Sale Leasebacks in the Data Center World and Their Importance

Data center sale-leasebacks have become an increasingly important strategy over the past several years. The benefits derived for both the seller and the purchaser in this financial transaction have proven to be mutually beneficial. The data center market has continued to see a rush of investors seeking such sale-leaseback projects, with a particular investor focus from data center developers and colocation operators.

Now that outsourcing enterprise IT operations to third-party colocation operators has become the preferred solution for most corporations, these same enterprises now must determine how best to dispose of its existing facility. The good news is that it remains a seller’s market for such well-maintained facilities and can provide a significant opportunity to get top dollar, among many other incentives to seek a sale-leaseback.

Data center sale leasebacks can take many forms and provide enormous flexibility

In the straight-forward real estate sale-leaseback scenario, the property owner simultaneously sells the building to an investor and then agrees to lease it back from the investor over a period of time. The property owner gets an immediate cash infusion while the investor gets a stable rent stream over the lease term.

In data center site selection, these mission critical sale-leasebacks can take on several different iterations that can prove lucrative to the seller, and still provide the investor the motivation to acquire the asset, such as:

• Straight sale-leaseback: The seller continues to operate the facility. If the facility requires technical infrastructure upgrades, the investor may agree to provide additional monies for these upgrades as part of the overall lease rate.
• Partial sale-leaseback (with seller becoming a colocation tenant): An increasingly popular scenario where the seller leases back only the data center space and power capacity needed, allowing the investor to operate the facility and lease the remaining raised-floor environment to other colocation tenants.
• Multi-site disposition / colo leaseback: The seller may have multiple well-maintained data centers in attractive markets but requires significantly less data center power. The seller leverages the sale of the properties, taking back colocation space in either the facilities being disposed of or in other colocation space operated by the third-party investor.

There are many compelling reasons on the seller side to pursue a sale-leaseback. The primary reason allows for the seller, which typically is an enterprise corporation, to exit the owning and operating of a non-core asset such as a data center and focus on its business. The seller no longer has to continually upgrade these operations and can have that responsibility transfer to the new investor. Leasing colocation space allows for significant flexibility and a tailored solution to the enterprise customer. Across the business landscape — from banking to healthcare to retail — many enterprises are evaluating selling their legacy data centers.

The investor side in these data center sale-leasebacks also have compelling reasons to pursue these financial transactions. Data center real estate has proven to be a stable asset class, given the long-term leases in place on a capital-intensive asset and the likelihood of future renewals.  Just as important — and probably more important — the colocation operator and data center developer gets:

• an anchor colocation tenant with immediate cash flow while it markets for additional colocation customers,
• speed to market by acquiring an existing facility at likely a price less than full replacement cost,
• the ability to announce its expansion into a new market to the data center community

Some notable data center providers that have positioned themselves very well to deliver flexible solutions to an enterprise’s needs include Digital Realty, Carter Validus, Lincoln Rackhouse and Chirisa Investments.

Notable sale-leasebacks

As the sale-leasebacks and partial sale-leasebacks have evolved, the data center providers have delivered different solutions to enterprises in the sale-leaseback model. Not including many single-tenant data center sale-leasebacks, the following are some notable deals with buyer and seller goals being met:

• Lincoln Rackhouse’s 2018 partial sale-leaseback with Bank of America: BofA sold three underutilized data centers totaling 900,000 square feet (SF) in three markets to Lincoln Rackhouse, with BofA leasing colocation space in two of the facilities.
• CyrusOne’s 2016 acquisition of the CME Group’s suburban data center: CME sold its primary data center campus for $130 Million to CyrusOne, leasing back 72,000 SF of data center. CyrusOne has since expanded this campus to offer almost 50 megawatts (MWs) of capacity.
• QTS Data Centers’ partial sale-leaseback with Health Care Service Corp.’s 260,000 SF data center: The deal represented its second location in the white hot Dallas-Fort Worth data center market. QTS acquired this facility, which had been listed for a few years at very favorable terms, representing a purchase price of ~$6 Million per MW (nearly $2 million per MW less than new construction cost). In addition, HCSC leased back 1 MW of data center capacity.
• H5’s partial sale-leaseback of Intuit’s eastern Washington Data Center: H5 will operate this 240,000 SF facility in a highly desirable wholesale colocation market with Intuit leasing back 3 MWs of wholesale space. At full capacity, H5 can provide up to 40 MWs of critical load to the data center floor. It is also noted that Intuit will also meet its goals of accelerating cloud productivity by moving more capacity to Amazon Web Services (AWS).
• NTT Data’s Partial Sale-Leaseback of two data center campuses to GI Partners – GI Partners, a long-time investor in this category, acquired over 1 Million SF in Texas and Washington in late 2018, with the opportunity to expand both campuses for additional data center capacity.

Conclusions

The benefits of the sale-leaseback, and especially the partial sale-leaseback, enable enterprise corporations to monetize legacy non-core assets and provide the future flexibility needed as they consider cloud, colocation and managed services for their IT operations. The data center operator has shown an aggressive willingness to deliver to meet this flexibility since they can create data center capacity in new markets. 

So the net result will be that sale-leasebacks will remain an important solution in data center site selection.