This Is What It Takes to Get a Data Center Financed

0:00You're being sold an AI future where you're obsolete or irrelevant. That vision is wrong. At Palantir, they're building AI that helps workers and unlocks their full potential. American workers are our nation's greatest strength. AI shouldn't eliminate them. It should elevate them. Palantir is here to tell their stories. From factories to hospitals, AI is freeing people from drudgery, letting them do what humans do best. Create. Solve. Build.

0:36So, let me get this straight. Your company has data here, there, and everywhere. But your AI can't use the data because it's here, there, and everywhere? Seems like something's missing. Every business has unique data. IBM helps your AI access your data wherever it lives to change how you do business. Let's create smarter business, IBM.

1:05Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting. That's software overload. Odoo is the all-in-one platform that replaces them all. CRM, accounting, inventory, e-commerce, HR. Fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you? Try Odoo for free at odoo.com. That's odoo.com. Wells Fargo has awarded$138 million in grants to nonprofits, supporting military and veterans with housing, small business, career transition, and more over the last 10 years.

1:48It's one of the many ways Wells Fargo seeks broad impact in communities. Wells Fargo, the bank of doing. Learn more at wellsfargo.com slash say do. Support includes contributions from Wells Fargo & Company and the Wells Fargo Foundation. Bloomberg Audio Studios. Podcasts. Radio. News.

2:21Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, you know, we've obviously been doing a lot about data centers, but one thing that's sort of becoming interesting is they just seem so complicated. There are so many different moving parts, and I don't mean like technically complicated, although that's part of it, but they really are this sort of weird thing where they're a high tech thing. They have the most advanced chips, or at least some of them have the most advanced chips in the world. They're real estate plays, and we talk about securitization and so forth.

2:50And then they have to figure out all the stuff of how they're going to connect to the grid and maybe they're going to build their own power plant inside the data center, etc. There's a lot of moving parts. Yeah, there's a couple of things here. So, number one, it does seem to be a complex space. And whenever I think about how some of these things are being financed, I get that. What's the meme with the guy standing in front of the board with like all the papers and string connections? Oh, yeah, yeah, yeah, exactly. It all feels a little circular sometimes, that whole ecosystem. But the other thing is just the sheer scale of the financing requirement for doing this.

3:24So I was reading a Morgan Stanley report. I think it came out over the summer. They were forecasting$2.9 trillion of global data center spend through 2028. And just for context, total CapEx spending by all companies in the S &P 500 in 2024 was$950 billion. That's crazy. Yeah. And by the way - The numbers are mind boggling. Well, the other big question is if you actually stack that up against existing revenue from generative AI, existing revenue is like$16 billion. So there's a bit of a gap there that needs to be filled. Right. Completely correct. The other thing that strikes me as very interesting and tricky is you have these projects and put out the big capital outlay, capital commitments, et cetera.

4:05And then the timelines like, oh, when do you get connected to the grid? When does that turbine for your inside gas generator actually get delivered? maybe 2030, et cetera. So it feels like I get the impression you're dealing with very uncertain timelines. And so how you establish that in the language so everyone feels protected, like, what if you could never get connected? What if anything could happen? What are the expectations for when this actually starts to pay off? When does it pay off? What are the obligations of the tenant, et cetera? We don't really know. Anyway, I'm sure it's different.

4:35Number one. So many more questions. We're just scratching the surface. Yeah, absolutely. And, you know, there have been some interesting things happening. So So a lot of the activity has been done in the private market. But obviously, AI players and companies have a lot of different options. So they could go to securitized markets. And I think we've been seeing some CMBS and ABS deals there. Private credit, I mentioned private equity, bank lending, or they can go the public route into corporate bonds. And so I'm really curious how a lot of these players are choosing between those options. Well, I'm really excited to say we have the perfect guest, someone who is really at the intersection of sort of every one of the things that these data centers are also at the intersection, we're going to be speaking to Travis Wofford.

5:17He's a partner at the law firm Baker Botts. He is the chair of the corporate department based in Houston. He works on all of these things. He can tell us what's in the details of all these agreements. So, Travis, thank you so much for coming on Adelaide. It's great to have you here in studio. Thanks for having me. What do you give us just a quick overview of what's your role at Baker Botts? What do you focus on? What do you call it? A practice area? Is that a legal term? Yeah. So I'm a deal lawyer. I help people build, buy, finance, and sell projects and companies. And so we take multidisciplinary teams and put them together in order to actually make people's dreams a reality is the way I like to explain it.

