A year-by-year equity cash flow for a pre-let turnkey campus, and the inputs that move the answer most.
The levered IRR of a data centre development is the IRR of the equity's own cash flows: the equity cheque during construction, then net operating income less interest once the tenant pays rent, then the sale price less the loan at exit. On an illustrative 40 MW pre-let turnkey scheme costing $460 million at 60 per cent loan to cost, $184 million of equity grows to $657.3 million of distributions over seven years, a levered IRR of 22.2 per cent against 15.5 per cent unlevered. Leaving out the two construction years, the most common shortcut, reports 34.8 per cent.
Worked in full in The Data Center Development Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A development return is not an acquisition return. Nothing comes in while the hall is built, the lender usually funds after the equity, and the rent starts only at energisation. The equity cash flow therefore has three parts, each on its own row of the model.
Year 0: −(all-in cost × (1 − loan to cost)), equity spent first
Operating years: NOI − interest (and any amortisation)
Exit year: forward NOI / exit cap rate × (1 − sale costs) − loan balance
Levered IRR in Excel: =IRR(B12:I12) on the equity row, one column per year from year 0 to the sale.
The case is fictional: one hyperscale tenant pre-lets the whole 40 MW of critical IT capacity, the build takes two years and the developer sells at the end of year 7. The all-in cost includes land and the interest capitalised during construction, so the operating loan starts at the full 60 per cent of cost.
| Input | Value |
|---|---|
| Critical IT capacity | 40 MW |
| All-in cost per MW | $11.5m |
| Loan to cost, interest-only once operating | 60% at 6.5% |
| Rent, net of power, from year 3 | $110 per kW-month |
| NOI as a share of rent | 94% |
| Rent escalator | 3% a year |
| Exit cap rate on forward NOI, sale costs | 7.5%, 1% |
Step 1, capital. 40 × $11.5m = $460.0m. Debt is 60 per cent, $276.0m; equity is $184.0m, paid in at year 0.
Step 2, first-year income. Rent is 40,000 kW × $110 × 12 = $52.80m, and NOI at 94 per cent is $49.632m, a yield on cost of 10.79 per cent. Interest is $276.0m × 6.5% = $17.94m, covered 2.77 times.
Step 3, exit. Year 8 NOI is $57.54m. At 7.5 per cent the campus sells for $767.2m, $19.2m per MW; less $7.7m of costs and the $276.0m loan, the equity receives $483.5m.
| Year | NOI | Interest | Sale, net of loan | Equity cash flow |
|---|---|---|---|---|
| 0 | −184.00 | |||
| 1 and 2, construction | 0 | capitalised | 0 | |
| 3 | 49.63 | 17.94 | 31.69 | |
| 4 | 51.12 | 17.94 | 33.18 | |
| 5 | 52.65 | 17.94 | 34.71 | |
| 6 | 54.23 | 17.94 | 36.29 | |
| 7 | 55.86 | 17.94 | 483.5 | 521.41 |
| Distributions | 657.3 |
The equity row solves to a levered IRR of 22.2 per cent and a multiple of 3.57 times, a profit of $473.3m. The unlevered IRR, on the full $460m spent $184m, $138m and $138m over years 0 to 2, is 15.5 per cent, slightly conservative because the $460m includes the construction interest; leverage adds 6.7 points because the asset earns well above the 6.5 per cent cost of debt, a 10.79 per cent yield on cost and a 15.5 per cent unlevered return. The general mechanics of moving between the two returns are set out in levered vs unlevered IRR in real estate. Most of the return arrives in year 7: the sale accounts for $483.5m of the $657.3m, which is why the exit cap rate and the escalator matter more than the first-year rent.
| Change from the base case | Levered IRR |
|---|---|
| Base case | 22.2% |
| Flat rent, no escalator | 18.6% |
| 2% escalator | 21.0% |
| Exit cap 7.0% | 23.6% |
| Exit cap 8.0% | 20.9% |
| Exit cap 8.5% | 19.7% |
| No debt | 13.3% |
| 50% loan to cost | 19.6% |
| 65% loan to cost | 23.9% |
| Twelve-month energisation delay | 17.9% |
The escalator is worth 3.6 points on its own, more than a full point of exit cap rate. The delay case moves the lease start and the sale one year later and charges a year of interest, $17.94m, to the equity in year 3: it costs 430 basis points, more than any single line except removing the debt. That the delay outweighs a rent miss of similar size is worked on the book's own campus in does a twelve-month delay cost more than a rent miss. The "no debt" line is the equity-only return with the same timing, lower than the unlevered 15.5 per cent because all $460m goes in at year 0.
Modelling the development as if it were a stabilised acquisition: equity in, rent from year 1. Measured from the day the lease starts, the same cash flows give 34.8 per cent, 12.6 points too high, because the two years in which the equity earns nothing have disappeared. The opposite error is also common: putting the whole $460m at year 0 in the unlevered model ignores that the money is spent over the build and understates the unlevered return. Model the calendar first, then the capital.
Two smaller traps: cap the exit on forward NOI if that is how the market prices, and check that the loan balance at exit includes the interest capitalised during construction, not just the hard-cost draws.
A monthly version with an S-curve draw and five scenarios side by side is in the free workbook for the book's 180 MW campus, and a general model is at the data center financial model template.
It depends on the risk taken: a pre-let turnkey scheme carries construction and energisation risk but no leasing risk, a speculative one carries both. The illustrative 40 MW pre-let case returns 22.2 per cent at 60 per cent loan to cost and 18.6 per cent with flat rent. Compare any target with the unlevered figure, here 15.5 per cent, to see how much comes from debt.
Leverage adds return when the asset earns more than the cost of debt. In the worked case the yield on cost is 10.79 per cent and the unlevered IRR 15.5 per cent, against 6.5 per cent interest, so 60 per cent loan to cost lifts the IRR from 15.5 per cent unlevered to 22.2 per cent, and 65 per cent to 23.9. The same debt also widens the loss if the exit cap rate rises.
Move the lease start and the sale one period later and charge the extra interest on the drawn loan to the equity, because the lender will not wait for the rent. In the worked case a twelve-month delay costs $17.94 million of interest and cuts the levered IRR from 22.2 to 17.9 per cent, 430 basis points.
This article is one calculation from The Data Center Development Handbook. 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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