S-11/A 1 ds11a.htm FORM S-11/A AMENDMENT #2 Form S-11/A Amendment #2
Table of Contents

As filed with the Securities and Exchange Commission on October 5, 2007

Registration No. 333-145294


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Amendment No. 2

to

FORM S-11

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


DuPont Fabros Technology, Inc.

(Exact Name of Registrant as Specified in its Governing Instruments)

1212 New York Avenue, NW, Suite 900

Washington, D.C., 20005

(202) 728-0044

(Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 


Lammot J. du Pont, Executive Chairman

Hossein Fateh, President and Chief Executive Officer

DuPont Fabros Technology, Inc.

1212 New York Avenue, NW, Suite 900

Washington, D.C., 20005

(202) 728-0044

(202) 728-0220 (facsimile)

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


Copies to:

 

John H. Toole, Esq.

Darren K. DeStefano, Esq.

Geoffrey M. Ossias, Esq.

Cooley Godward Kronish LLP

One Freedom Square

Reston Town Center

11951 Freedom Drive

Reston, Virginia 20190

(703) 456-8000

(703) 456-8100 (facsimile)

 

Daniel M. LeBey, Esq.

Edward W. Elmore, Jr., Esq.

Hunton & Williams LLP

Riverfront Plaza East Tower

951 East Byrd Street

Richmond, Virginia 23209

(804) 788-8200

(804) 788-8218 (facsimile)

 

J. Warren Gorrell, Jr., Esq.

Stuart A. Barr, Esq.

Hogan & Hartson LLP

555 Thirteenth Street, N.W.

Washington, D.C. 20004

(202) 637-5600

(202) 637-5910 (facsimile)

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

 


CALCULATION OF REGISTRATION FEE


Title of securities being registered  

Number of shares

being registered

  Proposed maximum
offering price per
share(2)
  Proposed maximum
offering price
  Amount of
registration fee

Common Stock, $0.001 par value per share

  35,075,000(1)
  $21.00   $736,575,000   $22,613(3)

 

(1) Includes 4,575,000 shares of common stock issuable pursuant to an option granted to the underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) $1,077 has been paid herewith. $21,536 has been paid previously.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated October 5, 2007

PROSPECTUS

30,500,000 Shares

LOGO

Common Stock

 


This is our initial public offering of common stock. All of the shares of our common stock offered are being sold by us. We intend to elect to be taxed as a real estate investment trust, or REIT, for federal income tax purposes commencing with our taxable year ending December 31, 2007.

Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on The New York Stock Exchange under the symbol “DFT.” We expect the initial public offering price of our common stock to be between $19.00 and $21.00 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 20 of this prospectus.

 

     Per Share    Total
Public offering price    $                         $                     
Underwriting discount(1)    $                         $                     
Proceeds to us (before expenses)    $                         $                     

(1) Excludes a financial advisory fee payable solely to Lehman Brothers and UBS Investment Bank of 0.75% of the initial public offering price. See “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to an additional 4,575,000 shares from us on the same terms and conditions as set forth above to the extent the underwriters sell more than 30,500,000 shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about             , 2007.

 


 

LEHMAN BROTHERS

UBS INVESTMENT BANK

 


 

CITI    KEYBANC CAPITAL MARKETS    WACHOVIA SECURITIES

 


 

BANC OF AMERICA SECURITIES LLC   RAYMOND JAMES
 

            , 2007


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

   1

Risk Factors

   20

Special Note Regarding Forward-Looking Statements

   47

Use of Proceeds

   48

Dividend Policy

   49

Capitalization

   52

Dilution

   53

Selected Financial Data

   55

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   58

Industry Overview/Market Opportunity

   76

Business and Properties

   80

Management

   97

Certain Relationships and Related Transactions

   112

Investment Policies and Policies with Respect to Certain Activities

   115

Structure and Formation of Our Company

   118

Description of the Partnership Agreement of DuPont Fabros Technology, L.P.

