How does one determine the value of a cell tower?
Unfortunately, cell tower valuation and appraisal is not simple. There are a variety of factors that go into a proper cell tower valuation and appraisal. Here at SteelintheAir.com, we get a few hundred requests annually related to the valuation of cell towers. Many requests come from real estate appraisers who have been called upon to evaluate a cell tower for eminent domain purposes or for taxation purposes. We also receive requests regularly from banks who are seeking to lend money to tower developers who are using their exisitng cell towers as collateral for bank loans. These banks need outside review of the value of the cell towers for collateral purposes. The valuation of tower assets is a highly specialized endeavor.
Cell towers have commonly been sold on the basis of a multiple of net cash flow, or what the industry refers to as “tower cash flow” or TCF. After deducting actual or assumed expenses for the operation of a tower from the actual revenue from tenants on the tower, the TCF is determined. The TCF is then multiplied by a multiplier which is a somewhat subjective number typically ranging between 10 and 40. The multiplier is determined by examining a number of factors:
1. Current Tenants on the Tower:
Are any of the tenants likely to terminate their lease prior to the last term? Are any of the tenants a financial credit risk?
2. Age of the Tower:
How long has the tower been standing? How aggressive or conservative has the lease-up on the tower been?
3. Zoning Protection:
Is the tower in an area where local zoning regulations will prohibit competing towers from being built up?
4. Location of Competing Towers:
Are there other towers within a given distance that would be satisfactory to wireless carriers? If there are nearby towers, are they really competing for the same clientele?
5. Structural Capacity of the Tower:
How many tenants was the tower originally designed for? How much capacity remains?
6. Ground Space Availability:
Is there ground space available for current tenants’ expansion or for future tenants’ equipment?
7. Location of Tower:
What are the coverage objectives of the tower? Is the tower primarily in a rural/suburban/urban area?
It should be clear from the factors listed above that cell tower valuation is based not only on information about the current tenants and the specific tower and location, but also a prognostication of the probability and amount of future additional revenue. Towers that are completely full and have little probability of future revenue are known as “mature” towers and typically trade in the lower end of the 10-40 times TCF range. Towers that are brand new and have limited TCF but plenty of upside down the road can easily trade in the upper end of the 10-40 times TCF range. That is why attempting to appraise a cell tower solely on the basis of comparable data fails to provide proper valuation. Each tower is as unique as the parcel of land on which it sits. Many appraisers who contact us believe that they can apply traditional real estate appraisal techniques to tower valuation. Unfortunately, traditional real estate asset classes do not have the same level of federal protection as vested in the Telecommunication Act of 1996, nor are other commercial types of real estate subject to the low churn the telecom industry sees. To further complicate matters, a statistically sufficient sample of tower transactions, especially current ones, is necessary (and not always easy to obtain) in order to provide an accurate cell tower valuation appraisal.