The rapid growth of cloud computing, digital streaming, social media and videoconferencing have all led to people demanding access to more data at faster speeds than ever before. As a result, the data center construction market is growing with new data centers coming online at an accelerated rate.

The cost of building these facilities can vary widely, from $200M for smaller data centers to well over $1B. Some technology giants build hyperscale data centers to meet their expanding needs, while other firms utilize colocation data centers and lease the space from infrastructure providers. Additionally, some 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,” said Carl Boccuti, senior vice president at TD Equipment Finance.

Bisnow recently spoke with Boccuti and Jeremy Smith, regional manager for TD Equipment Finance, about some of the challenges associated with financing data centers, and how separating real estate and equipment financing might be a smart move for companies looking to break into or expand their reach in the booming data center market.

Disrupting Traditional Data Center Financing

Usually, Boccuti said, 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, he said, it can be beneficial 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,” Boccuti said. “Handling them individually can give you significant savings.”

He added that commercial banks may 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 may 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,” Smith said. “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, he said, 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.

“Depending upon the type of 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 massive amounts of energy they consume. Because of their large size, Boccuti said, they are 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 issues.

“We’ve financed hundreds of millions in sustainability and energy-savings projects including solar, working closely with energy-saving companies,” 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, Smith said, it is a good idea to seek financing from a bank that understands both the data center space and the sustainability landscape.

Recently, TD Securities entered into a transaction as the administrative and collateral agent for the first-ever U.S. data center sustainability-linked financing deal. The $1.25B 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 or Jeremy Smith, or visit tdbank.com/equipmentfinancing.

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.

This article was produced in collaboration between Studio B and TD Bank. Bisnow news staff was not involved in the production of this content.

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