Incentives for Sale
The predictable Arizona weather may not be for everyone, but there’s at least one group that can appreciate it for what it is — data center owners.
Last September, Arizona’s House Bill 2009 went into effect, offering data center owners tax incentives for investing in the state. Twelve months later, there hasn’t been a rush, per se, to construct data centers. However, experts believe that with rising real estate costs and good PR, Arizona’s incentives will catch on.
“The incentives have not been a direct catalyst for new data center leasing demand in multi-tenant facilities over the past year,” says Cushman & Wakefield Senior Director Don Rodie. “However, the new incentives do keep Arizona competitive for companies seeking significant power load requirements and single-tenant data center requirements…the incentives also make Phoenix attractive to new, third-party market entrants and…existing third-party operators like CyrusOne and Digital Realty Trust.”
San Francisco, Calif.-based, Digital Realty established its Arizona presence in 2006. Though it has not built in Arizona since the tax incentives were established in 2013, its Vice President of Global Marketing, Pamela Garibaldi, says customers and companies in the East, West and Midwest have expressed interest in outsourcing data centers to Arizona, particularly now with tax incentives in the mix.
The incentives exempt equipment purchased by a qualified tenant or data center owner from local and state sales tax. There are also savings opportunities within Arizona’s property tax structure that, through accelerated depreciation, allows a five-year write-off on equipment, says Russell Smoldon, of B3 Strategies, an affiliate of Jennings, Strouss and Salmon Law Firm.
There is a 10-year exemption for investing $50M in urban Arizona and $25M in rural Arizona. Owners can also get a 20-year tax break for building a sustainable center or by retrofitting a building that has been vacant for six months. This is, for instance, what Digital Realty did with the old Arizona Republic print building on Van Buren Road in downtown Phoenix. Garibaldi says the tax incentive program can create savings of 90 percent or more attributable to the purchase and use of data center equipment.
“With real estate costs rising and in nearly every tech hub worldwide, data center providers like Digital Realty want to be able to offer alternative, less expensive locations, like Arizona, to clients,” she says. “Arizona also has a lower risk of experiencing outages caused by natural disasters. Finally, we see customers selecting Arizona as their data center home, in particular, our Chandler facility, because of its close proximity to power sources.”
While not many data center owners have rushed to Arizona in the last 18 months for the tax exemptions, Smoldon agrees with Rodie, who believes Arizona has gained a competitive advantage over its main competitors — Oregon, Nevada, Ohio, Virginia and, potentially, Texas. “Arizona’s incentives are competitive – but not the best or the worst,” says Rodie.
“There are multiple Fortune 500 companies that have expressed interest in locating a data center here and several are looking at sites,” says Smoldon.