Construction and Financing Risk in Data-Center Valuation

Thesis

A practical framework for modeling capital draws, construction-period interest, contingencies, completion support, and dilution before stabilization.

Key chart

The argument

The correct valuation unit is the full cash-flow path from today to stabilization, not stabilized NOI divided by a cap rate.

FactConstruction-period interest can accrue before a project begins producing revenue when debt is drawn during the build. InferenceApparently attractive stabilized economics can still produce a weak equity return when delay, cost overrun, or parent funding is material.

Key findings

• Construction-period interest begins when capital is drawn, not when revenue starts.
• Unused capacity can carry land, staff, commitment fees, and common infrastructure costs.
• Project debt may be non-recourse in name but require parent completion support.
• Contingency and change orders should be modeled explicitly.
• DSCR, loan-to-cost, and minimum equity can bind simultaneously.

Counterarguments

A highly creditworthy tenant can fund or guarantee much of the build, reducing equity exposure. Standardized designs and shared infrastructure can also lower later-phase cost.

Risks

Equipment lead times, labor, interconnection, cooling, permitting, commissioning, customer acceptance, and refinancing can interact rather than occur independently.

Catalysts

Fixed-price contracts, equipment reservations, lender commitments, tenant deposits, and achieved construction milestones reduce specific risks.

Scenario analysis

Valuation analysis

Model monthly or quarterly capital draws, interest, fees, contingency, tenant contributions, and revenue ramp. Reconcile the financing sources and uses in every period.

Assumptions

Important fields include EPC structure, contingency, interest during construction, debt commitment timing, customer deposits, parent guarantees, DSCR, amortization, and refinancing.

Methodology

The project uses a sources-and-uses schedule before applying any stabilized cap rate.

Disconfirming evidence

The risk case weakens when the project is substantially pre-funded, fixed-price, standardized, and supported by strong customer obligations.

What would change the conclusion

A complete financing package and construction budget can move a project from speculative option value to underwritten phase value.

Primary sources

Use debt agreements, construction contracts where public, lease disclosures, permit records, and audited cash-flow statements. See the source archive.