Data Center DSTs

The building is a shell; the money is in the systems, and the systems age faster than the building

The filed 10-K of the largest data center landlord puts its own risk in one line: it may not be able to adapt to changing technologies and customer requirements, and its data center infrastructure may become obsolete. It explains that tenant improvements may become outdated or obsolete as the result of technological change, including the recent acceleration in AI adoption and rapid advancements in compute, cooling and power technologies, which continue to drive evolving customer requirements, and that its properties may not be suitable for leasing to traditional office customers without significant expenditures or renovations. Access to sufficient power and the cost of providing it appears in its list of development risks.

A DST is the structure least able to answer that. Under Rev. Rul. 2004-86 the trustee may not accept additional contributions of money and may make only minor non-structural modifications to the property. A trust cannot re-power a building, add cooling capacity for denser racks or rebuild electrical distribution when a tenant's requirement changes. Whatever the building is on the day the trust closes is what it stays until the trust sells, the constraint developed at DSTs and value-add.

That is why the class is rare in the DST market. The capital that keeps a data center leasable is exactly the capital the ruling forbids.

Who the tenants are decides whether a long lease is a strength or a cliff

The same 10-K reports that its 20 largest customers represented approximately 51% of total annualized recurring revenue at December 31, 2025, that its top three customers represented approximately 26%, and that 20 of its 310 data centers are occupied by single customers, including centers occupied solely by its top three. Its customer table shows weighted average remaining lease terms among the largest customers ranging from under three years to about ten. Cloud providers and large enterprises negotiate from strength, and the filing's cautionary language is that customers may not renew.

In a DST holding one building leased to one such tenant, the trust's entire income is one renewal decision made by a counterparty with alternatives. That is the net-lease vacancy cliff with a technology clock attached, and the trade-offs between one tenant and several are laid out at single-tenant vs portfolio DSTs.

A tenant's credit rating tells you it can pay; it does not tell you it will renew a building whose power density no longer suits it. Those are different risks, and the second one is the one the trust cannot manage.

Turn-key or powered shell: the lease form sets what the trust owns and what it would have to maintain

The 10-K describes two products. Its turn-key facilities are move-in ready with the power, cooling and interconnection in place, for customers that lack the capital or desire to build their own infrastructure, and under some of those leases the landlord is not reimbursed for property operating expenses other than utility expense. Its powered base building offering provides the physical location, requisite power and network access for customers that build and operate their own infrastructure. Contract lengths for deployments below one megawatt are generally 2 to 5 years.

Only the second form fits a trust whose trustee is limited to the collection and distribution of income. A powered shell on a long net lease, with the tenant owning and maintaining its own electrical and cooling plant, keeps the trust out of operations. A turn-key hall, where the landlord's systems and their upkeep are the product, is an operating business the trust cannot run.

Even in the shell form, the ruling bars the trustee from renegotiating the lease or signing a new one except on the tenant's bankruptcy. When the lease ends, the trust's choices are a sale or the conversion described at the DST springing LLC, and the limits on getting out beforehand are at DST illiquidity and exits.

For 1031 purposes the customized systems are mostly real property, so the harder question is value, not like-kind

The REIT regulations contain a worked data center. Reg. section 1.856-10, Example 6, describes a building leased long-term whose electrical distribution and redundancy system, central heating and air-conditioning, telecommunication infrastructure, integrated security, fire suppression and humidity control systems were customized for computer servers. The HVAC, security, fire and humidity systems are listed structural components and therefore real property; the electrical and telecommunication systems are analyzed under the regulation's factors and, because they are embedded in the walls and floors, costly to remove, designed for that building and serve a utility-like function, they are structural components too.

Reg. section 1.1031(a)-3 uses the same listed structural components, including wiring, central air conditioning and heating systems, fire suppression systems and humidity control systems, and the same factor test for items not listed, with a steam turbine installed during construction held to be real property in Example 7. A data center is a building under the regulation's general definition of a structure enclosing space within its walls and covered by a roof. Servers, racks and other movable tenant equipment are personal property and outside the exchange, the line drawn at DST like-kind qualification.

The building itself is 39-year nonresidential property under section 168. Shorter-lived components inside it matter only for the part of your basis that is new money, as explained at depreciation and bonus depreciation in DSTs.

If you want data center exposure through an exchange, this is the realistic path

Expect to see, at most, a single-tenant powered shell on a long net lease, or a data center as one asset inside a portfolio trust. Read it as a net-lease DST with a technology clock: the credit, the remaining term, the renewal options and the reserve matter, and so does the age of the tenant's power and cooling plant, because that is what decides the renewal. The questions are at the DST offering due diligence checklist, and sponsor review at how to evaluate DST sponsors.

If no such trust is available in your 45 days, the related industrial and logistics class carries some of the same tenants with far less obsolescence risk. Distributions in any trust can be reduced or stopped, and a single-tenant data center is a case where that can happen all at once.