Telecommunications and New Technologies Law Practice

ARTICLES

New Revenue Opportunities For Residential Real Estate Developers From Telecommunications Infrastructure And Services

Introduction

The advances in new technologies utilized to deliver telecommunications services and the demand for new telecommunications services have created new revenue opportunities for new home residential real estate developers from telecommunication's infrastructure and services. These opportunities are stronger when developers ensure "last mile" telecommunications services in their planned residential communities through owning telecommunications infrastructure and investing in a telecommunications provider to serve their residential communities. Residential land developers have long ignored these opportunities, and left them to either incumbent local exchange carriers ("ILECs") or new local exchange competitive carriers ("CLECs") to profit from telecommunications infrastructure and services in large planned residential communities.

There is a business model, however, under which residential land developers can leverage major advances in telecommunications technology to provide amenities attractive to new home buyers in the form of advanced and traditional telecommunication services that add significant value to their planned community developments. This model is particularly attractive now because of the recent failure of many CLECs and the lack of real and significant competition in the local exchange telecommunications markets nationwide.

Residential Developer Ownership Of Telecommunications Infrastructure

Under the model, residential land developers would purchase and install the telecommunications infrastructure in their planned residential developments rather than allowing existing telecommunications providers (either ILECs and CLECs) to put in the infrastructure. Under current telecommunications industry practice, ILECs and CLECs generally charge residential developers an upfront fee under a filed intrastate tariff to install telecommunications infrastructure in the developer's planned community. Under the tariff the ILEC or CLEC allows residential developers to recoup only part of this upfront fee over time, that is, when a certain number of the homes in their developments are sold and hooked up to the infrastructure.

The Network Company

Residential land developers would form and own a new company (the "Network Co.") which would purchase, construct and install the telecommunications infrastructure serving their planned residential communities. Network Co.'s telecommunications infrastructure would consist of high speed fiber and wireless communications facilities, and associated telecommunications equipment. The infrastructure would be installed in private easements, dedicated for telecommunication infrastructure by the developers in their planned communities. The installation of the infrastructure in a private easement is significant requirement under the model. The placement of the infrastructure in such an easement (as opposed to a public utility easement) would raise higher barriers to access the Network Co.'s infrastructure by other telecommunications providers and allow developers greater assurance that all proposed telecommunications services will be delivered timely to each of their planned developments' units.

Residential land developers would finance Network Co., and the cost of the infrastructure in one of several ways: either through land development financing or the settlement process with finished lot builders or homeowners.

Advantages of Network Company

Residential land developer ownership of Network Co. and the infrastructure has several advantages. First and foremost, the residential land developer would receive all revenues generated from a lease of access to the infrastructure. Moreover, residential land developers' costs for purchasing and installing the infrastructure would be lower than those of existing telecommunications providers because there would be less costs to recover by the investment in the infrastructure. Second, residential land developers would not pay an upfront fee to an existing telecommunications provider in order to obtain telecommunications services to their planned community and only recover part of such a fee over time. Instead, the developers would recover the entire investment associated with the purchase and installation of infrastructure. Third, residential land developers would be able to lease Network Co.'s infrastructure on a long term basis to a new telecommunications company in which they would hold an interest and structure the lease, to include a sizeable initial payment, thereby allowing developers to receive earlier cash flow and profits. Finally, Network Co. would not be regulated either at the federal or state level. Thus, Network Co. would not have to make rate or tariff filings or obtain any regulating authority to purchase, construct and install the infrastructure. In short, developers would have a new stream of revenue and profits by taking advantage of ownership of the telecommunication infrastructure needed to provide the myriad of telecommunications services home owners now insist on being available.

The Operating Company

Network Co. would lease access to its infrastructure to newly formed telecommunications operating company ("OPCO") which would utilize it to provide innovative and traditional telecommunications services, including broadband services to each residential unit (and to commercial units if they are part of the master plan) in developers' planned communities. Broadband services would include broadcast television, video on demand, pay-per-view services, interactive television, and large enterprise voice private network services. Wideband services would include multi-media services, streaming video, multi-user high speed internet services, network gaming and medium enterprise voice private network services. Narrowband services include packet telephony (voice and data services), high speed internet browsing, streaming audio, audio share filing, home automation and home security, and small enterprise voice private network services. Currently, new home owners demand most, if not all, of these advanced and traditional telecommunications services.

Network Co.'s infrastructure could also provide common residential community facilities for the provision of telecommunications services to homeowner associations, access to distance learning, webcam security sites on premises and access to training and recreational services. Residential developers' capability to offer these new and traditional telecommunications services and assure their delivery on a timely basis would add significant value to each unit in the developers' planned communities.

Lease of Infrastructure to OPCO

Under the model, while the infrastructure is being purchased and installed, Network Co. would negotiate a long term lease of access to the infrastructure to OPCO, which would provide the broadband services to the developers' planned communities. Moreover, apart from requiring a substantial initial lease down payment, developers would include in the long term lease a formula for receiving a specific amount of revenues from each home connected to the infrastructure.

Developers would participate in the formation and ownership of OPCO but not control it. As an investor in OPCO, developers would have a stake in the entity that actually would provide the broadband services to their planned communities. OPCO would be managed by telecommunications professionals, thus avoiding the need for developers to focus on business activities not within their expertise.

Advantages of OPCO

This part of the model also has several advantages to developers. First, availability of the infrastructure to OPCO would improve the retail and resale prices of developers' residential properties based on the uniqueness of the telecommunications services offered, ease of and timeliness in upgrade of telecommunications facilities, and the availability of fiber to the home and in the community with unconstrained bandwidth. Second, through the infrastructure, OPCO would be able to offer an array of service packages tailored for a wide range of demographic community configurations and densities, multi-family to estate homes with brand identities and choice of brands over state of the art telecommunications infrastructure. Finally, OPCO, as the long term lessee of the infrastructure, would preserve the infrastructure's value in developers' planned communities, particularly since developers would have an ownership, and therefore, a voice in OPCO.

Conclusion

The lack of real competition in the local exchange telecommunications market presents residential land developers with a unique and timely opportunity to gain new revenues and profits and add value to their planned communications. Under a business model not previously followed, developers would own the telecommunications infrastructure needed to offer advanced and traditional telecommunications services that new homeowners now demand. Also, under the model, residential land developers can also protect their infrastructure ownership by investing in an telecommunications operating company formed specifically to provide the advanced telecommunications.

If there are any questions about this article or the model, please feel free to call the Telecommunications and New Technologies Practice Group.>

For more information call Michael L. Glaser at (303) 757-1600.

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