Which debt service coverage ratio (DSCR) is typically expected for data centers?

The debt service coverage ratio (DSCR) is a crucial metric in real estate finance used to determine a property's ability to generate enough income to cover its debt obligations. For data centers, a DSCR of 1.4x is expected, indicating that the property generates 40% more income than the amount required to service its debt.

Data centers are unique due to their operational requirements, capital expenditures, and potential for revenue generation. A DSCR of 1.4x provides a buffer that allows for fluctuations in income, covering operational costs, and addressing unforeseen expenses or changes in market conditions. Given that data centers often operate on long-term leasing agreements with tenants, the expectation for a DSCR of 1.4x reflects the distinct stability and cash flow characteristics of this type of property investment.

Higher ratios, such as those indicated in other choices, may be overly cautious for the unique aspects of the data center sector, where a balance needs to be struck between ensuring sufficient cash flow coverage and making investments viable.