By Erwin G. Krasnow and John M. Pelkey
Garvey Schubert Barer
As credit gets tighter and traditional financing sources dry up, broadcasters need to be more creative in finding sources of capital. For a broadcaster that owns its own tower, a source of cash may be in the station’s backyard. It can turn that steel into “gold” by selling the tower and entering into a leaseback arrangement. Such an arrangement may be particularly attractive to broadcasters that own towers in prime locations (e.g., in populous areas, near major highways, or in areas subject to land use restrictions that make construction of a new tower next to impossible) and that either want to be relieved of the distractions of tower ownership or wish to take advantage of the high multiples generally being paid for towers.
Over the last few years, broadcast stations have experienced a significant drop in value, both as the result of a decrease in adverting dollars brought about by a recessionary economy and because of the decline in the cash flow multiples for which most stations are being sold. By contrast, the towers used to transmit those broadcast signals have experienced an increase in value. This is due to the fact that tower rents continue to remain constant or increase and the cash flow multiples for which towers are being sold outpace the cash flow multiple for the broadcast stations that rely on those towers.
When a broadcaster enters into a sale/leaseback arrangement, depending on the cash flow multiple paid for the tower, it will be paying back in rent at some point in time more than it will have received in absolute dollars. However, immediately upon the sale of the tower, it will have the use of the sale proceeds to grow its primary business, fund acquisitions, reduce insurance costs, and retire debts. It will also benefit from having reduced or eliminated maintenance, operating and regulatory compliance expenses.
We predict that sale/leaseback arrangements will become more popular as the spread between tower and broadcast multiples continues to expand. Given the current credit-constrained environment, broadcasters may prefer such an arrangement to selling their stations or taking on expensive debt (assuming that such debt is even available). This alternative may be particularly attractive to those broadcasters who regard tower ownership as ancillary to their main line of business.
Advantages and Disadvantages of a Sale/Leaseback Transaction
There are five advantages to entering into a sale/leaseback transaction:
1. Liquidity. The broadcaster gets cash right away and is free to use the money to fund acquisitions, retire debt or put the money to more productive uses. The gain from the sale should be able to be recognized over the term of the lease.
2. Reduced expenses. Virtually all of the hard costs of maintenance, repair, insurance and regulatory compliance as well as the soft costs of the headaches in dealing with such matters are eliminated.
3. Less taxes. Payment of tower rent is deductible as an operating expense (assuming that the IRS does not re-characterize the transaction as an installment sale; see item below).
4. Reduced risk. If the sale includes the land beneath the tower, the liabilities of being a ground owner are eliminated. Even if the land is not included in the sale, selling the tower takes away the risk of a tenant leaving the site or failing to renew the tower lease.
5. Other Potential Savings. The broadcaster may be able to negotiate favorable lease terms with the new owner. (See below regarding market rental rates).
On the other side of the ledger, there are four potential disadvantages to entering into a sale/leaseback transaction:
1. Another operating expense. The lease payments will reduce the station’s cash flow (subject, of course, to the substantial one-time cash infusion at the time of sale of the tower), which in turn might result in a lower purchase price if the station were to be sold. In addition, the higher the price that the buyer pays for the tower, the higher the lease payments may need to be.
2. Loss of property ownership benefits. The seller loses the tax benefits of depreciation of the tower and equipment and, if real property in fee simple is being sold, any future appreciation in the value of the land. (To avoid this disadvantage, the owner of the tower might consider retaining title to the land and entering into a ground lease with the buyer of the tower.)
3. Risk of loss of use. If the station no longer owns its tower, there is a chance it could lose control or the assurance of long-term use. This can be minimized by negotiating the terms of a favorable lease.
4. Adverse IRS ruling. The IRS may conclude that the transaction is in reality an installment sale transaction and deny deductions for rent payments.
Practical Suggestions
* Enlist the services of an accountant to provide advice on the tax ramifications of the transaction for both parties (that information will assist the broadcaster in the negotiation process).
* Make sure the transaction meets the requirements of the Financial Standards Accounting Board to qualify as a sale/leaseback for accounting purposes. The price will be determined in part on how much the broadcaster will pay for leasing the tower. To avoid IRS scrutiny, the tower should be sold at a market price and leased at market rental rates.
* Negotiate (under the guidance of counsel) a long-term lease with renewal options, 24/7 unrestricted access to the tower and protection from harmful interference to the station’s signal.
* Consider selling the tower, but retaining title to the ground and leasing it to the new owner of the tower.
* Make sure that the lease is assignable as a matter of right to any new owner of the station. Buyers of the station will want assurances that they can assume a long-term lease on attractive terms.
* Consult with an experienced investment banker, broker or other intermediary to determine the fair market value of the tower before determining if a sale/leaseback transaction makes sense financially. Poll multiple parties to get a wide range of opinions and perhaps even valuations.
Most broadcasters regard themselves as only being in the broadcast business. But if they own towers and the ground beneath them, they are also in the real estate business. A sale/leaseback is one way of maximizing both their horizontal and vertical real estate assets.
Erwin G. Krasnow Esq., co-chairs the Communications and Information Technology Group at Garvey Schubert Barer. He is a former general counsel of the National Association of Broadcasters and was one of the founders of Tower America. He can be reached at [email protected] or 202-298-2161. He is, along with Henry A. Solomon, Esq., the coauthor of Broadcast Towers: A Step-by-Step Guide to Making Money on Vertical Real Estate, which is published by the National Association of Broadcasters.
During his more than 30 years as a communications attorney, John Pelkey, Esq., has done nearly everything that there is to do in the communications field. He co-authored the Supreme Court brief that sanctioned competition in long-distance telephone service. He argued both before the FCC and the court the case that led to the issuance of the nation’s first cellular authorization awarded through comparative hearing. He was co-counsel in the successful federal court proceeding that struck down the Fairness Doctrine. He represents both commercial and noncommercial broadcasters and has handled numerous broadcast sales transactions.
