The availability of broadband Internet service in apartment buildings, condominiums, and office buildings, or what the FCC calls multiple tenant environments (MTE), was the subject of a Notice of Proposed Rulemaking (NPRM) and Declaratory Ruling released on Friday of last week. Prior FCC decisions have attempted to strike a balance between promoting competitive access to tenants and preserving adequate incentives for the initial service providers to deploy, maintain, and upgrade infrastructure. For example, the Commission prohibits cable providers and telecommunications carriers from entering into contracts with MTEs that grant a single provider exclusive access to the MTE, but permits exclusive marketing agreements.
The NPRM follows a 2017 Notice of Inquiry in which the FCC sought comment on certain agreements between MTEs and service providers, including sale-and-leaseback of inside wiring, exclusive marketing agreements, and revenue sharing agreements, whereby a provider agrees to pay the MTE owner a share of the revenue generated from the tenants’ subscription service fees. The NPRM seeks to refresh the record from the earlier proceeding, and seeks comment on the impact that these arrangements have on broadband deployment and competition within MTEs.
In addition, the NPRM asks whether the FCC “should act to increase competitive access to rooftop facilities, which are often subject to exclusivity agreements.” Wireless providers use MTE rooftops to locate facilities that establish or enhance wireless services. The Commission seeks comment on, among other things, the benefits and drawbacks of rooftop exclusivity agreements, the prevalence of such agreements, and common terms and conditions of such agreements that may affect broadband deployment.
The FCC also seeks comment on any other arrangements and practices between MTEs and service providers that may hinder competition among broadband, telecommunications, and video service providers in MTEs, and on any state and local regulations that promote or deter broadband deployment, competition, and access to MTEs.
Comments on the NPRM are due 30 days after it is published in the Federal Register, with replies due 30 days thereafter.
In the Declaratory Ruling released along with the NPRM, the FCC granted in part a 2017 Petition filed by a coalition of service providers seeking preemption of a 2016 San Francisco Ordinance that prohibited building owners from “interfer[ing] with the right of an occupant to obtain communications services from the communications services provider of the occupant’s choice.” The Ordinance at issue states that a building owner interferes by not allowing a communications provider to (1) “install the facilities and equipment necessary to provide communications services,” or (2) “use any existing wiring to provide communications services as required by this [Ordinance].”
The FCC preempted the Ordinance “to the extent it requires the sharing of in-use facilities in MTEs.” The Commission explained that the Ordinance, while ambiguous on its face, appears to require the sharing of a building owner’s in-use wiring because it does not explicitly limit sharing to unused wiring, and instead uses the terminology “any existing wiring.” The Commission noted that San Francisco has failed to clarify whether the Ordinance requires the sharing of in-use wiring, and that such a requirement is the only one of its kind in the country.
The FCC reasoned that preemption is necessary because the in-use sharing requirement “deters broadband deployment, undercuts the Commission’s carefully-balanced rules regarding control of cable wiring in residential MTEs, and threatens the Commission’s framework to protect the technical integrity of cable systems.” The Commission explained that the Ordinance deters investment by MTEs because they no longer control the wiring they expended resources to install. Similarly, the FCC stated that the Ordinance deters investment by service providers who are hesitant to install and convey the wiring to an MTE if that wiring can be accessed by a competitor who bore none of the installation costs. The FCC also stated that the Ordinance has caused confusion as to who is responsible for maintenance of wiring.
The Commission’s preemption of the Ordinance became effective immediately upon release of the Declaratory Ruling.
By: JDSUPRA
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Archives for July 2019
Co-working Office Buildings on the Rise
Demand for co-working spaces is expected to show continued strong growth over the next few years, as more younger workers favor flexible office space over traditional office settings, according to BBG, a leading commercial real estate due diligence firm.
Flexible office space has quickly become a major disruptive force in the office real estate market. The co-working office trend has drawn mostly a younger generation who finds this an appealing workplace alternative in today’s sharing economy.
According to industry reports, there are an estimated 35,000 co-working spaces worldwide with a market value of an estimated $26 billion. And the number of the nation’s flexible office spaces is expected to grow at an annual rate of 6 percent until 2022.
Co-working spaces accounted for more than 25 million square feet in the 30 top US markets. Manhattan ranked the highest in flexible office space (12.5 million square feet), followed by Boston (3 million square feet) and Seattle (2 million square feet).
The co-working office trend also has allowed some investors and owners to raise their property values by dedicating a certain amount of square footage to flexible office space. One industry survey said nearly 40 percent of buildings that included co-working space achieved a higher value than the average for office buildings in their market.
“The proliferation of co-working office buildings reflects a monumental change in the way today’s society views the workplace,” said BBG CEO Chris Roach. “Flexible office space gives people the opportunity to meet and interact with others who have different skills and backgrounds that may not be otherwise available in a traditional office environment. In addition, it creates new opportunities for building owners and investors who could possibly generate more value from properties in high-growth areas.”
By: BBG
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July 2019 CCIM Deal Making Session Properties
Thanks to all of the brokers, sponsors, and guests who attended the July 2019 CCIM NM Deal Making Session & Forum and to those who shared the July 2019 CCIM NM Properties.
