Datacenters: A Real Estate Asset of the Future

09/03/2012

DATACENTERS
A real estate asset now atypical …
… the future of tomorrow ?

Thomas CARBONNIER, Business & Tax Lawyer
EQUITY AVOCATS – Lawyers Firm
17 rue du dragon - 75006 PARIS (FRANCE)
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09/03/2012

The establishment and development of the French subsidiary of a major global real estate fund
manager will be presented through financial simulations (I). Then the project “opportunistic fund”
with bank debt at 80 % in order to implement a risky real estate project but at the edge of technology
that would be, to date, unique in FRANCE (II).

I - FINANCIAL SIMULATIONS BY TYPE OF FUND
Financial simulations are presented below to find out the minimum required rate of return for real
estate investments and meet the objective of profitability expected in the hypotheses: "core, value
added, and opportunistic funds".

Article 14 of the fourth supplementary budget for 2011 provides that companies which have a turnover
that excess 250 million euros a year will be subject to an exceptional increase of 5% of corporation
tax. This increase was due to the years ending between December 31, 2011 and December 30, 2013.
For this project, we will consider that this increase only affects the opportunistic funds, only funds that
can generate such a turnover.
It is also considered the contribution of social enterprises in calculating the corporate tax rate under
3.3% of the SI by section 235 ZC of the French Tax Code. A turnover of over € 7,670,000 is required.
It is likely to be generated by all funds.

CORE VALUE ADDED OPPORTUNISTIC
Debt 0 0,4000 0,6000 0,8000
Equity 1,0000 0,6000 0,4000 0,2000
Debt financing 0,0000 0,4000 0,6000 0,8000
Cost of equity 0,0800 0,0800 0,1200 0,1600
Cost of debt 0,0450 0,0450 0,0500 0,0550
Rate of corporation tax 0,3443 0,3443 0,3443 0,3960
WACC 8,00% 5,98% 6,77% 5,86%

II - THE CHOICE OF INVESTMENT STRUCTURE AND CORPORATE OF THE
OPPORTUNISTIC FUND

If it was usual to structure investment through dedicated REITs exempt from corporation tax,
the supplementary budget of 2011 has considerably weakened the fiscal attractiveness of
these.

Therefore the investment will be realized through a different rent structure (2). However, the
distribution and motivations are presented previously (1).
1 - REJECTION OF TRADITIONNAL REAL ESTATE ASSETS FOR THE BENEFIT OF
MODULAR DATACENTER
As the market cycle is now very high, the risk of market downturn is real. The current economic crisis
is not likely to promote market development of offices and shops. As the housing market, profitability
is very low so unattractive. Growth prospects are uncertain.

However, on the side of IT, revolutions follow one another and a new era of choice for businesses has
begun. Our discussions or communications needs are growing at an exponential rate. More than a
trend, it is a fundamental shift. While it took nearly 38 years for radio to reach an audience of 50
million people, only 4 years for internet, facebook for 2 years and 14 days ... for google apps have
been necessary!

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09/03/2012

The share of the digital economy in the French GDP is 6%, against 13% in the U.S. and 17% in Korea.
Between 2000 and 2004, ICT contributed nearly 50% to productivity growth in the European Union.
The digital economy now represents over 25% of global growth and represents 30% before 5 years.

The need for data center computing capacity increases so in a drastic way to meet those new needs (1).
The processors are more powerful and the arrival of new technologies such as High Density,
Virtualization, Cloud-Computing, the SaaS (2) or VoIP mean that today the vast majority of data
centers is obsolete. If the cloud computing wasn't able to not fulfill all its promises, other technologies
will come into growth areas.

(1) Source : Gartner

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(2)

09/03/2012

The real estate market data center is both unusual and very complex. It seems necessary to define what
a datacenter is (1.1) before to present a panorama of different existing business model (1.2) and the
state of competition (1.3). Given those elements, datacenter construction project at the cutting edge of
technology will be exposed (1.4). If the intellectual effort to understand that atypical real estate market
is undeniable, at a time when rental yields of traditional assets are falling, this effort is needed to
anticipate what might be the future of corporate real estate (1.5).

1.1 – DEFINITION AND SEGMENTATION OF DATACENTERS

We can define datacenters as follows:

• A concentration of resources (servers + disks + network) in a dedicated building;
• A technical infrastructure to ensure that continuity of power supply, cooling and
telecommunications access to these resources are always available;
• A building incorporating specialized technical infrastructure, the computer room and
ensuring the security of the site;
• A building located near access points to very high electrical power and very high bandwidth
telecommunication.

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09/03/2012

These resources will thus ensure a very high availability, and in a secure environment, hosting critical
software applications for very large companies. Datacenters are designed on two main criteria that are
high availability for applications that never stop and energy efficiency to minimize energy bill and
carbon footprint of this activity. The datacenters are classified by the level of availability of I with
little redundancy of equipment, with multiple redundancy to IV equipment for maximum flexibility of
operation.