5:56The idea is somebody comes to us with a very complex project and they need an integrated solution, legal solution to that problem. So you want to build the data center, you've got power. You need people that actually understand the air, the water, the interconnection with the fiber, the interconnection with power, the land, everything else. And then the finance layer on top of that, we provide a one-stop shop for that. Okay. So my question is, how busy are you right now? Are you just getting requests flying at you constantly? Yes, we are very busy, which is a good thing and it's the bad thing, right?

6:32Because your capacity constrained, just like your clients are. My husband is a former lawyer, so I know how bad it can be. Yes. But the good thing is they're interesting deals. It's interesting stuff to work on. It's in the news on Bloomberg as well. And that makes it fun. It seems like at Baker Botts with like the long history based in Houston and all the energy stuff. I mean, this is all sort of novel to everyone, right? Especially the generative AI data center. Like that aspect is just a couple years old. Can you talk about when there is a new thing that everyone gets excited about that maybe even a couple of years ago, no one was talking about?

7:08Now, granted, I know data centers are a lot longer than a couple of years old, but the explosion of interest, how do you build that sort of team that understands all of the dimensions so that you can provide that one-stop shop service? Yeah. So it's a really good question. And I always go back to the expression, there's nothing new under the sun. When you actually think about what we're doing, You're building a power project. You're building out a data center, the powered shell or the powered land or the like. People have been doing that before. When you're financing these, we're actually using a lot of the same financing structures.

7:40It may not be exactly the same, but it rhymes. So 10, 20 years ago, we were doing whole business securitizations of cell towers. That same securitization technology, you move forward to residential solar. And now you're moving that same thing forward to CMBS and ABS of the data centers. So they're very similar. The rating agencies are very familiar with these things. You have to look at a few different variables and understand them slightly differently. But particularly energy infrastructure and telecom infrastructure, those are two things that we've been doing for decades. Oh, walk us through the differences then between, say, you know, a cell tower ABS or, I don't you know, a solar power ABS versus a data center ABS or CMPS?

8:24Sure. So a cell tower ABS, really, when you're looking at that, you just have the tower. It's on land. You may have somebody that's coming along in order to mow the lawn around it, but they don't have much in terms of the actual equipment that's on top of the cell tower. When you have a residential solar securitization, you put the solar panel on top of somebody's roof. You're contracting the cash flows off of that. Again, on the cell tower, you're contracting the cash flows off of that. You pool those together, and then you put a bond on top of it. With a data center securitization, what you're doing there is you have the cash flow from the data center lease.

9:02You have the cash flow from other aspects of the business that may be going along with that, like related to the power and some of the additional services. You pool those. You have long-term contracted cash flows, and then a rating agency can rate those as well. But at the end of the day, you're trying to make sure that you have a special purpose vehicle that has all of the assets that it needs within it. You have a separate entity that's handling the billing and the collection, an entity that's handling the operation and maintenance of the asset. And that's supposed to be a standalone product that can move at least the five to seven years until you get to the anticipated repayment date.

9:40And often it's about a 30-year rated final maturity. So I have a question, and it's come up a couple times on previous podcasts, but you mentioned having a special purpose vehicle for this. Why does it seem that so many big tech companies who are in the AI space, who are presumably very, very cash rich and profitable, why are so many of them financing off balance sheet? They have better things to do with their money. So the return on their invested capital is much better on the tech side than it is on the infrastructure side. Infrastructure is usually low margins, but the benefit with that is it's long-term, reliable, understood assets, such as, again, if you're doing a large energy project or even the powered shell itself, it's land, it's a building, it's got the fiber connection, it's got the power connection.

10:35And that's something that can continue over a long period of time. Whereas on the tech side, they make a lot more money and have much greater margins, as we all know. Right. So this aspect of the business, which could be very profitable, but it's stable, it's very predictable. It's like, let's outsource this. Let's have some other entity house that risk. What are the risks in data center finance? When you think about the other side, not the tech companies, but the lenders to the SPV, and we'll talk about the different structures that that credit form can take. What are the risks? You know, it's a fairly stable long-term thing, but how can things go wrong?

11:10So it depends on what exactly you're financing, right? So in a securitization and ABS, what you're doing is you are financing the business of this PowerShell or turnkey solution. The tenant quality is very important. Do I have somebody that has the investment grade tenant quality or diversified pool of high credit quality tenants who can actually - Just to be clear, you're securitizing the cash flows from the data center leases. right? Yeah, so exactly. So on an ABS, it's a focus on the business of this data center. The actual lease is in the securitization and then the hard assets are in there as well.

11:48In a CMBS, you have the lease as well, but it's more focused on the mortgage. And then we have credit tenant leases as well, which are kind of directly to the tenant. That's useful. Thank you. So risks associated with securitization are usually focused on the tenant quality. They're focused on the term of the lease. How long is the lease? If you have a 10 or 15 year lease, if you have a shorter term lease, you're going to look a little bit more at, well, is this something that's going to need to be released in that timeframe? What is the rate on the lease? If it's a below market lease, it's much less likely that somebody is going to want to get a new lease and leave you.

