed at the end of the term.
13. Access by the Cell Company. As discussed earlier, most of these options/leases require that you provide 24/7 access with substantial penalties if access is impeded or denied to the cell phone company. Some of these penalties can run up to $500.00 per day. However, what happens if you can not program your gate to give individual 24/7 access to a cell company and your tower is behind the unit or gate confines. Or what happens if the gate is out of order, malfunctioning because of electrical or power outage, these items must be negotiated into the agreement?
Further, you want to make sure you reach an agreement with the cell company that you are allowed to use the space up to the fence line for parking or for building. This has to be done in conjunction with the negotiation of turn around space as discussed earlier. Turn around space can mean a pickup truck or it could mean for a 30 or 40 foot long cherry-picker, since you lose a lot of useful storage space if you allow the turn around access 24/7 for a cherry picker, some kind of agreement must be negotiated about how to handle that situation or you will find yourself leaving a lot of wasted land.
14. Service. Many of these option agreements/leases provide that if the antenna is “disturbed, destroyed, or damaged” the lease terminates. Disturbed is an interesting word but I am not certain how cell phone companies interpret it. Does this mean that if one of your existing tenants climbs over the fence and messes with the antenna that you are going to lose a lucrative 30 plus year agreement? The term “disturbed” needs to be defined and the right to terminate should be reduced down substantially in the event of a disturbance. Also, you want to require the cell company to remove the cell tower and all equipment in the event the tower is determined “disturbed” and want they want to terminate the lease.
15. Real Estate Taxes. Because you will be increasing the income to your property, it is almost certain that your real estate taxes will increase. Many of the options/leases call for you to pass through to them any increases in your real estate taxes, but rarely do these agreements contain a formula. It is pretty easy to determine if you normally pay $10,000.00 per half in real estate taxes, and your real estate taxes go up to $12,250.00 per half with no other tax increases, after your tower is built. However, if there are also tax increases, levies, etc., it will be difficult to back out the increase in the assessment. Make sure you include an appropriate formula that will allow you to interpret this assessment and pass it through, including how to pass it through as your taxes increase since it may be hard to break out what portion of the taxes are on the higher value versus the higher tax rate. Also, be careful because these clauses often contain a requirement that you pass through certain tax bills within a certain period of short time after receiving them or you waive your right to collect.
16. Covenants and Warranties. As with any contract you are going to be asked to make certain covenants and warranties, including the above examples of hazardous waste, your ownership of the property, your right to sign a lease, that this will not violate certain zoning requirements, or terms of your mortgage, and etc. If you are not positive about the answers to these questions, you may want to change these warranties from “warrant” to wording like “to the best of my knowledge and belief.” Warranties are strictly construed and please be certain you can actually warrant something that you are going to be asked to warrant.
17. Right to Assign. As discussed earlier in this article, the right to assign a cell tower is risky because the cell tower company can transfer the lease to a different company that may or may not have assets sufficient to remove the tower should the cell tower company decide they do not want to do business with you anymore. There is not much you can do about this about this except be aware of the right. However, most of these cell agreements do not originally allow you to assign the lease someone. That makes it almost impossible to sell your property for the next 30 plus years. You will want to negotiate in a right to sell the property and assign the lease as long as the buyer of the property accepts the lease.
18. How do You Get a Cell Tower Company to Look at Your Property? There are 3 websites that purport to register cell towers with cell tower providers and hope to make a match. Some that appear to be particularly reputable is www.steelintheair.com, www.unisonsite.com; and for information about cell towers try www.wirelessestimater.com. I have never worked with any of these websites and do not know for certain that they are productive and I urge your caution before working with one of these companies. Further, you should have an expert in cell tower leases working with you to help you understand appropriate rates of rent, fees that you may need to charge with the addition of the cell tower lease based on what market conditions will bear. If you wander into this alone, you will be sorry that you entered into a much lower lease than the cell tower down the road. You also must have an attorney involved to assist you in all of the negotiation points of the options discussed in this article, as well as many other options and/or issues that may come up during the entire process.
Jeffrey J. Greenberger is a Partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati, Ohio and is licensed to practice in the states of Ohio and Kentucky. Mr. Greenberger’s practice focuses primarily on representing the owners and operators of commercial real estate, including self storage owners and operators.
This column is for the purpose of providing general legal insight into the Self-Storage field and should not be substituted for the advice of your own attorney.
Jeffrey’s new website, www.selfstoragelegal.com, contains Jeffrey’s legal opinions and insights into the self-storage industry, as well as an article archive.
Jeffrey is the legal counsel for the Ohio Self-Storage Owners Society, Inc., and the Kentucky Self-Storage Association, Inc., as well as a regular presenter at Inside Self-Storage Trade Shows. You can send your questions, comments, or suggestions for future topics to Jeffrey J. Greenberger at jjg@kgnlaw.com, or mail them to Jeffrey J. Greenberger, c/o Katz Greenberger & Norton LLP, 105 E. Fourth Street, Suite 400, Cincinnati, Ohio 45202, or you can reach Mr. Greenberger at (513) 721-5151.
Yes! Finally someone writes about storage.