datacenters 2012

09/03/2012

Thomas CARBONNIER, Business & Tax Lawyer

EQUITY AVOCATS – Lawyers Firm 17 rue du dragon - 75006 PARIS (FRANCE)

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DATACENTERS

A real estate asset now atypical … … the future of tomorrow ?

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The establishment and development of the French subsidiary of a major global real estate fund manager will be presented through financial simulations (I ). Then the project “opportunistic fund”

with bank debt at 80 % in order to implement a risky real estate project but at the edge of technology that would be, to date, unique in FRANCE (II ).

I - FINANCIAL SIMULATIONS BY TYPE OF FUND

Financial simulations are presented below to find out the minimum required rate of return for real estate investments and meet the objective of profitability expected in the hypotheses: "core, value added, and opportunistic funds". Article 14 of the fourth supplementary budget for 2011 provides that companies which have a turnover that excess 250 million euros a year will be subject to an exceptional increase of 5% of corporation tax. This increase was due to the years ending between December 31, 2011 and December 30, 2013.

For this project, we will consider that this increase only affects the opportunistic funds, only funds that can generate such a turnover.

It is also considered the contribution of social enterprises in calculating the corporate tax rate under 3.3% of the SI by section 235 ZC of the French Tax Code. A turnover of over € 7,670,000 is required. It is likely to be generated by all funds.

II - THE CHOICE OF INVESTMENT STRUCTURE AND CORPORA TE OF THE OPPORTUNISTIC FUND

If it was usual to structure investment through dedicated REITs exempt from corporation tax, the supplementary budget of 2011 has considerably weakened the fiscal attractiveness of these. Therefore the investment will be realized through a different rent structure (2). However, the distribution and motivations are presented previously (1).

1 - REJECTION OF TRADITIONNAL REAL ESTATE ASSETS FO R THE BENEFIT OF MODULAR DATACENTER

As the market cycle is now very high, the risk of market downturn is real. The current economic crisis is not likely to promote market development of offices and shops. As the housing market, profitability is very low so unattractive. Growth prospects are uncertain. However, on the side of IT, revolutions follow one another and a new era of choice for businesses has begun. Our discussions or communications needs are growing at an exponential rate. More than a trend, it is a fundamental shift. While it took nearly 38 years for radio to reach an audience of 50 million people, only 4 years for internet, facebook for 2 years and 14 days ... for google apps have been necessary!

CORE VALUE ADDED OPPORTUNISTIC Debt 0 0,4000 0,6000 0,8000 Equity 1,0000 0,6000 0,4000 0,2000 Debt financing 0,0000 0,4000 0,6000 0,8000 Cost of equity 0,0800 0,0800 0,1200 0,1600 Cost of debt 0,0450 0,0450 0,0500 0,0550 Rate of corporation tax 0,3443 0,3443 0,3443 0,3960 WACC 8,00% 5,98% 6,77% 5,86%

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The share of the digital economy in the French GDP is 6%, against 13% in the U.S. and 17% in Korea. Between 2000 and 2004, ICT contributed nearly 50% to productivity growth in the European Union. The digital economy now represents over 25% of global growth and represents 30% before 5 years.

The need for data center computing capacity increases so in a drastic way to meet those new needs (1). The processors are more powerful and the arrival of new technologies such as High Density, Virtualization, Cloud-Computing, the SaaS (2) or VoIP mean that today the vast majority of data centers is obsolete. If the cloud computing wasn't able to not fulfill all its promises, other technologies will come into growth areas.

(1) Source : Gartner

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The real estate market data center is both unusual and very complex. It seems necessary to define what a datacenter is (1.1) before to present a panorama of different existing business model (1.2) and the state of competition (1.3). Given those elements, datacenter construction project at the cutting edge of technology will be exposed (1.4). If the intellectual effort to understand that atypical real estate market is undeniable, at a time when rental yields of traditional assets are falling, this effort is needed to anticipate what might be the future of corporate real estate (1.5). 1.1 – DEFINITION AND SEGMENTATION OF DATACENTERS

We can define datacenters as follows:

• A concentration of resources (servers + disks + network) in a dedicated building; • A technical infrastructure to ensure that continuity of power supply, cooling and telecommunications access to these resources are always available; • A building incorporating specialized technical infrastructure, the computer room and ensuring the security of the site; • A building located near access points to very high electrical power and very high bandwidth telecommunication.

