Could Your Local Government Be Making More Money From Wireless?

Kreines & Kreines, Inc. consults to local governments.  We began in 1996 by showing cities and counties how to prepare Wireless Master Plans and ordinances for wireless facilities.  We still do that.  But increasingly we are being asked by the public sector about the value of cell sites.  Certainly, the industry enjoys most of a cell site's value: it's an asset worth money to the company, it has tremendous income producing potential and its value is compounded by its linking to a nationwide network.  But local governments have a share of that value: property tax, lease rates when the cell site is on public property and fees paid for obtaining permits.  Cities, counties and public agencies want to know if they are capturing their fair share of their cell sites' potential value.  

Property Tax Assessments: Here's What We Know

·       Cell sites are often undervalued by everyone except the people who own them.

·       A single user cell site may earn about $50,000 to $250,000 per month.  (See PlanWireless, August 1998).

·       A personal wireless service facility can cost anywhere from $100,000 to $1,000,000.  (See PlanWireless, August 1998.)

·       Kreines & Kreines, Inc. clients have leases with a single carrier for as much as $5,000 per month.

Kreines & Kreines, Inc. helps local assessors and property appraisers by visiting cell sites with them, showing them all the additions that have added value and discussing our view on how value changes over time:

A cell site may be shown to depreciate for property tax purposes, but because of upgrades and technology modifications, it is actually appreciating in value.

Follow the Lease, Because the Lease is the Best Indicator of Value

Kreines & Kreines, Inc. helps cities and counties, as well as other public agencies, structure their leases of cell sites on public land.  Of the three methods of value assessment, we prefer capitalizing the lease and here's why:

·       Income generation.  This may be the most lucrative method of assessing value, but try to obtain income data from the carriers.  It's impossible.  Most carriers will not divulge how much a cell site generates in revenue and, further, who needs to know the carrier's business?  In its early years, a cell site is causing more expenses to the carrier than it is bringing in revenues. 

But after those early years, because of modifications for new technology, the cell site becomes a cash cow.

·       Replacement costs.  This is the most popular method of assessing value, because it makes sense.  A tower may cost $30,000 to $50,000 (that's all, folks, because the tower is not the cell site).  Much of the equipment is software, and some states do not recognize software as a tangible asset.  If the assessor or property appraiser is inclined toward depreciating the hardware, the cell site appears to be an insignificant asset in a very short time.  Meanwhile , it is earning more and more revenue due to attachments and modifications that may not have been reported to the local government:

Depreciating the value of steel towers and fiberglass antennas is focusing on the wrong part of the asset. It's the upgrades that make the cell site capable of much higher value capture, and Kreines & Kreines, Inc. can show your jurisdiction how to monitor those upgrades. 

·       Capitalized lease rates.  How can a lease represent an amount of money equal to the asset's value?  The answer is that it can't.  We use the lease because it approaches the best number to use for the property tax value over time.  Kreines & Kreines, Inc. suggests:

Follow the lease.  Lease rates don't depreciate, they escalate.  A good lease should bring $4,000 to $5,000 per carrier per month.  By capitalizing a good lease, anyone can arrive at a value for the cell site.

Leasing – What Cities & Counties Need to Know

Kreines & Kreines, Inc. helps public sector landlords structure their leases for cell sites.  Here's what everyone thinks:  a good lease escalates in terms of a lease rate equivalent to Consumer Price Index (CPI) or some type of Cost of Living Adjustment (COLA).  That is good for a start, but consider these numbers:

·       Most leases are for five-year terms, renewable by the carrier for three to five more periods.

·       Since renewals are virtually automatic by the carrier, the lease life is actually 20 to 30 years.

·       Most depreciation tables show a  cell site declining to a residual value in 10 years.  That means the property value's asset life is considerably less than the lease's life.

·       It's true:  a cell site is technologically obsolete within a year of its construction:  it needs to be constantly improved (not just maintained … improved).

