The latest rage in the wireless industry has been the rush to purchase and build towers and facilities and lease them to wireless carriers. This accumulation of vertical real estate has launched a cottage industry referred to as “build to suit.”
A multitude of companies have been buying up existing communications towers and building new ones to meet the projected need of more than 100,000 towers and facilities for the wireless industry by 2005. These companies approach wireless carriers with an offer that is hard to refuse: to build out a carrier’s new infrastructure facilities with little or no out-of-pocket cash required by the carrier.
The concept behind owning these facilities makes a lot of sense. Zoning is becoming an ever-increasing problem for fill-in sites to existing cellular, personal communications services and paging networks, and the United States just has began to embark on supplying the necessary towers for new high definition digital television.
Carriers can save money on buildout costs by letting someone else take the financial risk and build the carrier’s facilities in exchange for a long-term lease agreement. In addition, carriers also may sell their existing towers to raise needed operational cash and lease back the facilities.
The build-to-suit (BTS) companies, many of which have been involved in short-term wireless project site development, seem to be good candidates for the carriers to entrust their system buildout. The arrangement allows the BTS companies to have a fixed investment that pays over the long term, typically 20-25 years.
With collocation finally being looked upon favorably by carriers and now a mandatory first attempt in many communities, the outlook for multiple tenants on BTS companies’ towers looks positive. And Wall Street is rushing to invest money in companies providing this service.
However, before carriers invest hard-earned (or easily borrowed) capital in one or more of the many BTS companies going public each month, they may wish to peel back the layers and take a long look at what actually is going on in this new sector of the wireless industry.
First, many of the players in this burgeoning sector-from CEOs to worker bees-have little or no experience in the wireless industry, and even fewer have experience in owning and maintaining towers and communications facilities.
Second, with competition becoming extremely intense, BTS companies already are starting to consolidate in spite of additional players entering the market each week. This has put incredible pressure on the amount of rent build-to-suit companies can charge a wireless carrier for their services. Anyway you add it, they count on a minimum of three tenants on a collocatable tower and must receive a minimum monthly rental of $1,000 to $1,500 per month per tenant for the facility to be profitable.
With such unknowns as soil conditions, foundation support and zoning costs possibly doubling or tripling the projected cost of each tower, the BTS company had better be getting this kind of rent on each facility.
What we now are seeing is that competition among these BTS companies has forced the rents down from a high of $2,500 per month only two years ago to rents that are at $600.00 per month for the primary tenant or $300 to $600 above the ground lease to entice the first tenant on the tower.
This forces the BTS company to make up the difference with the next two tenants on the tower, if there are any. And this is a big gamble when most of the carriers are complete with the first phase of their network buildouts.
In addition, most of these build-to-suit companies do not have their own tower-maintenance personnel on staff and have to contract these services, which are extremely expensive and difficult to obtain. The cost of operating a 24-hour network operations center (NOC) is very costly but necessary to monitor security, electrical or equipment failures such as Federal Aviation Administration tower lights that carry huge fines if allowed to burn out. There also is site maintenance such as keeping access roads clear and passable year-round, mowing weeds and making sure stand-by power generators are working and filled with fuel. Add real estate and personal property taxes that must be paid annually, and $600 per month rentals per tenant don’t make a dent in these fixed costs.
The third trend we are seeing is the exorbitant prices being paid for existing towers. The math on purchasing an existing tower has to work out with a purchase price of no more than four to six times rent over a five-year period in order to pay for the asset, and that is assuming BTS companies will have a constant three-tenant scenario, for which there is no guarantee.
We are seeing existing towers being purchased for 10 to 20 times rent over a five-year period.
Most owners of these existing structures do not own the real estate under them and have ground leases that must be paid by the BTS company to the property owner. Many of these have cost-of-living adjustments factored in. Many of these towers are old and in need of deferred maintenance. Many are not collocatable without being replaced or extensive structural support work being completed. Many are in areas where the major cellular and PCS carriers are already built out, and the BTS company is banking on a host of new carriers to pay the cost of their investment. These new carriers may not appear-or survive even if they do make it to launch.
Most of the money being made in this business is in the free or nearly free stock options given to the top management of these BTS companies.
When the initial public offering comes out strong, many of these executives will have vested their shares of stock instantly and be free to cash in on their new-found investment wealth. Some of these investments may not look so good two to five years out if the towers do not find a minimum of three tenants each or the maintenance eats up all the income.
The built-to-suit concept is a good idea, yes. And one that makes sense from the carriers’ points of view. It frees up much-needed capital for marketing and allows the carriers to focus on their core businesses.
But whether BTS companies really can make money at their ventures is yet to be seen.
With the high prices being paid for existing towers and the ever-shrinking rentals being received from the carriers, it may be a better risk to observe from the sidelines until the inevitable shakeout begins.
Greg Sweet is president of Acquire Telecom Services, a Bellingham, Wash., and Tucson, Ariz.-based company providing project management, training and recruiting to the wireless communications industry.
