Cell Towers: Retaining Rental Income Without a Subdivision

By Erik M. Hume

For many landowners, cell tower leases provide a steady, reliable stream of income for a piece of their property that would otherwise sit unused. When it comes time to sell a property, some landlords don’t want to lose the regular payments they receive from the tower company. Fortunately, when it comes to cell tower rental income, you can take it with you – without a subdivision.

Many people think that if you want to keep a portion of the land for yourself when you sell it, you must obtain subdivision approval. If you want complete and unfettered use of the property, a subdivision is your best bet. But subdividing off a small piece of land holding a cell tower can be extremely difficult under modern zoning requirements. Instead, what if a landowner reserves just certain rights in the property, rather than the dirt itself? Fortunately, the law provides for such a mechanism.

Most people are familiar with easements. The power company may have one to string power lines over your property. Or you may have an easement over your neighbor’s property for a shared driveway. And easement rights have been in the news lately in connection with the construction of pipelines. In short, an easement is a right to use someone else’s property. But easements aren’t limited to utilities or access. An easement can be created to cover any number of uses.

Cell tower lease buyout companies, who pay landowners large, upfront payments in order to purchase the future rents generated by the leases, have known about and used easements for years. When a landowner enters into a buyout agreement, typically the landowner conveys to the buyout company an easement over their land for the use and operation of a cell tower. The easement boundaries generally match those of the leased premises for the cell tower. The easement allows the buyout company to maintain control of the tower area, and to receive the income generated by the lease. But the landowner still owns the underlying dirt, subject to the buyout company’s rights.

A landowner looking to sell her property can do the same thing as the buyout company, except she would be transferring the easement rights to herself. What the landowner would do is have prepared and filed in the courthouse a “Declaration of Easements” that would create the easement rights for the cell tower. The Declaration must provide specific rights related to the cell tower and the income generated by it. The Declaration should also address what happens with the current lease and what rights the easement holder has to enter into amendments and new leases. The terms and conditions of the Declaration are extremely important, and a landowner should work closely with legal counsel in preparing the document.

Once those easement rights are created, they then need to be transferred. The transfer can be handled in several ways. In some instances, a landowner will want to keep them for herself, which she could accomplish by reserving the easement rights in the deed conveying the property. A landowner could also transfer the rights to an entity created by her, such as an LLC or a trust, by recording an instrument in the county courthouse. How those rights are held in the future could have significant tax consequences, so landowners should consult with their tax advisors on how to structure such a transaction.

Reserving the cell tower income sounds simple enough, but what are the drawbacks? There are several factors a landowner needs to consider. First, she needs to confirm that her lease permits such a scheme. A cell tower lease, like most commercial contracts, is a negotiated agreement between two parties. There is no set “form” for a cell tower lease. It is possible that the existing lease could include language that would make it difficult to or even impossible to reserve the income by easement. For example, a lease may say that only the “fee owner” (that is, the person that owns the dirt) may be the landlord under the lease. If that’s the case, it would be much more difficult to use the easement model. Review of the lease by legal counsel is very important early in the process.

Even if the lease doesn’t expressly prohibit the easement model, its terms could present issues moving forward. Careful attention needs to be paid to the lease provisions governing who receives notices, who receives insurance protection and what the tower company can and cannot do. Again, an attorney can help in reviewing the lease and identifying these issues.

Another important concern is the effect the easement scheme would have on the marketability of your property. Properties with cell towers on them are not attractive to some buyers. Separating the income generated by the tower from ownership of the property will have an effect on value and could make a property less desirable to certain buyers. Furthermore, many buyers will want a say in the terms and conditions of the Declaration of Easements as a condition to closing. Before electing to retain the tower rental income, a seller should discuss with the listing agent the effect retaining the income may have on efforts to sell the property.

Property owners should also realize that in addition to receiving rental checks, they will also likely have certain responsibilities. Using the easement model, the person receiving the rent checks must work with both the cell tower company and the new property owner. While the cell tower company is usually responsible for its site, if it fails to maintain the site or if there is another problem, the new landowner will look to the old landowner to address any issues. Furthermore, an astute buyer will require that the seller include indemnification and insurance language in the Declaration of Easements to provide additional protections. While a landowner may be willing to accept the risks associated with a cell tower if she is the beneficiary of the income generated by it, if she is not receiving the rent, she will expect the party that is to make her whole.

The easement model for retaining cell tower rental income is a convenient way to keep a revenue stream while still permitting the sale of the underlying property. It can even be used outside of a sale situation, such as in conjunction with estate planning. Before embarking on such a program, however, landowners should consult with legal counsel experienced in this area, as well as real estate professionals experienced in the sale and marketing of real property. While the easement model does not have many of the barriers faced in the subdivision process, it is still a complex mechanism that can have long-lasting effects on your property and finances.