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 existing 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 annual net cash flow, or what the industry refers to as “tower cash flow” or TCF. After deducting the operating expenses for the operation of a tower from the actual revenue from tenants on the tower, the annual TCF is determined. The annual TCF is then multiplied by a multiplier which is a somewhat subjective number typically ranging between 10 and 40.
EXAMPLE OF TOWER VALUATION
For example, suppose that Tower A has two leases that cumulatively pay $40,000/year.
Tower A also has recurring expenses for a land lease, insurance, maintenance, and utilities that equate to $20,000/year. Subtracting the annual expenses ($20,000) from the annual revenue ($40,000/year) equates to a tower cash flow (TCF) of $20,000/year.
This would be multiplied by a multiplier. For ease of the example, suppose that the multiple in this case is 20 times the annual TCF- that equates to a tower valuation of $400,000 or 20 (multiplier) times the TCF of $20,000. In other words, this particular tower is worth $400,000.
Simple so far – right? You should likely be asking yourself how the multiple of cash flow is therefore determined? This is where things get complicated. The multiplier is determined by examining a number of factors.
TOWER VALUATION CALCULATION
|TOWER CASH FLOW|
|INCOME – EXPENSES||$20,000|
|TCF Times Multiplier:||$400,000|
FACTORS THAT INFLUENCE THE MULTIPLE
Primarily, buyers of towers are seeking to know that the current revenue is predictable and that future revenue is possible or likely. Accordingly, the multiple of TCF is influenced by factors that relate to current revenue and future revenue potential. Please see a non-exclusive list below.
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?
If you are interested in learning more about what buyers in 2019 look for when purchasing towers– see this list put out by SteelTree Partners LLC on their blog.
TOWER VALUATION IS AN ART AND A SCIENCE
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 forecast 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 10-20 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 30-40 times TCF range. That is why attempting to appraise a cell tower solely on the basis of comparable data fails to provide a proper valuation.
Oftentimes, people with less experience try to compare tower portfolios by comparing the multiples paid for the towers. The reason that if tower portfolio A sold for 20 times TCF and portfolio B sold for 18 times TCF, tower portfolio C would likely trade for 19 times TCF. Or they try to compare smaller portfolios of towers to the publicly available data from American Tower or Crown Castle acquisitions of carrier towers- assuming that those tower transactions are representative of what private tower owners might receive when selling their towers.
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.
We maintain data from the sale of tens of thousands of towers- ranging from large tower company acquisitions of carrier portfolios to sales by individuals of individual towers. We have been recognized as an expert on lease and tower valuation in courts of law. If you need to know how much your tower is worth, please read on.