Data center underwriting is not conventional CRE underwriting with a technology overlay. It is a fundamentally different discipline. The inputs, the risks, the inspection process, and the value drivers all operate by a different logic. If you bring conventional office or industrial underwriting assumptions to a data center deal, you will misprice it — either leaving returns on the table or, worse, missing a fatal flaw.

This lesson walks through the complete underwriting framework for both stabilized data center assets and powered shell development projects. Work through this checklist before you sign a term sheet.

What's different about data center underwriting

Four substitutions explain most of what is different:

Power capacity replaces square footage. A 100,000 SF data center delivering 5 MW of critical IT load is worth less than a 60,000 SF data center delivering 20 MW. You underwrite megawatts, not square feet. When you read a data center offering memorandum, the first number you look for is contracted critical MW — not rentable square footage.

Tenant credit replaces location demographics. In retail, you study rooftop counts and traffic. In data centers, you study S&P ratings and EBITDA growth. A hyperscale tenant with an A-rated parent on a 15-year absolute NNN lease is the asset. The building is the vessel. If the tenant leaves and you cannot fill it with another high-density user, you have a very expensive, nearly unleasable building.

Infrastructure redundancy replaces building condition. A data center's value is its uptime. You don't inspect the roof membrane — you inspect the generator capacity, the UPS runtime, the cooling redundancy, and the number of independent utility feeds. A beautiful, newly constructed shell with a single utility feed and no generator redundancy is a bad data center investment. A somewhat dated building with 2N power and dual fiber entry points is a far better one.

Utility interconnection replaces zoning. In industrial, you ask: is it zoned correctly, and can we get permits? In data centers, you ask: does this parcel have a utility interconnection agreement, and for how many megawatts? Power is the zoning equivalent. Without a utility commitment, no amount of land, location, or building quality creates a viable data center site.

The underwriting checklist — stabilized asset

Use this checklist when evaluating an existing, operating data center — whether a single-tenant NNN colocation facility, a hyperscale campus lease, or a multi-tenant colocation building.

Power

Contracted critical MW vs. available MW. Contracted MW is what tenants have committed to draw. Available MW is what the facility can physically deliver. You want a tight gap — a large gap between available and contracted means the building is underutilized and NOI per capital deployed is weak.

Utility interconnection agreement. Pull the actual agreement. Confirm: the term (how long is power guaranteed?), the contracted capacity in MW, expansion options (can you get more power if you need it?), and whether it is assignable to a buyer. Losing a utility agreement at sale or refinance is catastrophic.

Generator capacity — N+1 or 2N? N+1 means one generator more than required, so you can lose one generator and stay online. 2N means a completely independent, parallel backup system. Hyperscale tenants and AI workloads increasingly require 2N. N+1 is acceptable for colocation with lower-tier SLAs. Know what your tenant's lease requires.

UPS capacity and runtime. Uninterruptible power supply systems bridge the gap between a utility outage and generator startup. Confirm capacity (kVA or kW), runtime at full load (minutes), and redundancy configuration (N+1 is standard).

Switchgear age and redundancy. Switchgear is one of the most expensive components to replace and one of the easiest to overlook. Aging switchgear (15+ years) with no redundancy is a material capital risk. Get the age, the maintenance records, and the replacement cost estimate.

PUE — trailing 12 months. Power Usage Effectiveness = total facility power divided by IT load power. A PUE of 1.2 means 20% overhead for cooling and infrastructure; a PUE of 2.0 means 100% overhead. Modern hyperscale facilities operate at 1.2-1.4. Older facilities often run 1.8-2.0+. A high PUE creates operating cost drag for the tenant — and can push a renewal decision toward exit if the tenant can get 1.3 PUE elsewhere. Get 12 months of actual PUE data, not design targets.

Lease

Base term remaining. Nothing matters more in a data center lease than remaining term. Unlike a Dollar General with re-leasing optionality, a vacant data center is nearly impossible to lease on short notice. Buyers typically want 10+ years of remaining primary term for clean pricing.

Annual escalator. Fixed percentage escalators (2-3% annually) are the norm. CPI-linked escalators provide inflation protection but create NOI uncertainty. Flat rent with step-ups at renewal options is common in older hyperscale leases and is not ideal — model it exactly as written.