   122

Principal Stockholders

   127

Description of Securities

   129

Material Provisions of Maryland Law and of Our Charter and Bylaws

   134

Shares Eligible for Future Sale

   140

Federal Income Tax Considerations

   142

Underwriting

   159

Legal Matters

   166

Experts

   166

Where You Can Find More Information

   166

Index to Financial Statements

   F-1

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

This prospectus contains third-party estimates and data regarding growth in the Internet and data center industries. This data was obtained from a report by Tier1 Research entitled “Internet Data Center Supply Report Midyear 2007” and a report by IDC Research, Inc. entitled “U.S. Web Hosting Services 2007-2011 Forecast,” dated May 2007. Although we have not independently verified the data contained in these reports, we believe that the data is reliable. However, there can be no guarantee that the markets discussed in these reports will grow at the estimated rates or at all, and actual results may differ from the projections and estimates contained in these reports. Any failure of the markets to grow at projected rates could have an adverse impact on our business.

Until                      (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regarding our company, including under the caption “Risk Factors,” as well as our financial statements and related notes appearing elsewhere in this prospectus. Unless the context requires otherwise, references in this prospectus to “we,” “our,” “us” and “our company” refer to DuPont Fabros Technology, Inc., a Maryland corporation, together with its consolidated subsidiaries after giving effect to the formation transactions described in this prospectus, including DuPont Fabros Technology, L.P., a Maryland limited partnership, which we refer to in this prospectus as our operating partnership, or OP. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ option to purchase additional shares is not exercised and that the common stock to be sold in this offering is sold at $20.00 per share, the mid-point of the price range indicated on the front cover page of this prospectus.

DuPont Fabros Technology, Inc.

Overview

We are a leading owner, developer, operator and manager of wholesale data centers. Our data centers are highly specialized, secure facilities used by our tenants—primarily national and international technology companies, including Microsoft, Yahoo! and Google—to house, power and cool the computer servers that support many of their most critical business processes. We lease the raised square footage and available power of each of our facilities to our tenants under long-term triple-net leases, which contain annual rental increases. As used in this prospectus, the phrase “wholesale data center,” or “wholesale infrastructure,” refers to specialized real estate assets consisting of large-scale data center facilities provided to tenants under long-term leases.

We believe our data centers are engineered to the highest specifications commercially available and provide sufficient power to meet the needs of the world’s largest technology companies. We consider our newest data center in Northern Virginia, known as ACC4, to be our prototype for future ground-up developments due to its enhanced power capacity and flexible design, which will enable us to accommodate both smaller and larger tenants in a single facility. Upon completion, this data center will be capable of providing tenants with a total of 36.4 megawatts, or MW, of power, which we refer to in this prospectus as critical load, or IT load. Critical load is that portion of each facility’s total power capacity that is made available for the exclusive use by our tenants to operate their computer servers. Because we believe that critical load is the primary factor that tenants evaluate in choosing a data center, we establish our rents based on both the amount of raised square footage that our tenants are occupying and the amount of power that we make available to them. Accordingly, throughout this prospectus, where we discuss our operations in terms of raised square footage, which we consider to be the net rentable square footage of each of our facilities, we generally also provide a corresponding discussion of critical load, which is one of the primary metrics that we use to manage our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

Upon completion of this offering and the formation transactions described below, we will own a 100% interest in the following properties:

 

   

four stabilized data centers located in Northern Virginia, which we refer to as VA3, VA4, ACC2 and ACC3, having an aggregate critical load of 46.0 MW and which were, as of October 1, 2007, 100% leased;

 

   

our prototype ground-up development in Northern Virginia, ACC4, which is expected to have an aggregate critical load of 36.4 MW and is being developed in two equal phases. The first phase has been completed and, as of October 1, 2007, was 100% leased. The second phase currently is scheduled for completion in November 2007 and, as of October 1, 2007, 43.8% of this phase was pre-leased;

 

 

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one data center under development in suburban Chicago, which we refer to as CH1, which also is expected to have an aggregate 36.4 MW of critical load and a flexible design. The CH1 development involves retrofitting an existing building, or shell, for use as a data center and is being developed in two phases, with the first phase scheduled for completion in 2008; and

 

   

undeveloped properties in Northern Virginia and Piscataway, New Jersey. We will also have a contract to acquire land in Santa Clara, California for $22.5 million. We believe that these properties will, in the aggregate, support the development of six new data centers with an aggregate critical load of 187.2 MW.

