The modern data center is a key component of the modern business. Strategies, go-to market initiatives, and entire organizational goals are being built around the capabilities of IT. Throughout all of this, we’re seeing growing demand around the data center and all of its supporting resources.
Today, organizations are absolutely looking at new ways to deliver data center resources to their users. However, what are the options? Do you buy, lease, or build? Consider this – At the end of February, the Financial Accounting Standards Board (FASB) released a new rule that will require companies to report operating leases on the balance sheet. The rule will affect all leases that are longer than one year -everything from real estate to vehicles to office equipment. But for most companies, real estate is where the dollars are.
According to the Wall Street Journal, real estate leases account for roughly 60% of the dollar value of the average Fortune 1000 company’s lease portfolio.
Some of those real estate leases are for data centers, which tend to be much higher value per square foot than other real estate. A growing percentage of organizations colocate their data center, which almost always means a 5, 10, or even 15-year lease agreement. In a colocation arrangement, you own and control your servers while the third-party provider operates and maintains the data center.
Overall, the colocation market is expected to grow from $25.70 billion in 2015 to $54.13 billion in 2020, according to research firm MarketsandMarkets; that’s a compound annual growth rate of 16.1%. In other words, when it comes to putting leases on the balance sheet, data center leases in particular will have a noticeable impact.
Still, for some organizations, putting the liability on the balance sheet is a “lesser evil” than recording it as an operating expense, which hits EBITDA. Regardless, most controllers/treasurers use the buy v. lease decision as a way to manage their financial reporting. The new FASB ruling could upend those calculations, because all long-term leases will end up on the balance sheet while the income statement will continue as it was before the change.
However – there is a silver lining. In this whitepaper from Aligned Energy, we learn that when it comes to the data center, a wide range of factors, many of which are not financial, influences the build v. buy decision. The new lease accounting rules could affect that decision-making, perhaps tipping the scales back in favor of owned data centers for some companies. But in most cases, companies that would have collocated (i.e., leased) their data center will continue to do so.
With that in mind – there are two critical questions to ask, or have your real estate team ask, as you’re negotiating new colocation contracts.
- What Is the Initial Lease Obligation I Have to Book on The Balance Sheet?
- How Can I Mitigate Both the Risk Of Future Capacity Constraint And The Risk Of Over-Provisioning?
In today’s data center dependent world, responsible use of financial resources has always been a top priority for the CFO. But the use of financial resources in lease agreements is brought into focus by the new FASB lease accounting changes. CEOs, boards, and investors will be looking to see if you’re making the best use of lease agreements to minimize impact to the balance sheet – and the business. And, this paper will help you answer those questions to create the best type of data center deployment model. Download this whitepaper today to learn how to take your ecosystem to the next evolutionary state and allow you to be in complete control of your data center.
Data Center Frontier is edited by Rich Miller, the data center industry’s most experienced journalist. For more than 15 years, Rich has profiled the key role played by data centers in the Internet revolution.
Great Article! I should stress however, that based on the fact that the companies the companies do not have the right to direct use of the collocation datacenters, these may not qualify as leases, and would not require capitalization on the balance sheet.
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