Found money: new opportunities in telecommunications leases.

(The following is Part 1 of a 3-part series on telecommunication lease issues.)

If someone came to you and offered you anywhere from $10,000 to $200,000 to add to your property's bottom line every year, with zero investment expected on your part, you might be skeptical. The truth is, that exact opportunity exists as a result of new telecommunications technology.

It is now possible to rent out previously unusable rooftop and interior space and to receive income for allowing telecommunications companies access to your building and your tenants. To appreciate the value these spaces can bring to your business, it is important to understand the types of new telecommunications technologies that are out there, their uses, their space needs, and the legal and business issues they raise.

Background

The Information and Technology Age has created a new type of real estate lease - the telecommunications lease. Ten years ago, car phones, cellular phones, portable fax machines and computers and personal digital assistants essentially did not exist in the workplace.

Today they are commonplace and vital business tools, on their way to becoming personal necessities. The transmission facilities required by these new technologies can be placed in existing, otherwise unusable space in all types of properties, and thereby create a new source of income for the property. For example, a typical office building in an urban area can add five to 10 small rooftop antennas. At an average monthly rental of $2,500 per antenna in Manhattan or $500 and up per month in other markets in a well situated building, these facilities could generate income of $50,000 to $300,000 per year.

Since the telecommunications tenant almost always pays ali the installation expenses for its facilities plus the cost of the utilities its uses, the only costs to the property owner are the transaction costs of the lease. Accordingly, the income from these leases translates almost directly into increased net operating income, and hence, into increased sale or financing proceeds.

Types of Telecommunications Leases

Small Rooftop Antennas: In urban areas, the transmission systems for these new technologies are small rooftop antennas, usually five to 10 feet in height. These small rooftop antennas service five types of technologies, including cellular, PCS (Personal Communications Services) equipment - the new portable digital phones, specialized mobile radio, fixed wireless services, and paging services.

Larger Rooftop Antennas: Satellite and microwave reception and transmission antenna dishes, generally six feet or more in diameter, can also be installed on rooftops. These satellite networks are generally installed for tenants on the roof of the building where they occupy space. Their uses range from data transmission for financial services to video conferencing.

Antenna Towers: Tall antenna towers broadcast radio and television signals throughout the country, and cellular and PCS signals in non-urban areas. These towers are located on top of the tallest building in an urban area. Co-location allows multiple antennas for different technologies to be located on a single tower, so that one tower could include a radio station signal transmitter, while also serving as both a cellular and a PCS antenna location, and also having several microwave repeater antennas pointed in different directions.

Communications Closets: Many telecommunications companies - wireless, Internet access providers or Competitive Local Exchange Companies (CLECs) need a small amount of space, either a stand-alone equipment cabinet or in a communications closet. Like rooftops, this is space that is not ordinarily rentable, except possibly as storage space at a much lower rental rate.

Wiring Smart Buildings: New technologies require the ability to transmit more and more information at faster and faster speeds. Ordinary telephone lines are no longer sufficient for many businesses, and even for individuals who don't want to wait for Internet web pages to be downloaded to their computers. For higher speed service, several types of cabling technologies are available, such as Integrated Services Digital Network service (ISDN), which is an all digital, high-speed phone line, or even faster T-1 or T-3 lines. In order for property owners to retain existing tenants with increasing technology and information transmission needs, and to attract new hightech or technology conscious tenants to their properties, they must have these capabilities, along with greater electrical capacity (eight to 12 watts or more per square foot instead of three to five watts per square foot); air-conditioning capacity to cool all of this equipment; and risers and equipment rooms available for tomorrow's new technology.

Wiring an existing office or residential building, particularly an occupied building, is very expensive. Although costs depend on the specific configuration of the building, the type of cabling and the number of cable "drops" to separate tenants, wiring a typical office building with fiber and equipment for Internet access can cost several hundred thousand dollars. As an alternative, private companies will wire a building at no cost to the owner, lease access to the wiring to the tenants, and share the income or profits with the owner or pay a flat rental type fee.

Making the Most of This Opportunity

With proper planning, telecommunications "tenants" of an office building can generate anywhere from $300 to $2,500 per month per deal - rent that really adds up - particularly because it is income without any additional expenses.

Along with opportunity comes the need to take a cautious approach to choosing which telecommunications service providers to "invite" into your building. The onus is on building owners to carefully manage the procedures and standards for access to their precious real estate, and to be certain that they utilize the best service providers available.

The first step in the process is generally educational. New clients, both property owners and tenants, want to hear how this type of lease affects their rental space, which service providers have the most to offer their property, what the business and legal issues are, and what type of deal should be negotiated. Most landlords don't realize the potential income telecommunications leases can generate. Because they are unfamiliar with this type of deal, they often think the lease is like a revocable license for removing their garbage - rather than understanding that, like a long-term lease, it requires greater protection for the owner and, if properly handled, creates a quantifiable asset upon sale or financing.

The average real estate owner initially doesn't fully understand the impact that telecommunications tenants will have on his/her business, as well as the legal issues that are ever present. Issues like rental rates, alteration rights, maximizing the use of riser space, interference, lease term and renewal options, the tenant's credit-worthiness, scope of installation, permits and approvals needed, and status of assignment and subletting rights must all be taken into consideration.

Real estate is a highly competitive business - any landlord can tell you that. Any edge you have on the competition can make a difference. Using telecommunication leases to your advantage is an edge that a smart landlord just can't afford to ignore.