CELL TOWER LEASE ASSESSMENT

CELL TOWER L E AS E AS SESSMENT

R E : V E R I Z O N G R O U N D L E A S E P R O P O S A L

E AS TE RN M UNI CI P AL W AT E R DI S TRI C T

SITE LOCATED AT

770 N. SANDERSON AVENUE, SAN JACINTO, CA 92582 (LAT. / LONG.: 33.7990, -117.0078)

Eastern Municipal Water District Attn: Chris Teague

770 N. Sanderson Avenue San Jacinto, CA 92582

RE: CELL TOWER LEASE ASSESSMENT: VERIZON LEASE PROPOSAL

Dear Mr. Teague:

Steel in the Air, Inc. (SITA) is pleased to provide the following Assessment regarding an evaluation of the Ground space lease proposal (“the Lease”) you’ve received from Verizon Wireless.

This Assessment includes a fair-market valuation of the proposed Lease for the tower installation which would be constructed on your property, 770 N. Sanderson Ave., San Jacinto, CA 92582 (“the Subject Site”), as well as recommendations on how to proceed.

For ease of use, we begin by providing our Executive Findings, which express the results of our Assessment, below.

EXECUTIVE SUMMARY OF FINDINGS:

 The proposed Site is a preferable location for Verizon.

 Verizon should pay $2,000/mo. for the use of this location and the lease should

include 3% annual escalation.

INDEX

I.

THE SUBJECT SITE AND PROPOSED LEASE

B. The Proposed Lease

II.

CONTEMPORARY WIRELESS INFRASTRUCTURE INDUSTRY

DYNAMICS

A. Emerging Technologies

B. Company Mergers and Acquisitions C. Network Optimization

III.

COVERAGE AND SITE GOALS

IV.

EASE OR DIFFICULTY OF NEW CELL SITE BUILDS

B. Competing Structure and Alternative Site Analysis 1. Competing Structures

2. Alternative Sites C. Key Findings

V.

COMPARABLE LEASE RATES DATA

CELL TOWER LEASE ASSESSMENT:

Evaluation of Verizon Lease Proposal

Completed May 21, 2015 Analyst: Ken Schmidt

I.

THE SUBJECT SITE AND PROPOSED LEASE

Verizon has expressed interest in leasing ground space on District property located at 770 N. Sanderson Ave., San Jacinto, CA 92582. Based upon their drawings, they are seeking to lease 900 sf of space to place a proposed 75’ stealth monopalm tower.

II.

CONTEMPORARY WIRELESS INFRASTRUCTURE INDUSTRY

DYNAMICS

A. Emerging Technologies

Part of our due diligence consists of recognizing and analyzing the dynamic nature of the wireless infrastructure industry, particularly as it relates to the Big Four wireless carriers (Verizon, AT&T, Sprint and T-Mobile) and the effect these dynamics may have on cell sites – thereby impacting the value of a proposed lease as depicted by any Offers.

Due to the fact that data growth per user is growing at staggering rates yearly (nearly 70% year over year growth for the last few years), we do not foresee the obsolescence of cell sites (overall) in the near future. On the contrary, it is our belief that the ongoing, widespread use of wireless devices will increase the need for cell sites at least for the next decade, if not considerably longer.

However, with the present-day reliance on data applications (“apps”) for cell phones and tablets, the wireless providers need shorter, more condensed cell sites in order to provide coverage and augment capacity – especially in a densely populated area. Think of coverage as signal strength (one bar versus five bars on your phone) and capacity as the ability of multiple users to tap that signal. For instance, coverage deficiencies exist when you have a low number of (or no) bars on your phone. Capacity deficiencies are when you have 4 or 5 bars but drop or simply can’t make a call; this occurs when there are too many users trying to tap the coverage at once. In all, the proposed Subject Site will allow carriers to address both coverage and capacity issues/objectives.

and speed of data on the cellular network. LTE allows the wireless service providers to do more with fewer sites. While this might suggest that they will need fewer cell sites in the future, the efficiencies gained on the network by use of LTE as opposed to older standards are still exceeded by the increased growth in wireless data usage. In other words, LTE is helping the wireless service providers increase their capacity, but they will still need more sites to meet the “data tsunami.”

