New Trends in Data Center Financing: Unbundling IT Equipment from Real Estate

In a world hungry for ever-greater amounts of data—driven by rapid growth in cloud computing, digital streaming, social media and video conferencing— it’s no wonder that the data center construction market is booming. To meet the rising demand, new data centers are coming online at an accelerating rate around the globe.

The cost of a new data center can vary widely, from $200 million for smaller facilities to well over $1 billion. Some technology giants build, hyperscale data centers to meet their expanding needs, while other firms utilize co-location data centers and lease the space from infrastructure providers. Still other companies are investing in a more decentralized strategy and are building out their edge data center networks.

With such sizable investments at stake, any company investing in a new data center should take a close look at the structure of the financing package to ensure they’re securing the best possible deal.

Disrupting traditional data center financing
Usually, data center financing is structured as a bundled package that combines property acquisition and construction costs with equipment purchasing or leasing into a single loan. In most data centers, however, the cost of IT equipment —from the racks of servers to the sophisticated networking systems—far exceeds the price of land and construction. For that reason, it can be advantageous to separate the two.

“It really does make sense to carve out the equipment financing side of the data center from the real estate side,” said Carl Boccuti, Senior Vice President for TD Equipment Finance. “Handling them individually can give you significant savings.”

Commercial banks can often offer much lower interest rates for equipment financing versus real estate financing. With millions of dollars in financing involved, even a small reduction in the interest rate can lead to substantial savings over the life of the equipment lease or loan.

“Whether the company is using a third party to develop the data center or doing it themselves, they can get better interest rates by segregating the equipment and real estate,” Boccuti said. “If you’re still doing turnkey data center financing, you’re probably paying more than you need to be.”

Shorter terms, faster payoff
Beyond cost savings, separating real estate and equipment financing can result in lease or loan terms that are more beneficial to the company.

“It’s all about flexibility,” said Jeremy Smith, Vice President and Regional Manager for TD Equipment Finance. “You can get financing for equipment with terms of three to five years, while the financing terms for real estate can be much longer, typically 15 to 30 years.”

As a result, financing terms better align with the useful life of the equipment, and companies can pay off their equipment leases or loans in a shorter amount of time

“With equipment financing, companies may also get tax benefits of ownership by claiming the depreciation and the interest paid each year,” Smith said.

Powering sustainability
Data centers are notorious for the prodigious amounts of energy they consume. Because of their large size, they’re prime candidates for the installation of solar panels on roofs and exterior walls. Solar panels can help companies reduce energy costs while helping to demonstrate their commitment to environmental, social and corporate governance (ESG) issues.

“We’ve financed hundreds of millions in sustainability and energy savings projects including solar, working closely with Energy Saving Companies (ESCOs),” Boccuti said. “We’ve found that the monthly savings created usually matches or exceeds the amount of money it takes to service the debt.”

Given certain financial complexities, it’s a good idea to seek financing from a bank that understands both the data center space and the sustainability landscape. Recently, TD Securities worked as the administrative and collateral agent for the first-ever U.S. data center sustainability-linked financing. The $1.25 billion credit facility for a leading data center provider is tied to the company’s core ESG objectives, as well as Key Performance Indicators, including a commitment to match 100% of the company’s annual energy consumption to zero-carbon renewable energy by 2024.

“We feel like we’re helping to support both the digital revolution and the green revolution,” Smith said. “Our customers are reaching multiple goals through smarter financing.”

TD Equipment Financing offers specialized financing options to support equipment purchases for data centers and a variety of other industries. For more information, reach out to Carl Boccuti (Carl.Boccuti@td.com) or Jeremy Smith (Jeremy.Smith@td.com)

All credit facilities are subject to credit review and approval. Before accepting any loan or lease product you are advised to consult with your accounting, tax and legal experts.


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