Background
AI has fundamentally changed the economics of data centers. What was once a relatively standardized real estate asset class has evolved into one of the most capital-intensive, infrastructure-driven investment categories in the global economy. As AI workloads accelerate, traditional valuation frameworks are being pushed to their limits, requiring investors, operators and tax authorities to rethink how value is determined.
Since the launch of large-scale AI models in late 2022, demand for computing capacity has surged. Developers are now prioritizing data centers over nearly every other commercial asset type, and planned projects routinely exceed $1 billion in total cost.
Modern AI data centers bear little resemblance to their legacy counterparts. Historic facilities were typically under 100 megawatts, grid-powered, air-cooled and relatively standardized. Today’s AI data centers often exceed 1 gigawatt in planned capacity, are bespoke to preleased hyperscale tenants, rely on on-site power generation and pollution control equipment and incorporate advanced liquid or immersion cooling systems.
Relevant Approaches to Value
Historically, the standardization of legacy data centers allowed appraisers to comfortably rely on all three approaches to value: cost, income and sales comparison. Today’s valuation of AI data center facilities leans heavily toward the cost and income approaches and less toward market comparables that differ significantly in scope and scale. In the cost approach, replacement cost analyses must balance the higher-cost specialized infrastructure against value-in-exchange principles, where market participants may balk at paying full price for uncommon facility characteristics. In the income approach, the shift to rent capitalization using dollars per kilowatt per month has been underway for years, with declining rents evident for larger, power-hungry tenants (aka the Costco discount). Unfortunately, many of the rents for gigawatt-level facilities are locked away in confidential prelease agreements, leaving appraisers to extrapolate, for example, 10 megawatts of rent in a primary market to 1,000 megawatts of rent in the middle of nowhere.
The Seven Factors
These are the most common factors that are driving changes in AI data center facility valuation:
- Reliability: Higher uptime tiers require exponentially more infrastructure investment but command premium rents.
- Efficiency: Power usage effectiveness is a critical measure because power is the single largest operating expense for most data centers.
- Density: AI workloads are pushing rack densities toward levels that exceed the limits of traditional air cooling.
- Scalability: Facilities capable of supporting high‑density, contiguous expansion are rare and highly valued.
- Connectivity: Facilities have historically preferred access to strong, redundant fiber interconnectivity, a robust labor pool and grid access. As facilities grow in scale, they push development into secondary and tertiary markets, where many of these needs are pushed aside in favor of …
- Power and Water Availability: This is the No. 1 value driver in today’s market. Access to power and sustainable water solutions increasingly dictates where data centers can be built at all. As Bill Parcells would say, “The best ability is availability.”
Tax Implications
Shorter‑lived fixtures now represent a larger share of total facility cost, and their useful lives are shrinking due to rapid technological change. This convergence leads to a “double whammy” of dramatically shorter overall useful lives for these facilities. These changes have massive implications on not only federal tax (cost segregation) but also property tax (depreciation schedules, income projections and capitalization rate studies).
Additionally, the incorporation of power in these facilities opens the door to property tax exemptions for pollution control, which offers significant ongoing tax savings to the owner for the life of the facility.
Summary
Kroll is uniquely geared to help operators and investors navigate this valuation storm. We are the market leader in advising and representing large, complex, energy-intensive properties on tax matters in the energy, communications and transportation sectors. We can meet the moment and support the valuation impacts facing these megaprojects.
