Appraisal Articles 2018 Free Appraisal Articles for Appraisers and the Public
Real estate appraisers can find that their appraisal assignments have become significantly more complicated when a cell tower is located on the property to be appraised. In most instances the owners have leased the site for the cell tower use and they do not own the improvements. This article discusses cell tower site leases and not situations where both the site and the cell tower itself are owned.
We all know that the best way to begin an appraisal on a property with a cell tower site located on it is to read the lease. Don’t let anyone convince you that they “know the terms,” because it is unlikely that they do, and you haven’t done your client a service by analyzing what someone remembers. Like outdoor advertising sign leases, many owners of cell tower site leases are secretive about the income that they derive from this source, so finding cell tower site lease information can become the most difficult part of the appraisal. Since it is the most important information you have to be persistent and demand a copy. If that basic information is not forthcoming I would not accept the assignment.
The Communications Industry
Most cellular service providers are straining to meet the demands of their customers for more bandwidth, the iPhones, Droids, Storms and many new competitive phones are all being made to push service limits further. What that means for current cell tower lease landlords is that few tenants will terminate their leases over the next 10 years. There are of course no guarantees, but if you are considering the probability of a termination it is likely low.
Real estate appraisers are often not in touch with the cell tower site market so it usually takes some time to find out what buyers and sellers of cell tower site and cell tower site leases are doing. The market is a specialized one and like golf courses, tank farms and convenience stores it has its own niche.
An interesting fact is that 80’ to 100’ foot cell towers serve only an area with a 1.0 to 1.5 mile radius. So the quality of the cell tower site as an asset directly relates to the density of the service area. If the site you are appraising adjoins a University campus or a Downtown area it is going to be much more valuable than a site that is located in the suburbs. I’m sure that I didn’t have to tell you that, but common sense is not a universal trait among appraisers. Some of the parties who acquire cell tower site leases utilize significant discounts for cash, discounts well above those that would reasonably be used by appraisers to value the lease assets.
An important source of information in this area can be found on cell tower related Internet sites and through conversations with cell tower experts. I would add, however, that some of the experts are biased by the fact that they are in the lease acquisition business. So you have to use discretion and strictly limit the information that you provide to them or they may end up calling your Client and try to acquire the lease. It's their business so you can't blame them for trying.
Cell Tower Capitalization Rate
While a cell tower lease may remain a beneficial interest for a long time, it is a lease and there is a risk of loss. Most cell tower site leases in Las Vegas have the downside of a 30 day to 90 day cancellation provision. So even though the lease term could state that the lease continues for many years, with possibly ten (10) ten year renewals, the risk of loss is still higher for a cell tower site for a normal lease that does not allow for early termination.
Capitalization rates are all about risk and return. On commercial properties in the Las Vegas real estate market cap rates range between 5.0% and 10.0% on most property types. An investor would expect to receive a relatively high rate of return given the risk associated with a cell tower site lease. It is my opinion that a capitulation rate at or above the high end of the range established for other real property assets is appropriate.
Don't simply add the income from a cell tower to the income from your rental units in a commercial appraisal, which I have seen in some appraisal reports, clearly there is more risk associated with a cell tower site lease than a bricks and mortar building improvement and, as I noted, a higher cap rate for the cell tower site is going to keep your value opinion reasonable.
Settling on a final capitalization rate for a cell tower site lease is a problem for every appraiser and it is of course tied to the specific cell tower site lease being appraised. Those of us who have appraised business assets know that the recognized Ibbotson "Build-up" method can provide a starting point for determining an after-tax net cash flow discount rate and in turn a capitalization rate, but a cap rate concluded after any reasonable analysis should bring you to a similar conclusion.
In the Las Vegas market area there have been few sales of cell tower site over the past few years. The site sales that are transacted are almost always an ancillary part of a larger residential or commercial property sale and the buyers and seller do not even allocate a percentage of the price to the cell tower site. Since sales information is often not available, you will likely find few appraisal reports on cell tower sites that include a sales approach.