B. Company Mergers and Acquisitions

Carriers have been remarrying since shortly after the break-up of the Bell System in 1983. In the past decade, the industry has witnessed many mergers and subsequent transfers and trades of spectrum bands in various markets, most notably, AT&T/Cingular, Sprint/Nextel, and Verizon/Alltel. During each change in ownership, some portion of the networks is deemed redundant, meaning that specific cell sites are terminated or will be terminated as a result of duplication. In the case of AT&T and Cingular, approximately 6,500 cell sites out of 50,000 combined sites were terminated (14%). When Sprint acquired Nextel, it announced its intention to terminate 21,000 out of 65,000 cell sites within 5 years. Clearwire is now majority-owned and controlled by Sprint. T-Mobile and MetroPCS finalized their merger in mid-2013, and AT&T’s acquisition of Leap Wireless (Cricket) went through in March of last year.

To summarize, future consolidation, especially in the wireless industry, is somewhat volatile and unpredictable; yet due to potential redundancies, the risk that a specific cell site might no longer be needed is indeed possible. The fact is that industry mergers, unions and dissolutions are a significant unknown, since any day new acquisitions might be announced (and retracted weeks later – for example Sprint’s acquisition of T-Mobile, which had the industry spinning for months, and just recently was quelled based, in part, on new FCC spectrum rules that will go into effect in 2015). We can say, however, that as long as the industry remains competitive, the chance that carriers will seek to build-out their networks by asserting a presence in any market that they have access to (via spectrum initiatives) does somewhat offset this risk.

C. Network Optimization

While there is no technology that we are aware of now that will make cell towers or structures obsolete as a whole in the near and mid-term future, there are technologies that could increase the effectiveness of individual cell sites, making some expendable. Increases in the capabilities of “smart antennas” could extend the range of cell sites or make them capable of handling calls differently depending upon the time of day, but cell towers and comparable structures like water tanks will still be needed; especially in areas that don’t have tall buildings or other structures, and particularly in rural areas. Increases in base station equipment efficiency (the equipment that handles the calls at the cell site) could increase capacity, thereby reducing the number of cell sites necessary for the operation of the network.

is a macrocell site). New smaller cell sites such as picocells or femtocells (see

http://en.wikipedia.org/wiki/picocell and http://en.wikipedia.org/wiki/femtocell) will increase the flexibility that the carriers have in deploying their networks. The carriers may find it easier and cheaper in the future to work around problematic or expensive sites.

III.

COVERAGE AND SITE GOALS

The main goal of the proposed Subject Site is to provide coverage to commuter traffic traveling along N. Sanderson Ave., N. Warren Road, Cottonwood Ave., and a portion of Rte. 79. This portion of San Jacinto is densely populated with residential, commercial, public, and educational establishments. With the volume of wireless activity increasing at a staggering rate daily, this proposed Site becomes even more important for Verizon and its ability to continue providing 4G LTE coverage to customers traveling, living, visiting, and working in the surrounding area. Most importantly from a competitive perspective, Verizon is strategically positioned to provide targeted “optimal” service to its customers (current and future) in an area where there are few alternatives and existing cell sites. Below you will find a coverage map for Verizon (as well as other carriers) along with a short explanation.

A. Verizon

Verizon is the second largest U.S. carrier (just behind AT&T) and serves approximately 114 million subscribers (compared to AT&T’s 120 million) nationwide. According to Verizon’s marketing team, its 4G LTE network now covers all 500 U.S. markets, to include 306 million Americans (98% of the U.S. population).

