Sales of cell towers or billboards are quite common. The sale may be from one taxpayer to another or to a company who is in the business of aggregating these assets for its own business of acquiring, owning, and leasing such assets. The value of the cell tower or billboard is largely a function of the value of the lease, i.e. the rent, term, and strength of the lessee. Oftentimes the sale prices can be considerable, which in turn, may cause a significant tax event to the seller. In many instances, the availability of a tax deferred exchange under Section 1031 of the Internal Revenue Code can be the key to enabling a sale to take place.
Use of Easement for Sale
As many people know, 1031 exchanges must involve like-kind property sold and purchased. This means an interest in real estate must be exchanged for another interest in real estate. In the case of a cell tower or billboard sale, the key is structuring it so that the disposition of the asset is considered the sale of real estate. A sale of a lessor’s interest in a lease does not constitute a real estate interest. However, a real estate sale can be accomplished by creating, or transferring an existing easement, on which the cell tower or billboard is situated. There is substantial case law providing that easements generally are a real property interest. One particular Private Letter Ruling provides validation of such a structure for the exchange of a cell tower easement. Although a Private Letter Ruling is “private” and can only be relied on by the recipient, the IRS does publish them to let the public know its position on the subject of the ruling.
Facts of the Private Letter Ruling
Facts of the PLR included a proposed “exclusive easement” for the site of the cell phone tower and “non-exclusive easements” for road access to the tower, maintenance, and access to the rooftop. transfer of the easement also included an assignment of the lease from the taxpayer to the easement owner. PLR references that most easements are perpetual unless the easement owner abandons the site for a number or years. It also states that a small number of easements are long term but not perpetual in duration.
This PLR provides a roadmap to structing an easement sale which includes the transfer of the lease of the cell tower or billboard located on the easement. It is important to note that the ruling references perpetual and long-term easements. That raises the question whether any cell tower or billboard sale requires a perpetual easement. In the PLR, the easement was to cease if the easement owner abandoned the property. That would seem to affect its otherwise perpetual nature. In addition, in the Analysis section of the PLR, the Service specifically noted that the “
(“Exchangor" or "Exchanger") Individual or entity desiring an exchange.
will acquire, own and lease perpetual and long-term easements…” [emphasis added]. In the Conclusion section of the PLR the Service states that “an easement acquired by Taxpayer under and
Easement is the right to use the real property of another for a specific purpose. The easement is itself a real property interest, but legal title to the underlying land is retained by the original owner for all other purposes. Typical easements are for access to another property, for utility or sewer lines both under and above ground, use of spring water, entry to make repairs on a fence or slide area, drive cattle across and other uses. Easements can be created by a deed to be recorded just like any real property interest.
Agreement is an “interest in real property” that qualifies, under § 856(c)(5(B), as a real estate asset…”. There is no reference in the conclusion indicating that the long-term easement would be treated differently than a permanent easement.
Also, it should be noted that the taxpayer in the PLR was a REIT and there are some small differences between the Code section real estate definition for REITs and 1031, however those differences are not material for the treatment of the easements.
No Inference from Treatment of Lessee’s Interest in a Long Term Lease
People tend to equate the necessary easement term with the well know fact that a lessee’s interest in a lease with more than 30 years to run (including renewal options) is like kind to conventional real estate. Unfortunately, that is not particularly relevant to the issues above. In connection with the cell tower or billboard easement, it is the landowner’s interest in the easement that is being sold and the lessor’s interest in the lease being assigned. That is quite different than a lessee’s interest in a lease.
There is an active market in the sale of cell towers and billboards. Similar assets such as wind farms, solar arrays, turbines, roof top antennas, and fiber optic cable should be capable of being exchanged in the same manner as cell tower and billboard easements. While some of these assets are valued based upon the value of the lease associated with the asset, an owner’s interest in a lease cannot be the subject of a 1031 exchange. PLR 1149003 provides some guidance on how to structure the transfer of the lease value by selling the easement under the leased asset. To maximize the validity of the easement, it would be best if the easement were perpetual in nature. However, it may be possible to do the exchange that is long term in nature. As always, it is always advisable to consult with professional tax or legal advisors before proceeding with such a transaction.