In passing the 1996 Act, Congress balanced the desire of state and local governments to retain control over the construction of telecommunications structures through local planning and zoning authority, with the national goal of removing barriers to entry so that new entrance to the wireless telecom-munications industry would be able to build out nationwide systems as mandated by the FCC. As the FCC received tens of billions of dollars in revenue from the sale of licenses for various wireless frequencies contained within certain band widths, the 1996 Act provided reasonable assurances to such purchasers that their substantial capital investments would not be subject to unfair or unreasonable regulation.

  As of January 1, 2001, one hundred seven million Americans have cell phones, up ten million since June, 2000, according to the Cellular Telecommunications and Internet Association. Such cell phones are operated either by analog or digital systems. Analog phones are essentially two-way radios, whereas digital phones can display alphanumeric messages. Digital cellular service was first introduced into the United States in 1993, the first commercial PCS system placed on the air in Washington, DC, in November, 1995.

  To date, the wireless telecommunications industry's biggest players have been Verizon Wireless (27.5 million subscribers) as owned by Verizon Communication, Inc., and Vodaphone Group, PLC, the world's largest wireless operator; Cingular Wireless, LLC (20 million subscribers), a joint venture between SBC Communications and BellSouth Corp; AT&T Wireless (15 million subscribers); Sprint PCS (9.9 million subscribers); and Alltel (6.3 million subscribers). Other carriers include VoiceStream Wireless Corporation; Nextel; U.S. Cellular; and Qualcomm.

  What PCS Is All About - For instance, digital cellular, or PCS (Personal Communications Service), is different from the traditional analog system. PCS offers enhanced features over an analog system such as caller ID, voice mail, voice command dialing, superior call clarity, and privacy as signals have their own "special" code.

  The PCS system operates between 1800 and 1900 Megahertz (MHz) that is far above radio and television frequencies. Analog systems operate at frequencies between 824 and 894 (MHz). Higher frequency users cannot interfere with lower frequency users. Since 1984, over 15,000 analog and digital cellular antenna sites have been erected across the United States.

  PCS is a wireless service and is an extension of existing telephone use utilizing digital technology in place of wires to transmit and receive phone calls. The system is supported by an infrastructure of small and moderately sized neighborhood antenna sites arranged in a geographical pattern. A "cell" is the basic building block of a PCS system and created by mounted antennas, and serves as a link between the customer and the telephone system while that caller is within proximity to the site. Each cell can handle a finite number of telephone calls. As the numbers of customers increase, more cell sites must be added to handle the increased volume. If this is not accomplished, calls are dropped due to "dead spots" or customer calls are blocked, and they will receive a busy signal. A new antenna site must be constructed each time a new cell site is created. The coverage radius per the typical cell site averages 1.5 to 2 miles.

  Location of Cell Sites Can Vary - PCS antenna arrays can be located atop monopoles, lattice towers, billboards, water towers, high rise buildings, church steeples, smoke stacks, light stanchions, or flush mounted to buildings. PCS antenna arrays have also been located inside monopoles which resemble trees or flagpoles (called "stealth" installations). Monopoles/lattice tower, a/k/a base station towers or structures, heights typically range from 50 to 200 feet. At 200 feet (60.96 meters) or greater, proposed telecommunications facilities must be studied by the Federal Aviation Administration (FAA) and registered with the FCC. Those approved by the FAA most oftentimes require that the top of the structure be always lit.

  The selection of a specific site is dependent upon several factors: compatibility with adjacent land uses; presence of suitable sites given zoning and permitting considerations; absence of topographic obstructions (since the PCS system relies on "line of sight" technology); and a willing landlord. Careful site selection is the most important way in reducing visual impact. Appropriate site selection would suggest, to the maximum extent possible, that a "cell site" be located in an appropri-ately zoned area (commercial or industrial), or in an area where it is most likely to blend in with the immediate surroundings; placed on an existing monopole or tower (known as co-location); mounted to an appropriate and existing high structure such as a high rise, office building, smoke stack, water tower, etc.; or be placed in a sparsely populated/ built-up rural or semi-rural area.

  Thus far, Americans have been more likely to worry that new towers will ruin the landscape or drive down property values as opposed to potential health issues relating to electromagnetic/ radio frequency radiation (RF) that such antennas do emit. As of this writing, numerous studies have found no such serious health risks from cell phone use. Notably, the National Cancer Institute found that all cell phone users are no more likely to develop cancer than anyone else, and Dr. Russell Owen, of the U.S. Food & Drug Administration's Center for Devices and Radiological Health, says that "there is no evidence thus far of health risks associated with cell phones." RF exposure levels, as defined by the FCC, have been established by adopted standards set by the American Standards Institute (ANSI) and the National Council on Radiation Protection and Measurements (NCRP).