In addition to the properties described above, we also will acquire certain property management, development, leasing, asset management and technical services agreements and arrangements for these properties from entities affiliated with our sponsors, Lammot J. du Pont, the Executive Chairman of our board of directors, and Hossein Fateh, our President and Chief Executive Officer. By combining our properties with these core operating functions, we believe we will be well positioned as a fully-integrated wholesale data center provider, capable of developing, leasing, operating and managing our growing portfolio.

We expect to qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2007. We intend to make regular quarterly distributions, beginning with a distribution for the period commencing upon the completion of this offering and ending on December 31, 2007.

Market Opportunity

Data centers are facilities used for housing a large number of computer servers and the key related infrastructure, including generators and heating, ventilation and air conditioning, or HVAC systems, necessary to power and cool them. Originally, beginning in the mid 1990s, colocation providers, primarily from the telecommunications industry, met the needs of early technology companies that required limited amounts of power but a significant amount of information technology support. However, as these technology companies grew, they began to seek data centers capable of producing significantly more power than typical colocation facilities were designed to provide.

Wholesale infrastructure providers entered the market to meet the growing demand from technology companies by offering significantly greater power through a single facility than colocation providers and long-term cost savings through economies of scale and the unbundling of services that larger tenants do not require. In recent years, there has been a significant increase in the demand for data centers in general, and wholesale infrastructure in particular, due to the following factors:

Growth of the Internet. Growth in demand for data centers reflects the growth in consumer and enterprise-based Internet traffic for applications such as search, media, commerce and application processing, according to Tier1 Research, a data center industry analyst. IDC Research estimates that the U.S. web hosting market totaled $8.2 billion of revenue in 2006 and projects U.S. web hosting revenue to grow at a compounded annual growth rate of 14.7% over the next five years, reaching $16.3 billion in 2011. IDC Research cites the following factors as contributing to the strong projected growth: the evolution of hosting beyond marketing and commerce to core business processes, the continued pursuit of on-demand computing, and the growth of the home office and small and medium-sized business segments. In addition, we believe that demand is being driven by the continued growth of Internet-based business models, such as search, online auctions, social networking sites, and online music, and that new Internet-based business models—such as online video—will continue to put upward pressure on data center demand in the future. In addition, we believe the increasing penetration of broadband technologies are contributing to growth in the Internet and demand for data centers. According to the Organisation for Economic Co-operation and Development, or OECD, the number of broadband subscribers per 100 inhabitants in OECD countries grew to 16.9 in 2006 from 2.9 in 2001.

 

 

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Industry Growth and Consolidation. We believe that growth, consolidation and the increasing maturity of the technology industry have led to the emergence of a significant number of well-known, financially secure companies, including Internet companies, with long-term business prospects. Many of these companies are now profitable entities that are willing and able to enter into long-term leases for their data center needs—as opposed to the short-term licenses typical of traditional colocation facilities—and take advantage of the benefits such leases have to offer, including lower base rents and economies of scale.

Demand Increasing, Including Among Enterprise Tenants. According to industry analysts, demand is out-stripping supply by a ratio of 2-to-1, as both technology and non-technology businesses, or enterprise tenants, increasingly outsource their network server needs to third-party data centers. Enterprise tenants are generally Fortune 500 businesses that require significantly less critical load than large technology companies. As somewhat smaller, but still significant, users of power, we believe that these companies do not find it cost-effective to build and staff their own data centers, but instead prefer to outsource such functions in order to focus on their own core competencies.