Key Metrics regarding Verizon:

 Subscribers: ~114 million1

 Rank in Big Four:2_#2

 Technology: CDMA, LTE  Wi-Fi Offload: None as of yet  New Sites in 2015: ~3,000

 Tower Sales: In 2015, Verizon agreed to sell and lease back ~11,500 towers for ~$15 billion to American Tower. In 1999, Airtouch (acquired by Bell Atlantic) sold 2,100 towers to American Tower. In 1999, Bell Atlantic (precursor to Verizon) sold 1,460 towers to Crown Castle and entered into a build to suit agreement via Crown Atlantic Joint Venture.  Number of Cell Sites: ~48,000

 Major Acquisitions: Alltel, Qwest, Cincinnati Bell  Lease Value: High

We have analyzed Verizon’s coverage maps in your area to determine coverage strength. In the coverage maps below you will see the subject property marked with a red pin. As you can see, this map shows Verizon having great coverage surrounding this site.

Verizon Coverage Map

Verizon’s coverage maps tend to be overstated and thus are unreliable. SITA believes that Verizon is trying to increase its data capacity in this area due to the highly residential and commercial building demographic of the area.

B. Key Findings

In reviewing carrier maps, public information, and our proprietary data, we find the proposed Subject Site to be a good location for Verizon. They are striving to meet area coverage and capacity objectives in order to maintain competitiveness. Please take note that carrier sites are strategically situated in order to provide uninterrupted coverage to their customers, particularly in areas where their subscribers have come to rely upon fast speeds and seamless connections.

IV.

EASE OR DIFFICULTY OF CELL SITE BUILDS

zoned Public Institutional (PI), and is surrounded by like-zoned PI properties to the west, a Specific Plan area to the north, Residential medium Density (RM) properties to the south and east, and Commercial General (CG) zoned properties to the east and northeast.

a) Industrial zones (BP, IH, IL)

b) Commercial zones (CG, CD, CN, CR, & OP) c) Residential zones (RE, RR, RL only)

Although the above hierarchy does not mention the RM and PI zones found proximate to the proposed site location, the Code does allow for tower siting within each of these zones through a Conditional Use permit process (Sec. 17.215, Table 2-2 & Sec. 17.230, Table 2-10), and the Code allows for tower siting within the CG zoning district through a Minor Use permit process (Sec. 17.220, Table 2-6). However, in the case of RM zones, towers may be approved only if the property is not developed with a single family residential dwelling unit (Sec. 17.430.360(D)(2)).

The hierarchy also fails to mention the Specific Plan Area zone. However, the code does allow tower siting within Specific Plan Areas in certain instances. Allowance of certain land uses, such as a wireless tower, is based upon the underlying General Plan designations for each parcel within the Specific Plan Area or, in the absence of specific designations, the densities and uses identified in the Specific Plan (Sec. 17.230.010(D)). Therefore, siting a tower within a Specific Plan Area will be reviewed by the City on a case by case basis.

The Code emphasizes the importance of diminishing the visual impact of WTFs through careful siting and design. For example, towers or monopoles without stealth treatment for concealment are prohibited by the code (Sec. 17.430.360(E)(14)). In addition, the code requires that WTFs be co-located with another structure, where appropriate, and that stealth designs and technologies be utilized (Sec. 17.430.360(D)(3)). In this regard, applicants seeking to develop a new tower must first investigate the feasibility of collocating additional antennas on existing towers or buildings, or clustering the WTF by placing it proximate to an existing WTF or structure (Sec. 17.430.360(D)(4)). The Code also requires that WTF support structures be screened from public view by locating them next to tall structures or placing them next to tall trees (Sec. 17.430.360(E)(2)).

Somewhat at odds with this clustering requirement is the additional requirement that monopoles be separated by a minimum distance of 1000 feet from any existing monopoles. In discussing this issue with zoning staff, we were informed that, while clustering is indeed a preferred siting strategy to diminish the visual impacts of WTFs, each application for a new WTF will be reviewed on a case by case basis to best minimize its visual impact.

