By Dave Flaherty
As a longstanding city councilor, and someone who’s been in the computer industry for about 40 years (about 15 years of that time in the utility sector), and someone who’s trying to do the best for Westfield and its taxpayers, I am not a fan of the proposed Data Center deal as submitted.
This is a very important long-term project for the city and the region. The scope is mind-boggling for most folks. This could be a $2.75 billion investment to build about 2.7 million square feet of data center buildings over 15 years or so. The site is on about 155 acres on the north side of town near the Home Depot and Lowes warehouses. This complex could hold between $12 billion and $18 billion worth of computer devices (using today’s technology). The applicant is demanding a tax valuation on the buildings that is somewhere between 10 and 20 percent of market value, and they are demanding zero tax on all of that computer equipment — for 40 years! They are demanding a fixed gradual tax increase for the entire 40 years — regardless of what happens in the commercial real estate market or the world economy. I believe we need to thoroughly evaluate the proposed deal, and make substantive changes, before we vote to allow over $2 billion in potential tax discounts.
To give you an idea of how big this is, they plan on investing about $2.75 billion on this data center campus, and as mentioned above, those buildings could hold another $12 billion to $18 billion worth of normally taxable property. The current valuation of everything else in the city is about $3.7 billion (land, homes, commercial buildings, industrial buildings, improvements, and taxable business personal property). They are projecting a peak energy usage of 395 megawatts. The historical peak day for the entire city is only 81 megawatts. Therefore, they will use more than four and a half times as much energy as the rest of the city. They proposed that their tax bill will average about $9 million (reaching that 18 years from now), and peak at about $14.6 million (40 years from now). The rest of the city pays about $82 million per year in property taxes right now. They are not paying anywhere near their fair share.
We have a valuable asset
I think we can make a better deal, and that it’s in their best interest to give us a better deal.
Some of the most important things to understand when negotiating is the value of what you’ve got, and the needs, desires and capabilities of the buyers.
In this case, we really have a valuable asset in Westfield. The data center market is looking to serve the northeastern United States (north of New York City). There are business objectives that are driving a push into the Northeast. There are not a lot of sites in New England that are ideal for data centers, but we just happen to have a perfect one. Our site is in an industrial zone; there is plenty of land; the area is mostly surrounded by warehouses and industrial buildings; there is a massive power supply running through the property (those big Eversource lines you see); there is a massive amount of “dark fiber” that allows this region to connect to the internet in many ways that are important to these types of customers; and, we have zoning laws that are favorable for development. There are also many other geographic and demographic attributes that make us even more attractive (airport, rail, highway, lower cost of living, municipal utilities, skilled workforce, etc.).
The applicant is a group that supplies power to large commercial and industrial projects. They’d love to have this giant energy user as a customer. They are not the ultimate developer on this site, but they are representing at least one client in the data center space. They haven’t told us who it us, but they’ve implied it’s one of the Fortune Fifty. Companies in this space are very profitable. I’ve researched several of the publicly traded data center real estate companies and service providers (such as AWS, Facebook, Google and Microsoft) that may develop their own facilities. Most of the data center companies have EBITDA — earnings before interest, taxes, depreciation and amortization — margins in the 45 percent to 55 percent range. Those EBIDTA margins are after accounting for the cost of energy, local taxes, and other operating expenses. For the big companies like Digital Realty, Equinix, and AWS, the EBITDA margins are in the half-billion-dollar range per quarter. For example, Digital Realty reports a trailing 12-month EBITDA of $2.26 billion, on revenue of $4.27 billion.
These companies are not hurting financially. One of them is owned in part by the richest person in the world, who happens to fancy space travel.
These data centers need reliable power and bandwidth, and like most other businesses they pursue lower operating expenses and “certainty” where possible. That’s why they want to negotiate this massive tax reduction deal for 40 years.
Competing in the Northeast
In my opinion, the business objectives require a location in the Northeast. Therefore, we don’t have to try to be the lowest-cost location in the entire country. We just have to try to be the best overall option in the Northeast. As mentioned above, there are lots of reasons that make Westfield the best location — it’s not only about which community is going to take the lowest tax revenue deal. We don’t need to race to the bottom. We can work out a deal that is fairer for the city of Westfield without making it financially untenable for the applicants. EBITDA margins of about 50 percent gives them plenty of wiggle room.
One of the repeated suggestions of the applicant is that it comes down to the sum of energy costs and local taxes. They’ve made it pretty clear that because energy costs more here, that the taxpayers should just absorb that cost, and reduce their taxes. I’m sure all of us would love that deal. The fact is, it costs a bit more to operate an energy pig of a business in New England. We have limited supplies of energy, limited supplies of natural gas, and an environmentally conscious government and population that makes it a bit more expensive to be here. It is what it is. Everyone knows that. However, as mentioned above, they have a market need to be here, and satisfying that market need is more important than paying an extra couple cents for power. I don’t believe it’s fair for them to expect the rest of the taxpayers in Westfield to subsidize their energy costs.
By the way, these applicants are wizards in the energy supply business. They are telling us that they can provide power to this site at about half the price other customers in New England pay. That lower cost is helping make this a more attractive deal to the data center companies.
