Who will provide high speed access to middle market tenants in the absence of building centric providers?
By Jeffrey Moerdler, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

1998 and 1999 saw the rise of Building Centric Local Exchange Carriers, also known as BLEC's and 2001 saw the demise of almost all of the BLEC's. BLEC's were founded on the principle that outside resources were required in order to install the last 100 feet of fiber optic and/or copper wiring within individual buildings occupied by small and medium sized tenants, "middle market" tenants, to allow those tenants to obtain high speed broadband services from telecom providers at a competitive cost.

The typical building serviced by BLEC's was a minimum of 100,000 square feet in size and had at least ten but preferably twenty or more tenants each occupying less than twenty five thousand square feet. Larger tenants already had or could justify the expenditure for obtaining their own fiber optic service or T-1 lines. The middle market tenants could not justify those expenditures and were prime targets for the BLEC's which typically share several large broadband "pipes" among all of the tenants in a building using the BLEC's distribution infrastructure installed in each building.

During 1999 and the first half of 2000 the BLEC's were entering into agreements with property owners allowing them to wire large portfolios of properties. At the same time, they were raising additional funds in the private equity and venture capital markets and in limited instances in the public markets, closing secured and unsecured financings and entering into sizable equipment leases from manufacturers and leasing companies. Money was plentiful and companies chose to retain equity by minimizing the funds raised. During 2000, BLEC's also began expending these funds to wire properties and then to begin to market their services to tenants in those buildings.

During late 2000 and early 2001 it became much more difficult for the BLEC's to raise funds. Almost overnight the investment bankers revised their method of valuing BLEC's and other telecom providers, changing from homes or businesses passed, to buildings wired and then to revenues generated. This required the BLEC's to show revenues much earlier than their business plans allowed since they had not wired a sufficient number of properties and were only beginning marketing services to tenants. Similar difficulties affected the DSL providers and those building long haul and metropolitan area fiber optic networks. Wall Street changed the rules in the middle of the game, and the BLEC's, along with many other telecom providers, were unable to adjust before they ran out of operating cash.

The companies that survived were often those lucky enough to have recently raised but not yet expended funds allowing them sufficient capital to support the company while they retooled their business plans and began generating revenue to satisfy the demands of the investment bankers and other capital sources. In many cases, the companies that fell upon difficult times the fastest were those that were the most successful in executing on their business plans - if they were able to scale their businesses and wire properties quickly then they expended their funds and once the market turned they were unable to raise additional funds.

Looking to 2001 the question will be, how do the same middle market tenants located in buildings not yet wired, or buildings wired but without a solvent provider, obtain high speed telecom service at a competitive cost. Today, the new reality is that telecom providers can only wire buildings if contracts from tenant customers for services supporting that capital investment are in place or the capital investment is paid for by the property owner or the tenants.

A variety of solutions must now be utilized in order to obtain services for properties that currently do not have active broadband services available therein. Some buildings have fiber optic or category five cabling which was recently installed by a now deceased or departed telecom provider which can be utilized by a new provider with limited additional cost. That cost may nonetheless require a subsidy from the property owner or the tenants in order to bring providers into the building. Other buildings will have a sufficient number of tenants willing to commit in advance for service to justify a provider wiring the building. Still others will require the property owner to take the initiative and subsidize the wiring and then either recoup that cost through potentially higher rents as a result of the availability of an additional amenity at the property or, if permitted under tenant leases, through operating expense reimbursements for capital expenditures benefiting the tenants.

Which and what type of providers will be the winners going forward? It is highly unlikely that one type of provider will dominate in the near future. Rather, a multiplicity of different types of providers (but many fewer providers in each category) will continue to grow and expand the network of properties and tenants they provide services to. In fact, such diversity is required in this economic environment in order to be able to provide services to the many additional properties that cry out for those services.

In the short term, there will be no single winner among the providers. The winners are likely to be several national and regional providers, along with successful local niche players, based upon those having capital to continue investing in a successful business plan and strong marketing and customer care to acquire and retain tenants as customers.

DSL providers, cable providers, incumbent local exchange carriers (ILEC's), competitive local exchange carriers (CLEC'S), the remaining Building Centric Local Exchange Carriers (BLEC's), and comparative new comers such as the Gigabit Ethernet providers should all produce winners - only a better ouija board than I have will allow any of us to pick which providers will be the ultimate winners today. Landlords and tenants can and should encourage the provisioning of services by proactively providing a hospitable environment for providers during these difficult times.

About the author
Jeffrey A. Moerdler is a member of the New York and Florida bars and is the New York Office Section Head of both the Real Estate and the Communications Sections for the Boston based law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Mr. Moerdler practices in the overlap of real estate, telecommunications and technology and his practice is the largest practice of its type in the country, handling hundreds of real estate telecom transactions involving thousands of properties every year. His practice includes representing property owners and telecommunications companies in all types of real estate transactions serving the communications industry including switch hotels, data centers, inside building wiring, rooftop antennas, antenna towers, fiberoptic transactions and related matters. He can be contacted via email or at 212-692-6700.