Financing any type of business venture can be complicated – much more so than, for example, financing the purchase of a home. But in many respects, data center financing takes the cake when it comes to complexity.
There are multiple approaches to structuring data center financing, and many variables to consider if you want to avoid missing out on special funding opportunities such as sustainability incentives.
With that reality in mind, let's discuss the essentials of data center financing, including how it typically works, the pros and cons of different financing strategies, and best practices for achieving the best financing deal for a new data center.
What Is Data Center Financing?
Data center financing is the process of obtaining funding, usually in the form of one or more loans, to support the purchase, construction, or expansion of a data center.
In addition, data center financing deals often help pay for the assets and equipment that businesses intend to install inside a data center facility.
The Complexities of Data Center Financing
At first glance, obtaining a loan for a data center may not seem more challenging than obtaining any other type of business loan. You figure out how much money you need, find a lender, justify your investment, and get the money, right?
Well, not necessary. For several reasons, data center financing can prove particularly tricky:
- Varying financing structures: Different lenders may want to take different approaches to financing data centers. Some may view a new data center essentially as a real estate investment and use a commercial real estate loan structure. Others may see it as a corporate loan or a leveraged loan. Each financing structure carries different implications for interest rates, loan lifetime and the ease of obtaining funding.
- Bundled vs. unbundled loans: Sometimes, data center financing deals cover both the physical facility and the IT equipment that needs to run inside it. Others may break each type of asset into different loans and deals. Again, the approach a particular lender takes can affect the terms of the loan.
- Long project timelines and varying costs: Building a new data center facility typically takes at least a year, and sometimes much longer due to disruptions like supply chain issues. From there, it may be many more months before IT equipment is installed, and the data center is fully online. This long timeline means that project costs are likely to vary, making it necessary to change financing terms once the original loan is secured.
- Changing needs and priorities: The lengthy timeline of data center construction may also mean that the plans a business has for a data center, and the returns it expects from its investment, could change before the facility is up and running. In some cases, this may lead to requests to modify financing terms, or obtain additional funding to cover costs that weren't originally included in a project.
In short, financing a data center project is challenging because there is not a lot of standardization or consistency in the way lenders approach data center funding requests, or in the way projects play out.
These factors make obtaining a loan for a data center more complicated than borrowing money for most other types of business investments.
Best Practices for Data Center Financing Projects
There's no simple way to work around these complexities. But there are some steps to consider for businesses that want to ensure the best financing deals for a data center project.
Shop around for lenders
Talking to multiple lenders is usually a best practice when obtaining any type of loan, because different banks may offer somewhat different terms. But it's especially important for data center financing because you may find that some lenders approach the overall project in fundamentally different ways than others.
Again, a lender who wants to treat your data center as a type of real estate investment may come to the table with dramatically different financing terms than one that views it as a leveraged loan, for example. But if you move forward with the first lender willing to offer you money, you may not know the full range of options available.
Consider multiple loans
Funding all aspects of a data center project – real estate acquisition, construction costs, and IT equipment costs – with a single loan is simpler. In some cases, it may also lead to lower overall loan costs because lenders are willing to offer more incentives to businesses seeking higher-value loans.
However, it's also often the case that total borrowing costs will be lower if borrowers break out their funding into multiple loans. This approach also makes loan payback schedules more flexible. You might want to pay back the cost of IT equipment in just a few years, for example, while having a longer repayment schedule for real estate costs.
Don't overlook financing incentives
Businesses may be able to benefit from various financial incentives when funding a data center project. For example, many states offer tax breaks for data centers, especially those that invest in sustainable technologies. Those incentives don't translate directly to lower borrowing costs, but they can offset some data center costs and reduce the amount of money businesses need to borrow.
Plan for the long term
Because of the lengthy timelines and evolving priorities associated with data center projects, don't treat financing terms as set in stone. It's sometimes necessary to renegotiate a loan, or obtain additional funding, once a project is underway.
Ask lenders about their flexibility in this regard before obtaining a loan, and don't be afraid to ask them to come back to the deal table if your financing needs change. Most lenders would rather modify a major loan than have a project fail because, for instance, construction costs proved higher than expected and the original financing is no longer sufficient.
Do Your Homework
Although there's no single trick to simplifying data center financing, there are many steps that businesses can take to help ensure they obtain the funding they need at the best terms. Data center loans are inherently more complex than many other types of commercial loans, and it's important to do your homework to get the best deal.
