With the imminent rollout of “5G” data services, the need for new cellular antenna towers or installations will challenge some churches with decisions that could have far-reaching impact on their ministries – and their property – both positive and negative. Before entering into what looks like a financially lucrative long-term lease, church leaders should enlist competent outside advice to avoid making mistakes from which there is little or no opportunity to recover.
Several important considerations must be taken into account before your church decides to trade some of its property for what appears to be a financial windfall. With typical tower leases offering upwards of $2,000 per month in cash payments over 10 to 30 years, churches have dived headlong into long-term contracts only to discover later that they lost the ability to remodel or expand their facilities, or accepted payments that were significantly lower than market rates, and were powerless to renegotiate. Remember – cellular service providers have a lot of experience at this while most churches have little or none.
Neighbors, county assessors and UBIT
Some churches have even incurred the wrath of their neighbors who object to the placement of a tower, even if disguised as a tree or church steeple, or the simple attachment of antennas to existing church structure. Others have run afoul of county assessors and lost property tax exemptions in whole or in part (every county in California has its own rules), and still others have felt the sting of “UBIT” – unrelated business income tax – imposed on net revenue under federal and state law.
Length of contracts
All too often, the temptation of immediate cash flow clouds the judgment of the church that struggles with finances, and by the time there’s a sense that something might be amiss, a contract has been signed and, unless there was material concealment, misrepresentation or fraud involved, it’s too late to undo the damage. Cellular tower contracts typically last two or three decades without opportunity for renegotiation – all in the best interest of the cellular provider rather than the church – something that could significantly impair a church as it grows.
On the up side, many churches have had positive experiences – no complaints from their neighbors, and if the church has no debt on any of its buildings or land, it may even be able to avoid the UBIT issue by allowing placement of antennas on existing buildings or simply renting a plot of ground to the cellular provider, which pays all the costs to construct and operate the tower. Churches with existing debt, however, must seek advice from tax professionals because most rental revenue is treated as a debt-financing mechanism regardless of how it is used, and this creates taxable income.
Seek outside counsel before signing contract
When it comes to taxation or contract issues in particular, most churches do not have “expertise” within the congregation or staff, and often fail to seek outside help. There should be a realization that this is NOT a “do-it-yourself” process. Working with professional tax advisers and making sure the church receives proper guidance on local, state and federal laws is essential. In reality, very few tax advisers have experience with non-profit organizations and are properly equipped to guide a church.
Questions to consider before signing the contract
As reported in a recent Church Tax & Law article, according to California-based real estate agent Dominic Dutra, churches should challenge themselves to ask questions like these before signing any tower contracts:
- Does it do anything for us beyond the income?
- Does it improve what we do in our ministry or in the community?
- Does it constrain what we want to do with our property on a long-term basis?
Dutra said the single most important question churches should ask themselves is, “Why are we doing this?”
I recently met with the new pastor of a church in Southern California that has one cell phone tower and signed a contract for a second before he arrived. The first contract was worth more than $640,000, but church trustees failed to do the math and sold it to a cellular service provider for a lump sum payment of $140,000 just a few years into the contract when cash-flow was a problem. The trustees also failed to spot a contractual provision that gave the provider 40% of the lease revenue from any new towers constructed on the property by any other cellular provider. As a result, the new contract gives up about $800 per month in added revenue for no effort or expense on the provider’s part, and the church loses another $270,000+ over 30 years.
Don’t make this kind of mistake! It is imperative that churches seek outside counsel before entering into, modifying or selling a cellular phone tower lease. Once signed, a contract is difficult to unwind.
For more information or guidance, contact Max Herr, Ministry Specialist for Human Resources and Church Compliance.