12:26And then the facility itself, is the facility going to be able to withstand kind of technology risk over a long period of time? So how are people structuring the deals at the moment to compensate for that risk? So you have the time mismatch. You have maybe tenancy rollover risk as well. Are people like adding extra credit protection or how are they making these palatable to investors? So one is the loan to value, your advance rate. So typically, if you're looking for something that's an investment-grade securitization, you're going to have it around 40 % to 50%. The structure of the bond itself will have a rated final maturity that's much further out than the lease, maybe 25, 30 years.

13:12But you're anticipating that the full principal amount of the bond would be able to be repaid within five to seven years. But the lease itself is a 10-year lease or a 15-year lease. And then that can get re-upped for another 10 years on top of that. So when you're looking at your cash flows, the cash flows are going to support your ARD prior to even worrying about the anticipated repayment date of the bond prior to even worrying about your release. So one of the things that sort of like people tweet about and people even write about, including us, and we've talked about even this whole thing about GPU life and some of these questions regarding the long term value of the assets and people like, you know, like to claim, oh, they're not going to be as valuable long term as people think.

14:02Does this come up in your work? And like, what is what's really going on? Sure. So it depends on what the financing structure is that you're using. So the GPU life itself is more a question on a private credit story or an equity story. On the securitization side, they're more focused on the turnkey data center itself. All right. The useful life comes up a lot when you're doing the accounting, and that rolls through to the earnings per share of these public companies. You've got a useful life of a few years ago, it was three years for these GPUs. Now, some of them are using six years. If you're doing straight line amortization, over three years, you've taken about a third off.

14:42Over six years, it's obviously less than that. And so you have much less amortization depreciation expense on it. That helps your earnings per share.

15:05Silicon Valley is selling you a future where you're obsolete, or worse, identical. At Palantir, they're witnessing something different and revolutionary, From re-industrializing the nation's defense base to shipyard workers building faster and frontline workers boosting productivity, AI is transforming work across the nation. AI is not replacing American workers or flattening them into conformity. It's unleashing what makes each one irreplaceable. Their judgment, their craft, their creativity. When American workers become more powerfully themselves, they own the future. Palantir, making Americans irreplaceable.

16:12HR, and more. No more app overload. No more juggling logins. Just one seamless system that makes work easier. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process so you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Maybe you already know about naked short selling.

16:51Maybe you've personally shorted stocks yourself, but do you know about the time short sellers ruined the Super Bowl basically? For me, I was a little late, but red flags went up like, what is going on? This is really scary. At Planet Money, we get the story behind the money to explain how money works. Listen on the NPR app or wherever you get your podcasts. What's your impression of how private credit lenders have been handling the GPU aging problem so far? Like, are they conscious of it or are people still kind of basing a lot of their expected cash flows off of GPUs that last longer because they were previously being used in cloud computing or something like that?

17:31Yeah, so they're very aware of it, particularly because if you look at the new, NVIDIA had the H100s and the H200s that had come out. Then it was the Blackwell, the B100s, 200s, and now Rubin's going to come after that, right? So every two to three years, you have these new chipsets. And it's almost like, do I want to be financing these laptops that you've got in front of me for six years or seven years? What's the replacement cycle on that? So when do I need to get repaid on my debt? The interesting part that comes into it is it's not just one laptop. We're talking about entire data centers full of these things, and that's in the tens, hundreds of millions of dollars.

18:17So how are you actually going to get your cash flow back when maybe those aren't going to be used for training the same way? The reality, though, is the useful life of these and the economic life is not just the that initial usage. You can use it for other things. So starting out with training, needing to get training done as quickly as possible. If the data center is well located in Virginia or another tier one location, maybe there's inference if it's close to a city or other location. And then for the CPUs, data centers that have those, you can use them for compute and analytics and other technologies and use cases that maybe that wasn't what you originally underwrote, but you knew that that was coming down the line.

19:06Since you mentioned Virginia, can you talk about where we are in 2025 with data center siting and picking locations? So I know that there's tons around Northern Virginia, and I know that there are some huge projects in the middle of nowhere in Texas where they're not going to offend any neighbors or whatever, et cetera. But what are the big themes that companies are thinking about right now when they think about location? Yeah. So one of the great things about Virginia is connectivity to the subsea cables. So getting to Europe, getting to Africa, getting to other locations and the rest of the United States.

