“Value Penalty” essentially speaks to the reduction in a property’s value caused by a cell tower’s very presence on a property. This Value Penalty does not always occur (as in the case of many commercial properties, for example), but it can and does, and becomes most obvious when a lease has been sold and the property owner is attempting to sell the property subject to the lease, but without lease cashflows. Many brokers assume that they can just back out the value of the lease from what they determined was the value of the lease and property combined, and that they will arrive at a net value for the property subject to the lease — let me tell you, that is not always the case.
For example, if you own a residential property and receive $1000 per month for your cell tower lease from Verizon, the lease has a 3% annual escalator, and the lease in the third of five, 5-year options. Now let’s say that you just sold the lease to Crown Castle for $170,000 and now you would like to sell the property. Let’s further assume that the property would be worth $500,000 with no cell tower…do you think the same property with a cell tower, but no lease cashflows is still worth $500,000? Maybe…but likely not?
In many cases — with residential properties — a cell tower can have a negative effect on a property’s value. However, the Value Penalty is not so noticeable when the lease income is still factored into the property’s total value.
Remember, who likes looking at cell towers? No one I know, but cell towers will be tolerated for a price. It is up to the local real estate market (at the time of sale) to decide just how much the presence of a cell tower will reduce the value of their property based merely on its presence — or whether the cell tower will have any effect on a given property’s value at all.
The Value Penalty can be most dramatic on high value residential properties, on properties which give up a great deal of land (or building space) for the tower’s construction, in cases when a tower is very unsightly, or if the tower has been constructed in an inconvenient location which is (or can be) detrimental to possible future expansion/development of the property.
As I mentioned previously, not all properties suffer from any kind of Value Penalty. For example, there are old industrial spaces with the tower located out of the way, in which the tower tenant is paying market value (or more) for a ground lease of just 500 square feet of land located on a 20-acre parcel, and for which the 500 square feet of leased land has no higher and better use.
But that can change – for example – when the tower tenant is paying substantially less than market rent, with a below average escalator for the tower lease, when the tower is constructed on the front of a property (which also happens to be located on a major thoroughfare or at a major intersection), and the dirt is prime redevelopment land. In the latter case, the mere presence of the cell tower will likely create a huge Value Penalty, and not just from the presence and location, but also from the opportunity costs.