Build-to-Suit Success

Rapid growth in the wireless industry has created a wealth of opportunities for businesses and investors, particularly in build-to-suit transactions. But not all build-to-suit ventures are successful. Success depends on whether the various players (landowners, carriers, developers, contractors, attorneys and consultants) are willing to work toward common goals. When one participant fails to fulfill his legal responsibilities and obligations, the process can fail.

Traditionally, participants have taken a reactive approach to these legal concerns. Parties often wait to address legal problems after the damage is done. The subsequent solution often is costly and imperfect.

The bottom line requires that you take pro-active steps toward eliminating the legal problems that plague build-to-suit deals. Experienced advisers and partners committed to your company's success can help guide you through the following preliminary legal considerations.

DEVELOP ALLIANCES First, recognize competing interests in build-to-suit deals. The legal responsibilities and obligations of parties often conflict. Therefore, it is important to emphasize common goals. Successful build-to-suit ventures require that all participants obtain beneficial results -- profit with reasonable levels of risk. When one party fails in the business deal and defaults under an agreement, permit or government approval, all of the remaining parties are at risk.

Many developers and carriers have formed strategic relationships through mergers, joint ventures, partnerships and national cooperation agreements to align their interests and profit potential. For example, developers have acquired construction companies as well as site-acquisition companies to gain more control over the build-to-suit process. Other developers and carriers are making regional and national build-to-suit agreements.

The success of your company will hinge on your ability to choose the right partners. Do your homework before forming these alliances. Find players with well-earned reputations for quality work and fair dealing.

Always document build-to-suit relationships. Well-drafted prime leases, subleases and construction contracts memorialize the terms of the relationship and form a document to govern parties' actions. Consider documenting these agreements in the same manner as master co-location agreements. It is more efficient to negotiate one master agreement rather than numerous individual agreements.

It also is imperative that you develop good working relationships with local government officials involved in the permit process. Planning and zoning staffs should be aware of the nature of your proposal. If the local zoning ordinance doesn't already require co-location, inform the staff that your proposal could eliminate the need for additional towers in the community. But keep in mind that zoning approvals are not automatic with build-to-suit. You still must obtain local government approval before construction.

LEASES & LIABILITIES The prime lease provides the developer with an opportunity to memorialize its rights and the landowner's responsibilities with the land. Placing the terms of the prime lease in writing is not only a practical measure but also a legal requirement under most statutes of fraud laws. Make sure the developer has negotiated a prime lease with the following provisions.

The lease should confirm that the site can accommodate the anticipated development and related zoning requirements. Obtain appropriate easements for ingress and egress of vehicles and utilities. Avoid land-locked parcels. Verifythat the developer has 24-hour access to the parcel for maintenance and emergencies.

The prime lease should grant the developer explicit rights to sublease space not only on the tower for co-location purposes, but on the ground for accessory equipment. Confirm that the developer can assign the prime lease to future tower owners.

The developer's presence on the land might subject it to liability under state and federal law for the environmental misdeeds of the landowner. Further development of the tower might exacerbate pre-existing environmental conditions. Therefore, it is important to obtain environmental reports and certain representations and warranties from the landowner regarding the environmental condition of the property. The developer should require that the landowner indemnify it from and against any environmental liabilities that may incur as a result of the landowner's actions on or ownership of the property.

The developer should rightly compensate the landowner for any direct damages flowing from an injury. However, many landowners also will attempt to recover indirect damages, such as consequential damages including lost profits, lost contracts and business downtime. These indirect damages can be a black hole of liability. Eliminating consequential damage provisions from the prime lease will decrease the developer's potential risk dramatically.

Verify that the landowner carries liability insurance to cover its negligent acts on the leased parcel. Verify that the policy names the developer as an additional insured. If an injury occurs in the leased area as a result of the landowner's negligence, the policy should cover the injury. Likewise, a landowner likely will require the same coverage from the developer.

The developer should insist that the landowner not encumber the property in a way that could jeopardize the validity of the prime lease. For example, if a landowner has granted a mortgage interest in the property, the mortgagee may be in a position to void the prime lease upon foreclosing its interest in the property. To avoid this risk, the landlord should provide a non-disturbance agreement from the mortgagee.

Developers should capitalize on the opportunity for several extension/renewal options in the prime lease. Note that many states differentiate between renewals and extensions. In some states, a renewal obligates the landowner to enter into a "new" lease with the developer. The new lease may be on new terms and for a new duration, whereas an extension binds the landowner to extend the original lease on the same terms. This distinction is state-specific and may be the difference between a beneficial and a harmful lease.

The developer must ensure that the landowner actually owns the property to be leased. A title search will verify ownership as well as recorded liens and encumbrances. The developer should require a warranty of title from the landlord in the prime lease. The developer also should obtain a quiet enjoyment warranty to ensure the landowner will not disturb the developer's occupancy.

The prime lease must permit the developer's use of the property. The description of the intended use should be broad enough to cover the developer and tenant activities. The lease should list events of default granting the developer rights to terminate the prime lease. These default events should include breaches by the landowner, landowner's bankruptcy or insolvency, developer's inability to obtain appropriate governmental permits and approvals, and developer's inability to use the property for its intended purposes.

A QUALITY SITE Engineering designs must meet code specifications before construction begins. Designs that do not accurately reflect the codes of a specific state or municipality waste time and money.

