Beyond the headline hype: how municipalities can separate data center investment from taxable property value

When a data center developer announces a multibillion-dollar project, the size of the investment can quickly become the headline. However, for municipalities, counties, and school districts (“governing bodies”), the more important question is not how much the developer plans to spend. It’s how much of that investment will become taxable property — and how much property tax revenue that taxable value will actually generate over time.

A data center’s total development cost is not the same as its taxable value. The property tax system is designed to tax the project’s real estate component. Specialized technology and substation equipment, pollution control equipment, network infrastructure, certain personal property, and intangibles such as guaranteed power contracts may fall outside the real property tax base or face lower tax rates, depending on jurisdictional rules.

That distinction can have a significant impact on a governing body’s expectations for future property tax revenue. A billion-dollar investment does not necessarily translate into a billion-dollar taxable base, and projections based primarily on total project cost significantly overstate the revenue a community will ultimately receive.

Building a defensible tax revenue forecast

For governing bodies considering data center development, the starting point should therefore be a clear understanding of the project’s taxable real estate, how assessors will value it over time, the expected property tax revenue, and, where applicable, the impact of tax increment financing (TIF) or other incentives.

A complete analysis should consider:

• The assessed value of the real estate over time
• The portion of total project investment that represents taxable real estate
• The amount and timing of property tax revenues
• The potential TIF increment
• The economic downside if the developer does not complete the project at full scale
• The basis for likely property tax appeals once the data center is operational
• The assumptions underlying developer tax feasibility studies
• The full impact of local rules for assessments and levies

Factual and conservative tax scenarios give governing bodies a clearer basis for evaluating the potential financial outcomes of a project and understanding the assumptions behind projected revenues.

Evaluating incentives and TIF potential

Data center projects often involve discussions about incentives, zoning considerations, infrastructure improvements, and development agreements. Those discussions should reflect realistic expectations for the property’s tax base and the revenue it can generate. Governing bodies should evaluate proposed incentives, the tax increment, and public investments against projected property tax revenues rather than relying solely on the project’s overall investment figure.

This helps establish a common set of assumptions among the municipality, developer, attorneys, other professional consultants, and related agencies involved in evaluating the project’s economics.

Making informed decisions about data center development

For governing bodies, separating total data center investment from taxable property value provides a more realistic basis for forecasting property tax revenue, evaluating TIF potential, considering incentives, and making informed financial decisions.

Without deep expertise in valuation and property taxation mechanics, governing bodies can significantly overestimate future tax revenue and plan based on unattainable assumptions. Sikich’s valuation and tax consulting professionals offer objective, accurate analysis based on defensible data and realistic expectations.