Your cell tower leases are an important financial asset, just like a savings account, retirement account or rental property you may own. Each of these financial assets has a specific value, risk and return associated with it. And all things being equal, most of us want to maximize the growth and value of our financial assets.
If you had $10,000 in a savings account, to increase its long-term value, you would likely move that cash to a higher paying money market account. That could earn you an extra $1,000 over 10 years. If you didn’t make that change, it would cost you $1,000 in potential income. This is what is called opportunity cost.
Is there a way to improve the return on your cell tower value? Some tower owners have taken immediate cash payouts for their towers and invested that money in other opportunities to seek a higher overall return. To give you an idea of what return this would require, we’ve created some examples of how different levels of investment returns compare to what you would earn by continuing to collect rents and investing that rent. Remember, cellular tower rent is taxed as regular income, while a cash buyout and subsequent investment income may be considered capital gains, which generally are taxed at a lower rate when the investment is sold. The examples we have created assume long-term investment strategies in order to utilize this tax situation to your advantage. As with all investments, you should consult with your tax and financial advisors.
Scenario 1: Continued Ownership Of A Cellular Site Vs. A Cash Buyout With An Average Investment Return Strategy
In this example, we calculated the capital that a tower owner in the 22% tax bracket would accumulate over 15 years if they invested all of their after-tax rents and received a 7% annual return on those accumulated rents. We then compared that to the growth in capital a tower owner could receive if they took a cash buyout now on their tower leases and invested those proceeds with an annual yearly return of 7%.
Scenario 1 Results: Different Strategies Produce Different Outcomes
Retaining the cellular tower and investing the after-tax rents at 7% provides a $555,842 total return over 15 years. Taking the $360,000 after-tax cash buyout now and investing with a long-term growth strategy that grows 7% annually could provide $993,251. After paying long-term capital gains taxes (-18%), this gives you an $814,465 total return.
In this scenario, taking the $360,000 cash buyout and investing it with a &% annual return would provide an additional $280,663 in total return to the tower owner or 28% more than they would receive from investing their accumulated rents at 7% over 15 years.
Scenario 2: Continued Ownership Of A Cellular Site Vs. A Cash Buyout With A 10% Annual Investment Return
In this example, we compare the capital growth a tower owner could receive if they sold their cellular ground leases and earned a 10% annual return on those proceeds with what they would receive if they continue to collect rent on their cell site and invested those accumulated rents and earned a 10% annual return.
Scenario 2 Results: Investment Strategies and Tax Advantages Can Make A Significant Difference
Retaining the tower and investing the after-tax rents with an annual 10% return provides you with a $555.614 total return. Taking the $360,000 after-tax cash buyout and investing with a long-term growth strategy that has an annual return of 10% projects a $1,503,809 in total return. After capital gains taxes (18%) this projects to $1,233,123 total return. This equates to an additional $677,509 to the owner who took the cash buyout and invested those funds and received a 10% return on his investments.
To find out more about how Crescendo Capital Partners can help you get the most out of your cellular leases, or for a free valuation of your site leases contact us at 203.972.3200 or send us your contact information.
The information contained in this website does not constitute investment, tax or legal advice by Crescendo Capital Partners, LLC or any of its affiliates and should not be relied upon as such. Before proceeding with any financial decision, you should consult with, and rely on the advice of your professional financial, legal and tax advisors.