Portfolio: What are the criteria an owner should consider when evaluating a provider?
Ganzi: First, consider whether the services being offered enhance the amenities of the property and the competitiveness of the asset. Second, when pricing to consumers consider whether the provider is offering a suite of services that are being requested by tenants: voice to Internet, web hosting capabilities to internet firewall. And, third, consider the viability of the telecommunications carrier. The first two factors assess whether or not the provider is going to add value to the building, and the third factor assesses the financial stability of the company.
Adler: Is there a track record, and an ability to deliver? Look at whether the telecom service provider is measuring its success in terms of service they provide or to how many buildings they have.
Morgan: Look at the carrier from the standpoint of whether or not they have local support staff in place, and find out what kind of a research and development lab they maintain. You want to know if they have a commitment to quality and whether or not they test their equipment before delivering it to their customers. And, check their references.

Portfolio: Why those points?
Ganzi: The last thing you want to happen is to install a meaningless service that takes up space in the building or have a provider go into Chapter 11 and never bring in the service.
Adler: Not all companies are going to be able to execute as fast as they like.
Morgan: Tenants sign a service agreement with the telecom provider that should have a provision that releases the building owner from any responsibility. But, the reality is that most tenants assume that if a carrier is in the building, the building owner has evaluated the providers and found them to be quality companies.

As a building owner, it's critically important that before signing an agreement to offer a carrier's services in the building, you make sure that the equipment and services being installed in the building are tested and proven.

Portfolio: How do you ensure that the installation you receive today is adaptable to the technology of the future?
Ganzi: The key is to tightly define where that equipment is going and how it is to be located.

When crafting a license agreement, specifically define the equipment and services the provider is putting in today. If that carrier wants to come back in a year or two from now and provide a new level of service, you just want to make sure that you, as an owner, get compensated for that. As an owner you want to make money from a new service.
Adler: Don't sign 20-year deals if you can avoid them. Make sure you're experts on technology issues so that you understand the mix of companies you're allowing into your building who will ultimately provide a mix of technology: wireless, high speed, copper, and so on.
Morgan: We install a fiber optic infrastructure. One thing that is absolutely true in fiber optics is that it is the only truly upgradeable infrastructure.

Portfolio: How do you evaluate which financial arrangement is best for you?
Ganzi: The financial piece is clearly the Pandora's box of telecom. One [arrangement] is a revenue share where you participate in the revenue stream, taking a percent of gross revenues that the provider makes in your building. The other arrangement is a flat monthly rental charge which tends to be the most predominant form in the marketplace.

The downside of taking a percent of revenue is that you let the telecom provider into the building and for them to successfully ramp up their service can take up to 18 months. The owner doesn't get any financial consideration for 18 months. Sometimes, we advise our owners to do a short-term deal with a fixed rate component with a renewal option that is contingent on the fair market at that time. Then, the owner can either convert this to a revenue sharing position or keep the monthly fixed-rate status.

One of the things that we've seen is telecom providers offering stock warrants in their companies to get REITs to join. That is a major trend. When you do a revenue share with somebody be very, very convinced that it is a good partnership. And, you have to be willing to take a vested interest in seeing that they're successful in the building. If not, you're better off taking a flat rent.
Adler: What you want to do is understand the comparables. If you don't, hire someone who does. Also, be very careful of exclusivity which today is rare in the marketplace.
Morgan: You want to attract and retain tenants and if a great infrastructure lets you fill up another percent of leaseable space, that's an element of the value. You can't forget that as you look at the financial components because there are some types of applications that will make your building worth more per square foot. Even when you look at a revenue share arrangement, there may be one company that can do $20 a month per desktop and another significantly more. If you're getting options from a public company today there's no guarantee what it's going to be worth down the road, and if you're getting options from a non-public company, there's no guarantee it will go public.

Portfolio: Any tips in negotiating a contract?
Ganzi: You really want to focus on the quality and diversity of services they intend to sell to your tenants, where they're going to run their cabling, and where they're going to install their switch. Otherwise, they'll have a free pass in your building that will lead to confusion for tenants and property managers as well.
Adler: Use a license agreement as opposed to a lease agreement. Don't accept a license agreement from the telecom service provider directly. Have your own, think through what it is, and have someone review it. Create an agreement letter of key business points and get those business points out of the way first. Then go into detailed legal agreements. Be open and have a strategy of what you want for your building. Remember, what you make in revenue will pale if you have to give up even a small percent of your occupancy.
Morgan: The thing you want to do more than anything else is to sit down and decide what you really need for your property, and how fast you want to have it installed. Do the homework on what it is you want to get out of the property and where you want this property positioned down the road. And then, make sure you're negotiating so those things are provided for the property.