  Impositions Placed on State and Local Governments - Congress vis-a-vie the 1996 Act imposed the following six main zoning and land use limitations upon state and local governments, which preempted any inconsistent provisions of local planning or Zoning Boards of Review pursuant to the Supremacy Clause of the U.S. Constitution:

  1. Municipalities Cannot Prohibit Wireless Facilities. No laws or actions by any local government or planning or zoning board may prohibit, or have the effect of prohibiting, the placement, construction, or modification of communication towers, antennas, or other wireless facilities in any particular geographic area (No. 47 U.S.C. §332 [c]);

  2. Competitors Must Be Treated Equally. Local governments and planning and zoning boards may not treat competing providers of cellular telephone services, Personal Communications Services (PCS), or specialized mobile radio transmitters differently unless their facilities present materially different visual, aesthetic, or safety concerns. Of course, differences in zoning districts or the general character of surrounding neighborhoods would affect whether competing facilities must be treated equally (No. 47 U.S.C. §332[c][7] [b][i]);

  3. Health Concerns May Not Be Considered. The Act expressly prohibits local governments or planning or zoning boards from considering the health or environmental risks associated with wireless communications facilities. Congress has vested exclusive jurisdiction to set and enforce radio frequency emissions standards in the FCC (No. 47 U.S.C. §332[c][7][b][iv])8;

  4. Denials Must Be Based on Substantial Evidence. Any decision by a local government or planning or zoning board to deny a permit, variance, or other zoning approval necessary to operate a wireless communications facility must be in writing and supported by substantial evidence contained in a written record (No. 47 U.S.C. §332[c][7][b] [iii]);

  5. Decisions Must Be Rendered Within a Reasonable Period of Time. Any application to place, construct, or modify a wireless communications facility must be acted upon by the local government or planning or zoning board within a reasonable period of time, taking into account the nature and scope of such requests (No. 47 U.S.C. §332[c] [7][b] [ii]);

  6. No Barriers to Entry. No municipal law or planning or zoning board action may prohibit, or have the effect of prohibiting, the ability of an entity to provide any inter-state or intrastate telecommunications service (No. 47 U.S.C. §253[a]).

  On-going General Findings - This appraiser was contracted in 1996 by a national wireless service provider to conduct an empirical study (via paired sales) in the state of Rhode Island in order to test as to whether or not existing telecommunications monopoles or towers, including other like-kind facilities had caused any negative impact on abutting and/or surrounding property values. Further, upon completion of that study, throughout the present day, this appraiser continues to represent the service provider on zoning presentations for the granting of such facilities throughout Rhode Island and Massachusetts. The following real estate findings have been observed by the appraiser:

  In general, the appraiser found no overriding evidence of adverse effects on property values as a result of proximity to telecommunication facilities, as predominately, such facilities are located in appropriate areas as directed by local zoning ordinances, i.e.) commercial, industrial, or wireless telecom-munications overlay districts. However, such facilities can have the potential to affect proximate neighborhood values in residential areas if not properly accommodated for.

  For cell sites located within residential zones, the appraiser has found that market perceptions differ from community to community and more specifically, from neighborhood to neighborhood. The measure of damage is not precise nor evenly reflected throughout the marketplace, as different market factors (social, economic, governmental, and environmental) are frequently at play. Old fashioned "common sense" is found to be the most important factor when considering where a facility should be located. Careful selection is crucial in gaining municipal and neighborhood acceptance for a "host" cell site.

  Typically, in the valuation of telecommunication facilities, utilization of the Income Capitalization Approach is primary. The income to the leasehold position is the difference between a monopole's or tower's market rent and contract ground rent. The capitalization and/or discount rates selected usually depend on the relationship between market rent potential based upon co-location capability and the terms of the contracted ground rent. The appraiser's judgement is critical in the analysis, as selected rates or ratios can be highly subjective.

  Prior to 2002, the appraiser observed that such rates were counterintuitive relative to the market rationale associated to the normal practice of most commercial real estate valuations. However, today, the analysis of telecommunication facilities appears to follow conventional application of the Income Approach as such facilities are viewed as comparable to other real estate investment vehicles, albeit that their financing terms are of short duration. Further, the Direct Sales Comparison Approach is only meaningful when there are sales of similar leasehold interests that the appraiser can analyze, and the Cost Approach is rarely applicable to the valuation of leasehold interests.

