COLUMBUS, Ohio — Cell tower leases can be a great source of income for landowners. The towers have a relatively small footprint on the land and can provide monthly income of $1,000 or more. Additionally, and in some cases most importantly, having a cell tower can increase cell service quality and dependability.
Many landowners are eventually contacted by the cell tower company or another third-party company to purchase the lease rights. The purchasing company offers a large, one-time payment to buy out the lease rather than continuing to receive monthly payments. This buyout presents the landowner with an opportunity to generate a large, one-time payment rather than waiting on the monthly payments. The issue for the landowner is whether the one-time payment is large enough to give up the future stream of payments.
When deciding if the one-time payment is enough to relinquish the monthly payments, the first course of action is to determine the Present Value of the lease. Present Value calculates the current value of a future stream of income. There are calculators available online to easily calculate the Present Value. The offered payment should be something close to the Present Value.
Another factor to consider when analyzing the payment structure is the number of carriers on the tower. Some cell tower leases pay additional rent when carriers are added to the tower. Thus, the value of the lease many not be limited to just the Future Value of the current income stream but also the potential for increased revenue due to additional carriers added to the cell tower. For leases with the opportunity to increase revenue with the addition of new carriers, this additional value should be factored into the one-time payment analysis.
Like most business transactions, taxes are an important factor in analyzing the favorability of the deal. Cell lease buyouts are no different. The buyout payment will likely be considered a capital gain. Therefore, the gain will likely be taxed as capital gains rate rather than ordinary income. Capital gains tax rates tend to be lower than ordinary income tax rates.
Taking the one-time payment has advantages. The first, and most obvious advantage, is it creates a much larger and immediate payment than the monthly payments. Additionally, the buy-out payment can usually be used in a like-kind exchange. That is, if the sale proceeds are invested into other business real estate, the capital gains tax is deferred. Lastly, the one-time payment is a guaranteed payment for a certain amount. There is not the same certainty with the lease payments. Cell leases typically allow the cell company to terminate the lease at any time.
The obvious disadvantage of taking the one-time payment is the loss of the monthly payments. The payments are a nice supplemental income and are a dependable source of income. Additionally, taking the one-time payment could cause the landowner to be pushed into the higher, 20% capital gains tax rate.
For those landowners who have cell leases and receive an offer to buy out the lease, seeking tax and legal advice is a good idea. An accountant and/or attorney can provide valuable guidance and insight into analyzing the advantages and disadvantages of having the lease bought out. Working with an attorney who has experience with cell tower leases can have significant benefits. The attorney can help advise as to how much the buyout payment should be, help negotiate better terms and, also help reinvest those funds into other real estate to defer capital gains.
— Ohio State University CFAES