Reduced Supply of Data Center Space; Increased Need for Power. Even as demand for data center space grows among technology and enterprise companies, many of the telecommunications companies that had traditionally built data centers exited the data center business between 2000 and 2002. As a result, the available inventory of space in traditional colocation facilities became increasingly limited. In addition, most colocation facilities—which generate on average approximately 5.0 MW to 6.0 MW of critical load—are not equipped to provide the heightened levels of power and cooling that large technology companies now demand, according to Tier1 Research. The amount of power required to operate modern servers and software applications has steadily increased, even as servers have become faster. These trends have further contributed to the demand for data centers.

Despite the increase in demand for wholesale infrastructure, we believe the significant cost to build wholesale infrastructure, the lack of specially trained personnel and the shortage of land that is optimal for the development of the most efficient data centers raise significant barriers to entry that would make it difficult for new companies to enter into this specialized market.

Our Competitive Strengths

We believe we distinguish ourselves from other data center providers through the following competitive strengths:

 

   

Data centers with high power capacity and long useful lives. Our four stabilized data centers and our newest data centers under development each will have sufficient critical load to serve the world’s largest technology companies and are specially designed to have long useful lives, with core power and cooling infrastructure based on stable technology that is not tenant specific and therefore is less likely to become obsolete.

 

   

Strategically located data centers. Our operating and planned development properties are strategically located in four premium markets, including Northern Virginia, Piscataway, New Jersey near New York City, Elk Grove, Illinois in suburban Chicago and Santa Clara, California in Silicon Valley, each of which are located near sources of relatively inexpensive power, major population centers and significant fiber optic networks.

 

   

Strong development pipeline and track record. In addition to the 36.4 MW planned for CH1, our development pipeline includes six new data centers comprising in the aggregate 187.2 MW of critical load. We believe that our in-house development expertise, including our key technical managers, as well as our extensive network of relationships with key providers who are experienced in the construction of data centers gives us a significant advantage over those of our competitors who must rely exclusively on third parties to develop and maintain their properties.

 

 

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Industry-leading tenants with strong credit. Our tenant base consists primarily of leading national and international technology companies, such as Microsoft, Yahoo! and Google, as well as leading enterprise companies, such as FactSet Research Systems, Sanofi-Aventis, and UBS. Our tenants generally have investment-grade or equivalent credit and we have not, to date, experienced any tenant defaults. As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, accounted for 85.8% of our annualized rent.

 

   

Long-term, triple net leases with annual rent increases. We lease our space through long-term, triple net leases under which our tenants are obligated to reimburse us for property-level operating expenses. Our leases also contain annual rent increases and, with one exception, do not permit early termination. As of October 1, 2007, our weighted average remaining lease term was approximately 7.8 years.

 

   

Seasoned management team with data center and public company experience. Our senior managers, Messrs. du Pont and Fateh and our Chief Financial Officer, Steven G. Osgood, have an average of 15 years of experience in the commercial real estate industry and, in the case of Messrs. du Pont and Fateh, a significant portion of this experience is in the data center business. In addition, Mr. Osgood has substantial public company experience serving as President and Chief Financial Officer of U-Store-It Trust from the company’s initial public offering in October 2004 through April 2006 and Executive Vice President and Chief Financial Officer of Global Signal, Inc. from April 2006 until its sale to Crown Castle International Corp. in January 2007.

Business and Growth Strategies

Our primary business objectives are to maximize cash flow per share and returns to our stockholders through the prudent management of a balanced portfolio of operating and development properties. Our business strategies to achieve these objectives are:

 

   

Maximize cash flow from existing properties. We intend to continue to use the triple-net structure for our leases, under which our tenants are contractually obligated to reimburse us for property-level operating expenses and which contain annual rent increases, which are typically 3.0% to 4.0%, to provide for stable growth in operating cash flows from our operating properties.

 

   

Build out our current development pipeline. We intend to grow our portfolio of data centers primarily through the build-out of our development pipeline. The first phase of ACC4 was placed in service in July 2007. We expect to complete development of the second phase of ACC4 in November 2007 and the first phase of CH1 by the end of 2008.

 

   

Diversify tenant base to include additional enterprise companies. With our new, scalable data centers, we intend to continue to target prospective enterprise tenants with strong credit, such as financial services, entertainment, media and travel companies and local, state and federal governments and government agencies to supplement and diversify our tenant base.

