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April 19, 2021

In a crowded pond, CT goes fishing for data centers with new incentives

HBJ FILE PHOTO State economic development director David Lehman estimates Connecticut could see as many as 20 data centers built over the next decade as a result of newly-adopted economic incentives.

Fueled by billions of dollars in annual investments by tech behemoths such as Google, Amazon, Microsoft and various other facility developers, the data center industry is fast growing, but Connecticut remains a bit player.

State lawmakers in March passed a new law that hopes to change that, offering potentially decades-long property and sales tax discounts meant to make developers of the high-tech computing centers — which can cost hundreds of millions or more than a billion dollars to build — take a second look at the Nutmeg State.

The new law comes amid surging demand in the U.S. and globally for computer power, spurred by the continued adoption of cloud-computing technology by large enterprises, a renewed focus on digital infrastructure in the wake of the pandemic-induced remote-working boom, and the anticipated emergence of 5G mobile networks and connected devices, according to Pat Lynch, senior managing director of data center solutions at real estate brokerage giant CBRE.

Pat Lynch

“Every market has a data center need,” Lynch said. “This is where it’s encouraging to see different states embrace technology, because it’s no longer an option. You will be at an economic disadvantage if you don’t.”

The Connecticut incentives were rushed through the legislature’s emergency certification process in response to a policy fight over a proposed transaction tax on stock trades in New Jersey that had equities exchanges such as Nasdaq and the New York Stock Exchange threatening to move their data centers out of that state. Besides Connecticut, the conflict also drew interest from Texas and Florida, with all three dreaming of poaching a modern and high-value sector from its northern New Jersey home.

However, that lobbying fight now seems to have died down, and it’s unclear whether it will result in any cross-state data center poaching.

Connecticut is already late to the party, as at least 26 other states had data center incentives as of early this year, according to a recent report from Cushman & Wakefield.

David Lehman, commissioner of the Department of Economic and Community Development (DECD), who recently estimated that Connecticut could see as many as 20 data centers built over the next decade, confirmed to HBJ this month there are no imminent deals on the table following Gov. Ned Lamont’s signing of the bill into law, which becomes effective in July.

However, Lehman said he and his team have talked to some major operators like Facebook and Amazon, and he’s hopeful the new bait helps catch a few fish in the years ahead.

Google has invested $22 billion over the past two years to build or expand its U.S. data centers and announced in March it will invest $7 billion in 2021. The company’s data center footprint spans much of the country, but excludes Connecticut, focusing on states like Nebraska, Nevada, New Jersey, Ohio, Oklahoma, South Carolina and Texas.

Luring that kind of investment, whether from Google or another company, is worth a shot, according to Lehman, who said there are no up-front taxpayer dollars on the line if the new incentives fall flat, while one sizable win could double the combined capacity of every existing data center in Connecticut.

“We know empirically no data centers are being constructed in Connecticut,” Lehman said. “And we know that data centers are being constructed in states with [tax exemptions.]”

“If the investment proposition still isn’t attractive, well then so be it, that’s where we were before,” he added.

While the recent legislation was spurred by a desire to draw the eye of stock exchanges, the incentives aim to make Connecticut more attractive to a broader array of data operators and interests.

“The way the legislation was crafted, we were focused on an industry, not just one discrete transaction or client,” Lehman said.

However, the law contains at least one provision aimed directly at the New Jersey situation: Incentive contracts would be permitted to exempt data center developers from any future transaction tax Connecticut lawmakers may pass over the life of the agreement.

A potential boost for proposed New Britain data center

The biggest Connecticut data center prospect that’s publicly known at the moment is a 44-megawatt facility envisioned for part of the former Stanley Works campus in New Britain.

EIP Investment LLC, which first unveiled its plans back in 2016, has said it intends to invest approximately $1 billion in the project, which also includes an array of fuel cells that will help power the data center.

Exactly when the project might break ground is unclear. Its first phase, which includes the installation of 20 megawatts worth of fuel cells, was delayed by the pandemic, according to New Britain Mayor Erin Stewart.

“It’s still happening, there have been some delays with the permitting process,” Stewart said. “COVID set them back.”

Stewart said EIP, which was formerly working with South Windsor fuel cell maker Doosan, is now working with California-based Bloom Energy.

EIP did not respond to a request for comment for this story.

While Connecticut has not had any data center-specific incentives until now, it still found a way to help out EIP.

In 2019, the quasi-public Connecticut Innovations granted EIP a sales and use tax exemption for its planned equipment purchase at the facility. That one-off exemption, which would now be available to other data center developers, was worth $55 million over a 10-year period.

A data center of EIP’s proposed size might invest $100 million or more every four years in new and updated equipment, according to CI officials, so the state’s new law could ultimately increase the size of EIP’s sales tax exemption by including qualifying equipment purchases over the next two or even three decades, assuming the company meets minimum capital expenditure thresholds for its facility investments.

Minimum buy-in

Connecticut’s new data center incentives allow for 20- to 30-year agreements with the state and the municipality where a data center investment of a minimum size is made, with exemptions for property taxes, as well as for personal property and sales and use taxes related to the computer servers, networking equipment, generators, electric substations and a variety of other technology common within such facilities.

The minimum investment to qualify for a 20-year deal is $50 million for any data center located in a state enterprise zone or federal opportunity zone (the EIP project in New Britain would be located in the latter) and $200 million for a center located anywhere else. DECD, which will oversee any negotiations with data center investors, would increase the length of an agreement to 30 years if the investment is at least $200 million within the economic zones or $400 million elsewhere.

Such taxes are key factors weighed by decision-makers when they’re location shopping a new data center, according to CBRE’s Lynch. However, the largest cost input is often electricity, and Connecticut’s rates are among the highest in the country.

“If your community is desiring to be a major competitor within the data center space, utility and taxes have to be part of it,” Lynch said.

According to industry data provider datacenterHawk, data center operators can expect to pay 15 to 16 cents per kilowatt hour for electricity in the Northeast U.S., but that cost can be as low as 2 or 3 cents in places like Quincy, Washington, or Montreal, Canada.

However, that doesn’t mean every data center is located around the cheapest power, Lynch said. There are other considerations, like fiber infrastructure and proximity to key customers in order to have fewer data transmission delays, a network factor known as “latency.”

Latency is important for stock trading, but it also matters in lots of other areas, such as in software for hospital operating rooms, Lynch said.

Lehman is well aware of Connecticut’s disadvantage when it comes to energy costs, but he is convinced the new tax incentives — which are similar to exemptions in place for manufacturing equipment — are a smart policy that could produce results.

“Are we going to be the biggest data center location because of our energy costs? I don’t think so,” Lehman said. “But will we see a lot more than the very limited investment we’ve seen? I believe we will.”

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