1.2 - THE BUSINESS MODEL OF HOSTING

This hosting market has grown remarkably in recent years, an overview is needed.

Hosts-rental companies offering services on surfaces and energy supplies are in a market that has seen
a strong concentration:

• the four world leaders are Equinix, Global Switch, Telecity and Interxion;
• the average load rate of these players is around 85%.

Hosting companies optimize occupancy rate of their centers:

• The investment decision is taken when 50% of their capacities are engaged;
• The occupancy rate of 80% is reached in three years.

The services provided by such hosters are:

• a surface powered, chilled, watered and secured by telecom operators;
• The client remains the owner of hosted material;
• a third party provider or the customer himself supervises and exploits computer equipment;
• a density of 1 to 2 kVA [Kilos Volt Amper] by full rack (5) on average, even longer in some
of high-density centers, is proposed;
• an acceptable level of confidentiality is ensured from when customer is the only in the room;

Billing is done as follows (prices are from May 2009):

• an entrance fee (setup fees) is payable to each rental of new surface (~ 1900 € / Rack 2kVA);

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09/03/2012

• a monthly rent does not include electricity and telecom costs (~ 300 € / Rack / month for rent
for a 2 kVA rack).

Lease contracts regulated by the Civil Code have duration of 3 to 10 years with an option to exit at
age 5. Terms of price revisions are in the contracts and may be based on evolutions of Syntec index or
Construction Cost Index. The Syntec index is preferable because of the variations observed over a
long period.

1.3 - TYPES OF HOSTING

Starting from the simply providing to surfaces managed to go up to value-added services
provided to the application layer, we can clearly distinguish several levels of market players:

• hosters "dry" are mainly focused on the leasing of space managed with variable
characteristics. May be mentioned here InterXion, Equinix, Telecity Redbus, Global
Switch and others;

• hosters such as IBM, HP, Orange Business Services, Accenture, Atos-Origin and
Cap Gemini, which are capable of the previous layer to provide additional layers of
services related to complete systems (mainframe, Unix, etc.) applications (SAP-related
services, accounting, Oracle financials) or models to support (help desk, please,
extended hours).

According to Markess International, a perspective of market segment, it may be noted that the
actors are quite compartmentalized: Atos-Origin will be reluctant to provide accommodations
unlike pure Equinix.

It is important also to mention corporations who appear increasingly as challengers, in that
they allow the user to stop using its datacenter.

These companies have offers which are based on the model of "Cloud computing" to provide
Internet services falling into either of the following categories:

• The hosting "platform as a service" offering lodging virtual machine in the world
x-86 charged by the hour, for example: Amazon EC2 and his offer is typical of this
evolution;

• The hosts' software as a service "offering online access to applications: Google Apps
or Salesforce.com are illustrations of these offers. Such companies should play an
increasing role in the coming years.

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09/03/2012

1.4 - CONSTRUCTION OF A DATACENTER IV MODULAR

To choose their data center, firms focus connectivity, physical security, building characteristics, the
company's financial stability, etc. The project will focus on a modular datacenter Tiers IV to ensure
the sustainability of investment. In a non-modular data center, electrical equipment and cooling system
with circulation spaces leaves about 50% of surface to computer rooms.

Even within these rooms, accessibility requirements and ventilation usually divide again by 2 to 3.5
from the land on which servers.

The modular data center will be favored because of its delivery time is only three months as against 12
to 18 months for a third datacenter tiers III.

It will also be due to its cost which, in reported m², is less than a non-modular datacenter. The cost of
each module HP 240a (delivered in Europe from 2012) (3) is approximately $ 8 million or about
6.18M€ for a capacity equal to that of a non-modular data center 929 m² (9600 square feet). It is not
considered the cost of land.

(3)

The filling ratio of this data center is expected to reach an occupancy rate of 90% through its Power
Usage Effectiveness (PUE) of 1.05 only! (4) To date, only the HP POD modules 240a offer such PUE.
No module developed by HP's competitors offer such performances!

(4)

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09/03/2012

The geographic location of the construction of the data center will be out of danger and close to the
fiber optic networks and electricity. The data center will be insured against financial loss caused to
tenants in case of occurrence of such risks. To reduce the need for internal cooling, a green roof
membrane will be implemented. With this upper layer, the temperature under roof is decreased from
2 to 5° C. In winter, the cold outdoors will be used for internal cooling.

1.5 ESTIMATED PROFITABILITY OF THE FUND OPPORTUNISTIC

The filling rate of the data center is progressive and may not exceed 90%. The Syntec index, generally
used for the indexation of rents particularly in datacenters, is not included.

