Sales Taxes, Costly Power Inhibit Colorado Data Center Development

Despite its geographic desirability, sales taxes and the high cost of power present make it challenging for Colorado to attract data centers, according to a panel discussion at Bisnow’s DICE Local: Denver, A Premium Data Center Investment Conference & Expo last week.

Colorado has never had to provide tax incentives for companies to locate here, and it hasn’t made an exception for data centers, Carter Validus Chief Acquisitions Officer Jason Reed said. They come anyway for the talent pool and quality of life.

H5 Data Centers Chief Operating Officer David Dunn said there is a need for incentives to lure data centers to the region.

“We need sales tax incentives,” Dunn said. “Almost every market in the country that has scale has sales tax incentives, with the exception of northern New Jersey and the Bay Area.”

Many large data center users are doing sale-leaseback transactions in an effort to invest in their businesses instead of real estate, Dunn said. A company like H5 will purchase the building and lease back between 10% and 30% to the user.

“Sometimes we take all existing employees, and sometimes the enterprise wants to keep them,” he said.

Carter Validus looks for stabilized properties for acquisitions, Reed said.

“We’re seeing a lot of these enterprises do a full sale-leaseback,” he said. “They want to unleash the real estate and reinvest in their business. We’re more the capital partner. It takes a lot of capital to retrofit these facilities. We will restructure a lease and provide a TI [tenant improvement] to help fund these improvements.” 

While some investors purchase data centers and reconfigure them, others are more interested in building them from the ground up, and in those cases, they are turning to modular, pre-manufactured structures.

“If you can have it 90% or more assembled, it makes the whole operation so much more efficient and leaner and it affects the bottom line,” AX2 Data Centers CEO Alaxandria von Hell said. “To make it work, you have to put your capital and time into the pre-construction phase. It needs to be 100% designed. Period. No changes. Otherwise you’re going to go back and things are going to keep changing.”

But Swanson Rink Senior Project Manager Ryan Sims, who moderated the panel, questioned whether having a project 100% designed so that no changes occur is possible.

“I love that philosophy,” Rink said. “I’d love to make it work some day, because that would be awesome.”