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Often times in M&A transactions, there are certain towers in a seller’s portfolio that are still in development and will not be completed as of the closing. The towers under construction (or “WIP Towers”) are often the subject of a substantial amount of negotiation between buyers and sellers.
One main issue to consider during these transactions is how to value (and when a buyer should pay for) WIP Towers. Generally speaking, there are three milestones that can trigger payment for a WIP Tower:
- Construction of the tower is “complete,” which typically means the tower has been developed and constructed in compliance with certain minimum technical, legal and other requirements set forth in a construction management agreement.
- A lease for space on the tower has been signed with an “anchor tenant,” which is typically defined as a credit grade carrier.
- The anchor tenant commences paying rent.
For example, sellers will often negotiate to have the full value (purchase price) of the WIP Tower paid upon the tower being “complete,” while buyers will frequently take the position that payment should be made upon the anchor tenant commencing the first payment of rent. Sellers will argue that they should not be penalized for the failure of the buyer to lease the space or get paid by the tenant because it is out of their control. On the other hand, buyers obviously do not obtain full value from the tower until the buyer has a lease and is receiving rent.
As a compromise, buyers and sellers could agree to make milestone payments, with a portion of the purchase price attributable to the WIP Tower being paid upon each of the milestones being met.
An additional issue to negotiate is who will manage the construction and development of the WIP Towers following the closing. For instance, sellers with development experience will want to manage the site development process post-closing, including entering into and overseeing contracts with design, architectural and engineering professionals and contractors. However, buyers will want to ensure that they have oversight and approval rights with respect to the development process, including ongoing and continuous rights to inspect and review the construction, and access to all pertinent information.
It is critical that a carefully drafted construction management contract be negotiated to reflect both parties’ intentions and clearly allocate responsibility and liability between the buyer and seller with respect to the completion of WIP Towers following closing.
Because the above issues can be especially complex during M&A transactions, buyers and sellers alike can benefit from having legal counsel with experience in the tower industry who can navigate these delicate points in the negotiation process.
By Michael Frattone, Managing Partner at Kleinbard LLC.
June 26, 2019