The year-one yield leaves out the escalator and the tower multiple, which together are most of the return.
A tower ground lease buyout is priced as a multiple of current ground rent, and its return held for ever is the year-one rent saved divided by the price, plus the rent escalator. Buying out an illustrative 18,000 a year lease escalating at 3.0 per cent for 20.0 times rent, 360,000, earns 8.15 per cent held in perpetuity, and 10.03 per cent if the tower is sold after ten years at 25.0 times cash flow. The 5.00 per cent headline yield understates it by 3.15 points.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most tower operators do not own the land under their towers. They lease it, typically for a term with renewals, at a rent that escalates every year. A ground lease buyout replaces that rent with a single payment for a perpetual easement or the freehold. The rent saved goes straight to tower cash flow, so the buyout is valued twice: as an investment in its own right, and as an addition to a tower that trades at a multiple of cash flow. The case is illustrative.
| Input | Value |
|---|---|
| Current ground rent, per year | 18,000 |
| Annual rent escalator | 3.0% |
| Buyout price, multiple of current rent | 20.0x |
| Buyout price | 360,000 |
| Tower valuation multiple of cash flow | 25.0x |
| Years left on the ground lease | 12 |
| Target return | 9.0% |
Held in perpetuity: IRR = rent saved in year 1 / price + escalator
Rent saved in year 1 = 18,000 × 1.03 = 18,540; IRR = 18,540 / 360,000 + 3.0% = 8.15%
Sold with the tower in year 10: IRR of (−360,000; the escalating rent saved in years 1 to 10; plus 25.0 × the year-10 rent in year 10) = 10.03%
Value accretion on day one: 25.0 × 18,000 − 360,000 = 450,000 − 360,000 = 90,000
In Excel: =B2*(1+B3)/B5+B3 for the perpetual return, and =IRR(C10:M10) on a row holding the price, ten years of rent and the exit value.
The perpetual formula is the Gordon growth model read backwards: price = rent / (return − growth). It is why a buyout at a modest multiple can still clear a return target, and why the escalator is half the answer. The year-1 yield of 5.00 per cent leaves out the growth entirely.
The exit return is higher than the held return for one reason: the buyout is bought at 20.0 times rent and the rent saved is sold at the tower multiple, 25.0 times. Every tower investor captures that spread on the day of the buyout, 90,000 here, or 25.0 per cent of the price. It is the reason tower companies run buyout programmes continuously: a ground lease bought below the tower multiple is accretive to value on day one, whatever its return held to the end.
The lease has 12 years to run. At a 9.0 per cent target, those 12 years of escalating rent are worth 152,366, or 8.5 times current rent. The other 11.5 turns of the 20.0 times, 207,634, buy the years after expiry, which the operator does not own today. That is the real asset in a buyout: the removal of the renewal risk, the chance that the landlord refuses to renew, sells to an aggregator, or demands a step-up when the operator has no alternative site. A buyout close to expiry is worth more to the operator than its cash yield suggests, and the landlord knows it.
| Buyout multiple | Price | Year-1 yield | IRR held for ever | IRR sold in year 10 | Day-one accretion |
|---|---|---|---|---|---|
| 15.0x | 270,000 | 6.67% | 9.87% | 14.03% | 180,000 |
| 20.0x | 360,000 | 5.00% | 8.15% | 10.03% | 90,000 |
| 25.0x | 450,000 | 4.00% | 7.12% | 7.12% | 0 |
| 30.0x | 540,000 | 3.33% | 6.43% | 4.85% | -90,000 |
At the tower multiple itself, 25.0 times, the two returns coincide at 7.12 per cent and the accretion disappears: the buyout is then simply a 3 per cent growing cash flow bought at a 4.12 per cent starting yield. Above it, the buyout destroys value at exit even if it still yields something held. For a 9.0 per cent return held for ever, the most the operator can pay is 17.2 times current rent.
A finite holding period changes the picture sharply because the easement has no value after the last year modelled. Held for 30 years with nothing at the end, the same 20.0 times buyout returns 5.93 per cent; held for 50, 7.56. A model that stops at a fund life without an exit value understates every buyout.
Comparing the year-one yield on the buyout with the cost of capital. At 5.00 per cent a buyout at 20.0 times looks dilutive against a 9.0 per cent target, and the programme is cut. Including the escalator, the held return is 8.15; including the tower multiple at exit, 10.03. The opposite mistake is to assume every buyout is accretive because the tower trades at 25.0 times: that holds only while the tower multiple holds, and a tower bought at a high multiple does not make an expensive buyout cheap.
Price a ground lease buyout as rent saved over price plus the escalator, then add what the tower multiple pays for the saved rent at exit: 8.15 per cent held and 10.03 per cent sold, at 20.0 times. The ceiling for a 9.0 per cent return held is 17.2 times. The book's Pellam Towers portfolio prices ground lease buyouts held and sold at the tower multiple, alongside the operator merger and the debt, in the free workbook for this book. For the other lever of tower value, see how the tenancy ratio drives cell tower returns.
Because the rent saved is capitalised at the tower multiple, so a buyout priced below it adds value on day one, and because it removes renewal risk. In the illustrative case a 20.0 times buyout of 18,000 of rent costs 360,000 and adds 450,000 of tower value at 25.0 times, an accretion of 90,000.
Held for ever, the IRR is year-one rent saved divided by the price, plus the annual escalator. For 18,540 saved on a 360,000 price with a 3.0 per cent escalator that is 8.15 per cent. For a finite hold, add an exit value for the saved rent at the tower multiple and solve the IRR.
Price = year-one rent saved / (target return minus escalator), divided by current rent. At a 9.0 per cent target and a 3.0 per cent escalator, the illustrative ceiling is 17.2 times current rent held for ever; a higher price can still be accretive at exit if it stays below the 25.0 times tower multiple.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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