Rent that starts late is deferred, not cancelled, but the whole value of the phase moves back with it, and past the long-stop date the lease itself is at risk.
A grid connection delay on a pre-let data centre costs the present value of everything the delayed phase will earn, moved back by the length of the delay, plus the cost of holding finished halls with no power. On an illustrative 16 MW expansion let at $138 per kW per month for 15 years, a 12-month delay costs $24.45 million, 7.3 per cent of the phase's value, about $0.13 million per MW per month, although not a dollar of rent is cancelled. Beyond the lease's long-stop date the cost is no longer time: it is the lease.
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 →
In many markets the binding constraint on new data centre capacity is now the grid connection, not the building. A developer can finish the shell and fit-out on time and still wait months for the utility to energise the site. Under a typical hyperscale pre-let, rent starts when the capacity is delivered, so the delay defers income rather than destroying it. That is where the first wrong answer comes from: "nothing is lost, it just starts later." The building's capital has been spent on schedule. Every cash flow it will ever produce, rent and the value at the end of the lease, arrives later, and money later is worth less.
The worked case in the book includes a pre-leased expansion waiting for its grid connection. The figures here are a separate, simpler illustration of the same problem.
| Input | Value |
|---|---|
| Pre-let IT capacity, MW | 16 |
| Rent, $ per kW per month | 138 |
| Annual rent / NOI after landlord costs (92%) | 26.496 / 24.376 |
| Escalator, a year | 2% |
| Planned energisation, months from today | 24 |
| Case A: lease term from rent commencement, years | 15 |
| Case A: exit cap rate on forward NOI at lease end | 8.0% |
| Case B: lease ends with the main lease, month | 96 |
| Holding cost of finished halls waiting for power, a month | 0.10 |
| Discount rate | 7.5% |
| Long-stop: months of delay before the tenant may terminate | 18 |
Delay cost = PV(phase cash flows, on time) − PV(phase cash flows, delayed) + PV(holding costs)
For a lease that runs from commencement, every cash flow moves: cost ≈ PV on time × (1 − 1 ÷ (1 + r)delay in years) + holding
Excel, on monthly rows: =NPV((1+7.5%)^(1/12)-1, OnTime) - NPV((1+7.5%)^(1/12)-1, Delayed)
Step 1, value the phase on time. Monthly rent is 16,000 kW × $138 = $2.208m, $24.376m a year of NOI. Case A: 15 years of NOI escalating at 2 per cent from month 24 is worth $216.17m today, and the exit at an 8.0 per cent cap on forward NOI, $410.09m at the lease end, is worth $119.93m. The phase is worth $336.10m.
Step 2, move it back 12 months. The lease loses $15.08m of present value and the exit $8.37m. Twelve months of holding costs add $1.00m. Total: $24.45m, 7.3 per cent of the phase.
Step 3, the co-terminous lease. Expansion leases are often set to expire with the main lease, here at month 96. A 12-month delay now cancels the first year of rent outright; the rent from month 36 onwards is unchanged, and so is whatever the asset is worth after month 96. The loss is the present value of that first year's NOI, $20.29m, plus $1.00m of holding costs: $21.29m.
| Delay, months | A: lease | A: exit | Holding | A: total | B: co-terminous total | A per MW-month |
|---|---|---|---|---|---|---|
| 6 | 7.68 | 4.26 | 0.51 | 12.44 | 10.84 | 0.130 |
| 12 | 15.08 | 8.37 | 1.00 | 24.45 | 21.29 | 0.127 |
| 18 (long-stop) | 22.22 | 12.33 | 1.47 | 36.02 | 31.56 | 0.125 |
| 24 (beyond it) | 29.11 | 16.15 | 1.93 | 47.19 | 41.47 | 0.123 |
Up to the long-stop the cost is close to linear, about $2.04m a month in case A and $1.77m in case B. The 24-month line is the one that should not be read at face value: past 18 months the tenant can walk away, and what is at stake is the phase's whole $336.10m in case A, or the $107.18m present value of the co-terminous lease in case B, against whatever the halls would fetch from a new tenant on new terms.
The long-stop date, the liquidated damages the developer owes the tenant for late delivery, and any extension for utility delay are the three clauses that turn this arithmetic into a negotiation. A clause that extends the long-stop for "delay caused by the grid operator" moves most of the risk from the landlord's lease to the landlord's balance sheet.
The first is the one above: treating the delay as a deferral that costs only the holding costs, $1.00m for a year. The second is the opposite: "we lose a year of rent," $26.496m, used as the cost for any lease structure. It happens to land in the right range here, where the case A cost is 92 per cent of it and the case B cost 80 per cent, but for the wrong reason, and it misses that in case A $8.37m of the loss is in the exit value, which no rent figure captures, and that the true risk is the long-stop, not the rent. The third is to apply the delay to the building's cost rather than its value: the capital was spent on schedule, so interest during the wait is a cost already inside the discounting, not an extra.
A buyer of a data centre with a pre-leased expansion should price the grid date as a distribution, not a point. How much of the price the signed lease covers is worked in how much of a data centre's price the lease covers; the delay moves part of that coverage further away.
The Digital Infrastructure Investor values data centres, fibre and towers with the models supplied, and the free workbook for this case carries the data centre lease, its expansion and the grid connection it waits for.
Roughly the present value of the phase times one month of the discount rate, plus a month of holding costs. On an illustrative 16 MW pre-let expansion worth $336.10m, a 12-month delay costs $24.45m, an average of $2.04m a month or about $0.13m per MW per month. A co-terminous lease costs $1.77m a month: the delayed rent is lost outright, but nothing after it moves.
The date by which the landlord must deliver the capacity, after which the tenant may terminate or claim agreed compensation. Before it, a delay is a time-value cost; after it, the signed lease is at risk. On the illustrative expansion an 18-month long-stop separates a $36.02m delay cost from a $336.10m phase value.
It does not always. A lease co-terminous with the main lease loses the delayed months of rent outright, but the asset's value after expiry is unaffected; a lease that runs from commencement defers everything, including the exit value. On the illustrative case 12 months cost $21.29m co-terminous and $24.45m with a floating term.
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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