Cell Tower Rent Escalators & Compounding
The Classic Story Of A Penny Doubled Every Day
There is a classic story of a worker who is offered a reasonable daily wage for a month’s work. Instead of taking the normal pay, the worker negotiates a compounding pay scale where his pay doubles every day – but starts with just a penny. The employer quickly shakes on the agreement, thinking he is getting a great deal. Unfortunately for the employer, as illustrated below, the 30 days of doubling pay that began with a single penny – ends with a total invoice of $10.7 million.
This story is a good example of the power of compounding and serves as a good analogy of just how important your rent escalator is.
How Important Is A Good Cell Tower Lease Rent Escalator?
In the words of The Donald, “It’s huuuuuuuggggeeeeee!” We are talking about putting hundreds-of-thousands more dollars in your pocket over the life of your lease. That’s how big of a deal a good rent escalator is.
It always frustrates me when I see representatives for cell tower companies taking advantage of property owners like you. I often see them offering landlords no rent escalator, or a below market rent escalator that increases every five years.
Investopedia defines an ‘Escalator Clause’ as the following:
“an escalator clause is a contract provision allowing for one to pass an increase in costs to another party. Escalator clauses are usually related to influences beyond both parties control, such as inflation.”
With that in mind, does inflation wait five years for you? Then why should you wait five years for your rent to go up?
The value of the rent you receive every year decreases due to inflation and without an rent escalator that meets, or exceeds, inflation – you are losing money.
How Much of A Difference is An Annual And A Term Escalator?
We can all agree that your cell tower lease rent should escalate (even if the carrier would prefer it to stay the same). The primary reason for a built-in increase in rent is for the rent to adjust with, or exceed, the uncontrollable outside influences on the value of your rent, such as inflation.
Often we are seeing tower companies such as Crown Castle, SBA, and major carriers, propose term escalators – a rent escalation schedule that increases every five years. This is a horrible proposition for the property owner for two major reasons: (i) inflation does not wait five years for you. You are affected by inflation annually. and (ii) by agreeing to a term escalator you are ultimately agreeing to an increase of less money due to the compounding effect of rent increases year after year.
How Do I Ensure I Am Securing A Good Rent Escalator?
To truly capture a market rent escalator and to ensure you are not leaving money on the table, contact Airwave Advisors to have your cell tower lease opportunity reviewed today.
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