Costs Falling, Investment Rising in Midwest Data Centers
Recent legislative changes resulting in tax savings, coupled with low utility rates and the ability to cool with outside air, are substantial cost advantages and merit study when selecting a data center site.
Reeder Holiman, Senior Vice President; Brian Ginkel, Vice President; Ann Marie Woessner-Collins, Managing Director; Bo Bond, Managing Director, Jones Lang LaSalle (Fall 2012)
Data centers have become one of the most active areas of investment in the real estate sector. The need for more computing capacity has skyrocketed as businesses and individuals become even more dependent on technology. This trend is driven by our rapidly increasing captivation by our new ability to store a myriad of information in the "the cloud," to socialize online, and to shop from the comfort of home.
Data centers are unique, as they require very high investments in both real and personal property, but with typically lower corresponding net new job creation. But although jobs are not created, there are other important economic benefits data centers bring to their host communities.
Thanks to the rapid evolution of technology, data centers are continuously refreshing their computer server configurations, software, and other technologies every two to three years. This purchase cycle generates both a real and a personal property tax base for the receiving community and, frequently, large sales tax liabilities. Data centers are also big power users, and utilities have sales taxes imbedded in electricity rates.
Recent Legislative Changes
As states throughout the country struggle with budget deficits and try to determine what difficult structural cuts must be implemented, some Midwest States, which have traditionally not legislated incentives for data centers, are learning that one road to a balanced budget is to make the revenue pie larger by attracting data center facilities. These Midwest States, which have not been comparatively as aggressive with incentives as the states south of the Mason-Dixon Line in the past, are now outperforming their competitors in enticing data center investment. They have implemented legislative changes (Slideshow, Figure 1) that have helped to secure some large projects, including data centers supporting Google, Microsoft, Yahoo! and Target.
It is remarkable that these states have been able to accomplish legislative change in the midst of one of the roughest recessions in U.S. history. Lawmakers are astute to realize that the tax advantages are only applicable to new investment that meets certain criteria, which ultimately increases the existing job and tax base and creates more revenues for the state. Attracting an additional tax base prevents governments from having to increase taxes on an already burdened system.
Favorable legislation for data centers across the country varies in that some states require companies to hire a specific number of new people at specified salary levels, spend a certain capital budget within a certain time frame to be eligible, construct a certain square footage size, or fall into certain SIC or NAICS codes to qualify for various tax exemptions. In those instances, a careful analysis must be conducted before moving forward, to ensure that the requirements can be met under the data center owner's business model or facility pro-forma.
This legislation can impact several of the largest costs associated with establishing a data center. For example, some of the largest cost components of data centers outside of construction and development are electricity and property and sales taxes. The impact of these costs is so substantial that companies must analyze the pro-forma liabilities for each state/location and overlay the company's tax position in order to draw the cost comparisons in each state under consideration. This will ensure that the data center is as cost-effective as possible to help drive shareholder value.
For illustrative purposes, we drew up a 10-year pro-forma operating cost profile for each midwestern state as compared to other popular states where data centers are located (Slideshow, Figure 3). The investment assumptions in Figure 2 (Slideshow) were used in our analysis to generate both property and sales tax liabilities, and the final consolidated 10-year operating cost profile.
Property Tax: In the Midwest, North Dakota, South Dakota, Minnesota, Iowa, Wisconsin, Illinois, and Kansas each offer a statewide personal property tax exemption for data center equipment. Indiana operates using a hybrid structure that allows counties to exempt personal property taxes on data center equipment on a company-by-company basis.
Sales Tax: Sales tax is a critical component cost of the initial data center capital budget and the ongoing "refresh" expense that must be analyzed on a state-by-state basis because of the large differential among states. It impacts the purchase of servers and computer equipment, other supporting data center infrastructure, and utility costs. Sales tax costs would be widely variable depending on the state, as demonstrated in Figure 4 (Slideshow).
Taxes aren't the only thing that contrasts the midwestern with the southern states: it's colder when you look farther north, and cold is good when it comes to operating thousands of servers. From a technical standpoint, the ability to use free outside cool air combined with lower-than-average utility rates and rebated sales tax on electric rates in the Midwest creates a substantial operating incentive for data centers to locate in cooler climates with attractive tax structures.
