Insight and analysis on the data center space from industry thought leaders.

This Unusual Type of Data Center Lease Can Save You Millions

If your requirement is 250kW or higher and you will be moving in three years or less, you're an ideal candidate for tenant equity participation.

3 Min Read
This Unusual Type of Data Center Lease Can Save You Millions

John Heiderscheidt is a licensed attorney and a data center broker. He handles development and compliance for MDI Access, Inc.

The time has come. Your company needs to relocate its data center. You’ve been assigned to find the new site and reduce operational expenses (Op Ex) in the process. Your first instinct is to move to the cloud. “It’s saved others money,” you think to yourself. And, of course, your CFO has heard that too.

What you haven’t heard is that a cloud migration can be fraught with headaches. It requires careful planning and familiarity with hyperscalability. Cloud migration breeds staff apprehension. In some instances, cloud migration comes with the expense of updating application architecture. By the time you factor in security vulnerability, the savings doesn't seem all that compelling. Fortunately for your company, there’s another way to reduce Op Ex and remain in the enterprise environment that offers you more control over your infrastructure. You can use the true value of your data center lease to subsidize your rental obligations.

See also: How to Survive a Cloud Meltdown

Whether you sign your next lease with a traditional data center landlord or a cloud infrastructure provider, you’re signing a lease. That lease creates an income stream that can be sold on the open market at a capitalization rate. In the traditional model, your lease conveys only the right to use the data center or cloud infrastructure in accordance with the written lease terms. Your landlord retains 100 percent of the income associated with the value of that lease. But what if you found a landlord willing to share a percentage of the value created by your lease?

Let’s look at the difference in Op Ex by reviewing two simple examples:

Ex. 1: Your company signs a 10-year lease with a data center provider at a rate of $125/kW with a power draw of 500kW. Your lease liability is $7.5 million. The value of that lease, at a cap rate of .075 percent is $10 million. Your company receives none of that value.

Ex. 2: Your company signs a lease with a data center developer at a rate of $125/kW with a power draw of 500kW. Your lease liability is $7.5 million. The value of that lease, at a cap rate of .075 percent  is $10 million. The developer gives your company $1.5 million from the sale of your company's lease, reducing your rent obligation to $6 million or $100/kW.

In example 2, your company lowered its Op Ex by 15 percent with just the stroke of a pen. It also found a data center that will be newly constructed. This means brand new infrastructure. It also means more input and control over design decisions than you ever thought possible from a traditional data center landlord. Best of all, none of the headaches that come with transitioning to a cloud platform. This is tenant equity participation, and it is the new frontier of reduced Op Ex in the data center industry.

Ideal candidates for tenant equity participation have a critical power requirement of 250/kW or higher, and will be relocating in three years or less. If your company fits this mold and isn’t convinced about the benefits of the cloud as a serious migration alternative, start exploring the New Frontier of Op Ex reduction today.

Opinions expressed in the article above do not necessarily reflect the opinions of Data Center Knowledge and Penton.

Industry Perspectives is a content channel at Data Center Knowledge highlighting thought leadership in the data center arena. See our guidelines and submission process for information on participating. View previously published Industry Perspectives in our Knowledge Library.

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