Written by Attorney Joe Irby
How do I borrow/leverage money against my radio station and license?
Broadcast stations are a business. Plain and simple. Whether the broadcast signal is the primary revenue stream of a business or it is just used to supplement another aspect of the business or entity, broadcasting is still a business and there is no getting around that. This is true even if the broadcast station is owned by a non-profit entity. Since non-profits primarily survive from grants and donations, these entities use the broadcast signal to pull in donations from the listeners. Bottom line – broadcast signals are a very important element in any business they are a part of.
Every business needs to raise capital at some point in its existence. The business may need to raise operating or expansion capital, it may need to raise capital to pay off other debts or liens. There are endless reasons why a business might need to borrow money.
Arguably, a broadcast station’s most valuable asset is its license. Sure, that 1,000 foot tower, the fancy building and the land it sits on, the powerful transmitter, processor, digital console, and expensive software system needed are worth something, but they might not be worth as much as the license. This is especially true in large metropolitan areas. In large cities, a license to broadcast might go for millions of dollars because of the revenue potential to be made. Likewise, radio stations in smaller markets have a lower earning potential because of the lower concentration of people in the area the station will serve. A license in some rural towns in Montana and North Dakota may go for as little as $20,000. In the meantime, it will cost roughly the same to build a 1,000 foot tower (not including the land it sits on) in North Dakota as it will in New York City. The transmitters and studio equipment, station vehicles, and software cost the same no matter where you are as well. The license in New York City is clearly the most valuable asset of the operation, whereas the equipment will be the rural North Dakota station’s most valuable asset.
When a business borrows money, often times it will leverage its assets. This allows a lender to take a security interest in the possessions of the borrower to be seized and sold in the event the borrower defaults on the loan. That said, stations wishing to borrow money are very tempted to borrow money against their radio license. The Federal Court in KIDD COMMUNICATIONS v. F.C.C., 427 F.3d 1 (2005) is the most recent case to articulate a very important point: radio licenses cannot be involuntarily transferred. This means that, even if a financial institution is careless enough to loan a broadcast station money using the license as collateral, the financial institution can’t ever foreclose on the license. The wording in 47 U.S.C. § 301 emphasizes that radio frequencies are licensed merely “to provide for the use of such channels, but not the ownership thereof.” This means that possessing a license merely vests limited rights in the licensee to occupy a particular frequency, not own it. 47 U.S.C. § 310(d) reads “[N]o. . . station license, or any rights thereunder, shall be transferred, assigned, or disposed of in any manner,. . . to any person except upon application of the commission.” Anyone who holds a broadcast license, must obtain permission from the FCC to transfer the license to another party. This includes involuntary transfers by foreclosure. In short, a security interest that will serve to dispose the licensee of the license cannot be granted.
Many times, the phrase, “licensee will, in good faith, cooperate in the transfer of the license to [the money lender] upon default of this loan” or something similar, will not be upheld in a loan agreement between a lender and a broadcast station. Why? Two major reasons.
The first reason is because many courts view this phrase to act as a security interest in the license. Let’s look at the following scenario: A licensee needs to secure a loan. He has a license with a fair market value of $3,000,000 and the sum of the value of all his other station assets is equal to $750,000. The lender agrees, based on the sum of all of the assets, to loan the licensee a total of $3,250,000 on the condition that the loan agreement contains a “cooperation of transfer” clause. No lender in their right mind would loan out $3,250,000 secured by only $750,000 of collateral. This means that the loan money is being secured partially based on the value of the radio license, and partially under the presumption that the licensee handing it over to the lender in the event of a default, and the lender can subsequently sell the license to recoup their money. In other words, in the event of a default, what’s the difference between a security interest being granted in the license directly, and a security interest being granted in a contract which serves the exact same purpose? Not too much. This brings up the second reason why a “cooperation of transfer” clause would likely be invalidated – it serves to involuntarily detach the license from its holder.
How then, does a licensee tap into the value of the license as a way to secure a loan? There are two major ways.
The first way to utilize the value of your license is by granting a security interest in the proceeds from the sale of it. This will be validated because it grants no security interest in the license itself – only the money brought in upon the license’s sale, and it in no way involuntarily dispossesses the licensee of the license. The major downside to this, however, is that a license holder may hang on to the license for many years. This is especially true if the license is not held by a single person, but rather it is held by a corporation. If the lender knows this, they are unlikely to be willing to loan much money using a security interest which may not provide any restitution, potentially for decades. This still is, however, one option.
The second way to utilize the value of the license is to create an LLC and transfer the license into the possession of the LLC. Make sure that the license is the only asset of the LLC. Once this is done, the shares of stock from the LLC can be pledged as collateral to a lender. Make sure to inform the lender, however, that it will not be able to exercise voting rights to transfer or sell the license without prior approval from the FCC.
Sometime in the future, the FCC may scrap the restriction on granting a security interest in a license. Until then, these are the two best and most effective ways to utilize the value of a broadcast license to generate some necessary operation or expansion funds.
This post is part of a series of posts on Radio Station & Broadcast Law: 47 CFR 73 – 74 & More