Landlords, tenant quality, municipal pushback and electricity costs are increasingly factoring into underwriting strategies for data center hardware as equipment lenders look to mitigate risk.  

Amid the data center boom, many lenders have financed GPUs and CPUs with little hesitation over the past year to capitalize on surging CapEx spending. 

But now context matters more than ever, Riley Thompson, vice president and head of direct sales at Mitsubishi HC Capital America, told Equipment Finance News, a sister publication of FinAi News.

“These days, we want to know where you’re putting [the equipment] and what data center you’re putting them in,” he said. “How well is it capitalized? What are the other tenants that are in there? What is your kilowatt cost per hour?  

“Those are all things that now go into the lending decision that didn’t a year ago.” 

For example, Mitsubishi HC Capital America struck a $100 million deal with a data center tenant occupying roughly 15% of the facility and the landlord required the lender to pay it “way more money than we’re even making on the deal” in the event of a default and repossession, Thompson said. 

Thompson said the landlord told the lender, “’What you guys need to understand is that because I have the water, the power, the land and municipal support, I have gold, so I can use whatever terms and conditions I want.’” 

Many lenders have financed data center equipment and later realize that the power purchase agreement (PPA) wasn’t baked into the deal and they’re “left holding the bag” when a borrower defaults, Thompson said. 

“You financed them, they have the GPUs, they’ve made a couple payments to you, but they literally don’t have a data center that they can put the equipment in,” he said 

PPAs are long-term contracts in which an energy company agrees to supply a power source and the data center owner or developer agrees to buy the electricity at a set price.  

It’s crucial to factor PPAs into data center hardware financing deals because electricity must be treated as a core part of the collateral, Thompson said.  

Kilowatt costs increased roughly 23% over the past five years, according to the U.S. Energy Information Administration. 

Municipal pushback  

Pushback from municipalities also is increasingly weighing on data center financing, Thompson said.  

There are 210 active data center moratoriums across 43 states, with most imposed by counties, cities and townships, according to technology investment firm Interconnected Capital.  

And now state officials are putting up roadblocks. This week, Texas Gov. Greg Abbott ordered a pause on all new data center approvals and Pennsylvania Gov. Josh Shapiro imposed restrictions on permit approvals for data center projects.  

Lenders are not only concerned about developments in progress but also data centers that are fully operational, Thompson said.  

“Some of those are in danger of getting shut down by the municipal pushback that’s going on,” he said.  

Reducing risk  

While many financial institutions are understandably targeting the largest data center players with top-tier credit, lenders also should consider smaller players to diversify their portfolios and help maintain balanced market dynamics, Thompson said.  

“We do not want the power of AI consolidated into three or four companies in China and three or four companies in the U.S.,” he said. 

“I understand why the lending community is changing their underwriting criteria, but we really need to support the mid-sized, small-sized companies to make sure that we don’t have a much, much bigger problem on our hands.” 

If this consolidation occurs, “we basically report to tech companies,” he added.  

Ultimately, lenders must stay disciplined and understand that the largest deals aren’t always the best deals when financing data center equipment, Wintrust Specialty Finance President and Chief Executive David Normandin told EFN. 

“It’s a very shiny object,” he said. “You can do a lot of volume very quickly, but it’s important to make sure that you don’t lose sight of what your mission is,” Normandin said. 

“You can put your entire portfolio at risk if you don’t use discipline around the size of and scale the opportunities that really fit your business.” 

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