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Data Center Boom in Dallas

by Kris Miller, Dallas, November 2018

 

The Dallas area data center market has become one of the largest in the nation. It is home to 2.99 million square feet of commissioned data center space, according to market research from datacenterHawk. That makes Dallas the third-largest market for data center capacity in the nation. In square footage, Dallas is the second-largest market, slightly ahead of Silicon Valley.

 

With the boom market, there's a new focus on property taxes, which tend to be the highest recurring expense of owning a data center.

 

Regional Growth

 

Initial growth in the Dallas area data center market began in downtown Dallas, in part because of the district’s telecommunication infrastructure, according to the report. Now there are several submarkets leading the growth. They include wholesale data centers in the Telecom Corridor of Richardson, Garland, and other northern suburbs. To the West, Facebook is the crowning jewel of a growing cluster of data centers in Fort Worth.

 

The data center market has grown steadily over the past five years, and although this growth often originates from companies that already have a presence in the area, many businesses are also entering the market due to the favorable business environment. There are more than 100,000 businesses in the Dallas/Fort Worth Metroplex, which bodes well for co-location demand.

 

Valuation Challenges

 

The ever-changing market makes the valuation of data centers for property tax purposes difficult. Typically, jurisdictions assess data centers using a replacement cost estimate, less depreciation. However, this will often capture intangible expenses that aren't subject to ad valorem taxes. In addition, once the cost is established, it does not mean the property could be resold at the same price. The data center being constructed today will likely not be the preferred design ten years from now.

 

Unlike most types of commercial property, there are some asset types in data centers that depreciate rapidly or suffer from obsolescence and tend to sell for less than the initial construction cost. Assessors often understate depreciation because the schedules commonly used lack categories for data centers. It's a mistake to apply depreciation factors designed for other property types such as light industrial or warehouses because they may have much longer economic lives.

 

In addition to depreciation issues, data centers are routinely over assessed by misclassifying personal property such as underground cables, fire suppression, and cooling systems as real property. Taxing the value of the entire going concern leads to the double taxation of personal property.

 

Data center owners should regularly evaluate their tax assessments for ways to reduce their property tax liability. Given the magnitude of the tax expense associated with these facilities, it's part of the annual operating expense that deserves attention.