(2)

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These resources will thus ensure a very high availability, and in a secure environment, hosting critical software applications for very large companies. Datacenters are designed on two main criteria that are high availability for applications that never stop and energy efficiency to minimize energy bill and carbon footprint of this activity. The datacenters are classified by the level of availability of I with little redundancy of equipment, with multiple redundancy to IV equipment for maximum flexibility of operation. 1.2 - THE BUSINESS MODEL OF HOSTING

This hosting market has grown remarkably in recent years, an overview is needed. Hosts-rental companies offering services on surfaces and energy supplies are in a market that has seen a strong concentration:

• the four world leaders are Equinix, Global Switch, Telecity and Interxion; • the average load rate of these players is around 85%.

Hosting companies optimize occupancy rate of their centers:

• The investment decision is taken when 50% of their capacities are engaged; • The occupancy rate of 80% is reached in three years.

The services provided by such hosters are:

• a surface powered, chilled, watered and secured by telecom operators; • The client remains the owner of hosted material; • a third party provider or the customer himself supervises and exploits computer equipment; • a density of 1 to 2 kVA [Kilos Volt Amper] by full rack (5) on average, even longer in some of high-density centers, is proposed; • an acceptable level of confidentiality is ensured from when customer is the only in the room;

Billing is done as follows (prices are from May 2009):

• an entrance fee (setup fees) is payable to each rental of new surface (~ 1900 € / Rack 2kVA);

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• a monthly rent does not include electricity and telecom costs (~ 300 € / Rack / month for rent for a 2 kVA rack).

Lease contracts regulated by the Civil Code have duration of 3 to 10 years with an option to exit at age 5. Terms of price revisions are in the contracts and may be based on evolutions of Syntec index or Construction Cost Index. The Syntec index is preferable because of the variations observed over a long period.

1.3 - TYPES OF HOSTING Starting from the simply providing to surfaces managed to go up to value-added services provided to the application layer, we can clearly distinguish several levels of market players:

• hosters "dry" are mainly focused on the leasing of space managed with variable characteristics. May be mentioned here InterXion, Equinix, Telecity Redbus, Global Switch and others; • hosters such as IBM, HP, Orange Business Services, Accenture, Atos-Origin and Cap Gemini, which are capable of the previous layer to provide additional layers of services related to complete systems (mainframe, Unix, etc.) applications (SAP-related services, accounting, Oracle financials) or models to support (help desk, please, extended hours).

According to Markess International, a perspective of market segment, it may be noted that the actors are quite compartmentalized: Atos-Origin will be reluctant to provide accommodations unlike pure Equinix. It is important also to mention corporations who appear increasingly as challengers, in that they allow the user to stop using its datacenter. These companies have offers which are based on the model of "Cloud computing" to provide Internet services falling into either of the following categories:

• The hosting "platform as a service" offering lodging virtual machine in the world x-86 charged by the hour, for example: Amazon EC2 and his offer is typical of this evolution; • The hosts' software as a service "offering online access to applications: Google Apps or Salesforce.com are illustrations of these offers. Such companies should play an increasing role in the coming years.

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1.4 - CONSTRUCTION OF A DATACENTER IV MODULAR To choose their data center, firms focus connectivity, physical security, building characteristics, the company's financial stability, etc. The project will focus on a modular datacenter Tiers IV to ensure the sustainability of investment. In a non-modular data center, electrical equipment and cooling system with circulation spaces leaves about 50% of surface to computer rooms. Even within these rooms, accessibility requirements and ventilation usually divide again by 2 to 3.5 from the land on which servers. The modular data center will be favored because of its delivery time is only three months as against 12 to 18 months for a third datacenter tiers III. It will also be due to its cost which, in reported m², is less than a non-modular datacenter. The cost of each module HP 240a (delivered in Europe from 2012) (3) is approximately $ 8 million or about 6.18M€ for a capacity equal to that of a non-modular data center 929 m² (9600 square feet). It is not considered the cost of land. The filling ratio of this data center is expected to reach an occupancy rate of 90% through its Power Usage Effectiveness (PUE) of 1.05 only! (4) To date, only the HP POD modules 240a offer such PUE. No module developed by HP's competitors offer such performances!

(3)

(4)

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The geographic location of the construction of the data center will be out of danger and close to the fiber optic networks and electricity. The data center will be insured against financial loss caused to tenants in case of occurrence of such risks. To reduce the need for internal cooling, a green roof membrane will be implemented. With this upper layer, the temperature under roof is decreased from 2 to 5° C. In winter, the cold outdoors will be used for internal cooling. 1.5 ESTIMATED PROFITABILITY OF THE FUND OPPORTUNIST IC The filling rate of the data center is progressive and may not exceed 90%. The Syntec index, generally used for the indexation of rents particularly in datacenters, is not included. The rapid obsolescence does not allow capitalizing rental income to determine the capital gain on the sale of the building. This business model is very different from other types of real estate: it offers very high rental income that offset a sharp depreciation, year after year, equipment. The fifth year, the property is sold with a profit. The sale price is based on a rental yield of 8%, current yield of a warehouse. In contrast, the HP POD 240a modules are sold to their net book value.