 

   

Expand integrated platform to other domestic and international markets. We intend to expand our integrated platform in order to accommodate the needs of our growing technology tenants and to meet the needs of new potential tenants, and we are actively seeking additional opportunities to expand in key domestic areas, including the southwestern United States, and in international markets.

Secured Credit Facility

Upon completion of this offering and the formation transactions, our OP will assume the obligations under an existing $275.0 million secured revolving credit facility, which we refer to in this prospectus as our revolving facility or as the KeyBank credit facility, and an existing $200.0 million secured term loan, both of which are arranged by KeyBank National Association.

 

 

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As of October 1, 2007, there was $233.2 million outstanding on our revolving facility, which has a maximum capacity of $275.0 million. Upon consent of the lender, this amount may be increased by up to $200.0 million to a total borrowing capacity of $475.0 million depending on certain factors, including the value of, and debt service on, the properties included in our borrowing base. In order to take advantage of this feature, we anticipate that we would need to add properties to the borrowing base. The revolving facility matures on August 7, 2010, but includes an option whereby we may elect, once, to extend the maturity date by 12 months. The term loan is an interest only loan with the full principal amount due at maturity on August 7, 2011, with no option to extend. Upon completion of this offering, the interest rate associated with the revolving facility will be between LIBOR plus 1.25% and LIBOR plus 1.70%, depending on our applicable leverage ratio, and the interest rate on our term loan will be LIBOR plus 1.50%. Our four stabilized properties comprise our current borrowing base. In addition, we may in the future choose to add some or all of the other properties that we acquire upon the completion of this offering or other properties that we may acquire in the future to the borrowing base in order to, among other things, increase the amount that we may borrow under the revolving facility. Once added to the borrowing base, properties may only be removed with the approval of our lenders. In addition, the revolving facility and term loan contain customary covenants.

Our Portfolio Summary

Operating Properties. The following table presents an overview of our operating properties, including our four stabilized properties and ACC4, based on information as of October 1, 2007:

 

Property and Location

  Year Built/
Renovated
  Gross
Building
Area(1)
  Raised
Square
Feet(2)
 

Critical

Load(3)

  %
Leased(4)
   

Annualized Rent

(in thousands)(5)(6)

  Annualized
Management
Fee Recoveries
(in thousands)(7)
 

VA3

    Reston, VA

  2003(8)   256,000   144,901   13.0 MW   100 %   $ 8,574   $ 660  

VA4

    Bristow, VA

  2005(8)   230,000   90,000   9.6 MW   100 %   $ 15,327   $ 1,080  

ACC2

    Ashburn, VA

  2001/2005   87,000   53,397   10.4 MW   100 %   $ 10,783   $ 704  

ACC3

    Ashburn, VA

  2001/2006   147,000   79,600   13.0 MW   100 %   $ 18,076   $ 1,156  
ACC4 Phase I
    Ashburn, VA
  July 2007   150,000   85,700   18.2 MW   100 %   $ 24,289     —   (9)
ACC4 Phase II
    Ashburn, VA
 

November 2007
(estimated)

  150,000
  85,600
  18.2 MW
  43.8
%(10)
   
n/a
   
n/a
 
                             

Totals

    1,020,000   539,198   82.4 MW     $ 77,049   $ 3,600  
                             

(1) The entire building area, including raised square footage (the portion of gross building area where our tenants’ computer servers are located), tenant common areas, areas controlled by us (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to our tenants.
(2) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(3) Critical load is the power available for exclusive use by our tenants expressed in terms of MW or kW (1 MW is equal to 1,000 kW). In addition to critical load, each of our data centers is designed to provide sufficient additional power to cool our tenants’ servers, which we refer to as essential load.
(4) Percentage leased is expressed as a percentage of raised square feet that is subject to a signed lease. With respect to any given facility, critical load is distributed approximately evenly to each raised square foot. Accordingly, percentage leased rates are not materially different when expressed as a percentage of a facility’s critical load.

