The Debt Stack
A data center's debt is a sequence, not a single loan, because the asset lives in two risk regimes. Construction is dangerous and non-earning, so it takes expensive, short-term, tightly-controlled money with a real equity cushion underneath. Once the tenant moves in and rent flows, the risk collapses and the deal refinances into cheap, long-dated permanent debt sized against stabilized cash flow. The handoff between the two is where sponsors get hurt. Two ratios govern how much debt an asset can carry: loan-to-value sets the cushion, debt-service-coverage sets the comfort, and the lower of the two caps the loan. When rates rise, coverage tightens and the same rent services less borrowing. Tenant credit sits under all of it. Size the debt to the cash flow, and you can predict which announced projects will never actually close.
Knowledge check
Rates rise sharply after a project was underwritten. Why can the same building now support less debt even though its appraised value has not fallen?
Show the answer
Because higher rates enlarge the annual debt-service payment, which drives the debt-service-coverage ratio down toward its minimum. The lender caps the loan at the level where coverage is still met, so the same net operating income now services a smaller loan. Coverage, not loan-to-value, becomes the binding constraint.