Use experienced local construction companies with exceptional safety records. This combination of experience and a proven history of safe work sites will allow the developer to meet project time lines and allow you to meet site integration goals.

Perform the same analysis on a build-to-suit tower that you would on an existing tower. It should include a foundation plan review, structural analysis and site walk down for equipment placement.

Subtenants must review the pertinent zoning ordinance to determine what permits are necessary to install an antenna on an existing tower. Non-anchor tenants/carriers should request a copy of the tower developer's documented governmental approval (conditional use permit, special use permit). This will give you a better understanding of any special requirements or conditions imposed on the tower developer (co-location notification, landscaping, maintenance, lighting). Up-front knowledge of approval conditions eliminates subsequent surprises such as a revoked conditional use permit because of non-compliance.

Build-to-suit problems do not end after the tower is constructed. Anticipate additional operational problems such as interference. The sublease should address interference issues and identify a process for resolving tenant claims.

Developers must lease enough land area from the landlord to meet anticipated tenant requirements and ensure adequate space on the ground for equipment and utility access. Developers also must ensure the tower and equipment will be reasonably secure and that tenants will not have access to other tenants' equipment.

Arrange for routine site maintenance, including maintenance of access, landscaping, drainage grading, snow removal and security measures. Monitor the site's condition to ensure it complies with government approval, including lighting and marking requirements.

As the tower ages and loading increases, developers should inspect the tower periodically to ensure structural integrity for current and future tenants. Keep a maintenance record on the tower. Tenants should request proof of structural assurance before signing a lease agreement.

MANAGEMENT COMPANY Once the tower is constructed, all parties are best served by a competent management company. A management company serves as a central clearinghouse for rental functions. The company will field complaints, handle emergencies, collect rents, disburse bill payments, provide security oversight, administer leases and address municipal inquiries. Having one focal contact point with a management company can make the site process much more efficient, but only if you use a high-quality company. Risks associated with poor tower management are substantial. For example, a local municipality may require a tower representative to appear at a local permit compliance hearing. Failing to attend such hearings can jeopardize the status of the permit and your operations. A good management company will notify you of all such requirements.

PLANNING & VISION Competition has created heated rivalries among build-to-suit participants. Being first to market is important, but the competitive fire must not lead to inflexible procedures with industry members and local government. Build-to-suit ventures require cooperation, not competition. Save the competition for marketing your service.

Consider joint development efforts with competing carriers in your region. Coordinate development plans at a particular site with other competing carriers. A united front before local municipalities is strong leverage. Coordination will help municipalities provide consistent and quality land-use planning.

This coordination requires vision. Local contacts with community roots and knowledge of local law will be valuable in coordinating this cooperation. Once local approvals are obtained and site development is complete, capitalism will run its course and the company with the best service will flourish. With vision and proper planning, that company can be yours.

Although the FCC has been active in spectrum auctions, FCC Chairman William Kennard recently said the FCC will not act as a pre-emptive clearinghouse on siting issues. Kennard also stated that the FCC would not issue a blanket pre-emption of zoning moratoria. Zoning moratoria, according to Kennard, are part of the process necessary for communities to develop clear siting policies. Carriers and communities must work together in building wireless infrastructure.

For your protection, it is helpful to understand how the Telecom Act of 1996 affects tower siting. The Act has changed the way tower applications are handled at the local level. According to Section 704, a state or local government may not prohibit wireless competition or unreasonably discriminate against carriers of like technologies. Local governments cannot ban wireless and cannot set ordinances so stringent that wireless service is restricted in an area. In addition, the Act prohibits communities from refusing applications based on RF emission unless the site does not conform to FCC standards.

Many municipalities are aware of this and will steer citizens away from this issue. But this doesn't mean the issue will never surface. An independent consultant can prepare a study to help prevent this issue from stalling the site-approval process.

Wireless applications do not receive expedited or special treatment under the Telecom Act at the local level. State and local governments must apply consistent review and granting procedures in the consideration period and approval of all special-use permits, including wireless tower applications.

Although the Telecom Act does not allow expedited application consideration, it does allow expedited redress for permit refusals. Permit denials that violate the limitations listed in Section 704 can be appealed to a court of competent jurisdiction. The appellant must bring all claims within 30 days of the original denial. In addition, an applicant can appeal any denial based on the environmental effects of RF emissions. Such appeals can be made to the FCC directly. Permit denials must be in writing and supported by substantial evidence.

You know it's time to sell your towers when:

10. You get a request for a co-location on a site you did not even know you had.

9. Your office-supply requisition to corporate for paper clips is turned down.

8. Your 1998 capital budget was just approved, and you're not sure how you are going to afford this (build-to-suit) conference.

7. You are considering adding bungee jumping on all your towers to increase revenues.

6. Your in-house site-development manager addresses the planning-commission chairman as a pompous ass.

5. Your property manager misses an option date, and your killer site isn't your site anymore.

4. You oppose a tower in your neighborhood (and it's yours).

3. You believe that your wireless job is secure for the next 20 years.

2. You find out that your surveyor is dyslexic.

1. You launched your network a year ago, and you are still using your competitor's cellular phone.

Remarks by John P. Tynan, TynanGroup president, at a June build-to-suit conference.