Click here to view source PDF.
| Name | Property, City | Type | Price | |
| 1. | Shelly Branscom, CCIM Riley McKee |
3821 Singer Blvd NE Albuquerque |
Office | $995,000 |
| 2. | Jim Wible, CCIM Keith Meyer, CCIM, SIOR Riley McKee |
1510 Barbara Loop SE Rio Rancho |
Industrial | $1,272,411 |
| 3. | Austin Tidwell | 9901-9931 Lomas Blvd NE Albuquerque |
Retail | $1,295,000 |
| 4. | Victor Wuamett | Luna Vista Subdivision Los Lunas |
Land | $1,250,000 |
| 5. | DJ Brigman Dave Hill, CCIM |
8206 Louisiana Blvd NE Albuquerque |
Office | $825,000 |
| 6. | Dave Hill, CCIM DJ Brigman |
1830 Juan Tabo Blvd NE Albuquerque |
Office | $562,000 |
The Value of Percentage Rent in Long-Term Ground Leases
The higher potential returns of percentage rent may make it a worthwhile lease model for landlords.
A principal challenge inherent in long-term ground leases is that they are contracts to be performed over an extended period. Ground lease terms can be as long as 99 years or even longer, and the lease must make provisions for market changes and events that will not occur until many years in the future. A major issue in the context of long-term ground leasing is the way ground rent will be adjusted over the term of the lease. At the outset, the ground rent is established by the parties (generally by applying a capitalization rate to the parties’ determination of the fair market value of the land). Similar to space leases, the fixed rent may be subject to periodic fixed increases (e.g., 2 percent every year). However, there will come a time during the term of the ground lease when the fixed increases in the ground rent begin to erode the value of the rent. To address this, most ground leases will provide (in addition to fixed increases) for one or more adjustments to the ground rent at stated intervals based on the fair market value of the land at the time in question. The deficiencies in this method of adjusting ground rent are numerous and have been widely discussed, but principal among these concerns is the lack of predictability which some tenants believe render their leases unfinanceable and/or unmarketable.
Percentage rent
While fair market value resets remain ubiquitous in ground leases and are likely to remain so, another interesting but less common approach to revaluing ground rent is the use of percentage rent, implemented in the same manner as with shopping center leases. Percentage rent works by applying a percentage rate to the annual revenue from the project, which could be the gross revenue, income before debt service, net operating income or other formulations based on revenue and might apply to the total revenue or only the revenue above an agreed upon threshold. As with the fair market value adjustment, the goal of percentage rent is to provide a return to the landlord that reflects the contribution of the land to the project. In the context of a ground lease, percentage rent should reflect increases in the market without bringing the rent to a level having no relation to the revenue being produced from the project. It also provides the landlord with an opportunity to participate in the profits of the project, making this an appealing option in certain situations. The simplest approach is to apply a percentage to gross revenue rather than net revenue without any threshold. Using gross income also avoids fluctuations that are a function of variable operating expenses and the potential for disputes over the tenant’s calculation of net operating income.
Possible arrangements
The landlord’s goal is to capture every item of income that is generated at the property, while the tenant must consider which amount that might otherwise be included in gross revenue should be excluded for purposes of determining percentage rent. Payments that do not reflect the income from the project can include reimbursements from space tenants for operating expenses and real estate taxes, payments for electricity and other utilities, and insurance proceeds (other than business interruption insurance). To be safe, a tenant may prefer to start with cash flow after debt service (or even after priority returns). This will likely be too uncertain for the landlord to comfortably agree on what percentage should be applied and may result in the landlord placing limits on financing amounts.
If percentage rent is based on net operating income, then the landlord is assuming the risk of not only the performance of the business, but also the tenant’s skills in managing the business. The landlord must look out for excessive fees paid to a tenant-affiliated management company and professional fees that are not directly related to operating the property.
The net operating income approach begins to resemble a joint venture. Calculating percentage rent is more cumbersome than other types of rental payment structures, requiring the landlord to monitor the tenant’s activities and performance. For example, since percentage rent provides the landlord with a return on the income from the project, the landlord will need to ensure that the tenant is operating the project in a manner that will maximize revenue. Accordingly, minimum operating requirements and restrictions on operating competing businesses within some radius of the property may be included in the lease. Space that is leased to an affiliate of the tenant at a below market rent (other than an appropriate management office) should be “grossed up” to the fair market rent for the space. The lease will also need to include a reporting and payment process to which the tenant must adhere. Most leases require that statements of gross revenues be submitted to the landlord together with estimated payments because of percentage rent on a monthly or quarterly basis. with an adjustment after the end of the year once the tenant determines the amount of gross revenue that was actually produced.
Risk equals reward
Traditionally, landlords expect a steady predictable income and do not assume risk related to the success of the business operated at the property. However, in a percentage rent scenario, the landlord also participates in any upside and may enjoy higher returns that are associated with this risk. When executed well, the return could exceed the actual value of the land for the project. The tenant also bears certain burdens of the de facto partnership with the landlord, including the obligation to make its books and records available to the landlord for examination to confirm that the tenant has paid the correct amount. The additional work might just be worth dealing with to alleviate concerns about the unpredictability of fair market value resets.
By: Dena Cohen (National RE Investor)
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