Cost Segregation for Data Centers (Server Colocation Facilities)

Data center colocation facilities are a type of data center where multiple telecommunications or network service providers locate their connections adjacent to each other’s networks with a minimum of cost and complexity. This allows the companies to avoid building the infrastructure to house the servers within their own existing properties. Additional advantages are that they provide high security, redundant systems, and highly trained IT staffs to monitor the servers. Colocation is popular because of the time and cost savings a company can realize as result of using shared data center infrastructure. Significant benefits of scale (large power and mechanical systems) result in large colocation facilities, often 50,000 to 100,000 square feet.

High end facilities that Source Advisors has worked featured walls armored with Kevlar lining, interior and exterior video surveillance, card key and biometric access, and manually monitored man traps with bulletproof glass. The redundant systems included a half dozen emergency generators and on site fuel tanks with enough fuel to last at least a week. The fuel tanks were surrounded by bulletproof and crash resistant walls. The colocation spaces are often raised on pedestal access flooring with a cooling system and power supply, for the servers, running beneath. The colocation spaces were also serviced with fire/smoke detection systems, dry fire suppression systems, and humidity control.

Accelerating the depreciation on 30% – 50% of the capitalized costs is typical, depending on the number of redundant systems, level of security, cooling needs, and extent of the site improvements.
Case Study – Garden Style Apartment Complex

Case Study – Data Center

Facts

The subject property is a, relatively small, two story data center colocation facility that was built in an existing structure. The construction costs Source Advisors examined was $7,100,000 and it was placed-in-service in 2015. The interior finish out was 25,000 square feet. It is currently leased to five tenants with two vacant spaces.

Interior finishes consist of vinyl tile, carpet, ceramic tile, drywall partitions finished with paint, and window coverings. Because data centers house large amounts of computer equipment, mainly servers, they require significant electrical backup; therefore, each tenant has an emergency generator for a total cost exceeding $500,000. To cool all the computer equipment, each tenant space has multiple computer air conditioner units, varying in size and cooling type totaling more than $1,800,000. An ANSUL FM-200 Clean Agent Fire Suppression System was installed in the colocation spaces. Also, cable trays are used to hold the large quantities of wires.

Site improvements include asphalt paving, concrete paving, site fencing, brick paving, and landscaping.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the actual construction costs, in the form of contractor invoices, and allocated the cost detail to various trades and building components. They conducted detailed estimates from the construction drawings and augmented those findings with additional estimates performed during the site visit of the property. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life

Result

Source Advisors reclassified 5% or $355,000 as 15-year land improvements and 44% or $3,124,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the scope being limited to only the new construction and did not include the building shell. Because this property is new construction and was placed-in-service in 2015, it qualifies for 50% bonus depreciation.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years