WTFs are required to meet the setback and height regulations of the underlying zone in which they are located. However, stealth-designed monopoles, such as Verizon’s proposed monopalm design, are allowed to exceed the height limitation of the underlying zone by up to 10 feet (Sec. 17.430.360(E)(3)). In addition, the City’s reviewing authority may grant modifications to specified standards and/or guidelines if deemed appropriate (Sec. 17.430.360(A)(2)).

The planning staff indicated that the City “would probably” be less willing to allow a tower to achieve additional height on CG or RM properties than for a tower on PI properties. This is due to the planner’s belief that the typical governmental uses found on PI properties are more conducive to a tower use than structures typically found on CG or RM properties.

WTFs within the Gateway Area and/or proximate to major highways must meet some additional requirements. The map below identifies both the Gateway Area and a planned freeway (Proposed MCP & Hwy 79) highlighted in red. The subject parcel is highlighted in yellow and is adjacent to the right-of-way for the upcoming freeway.

According to the code, WTFs located within 1000 feet of the ultimate right-of-way of this planned freeway must meet the following requirements (Sec. 17.430.360(F)):

 A monopole tower shall utilize stealth design and be set back a minimum of 200 feet from the ultimate right-of-way; and  A WTF shall be located near trees,

vegetation, buildings/structures, or other features that may exist on the project site that would aid in providing screening and concealment.

Assuming that the City prefers clustering in this instance given the other two poles at the subject location, the Subject Site is appropriate for the placement of wireless facilities like that proposed by Verizon. However, if Verizon seeks to get approval for 75’ as per their plans, the subject property appears to more desirable to Verizon in terms of probability of zoning approval as compared to the nearby CG or RM properties.

B. Competing Structure and Alternative Site Analysis 1. Competing Structures

Verizon would still have to enter into a separate lease with Eastern Municipal Water District because their equipment will not fit in the ground space allotted for either tower.

Competing Structures Map

Thus, there are no existing competing cell sites or structures in the area that will be of

any benefit to Verizon. 2. Alternative Sites

An Alternative Property Analysis identifies nearby properties upon which a carrier could site the tower should negotiations prove to be unsuccessful with the subject property. In examining the surrounding areas, and with “zoning” regulations in mind, we ascertained what potential options would be available to Verizon. These alternative candidates must be able to accommodate and meet Verizon’s coverage objectives for the area as best as possible. With the limited height of the proposed tower (75’), any alternate candidate will need to be relatively close to the current site in order to meet Verizon’s anticipated coverage objectives.

and from the planned freeway, both of which will be a focus of Verizon’s targeted coverage areas from the current proposed location.

In looking at the nearby residentially zoned areas, because the adjacent RM-zoned Rancho Di Milagro property to the east contains a residential dwelling, we can exhaust this property as a possible alternate site location due to the zoning code’s prohibition on tower siting on such properties. We can also eliminate the adjacent RM-zoned property just south of the Rancho property for the same reason. The RM-zoned properties along the east side of Sanderson Avenue and south of these two properties are close enough to offer similar coverage abilities to Verizon and do not currently contain a residential dwelling. Therefore, these properties may offer possible alternative siting solutions. Likewise, the RM-zoned parcel adjacent and to the south of the subject parcel is also undeveloped and is close enough to offer similar coverage abilities. However, because the Code prefers commercial over residential WTF siting, we can logically assume that Verizon will need to exhaust the nearby CG-zoned properties before these RM areas become viable. In addition, these undeveloped properties offer no existing structures or foliage to mitigate visual impacts from a new tower. For these reasons, we view these RM-zoned properties as possible but unlikely siting solutions.

Because the Code shows a preference for commercially-zoned locations, we did note that the adjacent and nearby CG-zoned parcels to the east and northeast present possible siting locations for the tower. In particular, the CG-zoned parcel just north of the Rancho Di Milagro property offers existing trees on its eastern half which could serve as visual buffering for the tower. Height and setback requirements are similar to the subject parcel, and this partially wooded parcel would offer similar coverage abilities for Verizon when compared to the subject parcel. However, when compared to the subject parcel, this parcel offers no existing structures and therefore less visual buffering for a new tower. For these reasons, we view this property as a possible, but less preferred site location for Verizon.

