An IRU is a lease prepaid at the buyer's cost of capital, with the maintenance still to pay; price both streams and the upfront figure follows.
A dark fibre IRU is worth the present value of the lease payments it replaces, less the present value of the annual operations and maintenance fee the IRU holder still pays. On an illustrative 200 km route, a pair that would lease for $120,000 a year rising 2 per cent, with a $30,000 O&M fee rising 2.5 per cent, is worth $1,089,387 upfront for 20 years at an 8 per cent discount rate, $5,447 per pair-km or 9.1 times the first year's lease. Forgetting the O&M fee would justify $1,471,376, overpaying by 35.1 per cent.
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 →
An indefeasible right of use (IRU) gives the buyer exclusive use of specific fibres for a long term, typically 15 to 25 years, for a single upfront payment. The seller keeps ownership and maintains the cable, for which it charges an annual fee. For the buyer the IRU is a lease prepaid at its own cost of capital; for the seller it turns spare fibre into cash on day one. Both sides price it the same way: as a discounted lease.
| Input | Value |
|---|---|
| Route length | 200 km |
| Equivalent lease rate, per pair-km per year | $600 |
| Lease escalator | 2.0% |
| O&M fee on an IRU, per pair-km per year | $150 |
| O&M escalator | 2.5% |
| IRU term | 20 years |
| Buyer's discount rate (cost of capital) | 8.0% |
| Route build cost, per km; cable of 144 fibres | $30,000; 72 pairs |
A lease of the same pair costs $600 × 200 = $120,000 in year 1, paid annually in advance and rising 2 per cent a year: $2,915,684 over 20 years. Discounted at 8 per cent that is $1,471,376. The lease price includes maintenance: the lessor repairs the cable.
An IRU buyer pays the seller an annual O&M fee for maintenance, repairs and relocations: $150 × 200 = $30,000 in year 1, rising 2.5 per cent. Over 20 years that is $766,340, worth $381,989 today.
IRU value = PV(lease payments avoided) − PV(O&M fees payable)
$1,471,376 − $381,989 = $1,089,387, or $5,447 per pair-km, 9.1 times the first year's lease.
In Excel, with the lease in B2, its escalator in B3, the O&M in B4, its escalator in B5, the rate in B6 and the term in B7: =(B2/(B6-B3)*(1-((1+B3)/(1+B6))^B7)-B4/(B6-B5)*(1-((1+B5)/(1+B6))^B7))*(1+B6), the growing annuity due formula for each stream.
The seller built the route for $30,000 per km, $6,000,000 in all, and the cable carries 72 pairs. At $1,089,387 per pair, 5.5 pair sales repay the build cost, 7.6 per cent of the cable's pairs. That is why long-haul builders sell IRUs: a handful of anchor customers fund the route, and every later pair is margin, provided the O&M fee covers the real cost of maintaining the cable over two decades. A fee set too low turns those later sales into a liability that escalates with every repair.
| Discount rate | Term, years | IRU value, $ | Per pair-km, $ | Multiple of year-1 lease |
|---|---|---|---|---|
| 6% | 20 | 1,262,269 | 6,311 | 10.5 |
| 6% | 25 | 1,448,317 | 7,242 | 12.1 |
| 8% | 15 | 923,435 | 4,617 | 7.7 |
| 8% | 20 | 1,089,387 | 5,447 | 9.1 |
| 8% | 25 | 1,212,936 | 6,065 | 10.1 |
| 10% | 20 | 952,724 | 4,764 | 7.9 |
| 10% | 25 | 1,035,444 | 5,177 | 8.6 |
Two lessons. The buyer's cost of capital matters as much as the term: going from 20 to 25 years adds $123,549 at 8 per cent, while a buyer with a 6 per cent cost of capital can pay $172,882 more for the same 20 years than one at 8. That is why the same IRU can be cheap for an investment-grade carrier and dear for a growth-stage one. And the extra years are worth less and less: years 21 to 25 add about a tenth to the value.
The same arithmetic works backwards. If the seller quotes $1,000,000 for the 20-year pair, the buyer is effectively earning 9.26 per cent on the cash it prepays instead of leasing; at $1,200,000 the return falls to 6.67 per cent. A buyer whose cost of capital is 8 per cent should buy at the first price and lease at the second.
Comparing the IRU price with the lease payments alone. The lease includes maintenance; the IRU does not. Leaving out the O&M fee values the pair at $1,471,376 instead of $1,089,387, a 35.1 per cent overpayment. The second error is the undiscounted comparison, "20 years of leasing costs $2.9 million, the IRU costs $1.1 million", which flatters the IRU by ignoring the cost of the cash paid upfront. Check also what the O&M fee covers: relocations forced by road works, splicing after a cable cut and access to huts are often charged on top, and they belong in the second stream.
Dark fibre IRUs are usually capitalised by the buyer and recognised over the term by the seller, so the upfront cash and the reported revenue differ. Lease rates, O&M fees and build costs vary widely by route; the figures here are illustrative.
The fibre economics of a fibre-to-the-home network, cohort by cohort, are in the free workbook for this book. The retail side of fibre, a subscriber's value with churn, is worked in how to calculate a fibre customer's lifetime value.
An indefeasible right of use: the exclusive right to use specific fibres for a long term, typically 15 to 25 years, bought with one upfront payment while the seller keeps ownership and maintains the cable for an annual fee. On the illustrative 200 km route a 20-year pair IRU is worth $1,089,387 against $120,000 a year to lease.
It depends on the buyer's cost of capital. Paying $1,000,000 upfront for the illustrative pair is equivalent to earning 9.26 per cent on the cash prepaid instead of leasing; at $1,200,000 it is 6.67 per cent. A buyer with an 8 per cent cost of capital should buy at the first price and lease at the second.
Divide the build cost by the IRU price per pair. A 200 km route at $30,000 per km costs $6,000,000; at $1,089,387 per pair, 5.5 pair sales repay it, 7.6 per cent of a 144-fibre cable's 72 pairs. Later sales are margin, provided the O&M fee covers the true maintenance cost.
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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