Home » Opportunity Zones and Data Center Development
What are “opportunity zones”?
As explained by California’s Opportunity Zone Portal, opportunity zones “provide tax incentives for investment in designated census tracts”. The objective is to help inject capital into under-invested areas.
It was established as part of the Tax Cuts and Jobs Act of 2017.
Data center developers have begun to take advantage of Opportunity Zones.
Orion Investment Real Estate notes that, “Fewer than one in 10 data centers built in the past 10 years was in an area now designated as an opportunity zone, according to CoStar data. Today, however, about 25 percent of the square footage proposed or under construction is scheduled for zones designated for special tax breaks under the program, according to CoStar.”
That’s a notable increase in the proportion of data center real estate developments that are leveraging the new Opportunity Zone tax advantages.
Here’s how it works at a high level.
As an incentive for the investor to invest in a QOZ, or “Qualified Opportunity Zone”, the federal government offers up to a full tax holiday on capital gains for assets held for at least 10 years.
Opportunity Zones have the following benefits for both investors and communities, as outlined by Sacramento County Economic Development.
For Investors:
For Communities:
Here’s the big caveat. In order for a data center tenant to take advantage of these tax breaks, they would need to share some of the equity in the data center real estate.
So if you are exclusively using cloud providers, and/or retail colocation providers to supply your company’s data center needs, you won’t be able to benefit from these impactful tax benefits.
In order to benefit, you’ll need to find a wholesale data center developer who is willing to enter into an equity sharing agreement with your company.
Also important to keep in mind in order to get a true sense of the size of the potential tax break: it’s not just the capital gains on the buildings themselves. It’s also the equipment that goes into the buildings. And in the data center world, we know that the value of the equipment we stuff the data center building with is huge.
This is exactly why we strongly recommend that data center site selection teams are made up of a cross-functional representation of folks reporting to at least the Chief Financial Officer and the Chief Information Officer or their equivalents.
Data Center Knowledge wrote an excellent three-part series about opportunity zones and data centers. Part 3 specifically references our Sacramento site, on a former air force base in McClellan Park.
Our Chief Investment Officer, Hoch Cho, was also recently a guest panelist on a webinar that discussed opportunity zones and data center development:
Our data centers are located in Sacramento, Hayward, and Santa Clara, California. Our Sacramento data center campus is located in McClellan Park, and is part of an Opportunity Zone. We can advise your company on how to increase your real estate investment returns by leveraging the Opportunity Zone.
Chat with us today and we can advise on your company's data center site selection and consolidation.
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