Telecommunication (“telecom”) leases can be a unique animal due to the nature of the tenant’s use and business model. In negotiating these leases, the parties can run into difficulties negotiating the subleasing rights. Landlords are typically reluctant to agree to a tenant’s ability to freely assign or transfer. In the context of telecom leases, however, it may be worthwhile to consider why these rights, particularly subleasing, are so valuable to tenants and may even be beneficial to landlords.
The Business Model
Several tower companies act as operators and managers of the telecom infrastructure, in other words the “cell tower”, and are often not wireless carriers themselves. Therefore, for these tenants the ability to freely sublease becomes integral to the success of their business, the value of the tower, and the landlord’s ability to reap the benefits. The reason being is that carriers, both nationally recognized like Verizon and AT&T and smaller companies such as a local radio station, seek to sublease space on the tower for which to locate their telecom, wireless or broadcast equipment for the operation of their business. Unlike the standard sublease, the original tenant typically remains an active party, facilitating the operation and management of the tower as permitted under the lease. In this model, the carrier pays rent to the tenant under the sublease of the lease, and the landlord typically receives a base rent and often times a revenue share of the carrier rent or flat fee per carrier as additional rent from the tenant.
The Valuation of Tower Sites
The most desirable towers, aside from location, are those on which carriers can most efficiently install their equipment and become operable. Carriers don’t want to be held up while the tenant obtains written consent for the sublease from the landlord; when they want to locate, they want to locate immediately. Time is money! Carriers don’t want to worry if consent cannot be obtained for weeks or more because it got lost in the mail or the landlord is on vacation. Instead, the carrier may look for a different tower to locate on altogether eliminating both the tenant’s and landlord’s ability to benefit. Therefore, these desirable towers often become the most valuable since they sublease to multiple carriers. The benefit to the landlord is sustained lease term and base rent, since most telecom leases allow the tenant a unilateral termination right of some sort, and in addition, larger amount of revenue share payments or flat rate payments.
From a landlord’s perspective, however, landlords want to give careful consideration to the effect of such expansion rights, particularly on roof top towers as this expansion may undercut your ability to further lease other roof top space to other telecom users. Roof top agreements have become beneficial sources of revenue for building owners and a landlord will want to ensure that its roof top agreements provide the ability to manage and preserve these revenue rights, and of course roof top space for building’s tenants and occupants.
Does this mean a landlord should agree to free subleasing without conditions? Not necessarily. What it means is landlords should consider the impact that the ease of doing business on their tower will have on its attractiveness to carriers. Instead of requiring “prior written consent”, as an alternative, a landlord could seek “prior notice” or “notice” or even a “deemed consent” concept after “flag” notice and a brief period of time. In this alternative, the carriers are able to locate easily and quickly, yet the landlord is still aware of the additional carrier on the tower. Moreover, the landlord’s awareness of how many carriers are on the tower can be useful when it comes time to renegotiate the lease; with an understanding of the value of the tower based on the amount of subtenants present, the landlord may be able to negotiate a higher rent. With easier subleasing rights, it is important that the lease contain adequate installation and alteration provisions (along with insurance and indemnity provisions) to protect the building and its infrastructure and other tenants and occupants. Moreover, with these more liberal subleasing rights, revenue sharing should be investigated.
Consideration and Potential Benefits for Landlords
Landlord considerations to subleasing:
- Less restrictions on subleasing is more attractive to the potential carrier/sublessee of the tenant;
- More carriers increase the value of the tower benefiting the landlord’s ability to receive ongoing base rent, and an increase in revenue share or flat rates per carrier received;
- “Notice” versus “consent” can be a satisfactory alternative to both parties, and one that still provides the landlord with knowledge of how many carriers are on the tower and ultimately how valuable it may be when negotiating rent in the future.
While each party will inevitably push and pull in different directions on the issue of subleasing, from a landlord’s perspective it may be worthwhile to consider why the tenant may be seeking these rights and how the landlord stands to benefit. Landlords exploring subleasing in the telecom context should contact a member of Sherin and Lodgen’s real estate department for assistance.