The AI revolution is increasing the demand for data centers, making them one of the hottest commercial real estate categories on the market. Consequently, many real estate investors are now looking for how to finance data centers.
However, given high borrowing costs, difficulties in getting finance from traditional investors, and competition from investors in other CRE categories, getting data center financing seems hard.
In what follows, we will consider investment options you can consider outside of traditional banks.
Group financing
If you know other investors who are excited about the prospects of data centers, you can link up with them and combine resources to invest in a data center.
This approach will lower the amount of money you need to raise.
Group financing is a form of creative financing that Pace Morby has in mind with gator lending.
Communities of real estate investors and other stakeholders can come together in diverse ways to accomplish various objectives, including financing deals that a single person cannot handle.
Some of these partnerships can even transform into a private equity firm that invests in various data center projects over time.
As Moody’s Analyticsthe investment assets rating agency, noted, “there are many partnerships and joint ventures forming in the data center lending space, usually between a data center developer-owner-operator and a private equity entity.”
CRE lending platforms
Traditional banks might be hesitant to lend money for a relatively new commercial real estate category but lenders who are versed in the operations of the CRE market won't be as hesitant.
CRE lenders recognize that “data centers are some of the most valuable, if not the most valuable, properties in the investment-grade commercial real estate universe,” as Moody's Analytics put it.
As part of their adaptations to the reality of data centers, lenders are now structuring financing deals to include the strictly data center portion (land and construction) and the equipment and technology used by the centers.
We have also seen multiple financing structures including project financing basis, real estate financing basis, receivables financing basis, single asset financing, and multiple assets financing, among others.
Instead of being bogged down by traditional banks, consider lenders that specifically target the CRE market.
Real investment trusts
Institutional investors also have their eyes on data centers.
According to Moody's Analytics, Equinox and Digital Realty, which are the two premier investors in data centers, are also among the top 10 largest REITs globally.
As “data centers have proven their mettle by offering consistently high returns, similar to utility companies,” the result is that “institutional investors have begun competing more aggressively with cloud companies in the quest for space,” according to DealPatha company providing real estate deal management software.
Consequently, instead of seeking to invest directly in data centers, you can purchase shares in REITs that have them on their balance sheets. This is a more accessible option for retail investors who cannot source for the kind of money needed to invest directly in data centers.
Don't forget earnest money deposits (EMDs)
Before you get the finance needed to close a data center deal, you need to pay the earnest money deposit demanded by the buyer. Without it, you can't even get to the negotiation table or schedule an inspection.
So, while you consider the financing options above, you need a solution that can quickly provide EMDs.
Duck Fund is a CRE financing platform that provides EMD within 48 hours for all kinds of CRE deals including data centers. You can complete an application within 2 minutes without submitting any credit reports.
As the data center market becomes more competitive, investors who can quickly raise EMDs will get an advantage over others. With Duckfund, you can put yourself in that advantageous position.
