MICHIGAN ASSOCIATION OF MUNICIPAL ATTORNEYS

An Affiliate of the Michigan Municipal League

P tPresents:

Cell Tower Leases and Cell Tower Leases and Buyouts:

A Municipal Perspective

ByJohn Pestle John Pestle

5/25/11 1MAMA 11‐01

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Peter A. LetzmannMAMA Professionalism MAMA Professionalism

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peter@letzmann.compe e @ e a .co248 705-9901

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TODAY’S PRESENTATIONTODAY S PRESENTATION

Cell Tower Leases and Buyouts:

A Municipal Perspective

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TODAY’S PRESENTER

JOHN PESTLEVARNUM LAW FIRM

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Cell Tower Leases and Buyouts:yA Municipal Perspective

By John W PestleBy John W. Pestle

prepared for

Michigan Association of Municipal Attorneys

May 25, 2011

Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2011, Varnum LLP. All rights reserved.

Varnum Law Firm One of Michigan’s largest firms, over 100 years old

Corporate law firm with significant communications and p gmunicipal law practice - - city attorney, township attorney, special counsel for municipalities

Represents cities and townships in Michigan and nationwide in dealings with cable and telecommunications utilities

R t i i liti d i t t llRepresents municipalities and private property owners on cell tower, WiMAX tower leases

Offers model cell and WiMAX tower leases drafted fromOffers model cell and WiMAX tower leases, drafted from property owners’ perspective at www.varnumlaw.com/lease

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John PestleOver 25 years experience in communications, utility and energy law

Partner in firm, heads Varnum’s communications practice

Graduate of Harvard College, Yale Graduate School and the g ,University of Michigan Law School

Admitted in Arizona and Michigang

Past Chair of Municipal Lawyers Section of Michigan Bar and Legal Section of American Public Power Association

Held FCC license to work on radio, TV, ship radar transmitters

jwpestle@varnumlaw com and 616 336 6725jwpestle@varnumlaw.com and 616-336-6725

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Cell Tower BasicsCell towers, antennas continue to increase

Approx 256,000 at end of 2010Increase by 5%-7% per year

Why the increase?Minor reason - - to fill in gapsMajor reason - - due to iPhones, Blackberries, etc. - - To add capacity as “phones” (wireless devices) are used foradd capacity as phones (wireless devices) are used for Internet, data, music, pictures, etcPlus 100,000 for WiMAX (wireless Internet, like Wi-Fi on steroids) service

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Cell Tower Basics (cont.)

Leasing and zoning usually farmed out to local lease agents Leases typically structured as option to lease, plus lease itselfProposed lessee (tenant, zoning applicant) may be either

C ll h b idiCell phone company subsidiaryTower company—on spec or with lessee

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Cell Tower Basics (cont.)

Local leasing and zoning agents for cell companies often problematic

Slow, little authority, change frequentlyOften inaccurate, not knowledgeable Often do not follow through on commitmentsOften do not follow through on commitmentsAgents without authority - - Home office vetoed XCell company often NOT in loopp y pBe slow to negotiate, give them your “final offer”

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Cell Tower Basics (cont.)

How tower/antenna sites are determinedCell company engineers determine need for additional tower in certain area“Search ring” (showing area where tower could be located) is drawn on map and sent to local lease agentis drawn on map and sent to local lease agentLocal leasing/zoning agent scouts possible sites in ringEnters into lease/option with preferred siteEnters into lease/option with preferred site

From engineering perspective rarely only one site which will fill need

Instead economics (rent too high at other sites), speed with which site can be built, ease of zoning very important

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General ObservationsThese comments are from the perspective of a municipality, or other property owner Draft to be specific on what is intended

Long term (25-50 year) agreementP d f i ifi hProperty owner compensated for significant changes

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Types of LeasesGreenfield lease - - Tower on open land

Easiest, but usually the lowest rentA i i b ildiAntenna on existing structure - - building, water tower

Higher rent often availableUnique concerns on not interfering with existing building itsUnique concerns on not interfering with existing building, its uses or maintenanceFuture changes to building, siteg g,

Antenna on existing/rebuilt communications towerSome offers to rebuild existing towers stronger, taller, so can carry cell antennasUnique issues on no interruption of service

Renewal of old cell lease which is expiring20

Key Points – ElementsType of antennas allowed, e.g. broadcast antennas not allowed

Initial rent, escalationInitial rent, escalation

Collocation revenues

Risk mitigation

Property owner retaining flexibility on the usage, change in, and disposition of property

Items unique to cities, townships, other units of government

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ApproachMinimize downside risks to the property owner

Liability

Interference with radios, etc.

