Cell Tower Leases: The Escalation Clause

Negotiation a cell tower lease? Congratulations, you've hit the jackpot. Now, don't blow it. Check with a cell tower lease consultant. Mistakes can be extremely costly.

Tower leases should always contain an escalation clause. This determines the percentage increase your lease payment goes up and how often it increases. This is where the power of compound interest comes in and hopefully keeps up with another set of compounding numbers, inflation.

Let's stick with what we have at least a little control over; the negotiations of a cell tower lease and the escalation clause in particular.

Normal Escalation Clause

The norms in the industry for lease payments are 3% yearly and 15% each five years. Other escalations that are somewhat less prevalent are 10% each 5 years and the cost of living as measured by PPI (Producer Price Index). There is not a rule that prohibits you from asking for more or even less, if there is another aspect of the lease that is more important. Just do the math and meet with a cell lease consultant.

At first glance, a 3% escalator yearly may appear the same as a 15% increase each 5 years. Don't forget that 3% in a year is compounded by 3% the next year and so on. An average least of $1,000 per month in year one would pay, more by nearly $45,000 over the life of the lease (normal is 30 years) vs. 15% each five years.

Cell Lease's Monthly Multiplier

Monthly income multiple when calculating a price for a cell site lease. Because the yield from the yearly escalations of 3% will always be higher than the 5 year/15% figures, the lump sum buyout price will always be higher.

The key in negotiating a lease escalation clause is what I refer to is the 'Goldilocks principle'. Not so high that you cell site would be a target for termination the minute another and cheaper site became available and not so low that you're not getting as much as you could or should get.

Also must reads - "ROFR (Right of First Refusals" | "Cell Tower Lease Co-Location Rents" | "Cell Tower Lease Rent Reductions"