Cell Tower Leases The Long-Term Financial Effects of Small Cells Could Be Significant

j.kennedy@steepsteel.com

On September 27, 2018, the Federal Communications Commission (“FCC”) issued a declaratory ruling --commonly referred to as the Small Cell Preemption Order (“SCPO”) -- which was drafted specifically to preempt state and local government agencies from regulating and conditioning the development and installation of an emerging technology (being rolled out in conjunction with 5G) which has become collectively referred to as “small cells”.

On January 10, 2019, the U.S. Court of Appeals for the Tenth Circuit (“Tenth”) denied a motion to stay the effectiveness of the FCC’s September 27, 2018 SCPO. As a result, the new rules became effective January 14, 2019 and – along with a highly restrictive “shot clock” -- effectively creating a government mandated subsidy for the benefit of the carriers and tower companies at the expense of state and local governments, their constituents, and ultimately private landlords in the years to come.

Overview

The SCPO, in its current form, will:

•Shorten the time local and state government agencies have to process applications for small cells to either 60 or 90 days, depending on whether they are being mounted on an existing or new structure;

•Limit application fees for small cells to $100 per site, and recurring fees to $270 per site, per year, for small cells in the rightsof-way;

•Prohibit local and state government agencies from assessing fees that include anything other than a “reasonable approximation” of “reasonable costs” directly related to maintaining the rights-of-way and the small cell facility; and towns.

•Limit aesthetic review and requirements (including ‘undergrounding’ and historic/environmental requirements) to those that are reasonable, comparable to requirements for other rightsof-way users, and which are published in advance.

Prior to the passage of the SCPO, more than thirty states passed similar state laws to address the issue of small cells for the benefit of the wireless vendors and many are still in court, although with the passage of SCPO and the recent ruling by the Tenth, such lawsuits are now likely frivolous.

Historic Example and Projected Effects

One only need look to Texas as an example of the negative fiscal effects of small cell fee caps, as projections in the state of Texas -- which passed a similar bill (SB-1004) in September 2017 -created an estimated reduction in revenue by cities statewide of more than $750 million per year That is just in Texas, for just one year, and is likely to increase as the number of small cells increase between now and 2025.

On a national basis, and when one calculates the differences based on the local real estate markets and costs of living, we can extrapolate the Texas numbers to determine the annual costs nationally of the FCC’s SCPO on an annual basis (as well as the total loss of value on a lump-sum basis) and we begin to see that the total transfer of wealth from local government agencies (and ultimately their constituents) to the carriers, which could be more than $200 billion, in spite of the fact that total 5G infrastructure costs for all vendors nationwide is projected to be far less (based on recent studies such as that published by iGR).

Problem

Part of the problem that has led to the passage of small cell bills on the state and federal level has been that cities nationwide are generally unaware of wireless infrastructure, wireless agreements, and the ways and means of the wireless vendors as a whole, which has led to slow and cumbersome application processing, poorly negotiated and managed wireless agreements, and a misunderstanding of best practices when working with wireless vendors leading to unnecessary delays and – in some instances -- unreasonable fees charged by local and state governments (relative to actual market values) for wireless infrastructure development.

As a consequence, the federal government, including the FCC and wireless vendor lobbyists specifically, appear to have lost their patience with local and state governments and have successfully duped the American people into believing the need to win the race to 5G must be won at any cost…even if such cost was to be borne on the backs of taxpayers.

This tactic is not unheard of, and in fact has been used historically by carriers and tower companies under the guise of a “rent guarantee” wherein property owners would be offered a guaranteed rent for a number of years – not subject to cancellation -- in exchange for a rent reduction by the landowner. The companies most often used to carry out such “guarantees” on behalf of the wireless vendors are known in the industry as “lease optimization firms” and have included the likes of Black Dot, MD7, and the Lyle Company.

When one considers the SCPO and lease optimization along with a ubiquitous clause contained in the vast majority of cell tower leases often known as an “early termination provision”, the risks to all landowners – public and private – become pretty apparent.

Once the densification of national wireless networks nears completion in the next six years, the lease optimization firms will be back with a vengeance to inform the vast majority of cell tower lease landlords that they either agree to a significant rent reduction, or the lease will be terminated entirely (and soon). The logic behind the argument will be that carriers and tower companies can no longer afford to pay the “previous” rental rates for cell towers as a result of the addition of all the small cells. They will go on to say that as small cells now average about $22 per month rent, cell towers rental rates should be proportionately reduced (which will equate to an 80-90% reduction on average) and let the landlords decide.

The SCPO will arbitrarily and systematically reduce the amounts paid to local and state government agencies by carriers, tower companies, and infrastructure developers (collectively “wireless vendors”) in the form of small cell application fees and annual fees. Unfortunately, as the fee cap is currently set to be $270 per year per node for small cells installed in the public right-of-way or on local and state government-owned property (including street lights, bus stop shelters, and buildings) nationwide, some local and state government agencies and districts will bear the burden more than others, as the rents have historically varied a great deal for macrocells (“cell towers”) nationwide according to the local real estate markets, traffic, alternative locations and costs of living, which means that cities such as San Francisco and New York will be hurt far more by the SCPO than small midwest

Conclusion

To private property owners, it is reasonable to be cautious about the ultimate long-term effects of the SCPO on wireless agreement (a.k.a. “cell tower lease”) monthly payment rates, as it is my prediction that wireless vendors will use the small cell fee cap created by the SCPO to set a precedent for cell tower lease rate reductions which has the potential to save carriers and tower companies billions in the form of rent reductions while costing private landlords dearly.

Such “proposals” often work to intimidate the uninformed, while the truth is – and will remain – that most towers and associated leases will exist beyond the lives of the majority of people alive today and will likely never be candidates for termination. While the wireless vendors would love nothing more than to enrich their collective bottom lines using such threats to terminate, unless the overwhelming majority of landlords agree to significant rent reductions, the threats to terminate cell tower leases based on the foregoing premise, will be ineffective. That said, private and government landowners alike should know this: Seek out a qualified wireless lease consultant to evaluate your cell tower and lease before ever agreeing to any change that could cost you money, as the nominal fee that might be paid for the consult will likely deliver exponential returns in the long run.