 

 

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(5) Annualized rent is presented for leases commenced as of October 1, 2007 on a straight-lined basis over the non-cancellable terms of the respective leases beginning from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended. Annualized rent includes base rent and other rents (including, as applicable, office, storage, parking and cage space) and all historical and future contractual increases to such rents, including any increases that are scheduled to occur subsequent to October 1, 2007. There is no annualized rent associated with ACC4 Phase II because these leases are not scheduled to commence until November 2007 and January 2008.
(6) Annualized rent based on actual base rental rates in effect as of October 1, 2007, without giving effect to any future contractual rent increases, equals $8.1 million, $14.6 million, $9.7 million, $16.5 million and $8.0 million for VA3, VA4, ACC2, ACC3 and ACC4 Phase I, respectively, or $56.9 million in the aggregate.
(7) Annualized management fee recoveries for all leases commenced as of October 1, 2007, as determined from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended, consists of our property management fee, which is a variable fee that our tenants pay in exchange for receiving property management services from us, including general maintenance, operations, and administration of each facility. This fee is equal to approximately 5.0% of the sum of (i) base rent, (ii) other rents (including, as applicable, office, storage, parking and cage space) and (iii) estimated recoverable operating expenses allocable to each tenant over the term of the lease other than direct electric, which we define as the cost of the critical and essential load used by a tenant to power and cool its servers. For purposes of calculating annualized management fee recoveries with respect to each property, we have annualized the most recently reported half year of property operating expenses.
(8) Acquired as a fully-developed property.
(9) Annualized management fee recoveries are not calculated because ACC4 Phase I was not in service for the most recently reported half year.
(10) As of October 1, 2007, ACC4 Phase II was 43.8% pre-leased. We currently expect to complete this facility in November 2007.

 

 

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Development Properties. The following table presents an overview of our development properties, based on information as of October 1, 2007. Other than ACC7, we intend to develop each of these facilities in two phases. We cannot guarantee that we will be able to develop these properties in accordance with the schedules, cost estimates and specifications set forth below, or at all:

 

Property and Location

   Expected
Completion
Date
   Estimated Total Cost
(in thousands)(1)
   Gross
Building
Area(2)
   Raised
Square
Feet(3)
   Critical
Load(4)

CH1 Phase I

    Elk Grove Village, IL

   2008    $ 240,000 - $300,000    285,000    121,223    18.2 MW

ACC5 Phase I

    Ashburn, VA

   2009    $ 180,000 - $230,000    150,000    85,600    18.2 MW

SC1 Phase I

    Santa Clara, CA(5)

