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How to manage the business of telecommunications leases.

It sounds too good to be true. Without lifting a finger, you can parlay your property's previously unused interior and rooftop space into a sizeable rental income.

But as any savvy businessperson knows, if something seems too good to be true, there is need to exercise caution. When it comes to negotiating and managing telecommunications leases, the property owner should beware. Here are a few key business issues to take into consideration before signing on the dotted line. As in every other area of business, the more information you have at your disposal, the better your position.

Rental Issues: Although rental rates can vary greatly, even within the same market, standardization has occurred over the past few years, particularly with respect to small rooftop antennas. For example, the going rate for small rooftop antennas which do not provide services marketed to building tenants - such as cell phone transmitters - has stabilized in Manhattan at about $2,000 to $2,500 per antenna, per month. The rental rates for larger rooftop antennas tend to be more negotiable, depending upon the bargaining power of the tenant, the location of the property and the volume of available space in other buildings-suitable for the specific use.

Negotiating points would include the right to add future antennas or other equipment, which would in turn affect the rate the property owner could charge.

In the case of wiring to create smart buildings, there are three basic solutions, depending upon the needs of the building. The owners can either arrange at their own expense to install the necessary wiring, hire a single preferred building service provider to perform the installation at no charge and then lease usage of that communications equipment to existing tenants with profits shared between both parties, or bring multiple separate service providers in to wire the building.

Generally speaking, interior communications closets and switch facilities rent for a higher rate than rooftop space, depending on whether they are located in the basement, on a tenant floor or on a mechanical floor. Understanding the market rate is important in negotiating the best deal.

Lease Term and Options: When deciding on the term of one agreement, it may be in the owner's best interest to give the tenant the shortest possible term, so that the property will not be tied up for an extended length of time. Renewal options are always in the service provider's favor, so the property owner will generally want to avoid giving options altogether. You will most likely be looking at a five-year lease for a small rooftop antenna, with the service provider seeking several five-year renewal options, with longer terms generally in effect for inside building wiring and antenna towers because they require a substantial capital investment to build and maintain.

Creditworthiness of the Tenant: Although most large telecommunications companies interested in leasing space are well known and well capitalized, there are new players emerging every day, and mergers of existing players abound. It behooves the landlord or lender to carefully analyze and investigate the creditworthiness of the tenant, its track record and chances of future stability before making a commitment.

Desirability of Use: Early on in the process of leasing space to telecommunications tenants, the landlord must seriously consider the big picture. The average office building owner is used to dealing with tenants that have little, if any, effect on the building outside of their particular space. In this case, you must think about the effect a rooftop tenant will have on your building and your core business of renting space in the building. Look beyond the dollars and cents as tempting as the bottom line might be. For example, adding rooftop antennas that are visible from the street to a shopping center may have a negative impact on the marketability of the property to future image-conscious tenants.

Environmental Concerns: Objections from existing space tenants, particularly in residential buildings, are common when the issue of telecommunication antennas is raised. With the exception of large antenna towers, all of the new technologies operate at very low power, generally 10 to 100 watts. This is not believed to have any significant adverse health or environmental impact, although the psychological impact can occasionally have a negative effect on your building's marketability. Larger antenna towers, such as those used by radio and television stations, however, do pose serious health and environmental risks at close range, which is why their placement, operation and proximity to people is government regulated.

Electricity and Other Utilities: Be sure there is sufficient access to electricity and other utilities to cover present and future telecommunications usage. Generally, telecommunications companies hire their own experts to evaluate a property under consideration early on in the site selection process. A landlord must be sure that the incoming telecom tenant doesn't impede or detract from existing utilities available to present or future tenants, and is prepared to pay for all costs associated with its own usage.

Physical Constraints: The property owner must be aware of the building's physical constraints - can the roof bear additional weight or will structural supports be required? Other issues that require investigation include how the new equipment will affect the roof warranty; how much space is already taken up by existing equipment; if the new equipment will cause interference with the old; and if sufficient riser space is available for the wiring that connects the roof to utility and other building systems.

Exclusivity: When the world of telecommunication leases first opened up about four years ago, it was common for a tenant to try to get exclusive control of an entire rooftop, without telling the landlord that they in turn were going to sublet space. The landlord would end up giving away the entire roof for the price of one antenna. Today, some companies act as rooftop managers for the landlord, with a fair deal struck upfront for those services. As long as the landlord is aware of his or her options, each situation can be fairly evaluated.

Looking to the Future: If the coming five years offer as much change to the telecommunications industry as the last five years have, it is impossible to predict where technology will go. Be cautious as to whom you take on as a tenant, since many of today's technology companies won't survive. Even an experienced building owner used to dealing with all kinds of tenants can be blind-sided by this industry, which measures time in milliseconds.

One fact is a certainty, the telecommunications industry is here to stay. It's up to you to proceed boldly, but with caution, in order to effectively making this industry work for you and your property. (Next Week: "The Legal Ins and Outs of telecommunications Leases.")

Jeffrey A. Moerdler, Esq. Partner Wolf, Block Schorr & Solis-Cohen, LLP
COPYRIGHT 1999 Hagedorn Publication
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Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:part 2
Author:Moerdler, Jeffrey A.
Publication:Real Estate Weekly
Date:Apr 14, 1999
Words:1128
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