·       By the time a cell site lives out its full lease life, the hardware, software and capability of the site, have been modified several times.

·       Most public sector landlords are not aware when modifications are taking place.

So, while the landlord may be sitting on a lease worth a small percentage of X, or the cell site's replacement value, the X value depreciates quite rapidly unless the original replacement cost is modified.  Soon the lease is worth more than the original replacement value.  Over a 30-year lease life, however, the X value should be upgraded so that it reflects the cell site's billing capability in terms of money received due to modifications.  Think of it as a best-selling book, the first printing doesn't make much money, the second printing (modification) makes more and, by the time the final printing is sold, the revenues are all gravy.

The replacement cost method misses this value appreciation, primarily because the upgrades are relatively inexpensive software, difficult to identify and (where they are taxable) often subject to rapid depreciation.  The income generation approach would capture this value appreciation, but the revenue data are not made available by the carriers:

Kreines & Kreines, Inc. shows its clients how to capture the value of constant upgrades, and we believe capitalizing the lease is the best way to do it.

How Can the Lease Rate Reflect Constant Upgrades?

Every time a carrier sends a workman into an equipment box or changes an antenna, most of us may think this is just "maintenance."  However, it is important for the local government, and the local government's lease manager, to understand that a cell site is just a platform.  The platform can be expanded, extended and otherwise "enhanced" to generate more revenue.  It raises the question: "how does the public sector capture the appreciating value of a cell site without knowing how much revenue the cell site generates?"

The answer is: By the landlord, public or private, properly structuring the lease.  If your jurisdiction does not lease public land to wireless carriers, your local government may want to have a wireless planning workshop to educate private landlords in how to properly structure a lease.  Their gain is the public's gain.

Every time the value potential of a cell site is enhanced, the value of the lease is appreciated.  And every time the value of a lease appreciates, the lease rate should be increased to reflect that value appreciation.

Can your lease do that?

If your jurisdiction is leasing rooftops or ground space to a carrier, the chances are that the cell site has already been modified more than once.  Has your lease manager been consulted?  Was the lease manager aware of the change?  Did the planning and zoning department grant approval of the modification and is the assessor aware of it?  Is the conventional wisdom in your local government that a cell site is not worth tracking for each little addition?  Think again.

Kreines & Kreines, Inc. can show jurisdictions how these little modifications take place.  Your local government can ignore them, at their expense, or they can monitor them for potential negotiations on the lease rate.

The Migratory Path to Value Appreciation

If your jurisdiction is serious about capturing value from all cell sites, you must understand cell site migration.  Since the early 1980s, when the first Cellular base stations were activated, it became clear that wireless must advance beyond the fundamental voice technology called Advance Mobile Phone System (AMPS).  An AMPS cell site is comparable to a DC4 in U.S. aviation economics: still used but very limited in its billing potential. There is commonly a sequence for technological advancement in commercial mobile radio services (CMRS):

·       First Generation - 1G (analog).  Still available but capable of voice telephony only.

·       Second Generation - 2G (digital).  Today's norm, but only capable of slow data transmission and reception as well as voice.

·       Midway Between Second and Third Generation - 2.5G (high bandwidth).  Being installed now and capable of modest data speeds.  This will be an add-on to most 2G (voice and data) technologies.

·       Third Generation - 3G (much higher bandwidth).  Fast and proven, but no handsets yet because infrastructure improvements won't begin until two to three years in the future.  It may take several years before sufficient improvements are in place for a 3G network to function.

Each of the above should bring at least a doubling of revenues to the carrier from the previous technology.  Advanced technologies will not only attract new users, but all users will be paying more per minute for advanced services.  The carriers must make physical changes at the cell site to accommodate these upgrades, and those modifications are the milestones your lease should be triggered by.

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Kreines & Kreines, Inc.
58 Paseo Mirasol, Tiburon, CA 94920
Phone: (415) 435-9214
Fax: (415) 435-1522
e-mail: mail@planwireless.com