   2009    $ 240,000 - $300,000    150,000    85,600    18.2 MW

NJ1 Phase I

    Piscataway, NJ

   2009    $ 220,000 - $280,000    150,000    85,600    18.2 MW

CH1 Phase II

    Elk Grove Village, IL

   not scheduled      *    200,000    89,917    18.2 MW

ACC5 Phase II

    Ashburn, VA

   not scheduled      *    150,000    85,600    18.2 MW

SC1 Phase II

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

NJ1 Phase II

    Piscataway, NJ

   not scheduled      *    150,000    85,600    18.2 MW

SC2 Phase I

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

SC2 Phase II

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

ACC6 Phase I

    Ashburn, VA

   not scheduled      *    120,000    77,500    15.6 MW

ACC6 Phase II

    Ashburn, VA

   not scheduled      *    120,000    77,500    15.6 MW

ACC7

    Ashburn, VA

   not scheduled      *    100,000    50,000    10.4 MW

 * Development costs for these projects have not yet been estimated.
(1) Includes costs incurred to date and estimated future costs, including capitalization for construction and development, including closing costs, capitalized interest, leasing commissions and capitalized operating carrying costs, as applicable. As of June 30, 2007, we had incurred development costs of $59.3 million, $6.8 million and $4.2 million in connection with CH1, NJ1 and ACC7, respectively.
(2) Gross building area is the entire building area, including raised square footage (the portion of gross building area where our tenants’ computer servers are located), tenant common areas, areas controlled by us (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to our tenants.
(3) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(4) Critical load is the power available for exclusive use by our tenants expressed in terms of MW or kW (1 MW is equal to 1,000 kW). In addition to critical load, each of our data centers is designed to provide sufficient additional power to cool our tenants’ servers, which we refer to as essential load. Estimated critical loads for ACC5, SC1, NJ1 and SC2 are based generally on our present intention to employ designs for these facilities similar to our ACC4 prototype. The estimated critical loads for ACC6 and ACC7 are expected to be lower due to constraints imposed by the size of the properties.
(5) Upon completion of this offering, we will have contractual rights to acquire the land for these data centers, which we expect to acquire in the fourth quarter of 2007.

 

 

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Summary Risk Factors

You should carefully consider the following important risks as well as the additional risks described in “Risk Factors” beginning on page 20, before purchasing our common stock:

 

   

Any decrease in the demand for data centers, including resulting from a downturn in the technology industry, could harm our business.

 

   

Our initial portfolio of operating properties are all located in Northern Virginia and any adverse developments in the area’s economy may negatively affect our operating results.

 

   

Our growth depends upon the successful development of our properties and any delays or unexpected costs in such development may delay and harm our growth prospects, future operating results and our financial condition.

 

   

As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, collectively accounted for 85.8% of our annualized rent, and the loss of either tenant or any other significant tenant could have a materially adverse impact on our business.

 

   

Our tenants may choose to develop new data centers or expand their existing data centers, which could result in the loss of one or more key tenants.

 

   

Our properties are not suitable for lease other than as data centers, which could make it difficult to reposition them if we are not able to lease available space.

 

   

The departure of any key personnel, including either of Messrs. du Pont or Fateh, who have developed significant relationships with leading technology tenants in the highly specialized data center business, could have a material adverse impact on our business.

 

   

We have not relied on third-party appraisals to establish the purchase price to be paid for our initial properties and other interests to be acquired by us in connection with this offering and the consideration paid by us in exchange for them may exceed their fair market value.

 

   

We have owned our properties for a limited time and may not be aware of significant deficiencies involving any one or all of them.

 

   

We face significant competition and may be unable to renew existing leases, lease vacant space or re-lease space as leases expire, which may have a material adverse impact on our operating results.

 

   

We will have a substantial amount of indebtedness outstanding following this offering, which may negatively impact our ability to make distributions, may expose us to interest rate fluctuations and may expose us to the risk of default under our debt obligations.

 

   

Illiquidity of real estate investments and the terms of certain of our leases could significantly impede our ability to respond to adverse changes in the performance of our properties, which could harm our financial condition.

 

   

Our senior management team will have significant influence over our affairs.

 

   

Our charter and Maryland law contain provisions that may delay, defer or prevent a change in control transaction, even if such a change in control may be in your interest, and as a result may depress our stock price.

 

   

Our board of directors has no policy regarding the level of indebtedness that we may incur.

 

   

Failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.

 

   

Our cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future, and we may need to borrow in order to make such distributions or may not be able to make such distributions at all.

 

 

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Formation of Our Company

Upon completion of this offering, we will engage in a series of transactions, which we refer to in this prospectus as the formation transactions, pursuant to which we will acquire ownership of our initial properties, contract rights to acquire property, and property management, development, leasing, asset management and technical services agreements and arrangements. See “Structure and Formation of Our Company.” In connection with this offering and the formation transactions and assuming an initial public offering price per share equal to the mid-point of the price range indicated on the front cover page of this prospectus:

 

   

Aggregate consideration of $555.2 million, consisting of 23,045,366 OP units and $94.3 million in cash, will be allocated to the contributors of property and other interests to our OP (or its subsidiaries), based on previous consideration elections made by those contributors. In connection with these transactions, our OP will also assume $370.4 million of debt.

 

   

Aggregate consideration of $167.7 million, consisting of 8,116,906 OP units and $5.3 million in cash, will be allocated to the members of certain entities affiliated with our sponsors in exchange for the contribution of such entities’ property management, development, leasing, asset management and technical services agreements and arrangements to our OP, based on previous consideration elections made by such members.

