Building Wiring Agreements: It's All About Negotiations
 
October 5, 2001
 
Christopher B. "Chris" Hanback- Washington

Owners of multifamily properties currently are faced with confusing and competing advice on the need to "wire" their buildings to respond to the needs of residents in the "information age." Two-page form agreements and easements do not cut muster. Gone are the days when the local Bell telephone company did all of the wiring, dealt with residents and arrived promptly to correct problems and provide new service.

Today, owners must consider providing high-speed Internet access, digital cable television, streaming video as well as local and long-distance telephone service. In the coming months and years owners will establish their own log-in home pages or Web sites. These sites will link their residents to local merchants, entertainment and restaurants (for reservations) as well as to national dot.com merchants. There certainly will be revenue sharing opportunities for the owner, but the new computer literate "Generation Y" will consider these "amenities" a necessity. In addition, sites will link the resident to the owner for rent payment, service calls and leasing issues. Systems also should afford owners with the capacity to access software applications and efficiently communicate within their company on leasing, procurement and maintenance needs.

Legal Requirements for Wiring

In 1996 Congress enacted the Telecommunications Act with a goal of assuring the availability of competitive and advanced telecommunications services to all Americans. The Act contemplated the growth of competitive local exchange carriers (CLECs) to compete with the local Bell operating companies (ILECs). Under current FCC rules a demarcation point may be established for a building, so that an owner can control, install and reconfigure wiring (including wiring originally installed by the telephone company) on the owner's side of the demarcation point. Depending on whether wiring was installed before or after August 13, 1990, the local carrier had broad authority to establish the demarcation points between its wiring and that of the owner. Effective May 11, 2001, upon an owner's request, the ILECs must move the demarcation point to the closest point at which the wiring crosses the property line or enters the building (Minimum Point of Entry). Thus, owners will be in a position to negotiate with a variety of service providers to gain access to their building.

The FCC also has interpreted Section 224 of the Communications Act to require utilities, including telephone, gas and electric companies, to provide telecommunications and cable operators with reasonable and nondiscriminatory access to poles, ducts, conduits and rights-of-way that the utility owns or controls within buildings. This regulation provides the opportunity for a variety of carriers to have a means of access to apartment buildings. The scope of such access is as yet unclear but affords the owner the opportunity to negotiate agreements and share in revenue streams.

Further, while the FCC has banned telecommunications carriers from entering into exclusive contracts in the future for commercial buildings, this order did not extend to residential buildings. However, the FCC requested additional comments on this issue in its "Further Proposed Rule Making" and may attempt to ban exclusive contracts by telecommunications providers for apartments. In addition, the FCC is considering further regulations concerning restricting exclusive marketing agreements and preferences and the use of home running wiring previously installed by a cable provider.

Various states, such as Texas, Massachusetts and Connecticut, have enacted some form of mandatory access for telecom companies to multifamily buildings.

Service Providers

While the media reports on the inevitable shake-out of the many companies trying to succeed in the competitive telecommunications market, savvy multifamily owners continue to recognize that high-speed Internet access and related telecommunications services will be a competitive necessity in the coming years. In the past few months, the market has been chaotic with numerous stories of providers unable to honor their commitments because the capital markets have dried-up. National broadband companies have laid-off significant staff and telecom providers stock prices have plummeted. At the same time, however, new service providers are entering the market with more cautious business plans that focus upon certain geographic markets and more limited services.

Issues to Negotiate

Regardless of whether the service is cable television, high-speed Internet, telephone or a bundling of services, owners must be prepared to negotiate certain key issues. Federal and state laws and regulations provide guidelines that enhance the bargaining power of one or the other of the parties depending on the circumstances. Thus, owners and service providers should understand their rights but recognize the financial benefits to both parties of reaching a voluntary agreement. The following are key issues for negotiation.

Control of Content. Owners should ensure that they are obtaining a system infrastructure, which will allow them to control the entry of online "content" to their property. Control of "content" will be critical because, after a few years, Internet access will change from a competitive amenity to a commodity that is available at most properties. Residents will pay for "content." Success will require local "content" on a complex's Web site-community information, ability of residents to make service requests to management online, links to local businesses and restaurants.

Financial Capacity of Service Provider. It is crucial that the service provider be able to complete the system build-out and provide the ongoing service and repair. Owners should insist that telecom providers explain their business plan and capitalization. Telecom providers must demonstrate a reasonable means of making money, as a result of agreements with the owner, to ensure that the provider will remain in business.

Who Pays for the Pipes (Wiring). Ideally, these costs should be paid by the service provider in return for an extended contract term and some right of exclusivity. The costs of wiring certain buildings may, however, be such that providers will insist that the owner share in the costs. These issues are negotiable, and it may be possible to defer owner costs over time or to provide rebates to the owner out of shared revenues.

Installation Plans. The service provider must provide detailed construction plans. This is often the most difficult aspect of the negotiation, but is critical to ensuring that the owner is satisfied with the installation both technically and esthetically. It is important to negotiate clear construction completion and service commencement deadlines and to provide financial penalties or rewards for meeting deadlines - up to and including termination.

Revenue Sharing. Despite initial negotiating positions of some larger service providers, revenue sharing is available. It is important to calculate whether the dollar amounts are really meaningful. In additional it may be possible to take an upfront payment in lieu of monthly revenue sharing. Since revenue sharing usually is based on some level of service penetration or exclusivity, it may be more advantageous to forego revenue sharing to permit multiple providers.

Term of the Agreement and Termination. A term of five to seven years, with right to renew on a year-to-year basis, unless one party terminates, is typical. A longer period might be justified if extraordinary capital contributions are made by the service provider in building the system. If the arrangement is not exclusive, the length of the agreement may be of less importance. It is critical that the agreement clearly provide the criteria and means to terminate the provider.

Assignability. This is a heavily negotiated issue. The provider will want the agreement to go with the land to any new owners (by an explicit or implicit easement), and the owner should want the right to terminate the contract in the event that the ownership of the service provider changes. There is usually a compromise to be struck, which permits the owner to ensure that any successor to the service provider is financially and technically able to perform.

Owners must stay abreast of the changing federal and state regulation of telecommunications and cable service. However, the key issues remain subject to negotiation.

For more information, contact Christopher B. Hanback at 1-888-688-8500, or via e-mail at chanback@hklaw.com.