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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
Data-center real estate houses computing equipment and the systems that power, cool, and connect it. This guide explains how to evaluate a data-center property for a 1031 exchange, including utility capacity, tenant obligations, cooling, capital costs, technology changes, and financing. Demand for computing does not guarantee that a specific building has the power or design customers need.
A data-center investment can involve land, a building shell, electrical and cooling infrastructure, an operating business, or some combination. The servers inside may belong to tenants rather than the property owner. Start with an asset and responsibility list.
Ask whether the property serves one large customer or several customers. Review whether ownership simply leases the building or also provides power, cooling, connectivity, and operational services. A lease-based investment and a service-heavy operating business have different costs and risks.
For a 1031 exchange, the ownership interest matters as much as the building use. Qualifying real property, company shares, ordinary partnership interests, and movable equipment are not interchangeable. Have advisers review the actual assets and legal structure. [1] [2]
Businesses use data centers for many purposes, including cloud services, storage, enterprise systems, and artificial intelligence. Different workloads can need different power density, cooling, network access, and locations. A broad growth story should be connected to the customers the building can actually serve.
Lawrence Berkeley National Laboratory's United States Data Center Energy Usage Report: 2025 Update was published in 2026. It presents modeled electricity-demand scenarios with uncertainty around equipment, use, and technology. Those scenarios provide industry context; they are not commitments to lease a specific property or guarantees of its future income. [7]
Ask for current customer evidence: executed contracts, credible inquiries, relevant comparable leases, and the reasons users choose the location. Separate signed obligations from prospective demand. A market can grow while a poorly powered or outdated facility struggles.
Power is a physical and contractual requirement, not just a marketing number. Ask how much capacity is available today, how much is contracted for the future, and what work is required to deliver it. Review the utility agreements and engineering evidence.
Distinguish a request, preliminary study, reservation, signed service commitment, and energized capacity. Each represents a different stage. A nearby substation or transmission line does not establish that the property can receive the required service on the proposed schedule.
Ask who pays for upgrades, what deposits are required, and which conditions could delay service. If the business plan depends on future capacity, model a delayed delivery date. Rent cannot be assumed to begin before the owner can meet its obligations to the tenant.
Megawatts measure power, while megawatt-hours measure energy over time. A building's power rating does not state how much electricity it uses in a year. Ask whether a quoted capacity figure describes utility supply, total facility load, or power available to computing equipment.
Cooling and other systems also consume energy. Review how the design allocates capacity between computing and facility needs. A headline power figure can be misleading if compared with another property using a different definition.
Ask for the capacity that can actually be leased under current conditions, not only a theoretical future maximum. Include redundancy, design margins, equipment limits, and contractual commitments. The engineering and revenue models should use consistent units and assumptions.
A familiar technology brand may occupy a facility through a subsidiary or another legal entity. Confirm the tenant, guarantees, security, and reporting rights. The logo and the lease obligor are not necessarily the same party.
Review the tenant's financial capacity and reason for using the site. A large company may still consolidate locations or change technical requirements. A smaller customer may depend on financing or a narrow group of end users. Ask what supports the contractual payments.
Count concentration in both rent and infrastructure. Several customers may share one utility connection, network route, or critical system. A property with many contracts can still have a single point of exposure. Tenant diversity and physical resilience are different questions.
Review the lease or service agreement's term, rent, increases, capacity commitments, acceptance tests, renewal rights, and termination provisions. Ask what must happen before payment begins and which party bears delay risk.
Service-level obligations can create credits, penalties, or other remedies if performance falls short, depending on the contract. Read the actual language and limits. A long contract is less informative without knowing the conditions under which revenue can change.
Ask who pays electricity, utility demand charges, maintenance, and capital replacements. A pass-through mechanism may have caps, timing differences, or exclusions. The financial model should show the owner's retained exposure rather than assuming every cost reaches the tenant.
Computing equipment produces heat that must be managed. Review the cooling design, capacity, maintenance, and ability to support the intended equipment. A building suitable for one generation or density of hardware may need changes for another.
DOE explains power usage effectiveness, or PUE, as total facility energy divided by IT equipment energy. It also describes water usage effectiveness, or WUE, in terms of site water use relative to IT energy. These measures describe aspects of resource use; neither is a direct measure of rent, profit, or overall investment quality. [8]
Compare measures on the same basis and period. Ask whether figures are modeled or measured and at what operating load. A design target should not be presented as achieved performance. Also review the cost and reliability tradeoffs behind the chosen system.
Cooling systems differ in how they use water and energy. Ask for the actual design, expected consumption, source, permits, and contingency plan. Do not assume every data center has the same water demand or that a low water figure means lower total cost.
Review service capacity, restrictions, pricing, and treatment requirements where relevant. Ask what happens during shortages or interruptions. The property's contracts and engineering should support the operating plan.
