There are hundreds of factors to consider when choosing a location for a new data center development, and each factor is weighted differently depending on the company’s business plan or purpose of the data center. Typically, the most important considerations for site selection decisions are taxes and access to power and robust fiber networks. These costs can be significantly impacted by incentives offered by the federal, state or provincial, and municipal governments. Even seemingly minor incentives should not be overlooked as they can add up to millions in savings to influence site selection.
Incentive may come in many forms, such as:
- Sales tax (both state and local) on computer equipment or electrical and software infrastructure or physical plant
- Property tax deferral or reimbursement
- Capital investment incentives
- Employment incentives based on numbers or above-average wage rates
- Enterprise zone incentives
- Electrical consumption rates
- Reduced land costs
- Assistance with delivery of electricity to the site
While provincial/state level incentives can have significant impact, often the most impactful and unique incentives are given at the municipal level. This could be a one-off situation related to a specific transaction, location or company, but such incentives are unique and can vary wildly region to region. For example, in 2017 JP Morgan purchased the former Rockland Psychiatric Center in New York State with intent to convert into a data center. The abandoned psychiatric facility — which sat largely unused for years— was purchased for $7.5 million and the overall investment is estimated to be $490 million. It includes incentives from the Rockland Industrial Development agency for $35 million in sales tax exemptions over a 20-year period.
While some municipalities are less bullish on the idea of data centers, others understand the benefits and have not only added specific incentives but have also revised existing incentives to attract data center investment with easier qualification. Such municipalities have been very successful at attracting billions of dollars in new investment while creating thousands of new jobs directly and indirectly from the projects. We have also seen data center clusters being created in prime markets like Northern Virginia, Texas, and Washington with attractive incentives playing a significant role.
Despite the importance of costs and the impact incentives can have, it is also important to keep in mind that each data center is fulfilling a specific function. Cost considerations are often superseded by other needs. The need for meeting specific requirements in a specific region can often leave very little wiggle room to optimize operating and acquisition costs. The site selection process requires specific expertise to achieve the creative solutions that can save millions in taxes and operating costs.
Cushman and Wakefield works closely with its clients to understand their data center needs and objectives, and assists in the evaluation of acquisition, development, and long-term operating costs to ensure a successful outcome. We can be a valuable partnering in modeling long-term total cost of occupancy by comparing sites and regions and considering any possible related incentive benefits for data center clients.
Randy Borron is a Vice Chairman at Cushman & Wakefield with 30 years of experience in data center and telecom switch site acquisition and lease negotiations, and more than 35 years of experience in commercial real estate. His data center expertise covers site selection, lease negotiation, portfolio strategy, real estate strategic planning, and account management.