Don’t restrict future use of land, buildings (e.g.—expansion)g ( g p )

Minimize interruption, impact on property owner’s normal operations - - use of water tower as part of water system

Especially over long term (20-50 year life) of typical lease

Lease dollars typically small in the scheme of thingsyp y gDon’t let tail wag the dog

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Type of Antennas AllowedUsually portrayed as “cell phone antennas”

BUT typical cell company lease language in effect says “Any yp p y g g y ykind of cellular, radio, FM, TV or other antenna they want”

Cell phoneWiMAXRadio station broadcast antennasTV station broadcast antennasMicrowave dishes

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Type of Antennas Allowed (cont.)

Property owner’s typical perspective Draft to allow only cell phone antennas

Or WiMAXLease amendment if other antennas desiredDraft throughout in that fashion - - cell antennas now, others by amendment.So drafting affects:

Definitions of types of uses and antennas allowed, andPl / i d i h d lPlans/construction drawings attached to lease, depicting type of tower and antennas allowed

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Rent and CollocationRents in general

Depend on location, location, locationHow much site is needed vs. alternative locations$1,500 to $2,500 per month range common for leases with municipalitiesmunicipalitiesOften more in cities, less in rural areas

Rent specificsRent specificsInitial RentEscalated how often (yearly?)By what amount - - percentage cap?Rent paid how long in event of early termination

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Rent and Collocation (cont.)

Collocation Revenues—Who Gets Rent from Second, Third Antenna on Tower?

Item most frequently overlooked by municipalities, other property owners!Can double or triple initial rentCan double or triple initial rentSeveral ways to draft if tenant will not agreeRequire tower to be able handle X more sets of antennasRequire tower to be able handle X more sets of antennas

Improper collocation on existing tower (e.g. WiMAX) may lead to back rent being paid, major increase going forwardSubstantial rent increase on renewal of expired lease

Existing network in place, expiring location is part of itNew tower costs $250,000+

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Risk MitigationProtect property owner from liability

Rentals nice, butLiability if tower falls, etc. is large

Risk to property owner increased because tenant is often a shell p p ycompany

And tenant has right to assign leaseBut property owner is still there, its’ name is on the deed, it is easily sued - - “Deep pocket”Especially if it is a municipalityEspecially if it is a municipality

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Risk Mitigation (cont.)

B d i i d i l h ’Broad insurance, indemnity clauses, so that property owner’s reasonable expectations of protection are met

Adequate coverageAdequate coverageDollar amountsEnvironmental, similar coverages

Ability to increase coverage during long term of leaseProhibition on retainages, no self insuranceHigh quality insurance companiesNotice if insurance cancelledCross insurance clauseCross insurance clauseCap on property owner’s indemnityDetailed language to fulfill property owner’s intentDetailed language to fulfill property owner s intent

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Risk Mitigation (cont.)

Restrict tenant assignment of leaseNew tenant has to be creditworthy, at minimum; have necessary licensesProperty owner’s ability to assign lease, be relieved of liabilityliability

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Risk Mitigation (cont.)

Bankruptcy provisionsLease fits in "commercial lease safe harbor" of Bankruptcy CodeCodeSo that lease has to be immediately

Affirmed (and brought current) or Rejected (tower removed)

Avoids risk of lease under Chapter 11 continuing for several years without any rentyears, without any rent

And with tower falling into disrepairRetain property owner’s ability to move, relocate tower or

t ti t t ’antennas - - sometimes at property owner’s expenseSo that property owner’s future use of property, expansion is not barred

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Other ItemsReject right of first refusal to purchase entire piece of land on which cell tower is located (not just cell tower site)

Si ifi l d i if i ldSignificantly reduces price if property is sold

Scrutinize non-interference clauses- - what happens if cell tower interferes with property owner’s radios or vice versa?interferes with property owner s radios, or vice versa?