Moreover, the case for locating data centers in cooler climates has become a significant cost advantage as the size and overall equipment density has grown. According to Mark Miner, writing for the Neural Energy blog on green data centers, "Another impact of higher energy densities is that server hardware is no longer the primary cost component of a data center. The purchase price of a new (1U) server has been exceeded by the capital cost of power and cooling infrastructure to support that server. And this will soon be exceeded by the lifetime energy costs for that server alone. This represents a significant shift in data center economics that seriously challenges conventional cooling strategies." (Slideshow, Figure 5 by Mark Miner illustrates the increasing cost components of the data center.)
Additionally, in a recent YouTube Video, the Google team of Chris Malone, principal engineer, and Erik Teetzel, technical program manager, discusses using "free cooling" by "leveraging outside cool air." They assert that this is a key best practice "both for reducing utility expense and the carbon footprint of data centers."
This video introduces why free-cooling is an important consideration for data centers, and some examples we have implemented at Google data centers.
And, according to Andy Woods in his article, "Cooling the Data Center," "Indeed, as the number of hours for which cooling is required increases, the energy consumed in the data center increases. If the number of hours increases by a fraction x of the total year, then the energy consumption may increase by an amount on the order of 0.2x of the total energy consumed in powering the IT equipment, assuming the use of direct cooling accounts for about one-quarter of the energy consumption. This points to the benefits of locating data centers in more northerly or colder climatic zones."3
Sales Tax Rebates or Exemptions on Utility Rates
Many of the Midwest States have also legislated sales tax rebates or exemptions on the sales tax imbedded in utility rates. Since utilities are one of the largest ongoing cost components of a data center, states that have this benefit present a significant savings opportunity for data centers.
The combination of utilizing outside cool air for the longest period of time possible and the waiver of sales tax on actual utility rates substantially reduces utility costs. For a hypothetical 20mW data center with 50,000 square feet of raised floor, the annual operating savings resulting from "free" outside cooling is estimated at +/- $856,000 in the Midwest States (Slideshow, Figure 6).
The clear cost picture of the advantage of locating a data center in one of the Midwest States comes by looking at the 10-year composite of all of the property and sales taxes and the ability to utilize outside cool air. The savings over 10 years can vary as much as $45 million from low to high.
Making a Comparison
Slideshow, Figure 7 illustrates the operating cost picture of locating a data center in the Midwest versus in other popular data center location choices. As stated previously, those making a site selection decision for a new data center would be wise to take into account the cost of power and the overall tax burden in each location under consideration. Only then will they have a true picture of the initial and ongoing operational costs.
Reeder Holiman, Senior Vice President, Jones Lang LaSalle
Reeder Holiman is a Senior Vice President and Market Lead for Jones Lang LaSalle's Project & Development Services in Minneapolis, Minnesota. As Market Lead, Holiman directs the firm's development, project management, and project consulting services in a five-state region that includes Minnesota, North Dakota, South Dakota, Iowa, and western Wisconsin.
Brian Ginkel, Vice President,Jones Lang LaSalle
As a veteran of the corporate real estate industry and part of the Jones Lang LaSalle's national Data Center Solutions team, Ginkel focuses on creating strategies to help companies site, analyze, and implement data center solutions across the nation. He works with corporate real estate teams to help maximize efficiency and mitigate risks associated with their current and future business needs.
Ann Marie Woessner-Collins, Managing Director, Jones Lang LaSalle
Ann Marie Woessner-Collins is a Managing Director and started and manages the Business and Economic Incentives team in North America. The practice helps companies negotiate with state and local governments to reduce upfront capital and expense costs along with ongoing operating expenses and taxes. Woessner-Collins' and her team's accomplishments include negotiating legislative changes in many states and applying little known statutes to achieve solutions for clients.
Bo Bond, Managing Director, Jones Lang LaSalle
Bo Bond is a Co-Leader of Jones Lang LaSalle's Data Center Solutions team. With over 16 years of experience in the commercial real estate industry, Bond has successfully negotiated over 15 million square feet of real estate transactions in multiple states.