Before Your Town Signs a Data-Center Deal, Ask Who Actually Pays the Rent

Data centers can bring enormous economic benefits to small communities. They can also create a new kind of risk that many towns are not used to managing.

Ellendale, North Dakota, is a good example.

Following the arrival of an Applied Digital data-center campus, the town of roughly 1,100 people has seen sales-tax revenue jump from about $400,000 a year to $3.5 million, according to the San Francisco Chronicle. The project has brought jobs, investment and new revenue.

Mayor Don Flaherty supports the project. His own son works there. But he also told the South Dakota Searchlight that he worries about the industry “every single day.”

And when asked whether the deal could eventually blow up in his face, he answered: “Absolutely.”

That doesn’t mean Ellendale made the wrong decision. It illustrates something more important: economic opportunity and financial risk can exist at the same time.

For local governments considering data-center projects, the question should not simply be whether to say yes or no. It should be: What happens if this deal does not go according to plan?

Know who is actually paying the bills

Data-center projects can involve several companies. One company may own or operate the campus. Another may lease the computing capacity. That tenant may depend on its own customers, financing and market demand to keep paying the rents that fund the data center and the tax revenues to project depends on.

In Ellendale, Applied Digital operates the campus, while CoreWeave is a major tenant under a long-term lease. That matters because the town's economic benefit ultimately depends on more than the company whose name appears on the development agreement.

CoreWeave has grown rapidly alongside demand for artificial-intelligence computing. It has also faced increased scrutiny from credit markets as it finances that expansion.

That doesn't mean CoreWeave will fail. It does mean municipalities should understand the financial health and obligations of the companies their projects ultimately depend on.

If your community is making long-term decisions based on revenue from one project, you should know what sits behind that revenue.

Plan for the downside before signing

Communities have seen versions of this before. It happened in Kentucky coal country, in upstate New York, and in North Carolina communities that are now weighing the same questions again with data centers.

During the cryptocurrency-mining boom, operators moved into communities with promises of investment, jobs and tax revenue. When market conditions changed, some projects shut down, leaving communities with unpaid obligations or infrastructure built for businesses that were no longer there.

Data centers are not cryptocurrency mines, and their economics are different. But the broader risk-management lesson still applies: a community should understand what happens if a major project closes, changes ownership or falls short of expectations.

At the same time, rejecting every data-center proposal is not necessarily the answer. For communities looking for new investment and a stronger tax base, these projects can provide meaningful opportunities.

The goal is not to be pro-data center or anti-data center. The goal is to negotiate from an informed position.

Six questions municipalities should ask

Jobs, tax revenue and incentives will naturally dominate negotiations. But local leaders should spend just as much time discussing what happens when things don't go as expected.

Before approving a project, consider these questions:

1. Who does the project ultimately depend on? Understand the operator, major tenants and other companies whose financial health could affect the project.
2. What happens if a tenant or operator leaves? Agreements should address defaults, ownership changes and the transfer or sale of the project.
3. Who pays if the site eventually needs to be dismantled? Consider requiring a bond, escrow or other financial protection for decommissioning.
4. How dependent will the community become on this revenue? A large increase in tax revenue can quickly become part of the operating budget. Consider putting some of that money into reserves rather than immediately building recurring expenses around it.
5. Are incentives tied to actual results? Tax abatements and other incentives should be connected to measurable milestones, with protections if promised investment or jobs do not materialize.
6. Who pays for infrastructure? Make sure agreements clearly address the cost of electricity, water, roads and other infrastructure, including what happens to specialized infrastructure if the project closes.

These protections are not anti-development. They are simply good risk management.

One question before the vote

Before approving a data-center agreement, local leaders should be able to answer one simple question: If the company or tenant behind this project walked away in year four, what in this agreement protects our community?

If there isn't a clear answer, there may be more negotiating to do.

Economic-development agreements naturally focus on what happens when a project succeeds. Municipal risk management also requires asking what happens when it doesn't. Those conversations are much easier to have before the agreement is signed.

RiskVersity has developed a free checklist of risk considerations municipalities can use when evaluating data-center projects. It is designed to be shared with your governing body, municipal attorney, financial advisor and other partners involved in the negotiation.

Download: Risk Terms Every Municipality Should Demand in a Data-Center Deal

And if your community is evaluating a specific proposal, RiskVersity can provide an independent review of the risks, counterparties and protections built into the agreement.