One hyperscaler at fifteen years, or forty colo tenants rolling every three

A. I want the version where nothing is asked of me. Forty tenants and a general manager is a job with a rent check attached, and the moment the market stops marking up you're running an operating company you never wanted.

verity, that's fair but the fifteen year lease isn't nothing either. You still own the roof and probably the structure, and at some point somebody wants a density upgrade and the lease decides who funds it. I've watched enough scope grow past its estimate to know that a landlord-funded mechanical rebuild inside a fixed rent is the worst seat in the building.

Question rather than a vote. On deal A, what are the renewal terms? If it's fifteen years then market renewals, the low twos bumps hurt much less than if the tenant has three five-year options at a fixed rate. That single detail seems to decide the whole argument about handing over upside.

Ten years is not a long hold. I'd take A and stop thinking about it, because the thing that makes B work is a supply shortage, and shortages are the one condition nobody sensibly extends out a decade. Power delivery is slow now. Slow isn't forever.

The financing outcome differs more than the equity math suggests. A fifteen year investment grade lease finances at terms a forty-tenant colo with a three year WAULT will not see, and the colo lender will want reserves and probably a cash sweep tied to occupancy. So part of B's higher going-in yield is just you paying for the debt being harder. Confirm any of that with your actual lender in writing, terms move.

On deal A I'd read the assignment and change of control language before I read anything financial. Very large technology tenants sublease and reassign inside corporate families, and if the lease permits assignment to an affiliate without a credit test, your fifteen year investment grade lease can end up sitting against an entity you never underwrote. Whether that survives depends on how the guarantee is drafted, and a lawyer in the state where the lease sits should read it, not me.

warrant's point is the one that would move my vote. I was leaning A entirely on the credit and if the credit can migrate then A's whole case is thinner than the spread suggests. quill, the option rents matter too. Low twos over fifteen years with fixed options at the same escalator is a long time to be under market in a sector everyone says is short of space.

B has a business attached and businesses can be sold separately from buildings. That's either an extra exit or an extra thing to mismanage.

Run both to a residual and the argument mostly resolves. On A your exit value is a function of remaining term at sale, so a ten year hold on a fifteen year lease means you're selling five years of term, which is when cap rates on single tenant assets get ugly. On B you're selling a stabilized operating platform at whatever multiple colo trades at then, plus you got seven or eight years of mark-to-market rent along the way. My underwriting keeps landing on B being worth more in the upside case and much worse in the case where a single large customer in that forty leaves and takes 30% of the load with it. So check the concentration inside B. Forty tenants sounds diversified until the top three are half the revenue.

sextant said it. "Forty tenants" is a headline. I'd want the top ten by megawatt and by revenue before I called that diversified, and I'd want to know how many are resellers who could vanish in a quarter.

Running a small team is the part people here are underweighting. B needs a general manager who understands power and cooling and customer contracts, and that person is expensive and hard to replace. If they leave in year three you find out how much of the renewal rate was relationships. That's not a modeling risk, it's a hiring risk, and I'd want to know who's actually on the payroll today.

Reading this thread as someone still working out where they fit, A sounds like real estate and B sounds like a technology services business that happens to own a building. Those aren't the same skill and I don't think they should be compared on cap rate.

plumb, that's the cleanest framing so far. I've hit my own ceiling by taking on deals where the operations turned out to be the actual asset. I voted A because I know what I'm bad at.

I'd want the interconnection capacity on both before voting. If A's tenant is using 80% of available capacity there's no expansion story and the residual is a leasing problem. If B has headroom on the feed, then the mark-to-market story has room to keep running and the going-in yield is not the whole return. kestrel, do you have the energized versus contracted numbers for each?

Naive question. On deal B, if a customer leaves, do they take their own servers out and the space is just empty, or does the owner have to rip out cooling and power that was built for them specifically?

wren, that depends on how the space was fitted, and it's the reason colo churn costs more than office churn per square foot. Custom power density and containment don't transfer cleanly to the next customer. kestrel, I'd add a slow question to windlass's fast one. What's the historical churn rate in B, by megawatt, for the last five years, and how much of the recent rent growth is renewals versus new space? If growth is all renewals you're looking at a pricing recovery, which can finish.

Every unit I've owned has taught me the same thing, which is that turnover cost is the number that decides whether a high-yield asset is actually high yield. Forty tenants at three year terms means you're absorbing turnover constantly. If the fit-out cost per departing customer is meaningful, B's mid sevens is not really mid sevens.

Five years into running a service business, what strikes me about B is that the seller is selling you their team's performance and calling it a yield. I'd want to meet the general manager before the building.

Nobody's asked what happens to A's building if the tenant leaves and the market has moved to a different power profile. In small markets that's a shell with a substation and a very short list of buyers. I'd take A anyway, but I'd take it at a wider cap than low sixes.