Or property owner’s constructing, adding to a building or antennas on property or nearby affects reception?

Reserve oil, gas, wind power rightsPipelines, power lines for same

License vs. leaseMany communities prefer a license to lease, as a license is

f bl t tmore favorable to property owner

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Other Items (cont.)

Attach detailed Legal description of property being leased Any easements for accessAny easements for accessPlans of what tower, antennas will look like; photosimulations Landscaping plan

Comply with restrictions on subdividing propertyHave clear removal obligation at end of leaseRestrict use of backup power supplies

Backup power NOT required by FedsBackup power NOT required by FedsGenerators are noisy and heavy, fuel is hazardous and pollutingBatteries are very heavy, acid is hazardous

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Antennas on Water Towers, BuildingsLease for antennas on water tower or other building much more complicated than lease for new “greenfield” tower

Two parcels being leased (one on ground, one for antennas) with different requirements Security; building access after hoursSecurity; building access after hoursPreventing restrictions on use, repair, expansion of building or structure very importanty pPreventing antennas, etc from harming, reducing useful life of building, roof, or other major building elements

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Antennas on Water Towers, Etc. (cont.)

Lease for antennas on water tower or other building much more complicated (cont.).

RF emission rule compliance more important due to people in building, workers on roof. Warning signs, automatic shutdown if people on roofshutdown if people on roofPlans, photo simulations of finished antennas, aesthetics often more important

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Items Unique to Municipalities, Local Units of Governmentof Government

Local zoning rules may not apply to tenant as matter of state, local law, i.e. - - no zoning approval required, g pp q

Because property is government propertyBut similar rules may apply as a matter of local policy

Federal restrictions on municipal zoning authority (shot clocks, etc.) do not apply

Because municipality is acting in its proprietary (landowner) capacity, not as zoning regulatorDo not require municipality to lease property Omnipoint vDo not require municipality to lease property, Omnipoint v. Port Authority of New York, 1999 U. S. Dist. LEXIS 10534 at *44, fn. 21, 1999 WL 494120 (2d Cir. 1999)

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Items Unique to Municipalities (cont.)

Bond counsel approval may be required if property being leased was acquired with tax exempt bonds such as revenue bonds for

t t d t twater system and water towers“Private use” rules restrict use of property so acquired

R t / t i ti f t b i t tiReverters/restrictions on use of property by private parties may apply

If property was acquired from Federal Government (BLM)If property was acquired from Federal Government (BLM)If property was acquired from State of Michigan And in some donations, grants of property to municipality by private partiesMay lead to “quit claim” approach, not warranting “good and

k t bl titl ” t t b i l dmarketable title” to property being leased

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Lease BuyoutsOffers to buy out or manage cell tower leases increasingCombine all the issues of ordinary leases plus additional practical and legal complicationspractical and legal complicationsProperty owner turns over cell site for ~50 years to third party, yet remains legally somewhat responsible for itparty, yet remains legally somewhat responsible for itPractical suggestion - - benefits ($$) of buyout are obvious

Disadvantages are hidden in (onerous) terms of contractg ( )Obtain copy of actual documents to be signed, have them analyzed before going to legislative bodySo that it will have clear view of both the pluses and minuses of the buyout before deciding how to proceed

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Lease Buyouts (cont.)

Conceptually two general approaches to buyouts, although increasingly the first shades into the latter

“Financing” or “discounted cash flow” approach - -Portrayed as pure financing arrangement, withL l t f t i t f i t fLarge lump sum payment up front in return for assignment of future lease paymentsOriginally buyout/assignment was solely for term of current g y y g yleaseNow being extended for 20-50 years after current lease expires With “extension” closer to next and more recentexpires. With extension closer to next, and more recent approach

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Lease Buyouts (cont.)

Two approaches (cont.)“Manage Lease Sites” typical approach - -

“W ll l t k h t i i“We are cellular experts, know how to maximize revenues from tower site” (and you don’t)Municipality approached now, 5-15 years prior to current u c pa ty app oac ed ow, 5 5 yea s p o to cu e tlease expiringTurns lease site over to buyout company, but still gets rents f id il i l ifrom current provider until its lease expiresBuyout company pays lump sum payment now, or periodic payments until current lease expires, thenpayments until current lease expires, then After current lease expires, payment of X% of future rentals, with guaranteed minimum, for additional 20 to 50 years

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Lease Buyouts (cont.)