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The power per rack full of 69 kVA will help address the growing need for power to accommodate further technologies. To date, no data centers in France provide such possibilities (max 5kVA, 2kWA average per full rack)! In this example, you’ve invested 100 M€

and after 5 years you get 929 M€ ! This is an example of what EQUITY AVOCATS can propose as solution to help you to increase your revenues.

CHIFFRES CLEFS

Number HP POD

Value HT HP POD

240a

Value HT Building + Land

Total Value HT

66 488 521 928€ 9 212 500 € 500 000 000 €

Surface HP POD 240a

Surface total (with buil-

ding)

Number of Rack

Power per rack

8 861 m² 22 000 m² 2 904 69,12 kVA Annual income Operating costs per m²

124 416 €/an per Rack de 69,12 kVA in HP POD 240a ! 300€/month per rack 2kVA

€ 7.2 million to 5 000m ² or € 1,440 / m² (third datacenter III) + € 427 029 by HP POD 240a (charged to the tenant in proportion to the leased space). This cost includes:

- Energy-supply: operating configuration average of 1 kW / m² - Salaries charged: skilled human resources needed to run 5000 m needing to work full-time equivalent of 100 (half in general services, half in technical computing) - Telecom costs: two leased lines of 10 Gbps

Setup Fees 65 664 € (HP POD : 69,12kVA) 1 900€ in full rack 2kVA

Depreciation periods

HP POD 240a : 10 ans Bâtiment construit : 30 ans

Examples de PUE bank debt

HP POD 240a : 1,05-1,15 Sun BlackBox : 1,13-1,21 Module IO : 1,17 Cisco CDC : 1,25 Google : 1,11-1,16 Amazon web services : 1,45

Bullet repayment of the loan Casualty Insurance natural

Insurance is required to cover certain types of risks that could undermine the service from the datacenter. The server shutdown can cause huge financial harm to tenants.

Power Equivalent area in tiers III 69kVA for a 50U rack against 10 kVA for a datacenter tiers III!

929 m² x number 240a HP POD 66 HP POD datacenter equivalent to a tiers III of 61 314m ² with a power per rack 5kVA Surface HP POD 240a

134,26 m² = 9,8 m x 13,7 m Cost effective area into tiers III

Land in Paris (IdF)

61,374 square meters of data center cost about tiers III 613 M € instead of 488 M€, is a price difference of over 25%!

27 500 m² ; 55 € HT / m² ; land use coefficient of 0,8 ; price HT = 1 512 500 €

Building cost to build (HT)

Construction cost: 350 € / m² Price: € 7,700,000

ANNUAL RETURN IN EUROS HT HC

Ye a r

filling rate

Income Price sale of the building

Price sale of the POD 240a modules

Operating costs (7)

Debt payment Insurance premium

Net cash flow discounted at the

WACC rental setup fees

1 2 3 4 5

50% 65% 80% 90% 90%

180 652 032 234 847 642 270 978 048 325 173 658 325 173 658

95 344 128 28 603 238 19 068 826 28 603 238

-

- - - -

12 375 000

- - - -

244 260 964

15 840 000 20 592 000 23 760 000 28 512 000 28 512 000

22 000 000 22 000 000 22 000 000 22 000 000 22 000 000

6 322 821 8 219 667 9 484 232

11 381 078 11 381 078

236 328 169 181 500 790 213 417 079 217 047 830 76 430 712

Total Discounted Cash Flow Net 929 362 868

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2 - THE USE OF A SOPARFI AND A TAX CONSOLIDATION First, a financial holding company (SOPARFI) will be established in Luxembourg. It will aim to ensure a reduction of tax burden in France through the use of management fees. For this purpose, a transfer pricing documentation will be implemented. On the French side, holding a SAS will be implemented to optimize the tax LBO. A SAS daughter will be created per investor. To optimize the taxation applicable to this project, every SAS benefit from the research tax credit (CIR) and will benefit from a tax consolidation. The CIR will seek to find how to create, like the Google project, a modular datacenter on a boat to use ocean waves to generate a portion of the electricity used by the data center from Pelamis converters. The ocean water would also serve to partially cool the servers. This floating datacenter would be based at 3 or 7 nautical miles from the coast over deep bottoms from 50 to 70 meters. This approach would create a datacenter with a capacity of 50-100 MW.

datacenters 2012

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