Consider community and approval issues as part of project feasibility. A proposed expansion may need extra studies or infrastructure. Those are site-specific questions, not reasons to assume all projects face the same outcome. Separate approved capacity from future ambitions.
Backup power, redundant equipment, monitoring, maintenance, and trained staff can support reliability. Ask qualified engineers to review how the systems work together and what assumptions the design uses. A label or equipment count alone does not establish performance.
Review testing, service records, fuel arrangements where relevant, and procedures for planned maintenance. Systems can fail because of design, equipment, operations, or shared dependencies. The review should identify responsibilities and evidence without exposing sensitive security details.
Ask how an interruption affects revenue and liability under the contracts. Insurance and contractual limits may help with some losses but do not guarantee full recovery. A reserve and response plan should reflect the owner's actual obligations.
A data center needs suitable communications connections for its customers. Ask which providers serve the site, what capacity is available, and what agreements are in place. A line shown on a map is not a service commitment.
Review physical routes and shared dependencies with qualified specialists. Two providers may still rely on common infrastructure for part of the connection. The marketing phrase “multiple carriers” should be supported by a clear explanation of practical resilience.
Location requirements vary by workload. Some customers care about very low delay to users or other facilities; others have more flexibility. Ask whether the site's connectivity fits the intended tenants rather than assuming one location is equally useful for all computing uses.
Electrical gear, cooling equipment, backup systems, roofs, and other components have maintenance and replacement needs. Review age, condition, remaining life, vendor support, and lead times. A building shell can outlast critical equipment inside it.
Ask who owns each component and who funds replacement. Tenant-owned equipment may be outside the landlord's budget, while building infrastructure remains the owner's duty. The lease should be matched to the engineering report.
Long lead times can affect both repairs and expansion. Review spare parts, service contracts, and contingency plans. A funded reserve is helpful, but money alone cannot instantly produce equipment that must be ordered and installed over a long period.
Computing hardware and workload requirements can change faster than a real estate holding period. Ask what upgrades would be needed if customers require greater power density, different cooling, or another layout. Some changes may be practical; others may require extensive work.
Do not assume every older facility will become obsolete or every new facility will remain current. Review the specific design, expansion space, utility capacity, and cost of adaptation. Flexibility should be described in concrete engineering terms.
Ask whether the projected exit value assumes a future use the building does not currently support. If so, include the cost, timing, and approvals needed to reach that condition. A broad artificial-intelligence theme should not substitute for a buildable upgrade plan.
Suppose a hypothetical agreement charges $120 per kilowatt per month for 5,000 kilowatts of contracted capacity. The simple annual charge is $7.2 million before contract adjustments and other revenue or costs. These figures are illustrative, not current market pricing.
Ask whether the charge begins on signing, delivery, acceptance, or actual use. If a six-month delivery delay postpones the full charge, the simple lost or deferred first-year amount is $3.6 million. The actual result depends on contract terms, credits, phased delivery, and other provisions.
Then reconcile revenue to property cash. Deduct owner-paid power costs, staffing, maintenance, taxes, insurance, reserves, financing, and investment fees as applicable. A large contracted-capacity number is not the same as cash available for distribution.
An operating facility with measured performance differs from a proposed site awaiting power, permits, construction, and customers. A partially built facility may carry both operating and completion risk. State the stage clearly.
For development or expansion, review contractor obligations, cost contingencies, utility milestones, permitting, delivery dates, and tenant commitments. Ask who funds overruns and what happens if one milestone delays the others. These projects can have interdependent schedules.
Review whether the investment structure permits the planned activities. A DST intended to receive the treatment described in Revenue Ruling 2004-86 has important limits. Do not assume it can operate like an unrestricted development company when the plan changes. [3]
Confirm zoning, access, easements, utility corridors, and required approvals. Review noise, backup-generation, water, drainage, and other site-specific requirements with qualified advisers. A permitted building does not automatically have approval for every future expansion.
Assess flood, storm, wildfire, heat, and other local risks through appropriate studies. Ask how the design and insurance address the exposure. The facility's importance to customers can make a disruption costly even when physical damage is limited.
Also review the site's history and any environmental reports. Identify recommendations and unresolved conditions. The investment should show what has been verified and what remains subject to extra work rather than describing all due diligence as complete because a report was ordered.
Ask who runs the facility, maintains critical systems, responds to incidents, and manages vendors. Review relevant experience, staffing, training, contracts, and reporting. Technical competence should be shown through records and responsibilities, not only a list of credentials.
Review management and service fees, incentives, termination rights, and transition provisions. If the operator changes, ownership needs a practical path to retain records, contracts, systems, and qualified personnel. A legal right to replace a provider does not make the transition easy.
Ask for reports that distinguish contracted capacity, delivered capacity, billable capacity, collections, operating costs, and capital work. Those measures help investors understand whether growth is completed, committed, or still prospective.
Read loan rate, payments, maturity, draw conditions, reserves, covenants, and prepayment costs. Ask whether the lender relies on signed contracts, completed infrastructure, or actual income. A missed milestone may affect both revenue and financing.