If you do have sales, how do you evaluated them? Experts have noted that cell tower traffic counts are proprietary, and as an appraiser I have not been able to gain access to that data. So I to evaluate a cell tower sale I have been reviewing traffic counts within a 1 mile to 2 mile radius of the subject and comparable sales cell tower sites. I also review the population density within the same area. In Nevada the Nevada the Dept. of Transportation (NDOT) provides a great annual traffic report that provides daily traffic counts at many metro Las Vegas locations, it can be accessed at http://www.nevadadot.com/About_NDOT/NDOT_Divisions/Planning/Traffic/Annual_Traffic_Reports.aspx and it is a free download to the public. The latest version of Google Earth provides an add-on that will get you the population estimate, eHow provides instructions at http://www.ehow.com/how_6759807_population-address-using-google-earth.html. If you find better tools than these I would appreciate hearing from you.
It has been possible to discover cell tower site lease rates in Las Vegas when owners listing a property for sale disclose the source of their property income. The following table provides examples of cell site leases and some of their terms. It is notable that the lease rate for a tower site has little to do with the area leased, and as discussed, the rate has more to do with location, cell tower height, population density and collocation.
Direct capitalization using a derived rate is the best methodology that I have discovered, or a discounted cash flow analysis that considers the relatively high risk associated with the lease and its rental payments over time could also be used.
As discussed, many of the cell towers that are in place today are likely to remain for the next 10 years, but that generalization may not apply to your specific property. It is important to contact the tenant and / or competitors in your market area and make a determination about your specific cell tower site and its likely future income. It is not possible for an appraiser to know all of the risks and the appraiser should also disclose in the appraisal report the fact that the term of a cell tower site lease, and thus the conclusion of the report, assumes that the lease will remain in place. It is an extraordinary assumption and it requires disclosure.
Since the improvements located on a cell tower site are of a temporary nature and generally owned by the tenant, the cost approach is generally not considered to be a useful or an appropriate methodology for cell tower site valuation.
Land value is important since you can have situations where the highest and best use of a site is not for a cell tower. Usually the cell tower site tenant / leasee has tied the site up for several years with option after option that in the end heavily favors the tenant, so an alternate use is not legally possible.
Cell tower site leases often contribute to the overall value of a residential or commercial property. Analyzing cell tower sites is a time consuming process since you have to research cell tower site leases and cell tower site sales that are not typically available through traditional data sources. Having a copy of the existing cell tower site lease is for me a requirement of the assignment.
It is important to remember that cell tower site leases come with more risk than is typically associated with other real property assets and it is reasonable to utilize a higher capitalization rate in your analysis. Almost all have a 30 day cancellation provision.
This article is meant to provide you with some help, an introduction on the subject, it is not meant to be a treatise and I am open to comments and suggestions for improving it.
2013 Comment: Today I got my first call for an appraisal of the "steel in the air" or the equipment and tower that are erected on cell tower sites. The request came with an Excel sheet that detailed the "buildout" for 10 sites including a main switch. Each site was noted to have the following costs; foundation ($ 24k), BTS ($ 51.4k), generators ($ 50k), site acquisition ($ 10k), site permit ($ 5k), site drawings ($ 5k), site FAA/FCC ($ 1.5k), Microwave antenna for backhaul ($ 75k), contractors ($ 50k), legal (5k) and consulting ($ 10k) and the construction "Steel Cost" of $ 168k. Not sure I'm understanding what is included in the "Steel Cost" but maybe this information helps you. It would have helped me but I bid high on the assignment and didn't get it.
2013 Comment: You can indeed find FCC data on registered cell towers and registered antenna by going to www.city-data.com/city/CITYNAME-STATE.html, but registered cell towers is not all cellular towers, so you are not going to get a lot of supply-side information. The Antenna towers information provides additional information including tower heights, antenna owners, etc. There are near 2,400 registered antennas in Las Vegas. If nothing else the list provides you with potential contact information in your market area.
For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website. Check out our new site this summer at http://www.appraiserlasvegas.com it will be a mobile enabled site.
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