Renewal options remaining. Count them and value them. A lease with 5 years remaining and four 5-year options is not the same as a lease with 5 years remaining and zero options. Options give the tenant the right to stay but not the obligation — they signal tenant intent, not certainty.

Termination rights. This is the most important lease term in data center underwriting: data center leases at stabilized hyperscale and colocation facilities typically have no early termination right. Tenants have spent millions building out the interior, installing cooling, and running fiber — they cannot walk. Confirm this is true of your specific lease. A data center lease with a termination right is structurally broken.

Corporate guarantee level. Is the lease guaranteed by the parent company (Microsoft, Google, Amazon) or by a subsidiary? Subsidiary-only guarantees mean that a subsidiary restructuring could leave the landlord with an unsecured claim. Always push for parent company guarantee. Know exactly which legal entity signed the lease and what backs it.

ROFO / ROFR provisions. Right of first offer (ROFO) and right of first refusal (ROFR) give the tenant priority on future expansions or purchases of the building. These can be beneficial (signals tenant commitment) or restrictive (slows a sale process). Know whether they exist and what they cover.

Expansion rights and obligations. Does the tenant have the right to expand into additional power blocks? Does the landlord have an obligation to deliver expanded power within a timeframe? Development obligations embedded in leases create balance sheet exposure — model the capital required.

Power commitment — minimum draw. Some data center leases include a minimum power draw commitment (e.g., tenant must pay for at least 15 MW of power monthly regardless of actual usage). This protects the landlord's NOI. Confirm whether the lease includes one and at what level.

Tenant credit

Parent company credit rating. Get the S&P and Moody's rating for the ultimate parent. Investment grade (BBB- or better from S&P) is the floor for institutional data center investing. Sub-investment-grade tenants exist, but they price at much wider cap rates and carry meaningful default risk.

Revenue and EBITDA growth trend. A tenant with declining revenue is a tenant who may not renew. Pull the last three years of financials. For public companies, 10-K filings provide everything you need. For private companies, you may need to negotiate disclosure in due diligence.

Data center as core vs. non-core to the tenant's business. Is data center space central to how this company operates? For hyperscalers (Microsoft Azure, Google Cloud, AWS), data center is the business — they cannot give it up. For a mid-size enterprise tenant, data center may be a cost center they'd rather outsource or consolidate. Core tenants have structural reasons to stay; non-core tenants are re-leasing risks.

Alternative facility availability. Can this tenant realistically move? Hyperscale tenants in a 30-50 MW custom-built facility cannot move without 3-5 years of lead time and hundreds of millions of migration costs. Enterprise tenants in a standard colocation cage can move in 90 days. The physical switching cost is a major part of what makes data center leases sticky — quantify it for your specific tenant and space configuration.

Physical

Tier certification. Tier I through IV is the Uptime Institute standard. Tier I is basic (no redundancy, 99.671% uptime). Tier IV is fault tolerant (full redundancy, 99.995% uptime). Most institutional data center investments are Tier III or IV. Know the certified tier and the gap between certification and actual configuration.

Cooling system type and redundancy. Air-cooled CRAC/CRAH units, computer room air handlers, chilled water systems, direct liquid cooling, and immersion cooling are different technologies with different density limits and failure modes. Modern AI GPU clusters require liquid cooling — an air-cooled facility may be unable to support high-density AI workloads regardless of available power. Confirm cooling redundancy (N+1 minimum) and the maximum supported rack density (kW per rack).

Age of UPS, generators, and switchgear. Useful life for UPS batteries: 3-5 years. Generators: 20-25 years with maintenance. Switchgear: 20-30 years. A facility with aging mechanical and electrical equipment has near-term capital expenditure requirements. Budget them.

Water and sewer availability for cooling. Cooling towers require significant water supply. Evaporative cooling facilities in water-scarce areas face regulatory risk and operating cost risk. In Florida, water availability is generally strong, but verify utility agreements and confirm adequate sewer capacity for cooling discharge.

Hurricane resilience measures — Florida-specific. Data center buildings in Central Florida must meet wind load requirements for critical infrastructure. Inspect the building envelope rating, the diesel fuel storage (how many days of generator runtime are onsite?), and the flood risk. Fuel storage is often the constraint in multi-day outages — a 72-hour fuel supply is inadequate for a major storm event; 7-day minimum is preferred.