Comments on “Manage Lease Sites” approachLargely based on ability to demand greatly increased rents from current tenants once their current leases expire

Due to $250,000+ cost of relocating to new towerAnd perhaps buyout company’s knowledge of whatAnd perhaps buyout company s knowledge of what providers will pay

And expectation of additional tenantsViewed by cell companies, tower companies as “highway robbery”, threats to take down tower (dog in manger) at l i ti th th d t t b tlease expiration rather than cede tower to buyout companyHence cell company demands for rights of first refusal on sale of lease or underlying propertysale of lease or underlying property

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Lease Buyouts (cont.)

lLegal IssuesMunicipal authority for transaction, compliance with Dillon’s Rule as and if applicableDillon s Rule, as and if applicable

Long term, finance aspects, one sided nature of contract (more so than cell leases) may create issues

Effectively a sale of property - - comply with applicable procurement laws on sales/disposition of municipal property at fair market value no waste of assetsproperty at fair market value, no waste of assetsCompliance with applicable municipal finance laws, restrictions on lending of creditgCompliance with applicable bond covenants, e.g. - - if property (water tower) was acquired with revenue bonds

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Lease Buyouts (cont.)

Legal Issues (cont.)Cash flow: Provider Buyout company Property owner

Risk of provider paying, but buyout company NOT paying, defaulting

P t d l bilit t t i t t t fProperty owner needs clear ability to terminate contract for non-payment, other defaults and then evict company- -Generally lacking in documentsy gProtections needed against buyout company bankruptcy, “commercial lease safe harbor”, same as in cell lease - -l ll l ki i dalso generally lacking in documents

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Lease Buyouts (cont.)

Legal Issues (cont.)47 USC Section 253 “prohibition of service” and similar F d l T l A t iFederal Telecom Act issues

Because buyouts are usually for key sites, rents demanded quite highdemanded quite high

Municipality needs broad indemnity, guarantee (including defense costs) for defaults, challenges to buyout, ideally ) , g y , yfrom parent company

Agreement is for ~50 years—Who is this company, what is their financial strength, track record?

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Lease Buyouts (cont.)

Practical suggestionsProperty owner should be able to get same/similar terms from providers as buyout companyBuyout companies take a large cut of revenuesD l di t id th iddlDeal direct, avoid the middleman

Cell companies come to property owner for leases, not the other way roundnot the other way roundBuyout company approaching you an indicator you have a valuable site

If proceed with transaction, address issues set forth above, have buyout company reimburse municipality’s l l flegal fees

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Rent ChiselingA k d d ’ b dAsked to reduce rent so company won’t abandon tower

The pitch - - From third party : “Provider has excess towers in your area” reduce rent save yourstowers in your area , reduce rent, save yours - -provider will guarantee reduced payment for X yearsCommon pretext - - Excess due to Sprint buying Nextel,Common pretext Excess due to Sprint buying Nextel, etc.

Be very skepticalIs caller licensed (as real estate agent, attorney)?Generally providers need more towersAre there other towers nearby?

Ask for specific competing locationsComments on AT&T proposed T-Mobile purchase

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Suggestions on ProcessCell companies negotiate cell antenna leases every day

Property owners don’t, are at a disadvantageLeveling the playing field

Use model cell tower lease, prepared from property owner’s perspectiveperspective

For new cell towerFor antennas on existing buildingg gLeases available at www.varnumlaw.com/lease

Have knowledgeable consultant, lawyer review draft of cell tower lease

When first submitted to you, for major suggested changesWhen nearl complete againWhen nearly complete, again

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Suggestions on Process (cont.)

Leveling the playing field (cont.):Make sure review occurs before you sign an “option”

Reviewing after you sign the option typically is too lateBecause the option typically has the actual lease attached

If h d l b t t ll d t t t tIf approached on lease buyout, get all documents at start, consult with attorney, cell specialist, financial advisor

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