As you can see, there is a lot to look at here. I’ve spent over 150 hours reviewing the application documents and researching the markets around the country. These applicants want to lock in a value of $60 per square foot for their facilities (with a gradual ramp up each year). That’s really low. If you look at your home tax bills, you’ll see that you are paying taxes on a square foot value that is much higher than that. Hyperscale data center buildings in Billerica are valued at $450-$700 per square foot, and they pay full property tax rates for their land, buildings, and all of the business personal property. In Loudoun, Va., the average valuation is in the $340 per square foot range, and their companies pay business personal property taxes, as well. In fact, Loudoun County receives over $586.8 million in taxes per year from data centers — about 70 percent of that coming from the business personal property taxes.
Our applicants claim that these are unfair comparisons because of our energy costs and the development costs of the site. However, Billerica is actually in Massachusetts, and their energy costs and land values are higher than those proposed in Westfield. The Loudoun land values are often in excess of $2 million per acre. In Westfield, this whole 150 acres is valued at less than $4 million. I’d say they have room in their budget to spend a little bit to deal with the wetlands and the spotted turtles.
I truly believe we can work out a better deal, and that we should work out a better deal for the residents and business owners in Westfield.
Questions and answers
I’ll address some common questions:
Isn’t anything better than nothing? Sure, but that’s not my goal. We can do better, and we should do better. We don’t have to accept just anything. We owe it to everyone in town to get a better deal.
Are they guaranteeing 1,800 construction jobs and significant contracts for local contractors? No, they will not guarantee anything for local businesses. They said “they’d try.” If you look at other massive construction projects, you’ll see that they use a lot of outside contractors.
Are they guaranteeing 400 high-paying local jobs when this center is operational? No, they will put any guaranteed number of employees or wages in the contract.
Why is this a 40-year deal? This special urban redevelopment law (Chapter 121A of state law) was intended to encourage private companies to get involved in urban renewal projects — primarily in derelict or hard-to-build areas, and for projects that involved affordable housing or local employment. The economics of those types of projects sometimes require 40-year terms to make them financially viable for the developers. The normal terms are that the minimum tax is 1 percent of assessed value plus 5 percent of the gross margin of the project from all sources. There is also an 8 percent maximum return on investment. However, in the proposed Westfield project, they want to fix the assessed value at a really low number, redefine the “gross margin” calculation, and use layered companies to get around the 8 percent return on investment. All legal, but certainly not the intent of the law.
What has the city negotiated? As far as I know, the city has not negotiated anything of value. The applicant completed the application documents, did a lot of zoning and design work (they really have done a heck of a job), and presented the proposed tax agreements. They are currently presenting it as a “take it or leave it” deal.
What can the city negotiate? This Chapter 121A process allows the city to negotiate just about anything into the deal. The includes payments in lieu of taxes, grants, trades, services, betterment fees, and an array or special terms and conditions. Both the Planning Board and the City Council can review this application and make suggestions for changes.
Will they be the biggest taxpayer? Probably. Home Depot is the largest right now. If this project develops as planned, they will be the largest taxpayer after a few years. However, that doesn’t mean they should be paying less than $2 per $1,000 for their tax rate when everyone else is paying $18.88 or $36.55. Their fair market value will exceed the entire valuation of everything else in the city, and they will use more than 4½ times the energy resources. Yet, they’ll pay only a fraction of the total tax burden.
Does this help our levy ceiling issue you’ve talked about in the past? Not really. All of this property is excluded from the city’s total valuations and everything that is derived from that number. There will be additional tax revenue beyond what is currently paid on the property, so theoretically if the city controls spending, this could lower the tax burden on others. However, because of the low valuation and ramping structure of this deal, the historic increases in annual city spending, the funding of a new school and police station, and the massively unfunded obligations related to pension and retiree health care, all of this estimated new revenue will be consumed, and therefore, not much will be available to reduce the tax bills of everyone else.
Can they be asked to fund amenities? Yes, the law allows the city to negotiate all kinds of things. For example, we could require employment for vocational students and local contractors, preservation restrictions, grants for various economic or social development programs, and more.
Will they walk away if the deal changes? That’s their threat. However, I believe this is the best location in the northeast for this project. I believe they think this, as well. They’ve done a ton of research, and have spent a significant amount of money already on this location. There is room to make this deal better for Westfield, without making it that much less attractive for the developers. “Certainty” is a significant factor for the developer and for the city — even more so that the actual final PILOT number. A 40-year deal is better than any other place in the entire country.
If they walk, then what? As mentioned above, this is a great location for many reasons. This team is not the only prospective developer. There are others trying to do the exact same thing in the northeast market. For example, there is a competitor in Connecticut that has already made deals with several communities. Over in the Boston area, both Digital Realty and Equinix have facilities. I believe with the right leadership, we could put together a proposal through our Redevelopment Authority in a few months, and that we’d get several interested parties.
What can the average citizen do to secure a better deal? This is being presented by some as a “take it or leave it” deal, and there’s an implication that this company is the only game in town. I think you could reach out the mayoral candidates, the City Councilors, and the Planning Board members, and ask them to make efforts to improve the deal. If you are a homeowner or business owner, you could express how unfair it is that you have to pay full taxes in order to subsidize these massively profitable technology companies.
Thank you for reading this very long explanation. If you have any questions or concerns about this or any other Westfield issues, please feel free to reach out to me by email at [email protected], or to give me a call at 413-206-9661.
Have a great Pumpkinfest weekend!
Dave Flaherty is an at-large member of the Westfield City Council.