Fiber entry diversity. A data center with a single fiber entry point is vulnerable to fiber cuts — a construction crew, a vehicle accident, or a hurricane can take the building dark regardless of how much power it has. Confirm the number of independent fiber carriers, whether they enter the building on diverse physical paths (opposite sides of the building, through separate conduits), and the presence of a fiber meet-me room.

Underwriting a powered shell development

Developing a powered shell data center — a building with utility power, generators, cooling infrastructure, and structural capacity, but no interior tenant fit-out — is one of the highest-return plays in commercial real estate today. It is also one of the highest-risk. The framework below walks through the underwriting process step by step.

Step 1: Verify utility interconnection

Everything else is secondary. If you cannot get power, you have a warehouse site, not a data center site. Before spending meaningful dollars on any other analysis, get written confirmation from the utility of available capacity at the proposed interconnection point, the timeline to bring power to the site, and the cost of the interconnection study.

Interconnection waitlists at major utilities are years long. Sites with existing interconnection agreements, or sites that can step into a prior interconnection position, trade at premiums — because they solve the scarcest constraint.

Step 2: Size the project

Available MW from the utility determines project scale — not the other way around. If the utility can deliver 20 MW to your site, you build a 20 MW project. If they can deliver 100 MW in phases, you plan a phased campus. Size the project to the power commitment, not to the building footprint you want.

Rule of thumb: approximately 7,000-8,000 SF of building per MW of critical IT load for modern powered shell construction. A 20 MW project requires roughly 140,000-160,000 SF.

Step 3: Estimate development cost

Current all-in cost benchmarks for powered shell data center construction in the Sun Belt (2025-2026):

Land: $3-10M per site depending on location, size, and power availability premium
Shell construction: $100-150/SF for the building structure and envelope
Power infrastructure: $5-8M per MW for electrical infrastructure (switchgear, transformers, generators, UPS)
Cooling rough-in: included in the above range for modern designs
Soft costs and contingency: 12-15% of hard costs

These numbers compress and expand with supply chain conditions, labor markets, and project scope. Power infrastructure cost is the largest variable — treat it as a range, not a point estimate.

Step 4: Underwrite the lease

Never build merchant — that is, never start construction without a signed lease or binding letter of intent from a creditworthy tenant. Data center developments are too capital-intensive to carry vacant. The pre-lease requirement is not negotiable.

Typical pre-lease structure for a powered shell:

Tenant commits to a 10-20 year absolute NNN lease
Rent commences at shell delivery
Tenant builds out interior at its own cost
Landlord builds to agreed-upon shell specifications

Rent is typically quoted in dollars per kilowatt per month ($/kW/month). Current market rents for new powered shell in secondary Sun Belt markets: $80-120/kW/month NNN. Hyperscale tenants pay lower rates than enterprise tenants due to scale and credit.

Step 5: Calculate yield on cost

Yield on cost = Stabilized NOI / Total development cost

This is your development return before any refinancing or appreciation. Target for a powered shell development: 7.5-8.5%. Below 7.5%, you are not being compensated for development risk; above 8.5%, you likely have an exceptional site, favorable construction costs, or above-market rent.

Step 6: Sensitize on cost overruns and timing

Run at least two stress cases:

+15% construction cost: inflation, supply chain, or scope creep. How does yield on cost change?
+12 months to delivery: permitting delays, utility delays, or contractor schedule slippage. What does the carrying cost do to your returns?

Both stress cases routinely happen in data center development. Build them into your base case expectations, not your downside.

Worked example: 20 MW powered shell in Orlando

Development cost:

| Component | Amount | |-----------|--------| | Land (15 acres) | $8,000,000 | | Shell (150,000 SF at $150/SF) | $22,500,000 | | Power infrastructure (20 MW at $6M/MW) | $120,000,000 | | Soft costs and contingency (15%) | $22,500,000 | | Total development cost | $173,000,000 |

Income (pre-leased to hyperscale at $100/kW/month NNN):

Annual NOI = 20,000 kW × $100/kW/month × 12 months = $24,000,000

Returns:

| Metric | Value | |--------|-------| | Yield on cost | $24M / $173M = 13.9% | | Stabilized value at 5.75% cap rate | $24M / 0.0575 = $417,000,000 | | Development profit | $417M - $173M = $244,000,000 |

Note: these numbers are illustrative. Real projects vary widely based on power cost, land basis, lease terms, and market conditions. The yield on cost number of 13.9% is toward the high end of what current market conditions support — underwrite your specific deal from actual construction bids and executed lease terms, not benchmarks.