The next CG-zoned parcel moving north and on the east side of Sanderson Avenue lacks any type of structure or trees with which to help diminish the visual impact of a new tower. For this reason, we view this property as a possible but less likely siting solution for Verizon.

Finally, we note that the adjacent, undeveloped property to the north is currently zoned as a Specific Plan Zone entitled “Villages SP” which one can assume is slated for residential development. While some areas within this very large parcel may be reserved for non-residential uses, the subject property to the south, as well as the CG-zoned properties to the east, present siting options which better meet the requirements and intent of the city code. Also, in our experience, siting within such a “planned property” prior to its actual development may be difficult if not prohibited. For these reasons, we view this Specific Plan Zone as an unlikely siting candidate for Verizon.

clustering” intent of the City code and to better mitigate the visual impact of the new tower. Lastly and most importantly it appears that Verizon would likely be limited to 55’ on the nearby properties and would stand a much better chance of getting approval for a 75’ on the subject property. For these reasons, we feel Verizon will wish to exhaust the subject property as a siting option before attempting an alternative siting solution.

C. Key Findings

In summary, we believe that Verizon performed its due diligence when narrowing in on and selecting this location for a new tower build. In fact, we believe the Subject Site is a good location for Verizon and is preferable to other sites in the area. If Verizon doesn’t go on the Subject Site, they would need to get approval from the City for placement of a tower on one of the nearby CG properties. While it is possible, we don’t believe it is likely that Verizon would get approval for a new pole on one of these properties due to the clustering requirement and even if they did, would not likely get approval for the full 75’ they are requesting at the subject property.

V.

COMPARABLE LEASE RATES DATA

We queried our database to find comparable leases in order to determine the average monthly rent paid for ground space leases. We found 16 cell site leases tied to ground leases located within 15 miles of the site. Our data shows leases ranging between $820 to $3,150/mo., with an average of $1,518/mo.

Regarding Lease Escalation,SITA sees most leases escalating at around 3% annually (or 15% every five years or term when compounded). However, please note that as of this past year, we have seen companies like Verizon (when proposing a new cell site) take a hard line on escalation, and seem to be less willing to enter into agreements at more than a 2% annual escalation.

VI.

RECOMMENDATION

It is SITA’s steadfast belief that every cell site is uniquely positioned, and as such should be valued on a case-by-case basis. Each proposed cell site location should be evaluated to determine:

 Whether there are other existing structures nearby of similar height that are available for use or other public parcels that a wireless carrier could use;

 The availability or lack of private alternatives will aid in determining the appropriate lease rate.

In our review of this location, we found that the City of San Jacinto, CA has fairly restrictive zoning which encourages clustering of wireless communication facilities. In this case there are already two concealed towers on the subject property. If Verizon doesn’t select this property, it will need to procure a lease and zoning approval for construction of the tower on nearby CG-zoned property. While possible, we believe that the Subject Site presents the optimal circumstances for approval of this tower especially at the 75’ height limit. We believe that Verizon should pay $2,500/mo. to $3,000/mo. for use of this property. The lease should escalate at 3% per year. We also suggest that you do not allow Verizon to expand the lease area nor increase the height of the structure (but may make changes in its lease area as it sees fit) without your prior written consent. Lastly, Verizon may not sublease unless the sub-tenant enters a separate lease with the EMWD for separate access and ground space for its equipment. Should you have any questions about this analysis, please don’t hesitate to contact us. Once updated offers are received, please let us know, and we will advise on the best step forward. Thank you for your time. I hope you have found this recommendation to be useful. Please do contact us for any questions you might have.

Sincerely yours,

Ken Schmidt, President