The rapid obsolescence does not allow capitalizing rental income to determine the capital gain on the
sale of the building. This business model is very different from other types of real estate: it offers very
high rental income that offset a sharp depreciation, year after year, equipment.

The fifth year, the property is sold with a profit. The sale price is based on a rental yield of 8%, current
yield of a warehouse. In contrast, the HP POD 240a modules are sold to their net book value.

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CHIFFRES CLEFS
Value HT Value HT
Number Total Value HT
HP POD Building
HP POD 09/03/2012 240a + Land
66 488 521 928€ 9 212 500 € 500 000 000 €
Surface total
Surface HP POD Number of
(with buil- Power per rack
240a Rack
ding)
8 861 m² 22 000 m² 2 904 69,12 kVA
Annual income Operating costs per m²
124 416 €/an per Rack de € 7.2 million to 5 000m ² or € 1,440 /
69,12 kVA in HP POD 240a ! m² (third datacenter III) + € 427 029 by
300€/month per rack 2kVA HP POD 240a (charged to the tenant in
proportion to the leased space).
Setup Fees
65 664 € (HP POD : This cost includes:
69,12kVA)
1 900€ in full rack 2kVA - Energy-supply: operating
Depreciation periods configuration average of 1 kW / m²
- Salaries charged: skilled human
resources needed to run 5000 m
needing to work full-time equivalent
HP POD 240a : 10 ans of 100 (half in general services, half
Bâtiment construit : 30 ans in technical computing)
- Telecom costs: two leased lines of
10 Gbps

Examples de PUE bank debt
Bullet repayment of the loan
HP POD 240a : 1,05-1,15
Casualty Insurance natural
Sun BlackBox : 1,13-1,21
Insurance is required to cover certain
Module IO : 1,17
types of risks that could undermine the
Cisco CDC : 1,25
service from the datacenter. The server
Google : 1,11-1,16
shutdown can cause huge financial
Amazon web services : 1,45
harm to tenants.
Power Equivalent area in tiers III
69kVA for a 50U rack 929 m² x number 240a HP POD
against 10 kVA for a 66 HP POD datacenter equivalent to a
datacenter tiers III! tiers III of 61 314m ² with a power per
Surface HP POD 240a rack 5kVA
134,26 m² = 9,8 m x 13,7 m Cost effective area into tiers III
Land in Paris (IdF) The power per rack full of 69 kVA will help
27 500 m² ; 55 € HT / m² ; address the growing need for power to
land use coefficient of 0,8 ; accommodate further technologies. To date,
price HT = 1 512 500 € 61,374 square meters of data center cost no data centers in France provide such
about tiers III 613 M € instead of 488 possibilities (max 5kVA, 2kWA average per
Building cost to build (HT)
M€, is a price difference of over 25%! full rack)!
Construction cost: 350 € / m²
Price: € 7,700,000
In this example, you’ve invested 100 M€

ANNUAL RETURN IN EUROS HT HC
Y Income
Price sale of the Net cash flow
e filling Price sale of Operating Insurance
POD 240a Debt payment discounted at the
a rate rental setup fees the building costs (7) premium
modules WACC
r
1 50% 180 652 032 95 344 128 - - 15 840 000 22 000 000 6 322 821 236 328 169
2 65% 234 847 642 28 603 238 - - 20 592 000 22 000 000 8 219 667 181 500 790
3 80% 270 978 048 19 068 826 - - 23 760 000 22 000 000 9 484 232 213 417 079
4 90% 325 173 658 28 603 238 - - 28 512 000 22 000 000 11 381 078 217 047 830
5 90% 325 173 658 - 12 375 000 244 260 964 28 512 000 22 000 000 11 381 078 76 430 712
Total Discounted Cash Flow Net 929 362 868
and after 5 years you get 929 M€ ! This is an example of what EQUITY AVOCATS can propose as
solution to help you to increase your revenues.
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09/03/2012

2 - THE USE OF A SOPARFI AND A TAX CONSOLIDATION

First, a financial holding company (SOPARFI) will be established in Luxembourg. It will aim to
ensure a reduction of tax burden in France through the use of management fees. For this purpose, a
transfer pricing documentation will be implemented.

On the French side, holding a SAS will be implemented to optimize the tax LBO. A SAS daughter will
be created per investor. To optimize the taxation applicable to this project, every SAS benefit from the
research tax credit (CIR) and will benefit from a tax consolidation.

The CIR will seek to find how to create, like the Google project, a modular datacenter on a boat to use
ocean waves to generate a portion of the electricity used by the data center from Pelamis converters.
The ocean water would also serve to partially cool the servers. This floating datacenter would be based
at 3 or 7 nautical miles from the coast over deep bottoms from 50 to 70 meters. This approach would
create a datacenter with a capacity of 50-100 MW.

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Datacenters: A Real Estate Asset of the Future

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