OpEx Solutions for Financing Data Center Renovation/Construction

Funding a data center build, renovation or expansion does not have to mean draining capital resources.

Big Data. Mobile enablement. The knowledge economy. The reasons are myriad, but the impact is singular…data center demand continues to grow in the enterprise, regardless of industry or corporate maturity. Today’s CIO must figure out how to satisfy an increasingly demanding audience of users, seeking access to data across a diversifying array of applications, and do so with continually stretched IT budgets.

In fact, many legacy data center assets are being stressed by power density and distribution constraints, rising cooling costs and complex networking and peak load demand curves. However, retrofitting, upgrading or consolidating multiple legacy, lower performing assets into a newly designed and constructed facility, or constructing large new data center facilities to support enterprise growth, can require significant capital.

At BRUNS-PAK, our proprietary Synthesis2 methodology integrates a structured approach to data center planning and construction that includes rigorous estimation and structured adherence to budget guidelines throughout the project. This discipline has helped us define breakthrough approaches to data center financing driven by operating cash flow instead of capital reserves. This can dramatically expand an organization’s ability to support required IT expansion in the face of rising end user demand.

The basic concept behind OpEx financing is the use of long-established structured finance techniques that leverage the credit rating of investment grade companies (BBB or better) to finance the new assets or improvements on a long term basis. In a retrofit or upgrade scenario where energy savings are anticipated as a result of the project, the financing to provide the capital improvements can be secured by the cash flow generated by reduced energy usage. For a new build scenario, the financing to construct and use the facility can be secured by a well structured, bondable, long-term lease.

To illustrate how this can work, here are two scenarios outlined below for a retrofit and new build:

Scenario 1: Energy Saving Retrofit/Upgrade Financing

Financing an energy efficient retrofit or upgrade to a data center requires a few key considerations:

  • The amount of capital required to complete the retrofit or upgrade
  • The energy savings that will generated
  • The term of those energy savings which often coincides with the obsolescence life of the assets being deployed

Baseline anticipated energy savings are first established through an energy audit to determine the as-is energy costs and plan the target cost profile. The difference between current costs and future costs is presumed to apply to the debt service on the construction. If the actual annual energy savings exceed the annual debt service costs of the underlying financing, the owner or user can keep the positive difference or spread between those streams. For example, if an organization invests in a $50 million upgrade that results in $12.5 million in energy savings per year, here is a basic financing option. First, let’s presume 84 month (7 year) financing at a 7% interest rate. That results in an annual debt service cost of $7.5 million. That $7.5 million is paid from the energy savings, and the organization retains the remaining $5 million in savings. After the financing is repaid, the full energy savings flow to the organization’s bottom line.

An important note in this example…the organization has not outlaid any cash for the construction.

Scenario 2: New Build Financing

For new facility financing, we will take into account a different set of considerations, including:

  • The amount of capital and the construction schedule for the facility
  • The credit rating of the user
  • The desired term that the user will occupy the facility which is used to establish the lease term.

In this scenario, the user will execute what is known as a bondable, net-lease that provides sufficient duration to completely pay back the financing provided. Once again, the user is not required to outlay capital for the construction. Instead, they pay for the facility through lease payments that factor in the term, total construction cost, construction period interest, and the assumed interest rate applied to the project.

For example, assume an investment grade rated company wants to consolidate three existing legacy data centers into a new, state of the art facility that will cost approximately $50 million, but they do not want to tap their capital budget. They are, however, prepared to occupy and pay for annual use of the facility over a 15 year period. If we were to apply a 6% interest rate to this project and assume the hypothetical loan would be repaid ratably over the 15 year lease, the company would pay approximately $5.5 million annually over the lease term, with an option to buy the facility at term end.

The BRUNS-PAK Advantage

Using structured finance techniques to finance long term assets is not limited to these two scenarios discussed. In fact, for organizations with strong credit ratings, there are practically endless ways to structure a capital efficient transaction for data center facilities. As noted earlier, BRUNS-PAK’s track record for accurate estimation of facility construction costs and long-standing history of on-budget project completion, have become powerful assets when discussing OpEx solutions.

With over 5,500 customers in all industry, government and academic sectors, BRUNS-PAK’s proven process has helped us line up multiple sources for structured financing that we can introduce into project plans to ensure that you can plan and implement a program that effectively supports your current and future IT infrastructure demands. For more information, contact Jackie Porr at 888.704.1400 or via email at jporr@bruns-pak.com.