Data centre debt is sized on the lease, and the lease has an end date. Refinanced a year before expiry, the same building borrows like a bond or like a construction site.
The lower of what the debt service coverage ratio and the loan to value allow, counted only on income the lender can see under contract. On an illustrative 32 MW data centre refinanced one year before its hyperscale lease ends, a lender at 1.40x DSCR, 6.5 per cent and 20 years sizes 672.7 million if a new long lease is signed, against 752.1 million on a 55 per cent loan to value. Without the new lease it counts only the expansion's income and lends 116.4 million, leaving the equity to repay 328.9 million.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Data centre debt is sized on contracted cash flow, and the contract has an end date. A building with eight years of rent from an investment-grade tenant borrows like a bond; the same building with one year left borrows like a construction site. The question that decides the equity return is not how much the asset can borrow at purchase but how much it can borrow when the first loan matures, and that depends on whether the lease has been extended by then.
| Input | Value |
|---|---|
| Purchase price | 900.0 |
| Phase 1: 32 MW leased at $138 per kW per month, lease ends year | 8 |
| Acquisition loan: 55% of price, 6.0%, 2 years interest only, then 25-year amortisation | 495.0 |
| Maturity and refinancing, end of year | 7 |
| New lender: DSCR / loan to value / rate / fee | 1.40x / 55% / 6.5% / 1% |
| Year 8 NOI less reserve, new long lease signed | 85.47 |
| Year 8 NOI less reserve counted with no new lease (phase 2 only) | 29.72 |
| Cap rate for value | 6.25% |
1. What is left of the first loan. The 495.0 is interest only for two years at 29.7 a year; year 1 cash flow after the reserve is 49.484, a DSCR of 1.666. Then it amortises on a 25-year schedule at 38.722 a year, and at the end of year 7 the balloon is 444.141.
2. Size on DSCR. Divide the cash flow the lender counts by the required cover to get the debt service it allows, then take the present value of that payment over the new tenor.
Debt service allowed = 85.47 ÷ 1.40 = 61.05 a year
Loan = 61.05 × annuity factor (6.5%, 20 years) = 61.05 × 11.019 = 672.68
Excel: =PV(6.5%,20,-CF/1.4)
3. Size on loan to value, and take the lower.
Value = 85.47 ÷ 6.25% = 1,367.5; loan at 55% = 752.14
New loan = MIN(672.68, 752.14) = 672.68, an actual LTV of 49.2% and a debt yield of 12.7%
Cash to equity = 672.68 × (1 − 1%) − 444.141 = 221.81
DSCR binds. Loan to value would only bind if the lender accepted cover of 1.25x or less.
4. Now without the new lease. A year before expiry, the lender cannot count phase 1 rent it has no contract for. It counts the expansion's 29.72, and because that lease runs only to year 14, it insists on a 7-year amortisation.
Debt service allowed = 29.72 ÷ 1.40 = 21.229
Loan = 21.229 × annuity factor (6.5%, 7 years) = 21.229 × 5.485 = 116.43
Equity must repay 444.141 − 116.43 × 99% = 328.88
The same building, one year apart in the timing of a signature, can borrow 672.7 or 116.4: a gap of 556.3. In the first case the refinancing returns 221.8 to the equity; in the second it calls 328.9. Even if the lender stretched the phase 2 loan to 20 years, it would size 233.91 and the equity would still have to find 212.57. That is why the lease extension, not the interest rate, is the most important input in the debt model.
| DSCR required | New lease, 20 years | No new lease, 7 years |
|---|---|---|
| 1.25x | 752.1 (LTV binds) | 130.4 |
| 1.30x | 724.4 | 125.4 |
| 1.40x | 672.7 | 116.4 |
| 1.50x | 627.8 | 108.7 |
| Rate | 5.5% | 6.0% | 6.5% | 7.0% | 7.5% |
|---|---|---|---|---|---|
| Loan | 729.6 | 700.2 | 672.7 | 646.8 | 622.4 |
A full point on the rate moves the loan by 50.3 to 56.9 million; the lease decision moves it by more than 500. Tightening cover from 1.40x to 1.25x on the unrenewed building adds only 14.0.
The lease-tail problem is why sponsors try to refinance before the final years, or negotiate extensions early in exchange for rent concessions. A renewal at 90 per cent of the final passing rent of 60.871 costs about 6.1 million a year; failing to refinance calls 328.9 million, 76.8 per cent of the 427.95 the equity put in at purchase (the price plus 2 per cent of costs, less the loan net of a 1 per cent fee).
Sizing the refinancing on the asset's value or on the current NOI. Capitalise the renewed cash flow at 6.25 per cent and the building looks worth 1,367.5, and a 55 per cent LTV loan 752.1, but until the new lease is signed no lender will amortise a 20-year loan over a lease that ends in one. Size on the cash flow under contract, over a tenor no longer than the contract, and test both the renewal and the no-renewal case before buying. The same DSCR mechanics, with sculpting, are in sculpted versus annuity debt; the rest of what the lease does and does not cover is in how much of a data centre's price the signed lease covers.
The acquisition loan, the refinancing and the DSCR path for every lease-end outcome are in the free workbook for this case, and a ready-made sizing sheet is in the DSCR and debt yield loan sizing template.
On both, and the lower wins. On the illustrative refinancing, 85.47 million of cash flow at 1.40x DSCR, 6.5 per cent and 20 years supports 672.7 million, while 55 per cent of a 1,367.5 million value would allow 752.1 million. DSCR binds unless the lender accepts cover of 1.25x or less.
Because a lender counts only contracted rent and keeps the tenor inside the contract. With one year left on the main lease, the illustrative lender counts only the expansion's 29.72 million over 7 years and lends 116.4 million instead of 672.7, leaving the owner to repay 328.9 million of the maturing loan from equity.
Less than the lease does. At 1.40x DSCR over 20 years on 85.47 million of cash flow, the loan is 729.6 million at 5.5 per cent, 672.7 million at 6.5 and 622.4 million at 7.5: about 50 to 57 million per point, against a 556.3 million swing from the lease renewal.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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