Cell Tower Capitalization Rates (Cap Rates) – SteelTree Partners

Investors looking at valuing cell tower leases or cell tower assets base their valuation on a desired capitalization rate or the initial unlevered return on investment. However, the tower industry doesn’t typically speak in terms “cap rates” to compare tower assets but rather in inverse multiples of asset level annual net operating income or tower cash flow. Read on for more details on why and how it’s relatively easy to arrive at the cap rate for tower or lease assets.

The capitalization rate, or cap rate, is generally defined as “the rate of return on a property based on the net operating income (NOI) that the property generates upon inception.” A cap rate lets investors compare different opportunities for similar real estate investments based on the expected rate of return. The cost of capital, growth potential, market, and risk determine where the cap rate and corresponding multiple will be struck. Investments that generate a flat or static return generally will be relatively high to generate an accretive return on investment.

How are Cell Towers Valued?

The tower industry typically uses a “multiple of tower cash flow” as a means of comparing similar tower assets. Tower cash flow is defined as Gross Revenue minus Expenses with expenses generally assumed to include Ground Rent, Utilities, Monitoring, Insurance, Maintenance, and Taxes for the tower. The multiple of tower cash flow is determined by dividing the purchase price for the tower by the tower cash flow-the cape rate by dividing the TCF into the purchase price a buyer is willing to pay. Tower cash flow is like Net Operating Income. Suppose that a tower generates $100,000 of gross revenue and its expenses are collectively $20,000. The tower cash flow is therefore $80,000.

How are Cell Tower Leases Valued?

For cell tower leases, there are rarely any expenses, so the net operating income equates to the rent being paid. So, if a lease generating $20,000/year is sold for $350,000, the multiple of rent is equivalent to 17.5.

Converting Multiples to Cap Rates

Once you have a multiple of rent (either on a tower asset or cell tower lease), you can easily convert from a multiple to a cap rate by dividing 100 by the multiple. For the cell tower example above with a multiple of 30X, 100 divided by 30 = 3.333% or a 3.3% cap rate. For the cell tower lease example above, 100 divided by 17.5= 5.7 – a 5.7% cap rate.

What are Standard Cap Rates for Cell Tower Sales and Cell Tower Lease Sales?

In 2024, tower assets typically sell for anywhere from 15X to 40X, which equates to cap rates of 6.6% to as low as 2.5%. The average cap rate of the hundreds of tower sales in our database is just over 4%.

Cell tower lease assets typically sell for 10X to 25X, which equates to cap rates of 10% to as low as 4%. The average cap rate for the thousands of cell tower lease sales in our database is just over 6%. In most cases the lower the cap-rate is based on the purchase price being offered is inversely ties to the anticipated growth a give acquisition if believed to yield over time.

Do Not Rely Upon Cap Rates or Multiples Alone.

The issue with using historical cap rates or multiples alone to ascertain the value of any asset is threefold:

1. Cap rates are useful for comparing similar assets. However, neither towers nor buildings are all the same. Tower assets vary widely and just as you wouldn’t expect to purchase a building knowing only the cap rate, you also wouldn’t purchase a tower knowing simply the multiple.

2. Buyers in the tower industry look for upside when purchasing assets. Assets with a higher probability of growth in the future will trade at higher multiples/lower cap rates. That’s why it isn’t uncommon to see multiple higher than 35X or cap rates lower than 3% for new towers. The buyers are factoring in future upside.

3. Both multiples and cap rates fluctuate in the tower industry. In the last year, valuations of tower assets and lease assets have been at all time highs. However, as of late 2023, we are observing increased sensitivity on pricing and seeing some retraction in the market. Thus, using yesterday’s cap rates will yield yesterday’s valuations, not today’s.

When we advise landowners or tower owners of the value of their cell tower(s) or cell tower leases, we look at many factors before assigning a multiple or cap rate. For more details on what buyers look for (and what we evaluate), please see this article on What Tower Buyers Want in 2023.

Ultimately, if you are trying to determine the cap rate or value of specific tower assets or lease assets, you will be best served by reaching out to us for a free confidential conversation. If you own a tower or lease, we will be happy to provide you with a well-informed verbal estimate of the value of your asset(s).