Why Data Center Valuation Remains a Point of Contention

We have written before about the complexities associated with data center valuation for assessment purposes. While the issue is complex, it isn’t unsolvable. Thankfully, legislators in Virginia are moving in the right direction to lift this shroud of confusion. Lawmakers are currently shepherding two new bills through the 2022 General Assembly. And if you wonder why Virginia is a battleground state over data center taxation, it’s because a majority of the world’s internet traffic travels through data centers in Northern Virginia. This means the state continues to be the leading data center market globally.

To sum up the taxation issue, the difficulty in valuing data centers (especially for property tax assessment purposes) is that the inherent investment value of a data center comes from the income streams they generate from tenants or users. Those leases/contracts and the resulting income often include more than just renting physical space in the steel and concrete shell of the data center itself. The income streams often capture value intrinsic to the data centers that include power, cooling, security, and associated equipment. The issue is not that investors struggle to properly value those income streams as a going concern, it is that taxing jurisdictions must properly separate various components of the value for tax purposes to avoid double taxation and over-assessment.

In Virginia, there are separate tax rates for real property and business tangible personal property. Even with different formal and implied depreciation schedules for different types of personal property, this means that the taxation structure as it stands now in Virginia still doesn’t fit for data centers. When assessors are required to legally separate the value of all of these different components for tax purposes for a data center whose overall worth (e.g., going concern) cannot easily be segmented, it leads to confusion, excessive taxation, double taxation, and uncertainty in the market. All of which are bad for business.

Lawmakers in Virginia, with the support of various data center industry advocates, are attempting to address this friction and uncertainty by establishing standardized approaches to the valuation of fixtures in the data centers. Fixtures in this case are defined as all fixtures and equipment in data centers except computer equipment, security, and safety systems. The bills also exclude other types of tangible personal property and do not speak to the most confounding piece of data center valuation, which is how to separate out the lease/contract income for the real property only.

Bottom line? Lawmakers should be applauded for clarifying one small component of how a data center should be valued, but they still leave a broad spectrum of interpretation related to the real estate or real property. Until lawmakers standardize the valuation for all taxable pieces of data centers, double taxation and excessive assessments will still plague Virginia’s golden goose.