Senior debt-fund data center construction loans typically price floating off SOFR and require the borrower to purchase a SOFR rate cap with a defined strike, term, and notional. For a $500M / 36-month loan with a 5.00% strike in a 4.00% SOFR environment, cap cost can run several million to over ten million dollars depending on rate volatility.
How to model the cap into the construction budget
Cap cost depends on strike, term, notional, and rate volatility. Caps must be replaced at extension, and the replacement cost can be significantly higher than the original cap depending on the prevailing rate curve. Sponsors should model the cap cost into the construction budget and the takeout assumptions.
Some debt funds have begun to embed cap-cost financing into the loan structure, allowing the borrower to fund the cap from the loan proceeds rather than equity, which improves day-one IRR but adds to the total funded loan amount.
Sources
- 2024 United States Data Center Energy Usage Report · Lawrence Berkeley National Laboratory (LBNL) · 2024
- Long-Term Reliability Assessment (LTRA) · North American Electric Reliability Corporation (NERC) · annual