Typically, in the valuation of a telecommunication facility's leasehold interest, utilization of the Income Capitalization Approach is primary. The income to the position is the difference between market rent and contract ground rent. The capitalization or discount rates selected usually depends on the relationship between market rent potential based upon co-location capability and the contracted ground rent. The appraiser's judgement is critical in the analysis, as selected rates or ratios can be highly subjective and counterintuitive relative to the market rationale associated to the normal practice of most commercial real estate valuations.

  Further, and generally speaking, the Direct Sales Comparison Approach is only meaningful when there are sales of similar leasehold interests that the appraiser can analyze. Addition-ally, the Cost Approach is rarely applicable to the valuation of a leasehold interest.

  As noted, the tower industry is an emerging market and given its infancy, the valuation methods employed by an appraiser can be seen as not only subjective, but also contrary to what would be considered normal practice in the valuation analysis of most commercial real estate.

  COST APPROACH

  As noted in an article entitled The Valuation of Wireless Communication Towers, as published by the Right of Way magazine in its September/October, 2001, publication, "the current market seems to give little consideration to the cost of construction when towers are purchased. This is evidenced by comparing the prices paid per tower to construction cost per tower. The average cost to build, as reported by Crown Castle and SBA, was between $240,000 and $250,000 per tower. However, both of these companies purchased existing towers at an average rate of $356,000 per tower during the last three years. This equates to a 42% premium over cost.

  As such, the "in place" value of the monopole should exceed its installation cost given its income generation potential. Over time, the value of the installation will increase as other carriers are added. As a result, it is not unreasonable for the market to value a fully loaded and leased monopole at multiples of three to five times cost.

  DIRECT SALES COMPARISON APPROACH

  As noted in the 12th edition of the Appraisal of Real Estate on Page 417, "in the Sales Comparison Approach, the appraiser develops an opinion of value by analyzing similar properties and comparing these properties with the subject property. The comparative techniques of analysis applied in the Sales Comparison Approach are fundamental to the valuation process ... a major premise of the Sales Comparison Approach is that the market value of a property is related to the prices of comparable, competitive properties."

  As further noted on Page 419, "the Sales Comparison Approach is applicable to all types of real property interests when there are sufficient recent, reliable transactions to indicate value patterns or trends in the market. For property types that are bought and sold regularly, the Sales Comparison Approach often provides a supportable indication of market value. When data is available, this is the most straightforward and simple way to explain and support a value opinion."

  Conversely, the Direct Sales Comparison Approach may be limited when a market is weak and there are few market trans-actions available in order to effectively apply the approach. At this point in time, such is the case in the tower industry, as the sales market has been controlled by the large wireless providers and tower companies, nationwide sales characterized by portfolios that may include partial stock consideration, relationship building, and soft asset transfers.

  As noted in the aforementioned Right of Way magazine article, nationwide tower transactions which occurred between 1998 and 2001 typically involved main "players", where "the net result has been a seller's market with prices reaching levels that have surprised the participants." Said article reports on 21 separate packaged sales of towers, the total number of which was 21,093. The author, Edward M. Wright, points out that the mean price paid per tower over this time period was $623,480 and that the indicated sale price reflected a mean annual cash flow multiplier of 20.53. Thus, on average, a tower that was generating approximately $30,400 per year in net operating income was selling at a multiple of 20.53, thereby reflecting a mean sale price of $623,480. Analyzed further, it would appear that the mean overall capitalization rate reflected in these tower sales was 4.87%, a capitalization rate significantly lower than most institutionally graded real estate investment properties have performed. As noted by the Korpacz Real Estate Investor Survey report for third quarter, 2001, a rate range of 6.6% to 12% was reflected for such property types.

  INCOME APPROACH

  Traditionally, telecommunication towers were built and operated by the wireless carriers themselves. However, over the last few years, the carriers have out-sourced this function, thereby leading to a substantial rise in the number of independent tower operators. The FCC has stated that there are more then 20,000 cell sites now operating in the United States. Some industry operators project tower growth to exceed 100,000 cell sites within the next 10 years.

  Telecommunications companies typically negotiate long term leases brought about by option periods. Oftentimes, leases are negotiated for an initial five year term with automatic five year extensions, with companies insisting on cancellation clauses. Ground rents vary greatly by location, and rental rates are influenced by the number of site options available. As noted, the demand for tower space is very high, and the barriers to entry for new towers, given local zoning and planning board restrictions, can be substantial. While ground rents vary from town-to-town, city-to-city, and state-to-state, the appraiser has observed, at least for the Rhode Island and Massachusetts markets, a ground rent range of $1,000 to $1,850 per month, with the median rental rate portrayed at $12,000 per year for a traditional ground site and higher rents exemplified for roof-top locations in major metropolitan areas.

  Typically, if one tower serves a number of telecommunications companies, ground owners can request a percentage rent for any additional co-locations. A typical co-location fee could range from 10% to 30% of the additional revenue received after the first carrier.

  Up to this point in time, revenue streams have been highly secure given the reliable base of carrier customers, long leases, and low carrier turnover. As noted, the master lease contracts are typically for the long-term given the option extensions, and normally contracts are written with a consumer price index (CPI) based minimum annual increase. Lastly, industry observers note that turnover rates are less than 5%, and turnover is typically due to carrier consolidation rather than relocation to a competitor tower.

  The economic impact of co-location was identified in 1998 by a Lehman Brothers study. This study indicated that with one carrier tenant, the cost of tower construction would require a payback period of 26.3 years. However, a substantial decrease in the payback period is reflected at 5.5 years with four carrier tenants and is dramatically reduced to 3.1 years if seven carriers are present (Investing in the Tower Industry, Lehman Brothers, October 6, 1998).

  As stated earlier in this report, every industry has its own benchmarks or standards for financial performance. Noted by the Right of Way magazine publication and this appraiser's investigation with a local tower contractor, it appears that market participants are estimating tower values on a multiple of net operating income (NOI). It appears that multipliers are dependent on the projected income growth or net income potential of the asset as opposed to its historical income stream. That is to say, if a tower is well located and, say, has only one tenant, the potential revenue from co-locators is often only limited to the tower's load capacity. Thus, a buyer can afford to pay a higher multiplier of a tower having relatively limited existing income assuming that the tower's excess capacity will render future value growth. This runs contrary to normal practice in the analysis of value for commercial real estate, as this market appears to be indicating that a tower is more valuable (on a multiplier basis) if its occupancy is lower.

  Nationwide, as reflected in the Right of Way magazine article, observed multipliers have been 10 to 14 for those towers having excess capacity for additional co-locators and an NOI multiplier range of 8 to 12 for those fully loaded towers having no excess capacity. Locally, this appraiser has observed a NOI multiplier range of 11.59 to 21.08 and a range of overall rates of 4.74% to 8.63%

  The Right of Way magazine valuation article indicated that of the reported 21,093 tower sales transacted between 1998 and 2001 nationwide, the indicated overall rate range was 2.7% to 7.74%, with the median rate depicted at 4.87% and the mean rate reflected at 5.11%. Two bimodal overall rates were indicated at 4% and 5%, respectively. Again, the market would appear to indicate that a tower having excess capacity for additional co-locators should have a lower overall capitalization rate as compared to a tower having limited or no excess capacity for further co-locators, which would, therefore, reflect significantly higher overall rates.