19:40There's a great regulatory environment there in terms of power, in terms of actually building out the infrastructure there and other data centers so that you can have, I hate to use the word co-located, but connectivity within other data centers makes it very attractive. The problem is it's saturated. It's a very saturated market. And so if you want to build that next large giant data center and you need power or you need water or you need other parts of the infrastructure and you need to do it quickly, you're often going to look elsewhere. That's one of the reasons that Texas and ERCOT have become so attractive.

20:18Yeah. So one of the things we hear constantly is that chips and financing are not necessarily the big choke points for doing this. It's more the power. And I guess I'm curious, is it really a power shortage problem or is it more the distribution of power is not in the places where these data centers want to be because of convenience like co-location? You can say both as well. Yeah, it definitely is both. I will say, though, that with power, it's interconnection. It's getting that actual permission both for the load. So the data center itself is drawing power from the grid and for the generation.

20:55And those are two separate interconnections on these larger facilities that you're going to be getting at relatively the same time. And if you can't have both, then you're probably not going to be able to support such a large facility. So on the generation side, if you're trying to get interconnection, you go through a long process, potentially with FERC and with your ISO or RTO, you know, ERCOT if you're in Texas to do typically at this scale, like the large data center scale, like a five-year process in order to get that generation approved and interconnected. And it's... That's just the approval, five years, and then you have to actually do the connection.

21:37Yeah. And then you got to build it. Wow. The fun part about that is that timeline, a lot of people walk in and they think, oh, I've heard that it's going to be 18 to 36 months in order for me to get this done. And then a month or two goes by and they get a new date and it's been pushed out. And then a few months go by and they get a new date and it's been pushed out. And one of the analogies we use is like you're waiting in the airport to get on the plane. And they call, I fly United all the time. They're like, oh, it's global services. Okay, global services go forward. And now armed services.

22:11Okay, armed services. And people with young children. And you just you realize that that first class ticket that has, you know, boarding group one doesn't mean that you're getting on first. Well, you all get there at the same time, at least. This is how I because, you know, I don't like waiting there either. But I was like, you know what I'm getting? I'm going to arrive at the destination the same as all these people with children and everything. So it's hot. Anyway, you know, there was a story recently, Corweave, one of the big neocloud companies sort of lowered a growth forecast because of a delay in a third party data center project, which is exactly sort of what you're talking about.

22:45How does that affect the financing, this uncertainty of when you can actually plug these things in or when they're going to get approved? Because that sounds very frustrating and time is money. And so how does that interact with the credit component? Yeah. So you kind of have three categories in the timeline of one of these projects. You have your development capital that's often equity funded. You have your construction capital. So you get a big construction loan once you've got your permits and your power. And then after that's been completed, then you do your takeout financing. That may be the securitization and the like.

23:20has the regulatory, I guess, political environment, does it feel like it's significantly changed in the last six months? So you talk about like, you know, very few people were talking about water. My impression is that the water component specifically is very overrated based on things I've read. But it obviously is a matter of, you know, the public is really concerned about water. The public is clearly concerned about electricity prices. People are showing up to town halls to protest or to voice their opposition to new data center projects in the areas where they live. Does it feel like the environment today when we're talking in December 2025 is meaningfully different than it was at the start of the year in terms of public awareness of all this stuff?

23:59So politically, absolutely. Right. I think that the community organizers and there are a lot of organizations that kind of make their money based on outrage around these types of things. they've realized that this is a great opportunity for them. And if you look at the sustainability reports of a lot of the hyperscalers and others, they talk about being water positive. It doesn't mean that they're just happy about water. It means that they're actually trying to have a positive impact and they'll start putting money into the watersheds and the like and water replacement. And that actually is really meaningful as a part of the story that I think a lot of the folks that are thinking about the political aspect of this don't realize, which is when these data centers come in and the balance sheets of these hyperscalers come into an area that's largely been overlooked.

24:44You know, it's that New Yorker magazine cover where, you know, you're looking from New York. The East River, Manhattan, and then it's California, right? Exactly. A lot of these areas are underinvested, particularly in infrastructure. And a hyperscaler comes in and starts saying, well, you know, this water treatment facility isn't sufficient. We need to build it out. That's very meaningful. Part of that interconnection study that we're doing, you're looking at the electric transmission of the area. That is very meaningful. But water for the developer, it's not a problem unless it's actually a problem.

25:18What I mean by that is, we have a lawyer on, several lawyers on staff that focus on water. And one of them, for example, knows all 98 water districts in Texas and knows which one you are supposed to go to if you want to get your project done quickly and which one to avoid. That's something that if you mess it up, could really affect your timeline. Wait, now I'm really curious, what would make one water destination more attractive versus the one you want to avoid? Is it just regulatory hurdles or is it like quality of the water? So it's not quality of the water. You know, if it's potable water, it's potable water.