Are you sitting on the fence wondering if you should sell your cell tower lease? From my observations of the markets, my advice is: Don’t sit too long.

First of all, I have nothing to gain by trying to convince you to sell. I’m not going to benefit from your decision in one way or the other. This article is simply an opinion I’ve formed after spending considerable time reading about the topic as it pertains to my own business.

You already know that you can convert these types of long term payments into cash, but did you know that you may be able to convert your payments into real estate investments with potentially greater return? You may benefit greatly by utilizing an IRC 1031 exchange. Utilized properly, you can get cash AND make another investment, possibly even outpacing the income that you were realizing from the site lease. More on this later.

When I started researching this topic I studied several online sites that buy cell tower leases. Most use tactics to build a “sense of urgency” in the potential client. They want to motivate you into action. In fact, by reading the paragraph below, you will know what I’m talking about.

The very Nature of a lease implies that it is a source of income that is not permanent. Sure, it may be there for the greater part of your lifetime. But do you really want to be renegotiating a lease in your 90’s?  And what about your heirs? A lease is not infinite. It will end. And it may happen sooner than you think given the nature of communications technology. NEVER underestimate the power of technology.

You are a target. They want you to sell your lease in order to earn a commission. Plain and simple. There a very, very few direct “buyers”. To break this down even further, the type of buyer I’m referring to is the “end buyer”. This is the investment company that will ultimately be receiving your payment until the end of the lease. This is after your lease goes through a chain of referral agents, brokers and holding companies. You will rarely talk to an end-buyer.

My observations soon caused me to really wonder why an end buyer would invest in site leases, given the obvious risk. The fact that a lease is purchased at far below it’s actual value is only part of the answer.

Think mortgage market. It’s in the news every day. Mortgage companies are folding right and left, because customers are defaulting right and left. A sad case of companies playing the odds, banking that this will last long enough for them to make some gravy before a lot of folks lose jobs. They pass along mortgages like hot potatoes to the end-buyers, who eventually pay the price by taking a hit on their portfolios. Usually the end-buyer is diversified enough that this is not the end of the world. It’s the middleman who gets hammered.

The same philosophy applies to the site lease market, which is precisely why I am an advocate for selling. This market is a bubble. It will end. It’s just a matter of when. The end-buyer is playing the odds, banking on the fact that he’ll make enough before the bubble bursts.

As long as there are companies out there willing to buy cell tower leases, I say go for it. Just be an informed seller. As a buyer I want to know what is motivating the seller--you. As a seller, you should know what is motivating the buyer. That way everybody’s cards are showing.

In this case, the cards are telling me to convert that lease into a cash and/or real estate exchange.

IRC 1031 - Converting site lease income into a tax deferred real estate

With an IRC 1031, a seller can reinvest their buyout funds into commercial real estate, deferring capital gains tax liability indefinitely. Landowners may earn 7-12% annual returns, substantially sheltered by depreciation allowances -- not to mention appreciation of their principal investment. The IRC 1031 real estate exchange program allows site lease landlords to easily realize annual yields well over 18%. Depending on your tax bracket, the deferred after-tax purchase multiple could be over 13-years of lease payments. This means that you can swap your “risky” tower income stream for an appreciating real estate asset, which after taxes could yield more than your current monthly tower income. Landlords need to ask themselves, which they would rather have, zero principal/asset value with indefinite rental income, or an appreciating asset with highly secure, long-term, commercial rental income.

This article is not to be construed as tax advice. There are plenty of qualified tax advisors out there. I strongly urge you to talk over anything concerning IRC 1031 and how it will affect you in your investment decision with your tax advisor.