Test a delayed utility connection, slower tenant acceptance, and higher capital costs together. The property may need cash while revenue is postponed. Review committed funding and the consequences if it is not enough.
At refinancing, a new lender may value the facility differently based on remaining leases, equipment condition, power rights, and technical suitability. A strong industry forecast does not guarantee a replacement loan on the original terms. The plan should show a less favorable case.
A buyer will assess power, contracts, location, operating performance, equipment, and capital needs. Ask whether the projected sale price reflects the facility's expected condition and remaining lease term at that date. Today's competitive position may not be unchanged years later.
Compare transactions with similar ownership and service obligations. A shell leased to one tenant is not directly comparable to a fully operated multi-customer facility without adjustments. The income definitions and capital burden need to match.
Include selling costs, loan payoff costs, fees, and any required upgrades in investor proceeds. A headline property value is not the amount investors receive. Review who controls sale timing and whether the hold may extend.
Qualifying business or investment real property can generally be exchanged across property uses. A data-center transaction may also include equipment, service contracts, software, or business value. Those items need separate analysis under the real-property rules and transaction facts. [1] [2]
Coordinate with your qualified intermediary before the relinquished sale closes. Standard deferred-exchange timing generally includes 45 days for identification and 180 days for completion, subject to the earlier tax-return due date, including extensions, and applicable relief. Utility or construction delays do not automatically extend your exchange. [5]
Have tax advisers review proceeds, liabilities, costs, cash, asset allocation, and Form 8824 reporting. A sponsor's technology thesis does not establish tax qualification. The investment structure and your exchange facts need their own documented review. [6]
Private real estate offerings can be illiquid and involve fees, conflicts, and substantial loss. Read the private placement memorandum, investor rights, and related-party agreements. You may not control technical upgrades, tenant negotiations, financing, or sale. [4]
Compare your need for current income with the project's stage and capital demands. An expansion that depends on future power is different from an operating lease with delivered capacity. A higher target should be weighed against the events required to achieve it.
I would want the investment case to explain deliverable power, customer payment capacity, the cost of keeping the facility useful, and the financing cushion. Those facts connect the computing-growth story to a real property. The industry can be important without every offering being a good fit.
For a simple illustration, an average total facility load of 10 megawatts over 730 hours uses 7,300 megawatt-hours. At an assumed energy-only price of $75 per megawatt-hour, that portion of the bill would be $547,500. This is arithmetic, not a utility quote, and it omits demand charges, taxes, other fees, and contract terms.
Ask which parts of the actual bill the tenant reimburses and when. If ownership pays first and collects later, working capital is needed. If the agreement caps recovery or uses a fixed formula, some cost changes may remain with ownership. A revenue forecast should not treat a large reimbursement as profit.
Review minimum commitments and charges for reserved capacity. A facility may incur costs before customers use all the available power. The business plan should explain the relationship between capacity booked with the utility, capacity delivered, and capacity billed to tenants.
A project may receive tax benefits, infrastructure support, or other incentives under specific agreements. Ask what has been approved, what performance is required, how long the benefit lasts, and whether repayment or reduction can occur. An announced incentive is not always unconditional cash.
Review who receives the benefit and whether it transfers with ownership. Some terms may depend on investment, employment, use, or reporting obligations. The investor should see the net effect on costs and the result if the benefit ends or is not fully earned.
Keep incentives separate from the property's underlying economics. A project should be evaluated with the actual agreement and a downside case, not with a headline dollar amount spread across years without explanation. The same discipline applies to future utility upgrades or public infrastructure that the site depends on.
No. A facility still needs suitable power, cooling, connectivity, customers, pricing, and financing. Industry scenarios describe possible broad demand, not a promise of rent or resale value at a specific property. [7]
No. Review contracted and deliverable capacity, required upgrades, cost, timing, and conditions with the utility and qualified engineers. A request or preliminary study is different from energized service.
It compares total facility energy with IT equipment energy. It helps describe resource efficiency on a defined basis, but it is not a measure of rent, profit, or investment suitability. Compare measured and modeled figures carefully. [8]
Not necessarily. Tenants may own computing equipment while the owner provides land, buildings, and other infrastructure. Review the asset list, lease, maintenance duties, and replacement responsibilities.
No. Power density, cooling, connectivity, layout, and location needs vary. Ask qualified specialists to confirm what the current design supports and what upgrades a different use would require.
No. Review the obligor, delivery conditions, service requirements, credits, termination rights, and credit support. A signed agreement is valuable, but its terms and the parties' ability to perform determine the cash flow.
Some permanent components may qualify as real property, while other equipment and business assets do not. Classification depends on the facts. Have advisers review the exact assets and purchase allocation. [2]
Combine delayed power or tenant acceptance, higher capital costs, and less favorable refinancing. Check committed funding and the ownership structure's permitted responses. That connects the technical schedule with investor cash risk.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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