Sale-leasebacks have been an important instrument in the real estate toolbox across all sectors. For many companies selling an owned property, a sale-leaseback—where an investor purchases the property in exchange for the company leasing some or all of the property for a period of time—provides a method to realize substantial proceeds from a non-core asset that can be better directed into a company’s business operations.
In the data center and colocation site selection sector, sale leasebacks have become an integral part of many enterprise corporation strategies to get out of the “data center business” and instead focus this capital on their core strengths. The better news is that there is significant competition across the data center and colocation landscape among operators, developers and investors all seeking such sale-leaseback opportunities and paying aggressive valuations to do so. Even during this COVID pandemic, 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.
On the enterprise side, the benefits to a sale-leaseback go far beyond just the immediate sale proceeds
Cost savings would be one of the primary reasons for a sale-leaseback. Most corporations–even the global giants in the financial world–are finding it very difficult to stay up to date managing their IT footprint. Furthermore, they are exploring cloud initiatives and using third-party colocation providers as their company data centers are severely underutilized yet the data center floor must be running at 100% so operating costs are high. Part of these high operating costs include resources devoted to data center manpower needing to be in place to run it 24/7. Then the company also has to invest more capital annually to keep the data center running at top efficiency.
Flexibility is another important factor to the decision to sell the data center to an operator. The company can now lease only the IT critical load that it needs and can also scale up as needed, no longer dealing with the day-to-day operation. This flexibility extends to where the company needs its capacity, so it can lease IT capacity in other markets where the operator has locations.
For the data center operator or investor, a sale-leaseback provides many opportunities
The market for well-maintained data centers in Tier 1 markets is very competitive. On every colocation and cloud operator website there is generally a page or two dedicated to marketing to sale-leaseback solutions.
Where most sale-leasebacks in other real estate classes such as office space tend to require long-term master leases of fully occupied buildings, the better news is that these data center operators will pursue many creative versions and hybrids of the sale-leaseback including:
As creative solutions have evolved in sale-leasebacks, the following are some notable deals with buyer and seller goals being met:
Outsourcing enterprise IT operations to third-party colocation and cloud computing 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.