Red flags in data center underwriting

Walk from any deal that presents the following without a clear explanation and remediation plan:

Single utility feed with no redundancy agreement. One feed, one failure point. Institutional-grade data centers have two independent utility feeds from separate substations. A single feed is a disqualifying physical characteristic for most investors.

No N+1 generator. Without backup generation, a utility outage takes the building dark. No hyperscale tenant will accept this. If existing, it is a hard capital requirement before close.

PUE above 2.0. A PUE of 2.0 means the building uses as much power for overhead (cooling, lighting, UPS losses) as it delivers to compute equipment. This is profoundly inefficient by modern standards. Tenants running dense AI GPU clusters will not sign long-term leases in high-PUE facilities if alternatives exist.

Lease held by a subsidiary, not the parent. Verify the guarantor. A lease signed by "XYZ Data Services LLC" with no parent company guarantee is not a lease on the parent's credit. Subsidiaries can be restructured, carved out, or wound down.

Lease expiring within 5 years with no renewal option. A data center with a near-term lease expiration and no renewal optionality is a re-leasing risk. Given how difficult it is to re-tenant these assets, buyers discount aggressively for short remaining term.

Outdated cooling incapable of high-density AI workloads. Air-cooled facilities with maximum rack density of 10-15 kW per rack cannot support modern GPU deployments (40-100+ kW per rack). If the tenant mix is shifting toward AI compute, a cooling-constrained building is a structural problem, not a capital expenditure problem.

Insufficient fiber diversity. A single fiber carrier or a single physical path into the building creates connectivity risk. In a hurricane, fiber cuts are common. For any facility marketing connectivity as a feature, dual-carrier diverse-path entry is non-negotiable.

How data center due diligence differs

In conventional CRE due diligence, you inspect the building: roof, HVAC, foundation, envelope. In data center due diligence, the building skin is close to irrelevant. What matters is everything inside the electrical and mechanical rooms.

Hire a critical facilities consultant. This is not optional. A critical facilities consultant — typically a firm that designs, builds, or operates data centers — knows what to look for in generator sizing, UPS configurations, cooling architectures, and electrical systems. Do not skip this because it costs $30,000-$50,000. A missed generator redundancy problem costs multiples of that.

Review commissioning reports. When a data center is built or substantially upgraded, systems are commissioned — tested under load, often including simulated failure events. Pull all commissioning reports. They document whether systems were tested and whether they passed. Missing commissioning reports on major equipment are a red flag.

Inspect generator and UPS test records. Generators should be load-tested monthly and full-load tested annually. UPS systems have battery replacement schedules. Request at minimum three years of test records and confirm the testing was actually performed, not just self-reported.

Pull 5 years of CMMS records. A Computerized Maintenance Management System (CMMS) logs every work order, inspection, and equipment repair. Five years of CMMS history tells you whether this facility has been maintained properly or deferred maintenance is accumulating. Look for repeat failures on the same equipment — that pattern signals a systemic problem.

Verify fiber carrier agreements. Do not take "dual fiber entry" at face value. Pull the carrier agreements, confirm both are active and contractually committed, and physically verify that the paths enter through separate conduits on separate sides of the building.

What to take away

Power capacity (MW) is the primary unit of value in data center underwriting — not square footage
The utility interconnection agreement is the most important document in the deal; verify it first
Data center leases at stabilized assets typically have no early termination — confirm this before assuming passive income
Always verify the guarantor on the lease: parent company guarantee vs. subsidiary guarantee is a major credit distinction
PUE is an efficiency metric that affects tenant retention and renewal risk — target below 1.4 for AI-capable facilities
For development deals: never build merchant; target 7.5-8.5% yield on cost; sensitize on +15% cost and +12 months timing
Physical due diligence centers on mechanical and electrical systems, not the building envelope — hire a critical facilities consultant
Red flags that should stop a deal: single utility feed, no generator redundancy, subsidiary-only guarantee, cooling incapable of high-density AI workloads, PUE above 2.0
Five years of CMMS records and all commissioning reports are mandatory due diligence items — missing records are a red flag, not a paperwork issue

Next lesson: how data center cap rates are set, how they compare to other CRE asset classes, and what drives compression and expansion in the current market cycle.

Underwriting a Data Center Deal — A Step-by-Step Framework