Wireless carriers are pulling out all the stops to renegotiate their ground and collocation leases in one of the most extensive efforts seen to date.
In the last few months, we have observed more concentrated efforts by individual wireless carriers to issue RFPs and to enter agreements with build-to-suit tower companies to build towers adjacent to existing public and private tower company owned towers. These efforts followed very public statements of discontent with the public tower companies leasing practices. In short, the wireless carrier commits to moving from an existing tower to a new tower built by a private tower company on financial terms and conditions much more attractive to the wireless carrier. They "rip" their equipment off the old tower and "replace" it on the new tower otherwise known as "rip-n-replace." We think further clarity on how the Rip-n-Replace efforts fit into broader efforts to renegotiate will be helpful.
HISTORICAL EFFORTS BY CARRIERS TO RENEGOTIATE
By no means are these the first attempts by wireless carriers to renegotiate leases, nor are they the largest. As far back as 2002, AT&T was trying to renegotiate the terms of its collocation, rooftop, and ground leases. There was a flurry of renegotiation activity between 2007 and 2012 after which the wireless carriers started to realize that they were damaging their relationships with the landowners and tower owners who they had to continue to contact for modification and lease extension requests. These landowners and tower owners disliked the aggressive car salesman like tactics of third party "optimizers" for the wireless carriers, so much so that they would often refuse to talk to the wireless carrier or would ask for exorbitant rent increases for changes that weren't allowed under the lease.
TODAY'S "NEW" RENEGOTIATION EFFORTS
Today's efforts seem more concentrated and refined but are increasing significantly in the first quarter of 2017. We suspect that the wireless industry has learned a good deal (as have their lease optimization vendors like Md7 and BlackDot Wireless) about what works, what does not work, and what they legally can and cannot say in contract renegotiations. We also believe that the commoditization of the wireless sector has caused the wireless carriers to focus on reducing operating expenses as they find it is harder to increase revenue now that wireless penetration (number of devices vs. number of possible subscribers) has exceeded 100%.
Based upon the inquiries we receive daily from our landowner and tower owner clients, each of the renegotiation efforts tend to make the following requests:
- Reduce Rent
- Reduce Escalation in New and Renewed Leases
- Extend the Term of the Lease
- Increased Expansion Rights at Fixed or No Additional Rent
- Revision to Permitted Use Language
- Incorporate Right of First Refusal Language
These renegotiation requests almost always accompany the implication of termination. We say "implication" because the wireless carriers found out the hard way that the direct threat of termination may be considered "anticipatory breach" of the underlying contract which is a quick way to end up in court as the carriers found out previously. They come with catchy acronyms like "TOSS" or suggest that rejection of the proposed terms will then necessitate an "Alternative Site Review." They include articles and news stories that purport to show that T-Mobile and Sprint must merge. For example, here is a quote from an email a client of ours sent us.
Below please see a sample letter below from AT&T. Note the careful use of AT&T and Md7 addresses in the document – which is intended to disguise to the landowner where the letter originated.
The obvious next question is "If these efforts have been occurring since 2002, why should we care that they are doing them again today?" The answer is that we believe that these endeavors are indicative of both the increasing competitiveness in wireless today and that they predict precisely what the carriers are most concerned with as it pertains to their leases.
CARRIER BY CARRIER EFFORTS AND OBSERVATIONS
We do have additional insight based upon the priorities to which each carrier places on various clauses in their renegotiation efforts. We further believe that the scale of the renegotiation efforts by each carrier is indicative of their future concerns.
AT&T: By far the most aggressive in 2017 in attempting to renegotiate their leases. Based upon our landowner and small to mid-size tower client inquiries, AT&T is using multiple outside vendors to renegotiate their agreements. These vendors are even going as far as having term sheets for new tower leases signed with landowners on adjacent properties next to our client's tower or rooftop sites as a means of encouraging our client to renegotiate. These efforts extend from small landowners with single sites to tower companies with hundreds of sites. AT&T seems significantly more focused on procuring unlimited expansion rights and revisions to the permitted use language than other carriers in their renegotiation efforts.
Our checks indicate that AT&T seems to be more active than other wireless carriers in considering alternative towers. Build to suit agreements being offered by AT&T have significant worse terms for the tower developer than the previous build to suit agreements.
Sprint: Sprint has been inactive altogether. We have seen very little activity from Sprint in renegotiating their leases or on anything else for that matter.
T-Mobile: T-Mobile is the most incongruous of the wireless carriers. On the one hand, they appear to be willing to spend more for new leases than other carriers, but on the other, they are using third parties to contact landowners and tower owners to suggest that landowners should renegotiate their terms before a possible merger with Sprint. (Note: They aren't saying they are merging with Sprint- but they attach newspaper articles that address the possibility of such a merger and let the tower owner or landowner come to their conclusion.) T-Mobile is also emphasizing unlimited expansion rights and revision to the permitted use language in the lease.
Verizon: Verizon doesn't appear to be using outside vendors to renegotiate terms. Instead, they are focusing on addressing more favorable lease terms in their new proposed lease agreements and any contract extensions. Verizon's primary push is reducing escalation in their leases to 2% or less per annum.
What is our take from all this? We believe that wireless carriers (especially AT&T and T-Mobile) are increasingly concerned with limitations in their leases that prevent them from expanding or increasing equipment. With a possible new spectrum coming from FirstNet and the Broadcast Incentive Auction, we anticipate that AT&T will need to expand or increase the amount of equipment they have at each site more than other wireless carriers. We further expect that T-Mobile will need to make modifications because of winning spectrum in the Broadcast Incentive Auction.
In some cases, we are advising tower owners or building owners to consider accepting revisions to their leases especially when there is a possibility that a new tower could be built or a new rooftop could be selected for "rip-n-replace" of carrier equipment from the current site. The key is knowing what the risk is to your specific location and whether there are other options. Historically, it may not have made sense to move, but with the new deals being entered with build to suit tower companies and the wireless carriers who are seeking rent concessions on high rent sites, there are increasingly more situations where it makes sense to move.
If you have concerns about a letter or proposal you have received, please don't hesitate to contact us. We will gladly review your situation, see if there is anything to be concerned with, and if so, make a fair and reasonable proposal to you for services. Your inquiry to us will be kept confidential, and there is no obligation to pay us anything until you sign a contract for services.