  Every industry has its own benchmarks or standards for financial performance. Formerly, market participants in the telecommunications industry had estimated monopole/tower values on a multiple of net operating income. Buyers had historically paid relatively high values for limited income, basing purchase decisions on the assumption that the monopole's/tower's excess capacity will render future value growth. This mind-set of valuation had run contrary to normal practice of commercial real estate valuation given that the telecommunications marketplace appeared to be indicating that a monopole/tower is more valuable (on a multiplier basis) if its occupancy is lower given the anticipation for greater future income via co-location. For that market prior to 2002, higher multipliers were equated with low capitalization rates.

  However, 2002 witnessed bankruptcies, corporate layoffs, and re-organizations within the telecom sector. Office properties associated with the industry witnessed substantial vacancy rates and a lowering of asking rents. Speculative development of office product to accommodate the telecom market all but died.

  Outside of the office market, per se, funding for telecom infrastructure projects became extremely difficult and earnings were down industry-wide. Financial experts expected further consolidation within the industry and financial analyses of the industry's infrastructure now appeared to be based upon conventional methods of appraising income streams. Prior to 2002, industry standards established as reasonable the market value of a fully loaded and leased monopole/ tower to be at multiples of three to five times its cost.

  As noted in the article entitled The Valuation of Wireless Communication Towers, as written by Edward M. Wright and as published by the Right of Way magazine in its September/October, 2001 publication, tower companies were purchasing existing towers at an average rate of $356,000 per tower from 1999 to 2001, where the average cost to build was estimated at $240,000 to $250,000 per tower. Thus, tower acquisitions were being made at what amounted to an approximate 42% premium over cost.

  Given the fact that income generation/potential is the basis for calculating monopole/tower value, the Cost Approach is not a very accurate indicator of value in today's market. However, it could appear to serve somewhat of a limited purpose by at least identifying the low end of the value spectrum.

  Application of the Direct Sales Comparison Approach is limited by the fact that there are few arm's length market transactions available in order to effectively apply this approach. Up to this point in time, the sales market has been controlled by the large wireless providers and tower companies, with nationwide sales characterized by portfolios that most likely included partial stock considerations, relationship building, and soft asset transfers.

  The aforementioned Right of Way magazine article noted that tower transactions which occurred between 1998 and 2001 typically involved main players, where the net result had been a seller's market with prices reaching levels that surprised industry participants. The author pointed out that the mean price paid per tower over that 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, or thereby reflecting a mean sale price of $623,480. Similarly analyzed, such an example would have denoted a mean overall capitalization rate of 4.87%!

  Traditionally, telecommunication towers have been built and operated by specific owners/users. Telecommunication companies typically negotiated long-term leases brought about by option periods. Oftentimes, leases were negotiated for an initial five year term with automatic five year extensions, with companies insisting on cancellation clauses.

  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 rent 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 telecommunication companies, ground owners can expect a percentage rent for additional co-locations. A typical co-location fee could range from 10% to 30% of the additional revenue received after the first carrier.

  Prior to 2002, revenue streams had been highly secure given the reliable base of carrier customers, long leases, and low carrier turnover. As noted, Master Lease contracts were typically for the long-term given the option extensions, and normally, contracts written with a Consumer Price Index (CPI) based minimum annual increase.

  The economic impact of co-location is an important factor in analyzing a monopole's/tower's value. A 1998 Lehman Brothers study indicated that if a monopole had 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.

  In analyzing the leasehold value, an appraiser can implement Direct Capitalization of anticipated net operating income. The Right of Way magazine article indicated that between 1998 and 2001 nationwide, the indicated overall rate range was 2.7% to 7.74%, with the median overall rate depicted at 4.87% and the mean overall capitalization rate at 5.11%. Two bimodal overall rates were indicated at 4% and 5% respectively.

  Contrary to these prior obtained overall rates is the reality of 2002, which saw the downturn in the telecommunications and dot.coms industries, the valuation mind-set now being that such investment vehicles should be viewed as would a conventional/commercial real estate investment. Thus, the appraiser would anticipate capitalization rates exceeding the high end of the rates observed by the Right of Way article. In establishing overall rates, appraisers can refer to investor surveys relative to non-institutional grade properties for comparison purposes.

  Taking all these factors confronting the telecommunications industry today, coupled with the uncertainty of the national economy as reflected in the actions of a volatile stock market, the appraiser considers application of a Discounted Cash Flow Analysis to be too hypothetical. Therefore, although leases are written long term, this appraiser chooses not to apply this valuation tool. Alternatively, Direct Capitalization of net operating income or the application of a new income multiplier is preferable, especially when considering that bank financing views loan terms of short durations, i.e.,) 3 to 10 years. Lastly, the Cost Approach can provide at least a floor for the possible range of value and means by which a financial institution can assess risk potential.