We discuss below the following significant elements of our formation transactions:

Contribution of Properties to Secure the KeyBank Credit Facility Prior to the IPO

Prior to entering into the KeyBank credit facility, each of our initial properties was directly owned by a single-property entity. To secure the KeyBank credit facility, we combined the interests in several of our operating and development properties—VA3, VA4, ACC2, ACC3 and CH1—to be held indirectly by one holding company, Safari Ventures LLC, in order to serve as collateral. Following the closing of the KeyBank credit facility, each of the former members of the property-holding entities held a direct or indirect interest in the holding company. This holding company used a portion of the proceeds of the KeyBank credit facility to purchase for cash an indirect interest in land to be used for the development of ACC5 and ACC6.

Contribution of Assets in Connection with the IPO

Operating and Development Properties

Following the contribution of properties to secure the KeyBank credit facility, we will acquire the holding company through a series of five mergers and will indirectly own all of the interests in VA3, VA4, ACC2, ACC3 and CH1 and the land on which we plan to develop ACC5 and ACC6. In addition, we will acquire a 100% interest in ACC4 and land to be used for the development of NJ1 and ACC7 through a merger and contribution, respectively. In connection with these transactions, the members of the property-holding entities will receive, based on previous elections made by them, an aggregate of $92.0 million in cash and 23,045,366 OP units.

Contract Rights to Acquire Santa Clara Land

We have entered into a contribution agreement pursuant to which an entity controlled by our sponsors will contribute contract rights to acquire land in Santa Clara, California to us. In connection with this contribution, our sponsors will receive, based on previous elections made by them, an aggregate of $2.3 million in cash.

Property Management, Development, Leasing and Asset Management Agreements and Arrangements

We have entered into contribution agreements with affiliates of our sponsors pursuant to which such affiliates will contribute property management, development, leasing and asset management agreements and

 

 

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arrangements to us, and the members of such affiliates (including our sponsors) will receive, based on previous elections made by them, an aggregate of $4.9 million in cash and 7,865,990 OP units.

Technical Services Arrangements

We have entered into an agreement with an affiliate of our sponsors pursuant to which such affiliate will contribute its technical services arrangements to us, which we will in turn contribute to our TRS, and the members of such affiliate (including our sponsors) will receive, based on previous elections made by them, an aggregate of $0.4 million in cash and 250,916 OP units. Following the offering, our TRS will provide technical services to our tenants on a contract basis.

Our Operating Partnership

Following completion of this offering and the formation transactions, substantially all of our assets will be held by, and our operations conducted by, our OP. We will contribute $560.3 million of the net proceeds of this offering to our OP in exchange for a 49.8% interest in our OP, or $645.4 million to our OP in exchange for a 53.3% interest in our OP if the underwriters exercise in full their option to purchase additional shares. As described above, certain other entities and individuals, including Messrs. du Pont and Fateh, will own the remaining OP units and be limited partners of our OP. We will control our OP as general partner and as the owner of approximately 49.8% of the interests in our OP. Our primary asset will be our general and limited partner interests in our OP.

Upon completion of this offering and the formation transactions, Messrs. du Pont and Fateh will have an aggregate 34.8% interest in our OP, and an approximate 35.2% beneficial interest in us.

 

 

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Our Structure

The following chart reflects the expected ownership structure for our company and our OP upon the completion of this offering and the formation transactions:

LOGO


(1) Less than 1% held by insiders.
(2) Entity created to hold combined interests in properties serving as collateral for the KeyBank credit facility.
(3) ACC4 Phase I was brought into service in July 2007. ACC4 Phase II is expected to be completed in November 2007.
(4) Includes land under contract.

 

 

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Material Benefits to Related Parties

Upon completion of this offering and the formation transactions, our executive officers and members of, and nominees to, our board of directors will receive material financial and other benefits, as described below. For a more detailed discussion of these benefits see “Management” and “Certain Relationships and Related Transactions.”

Formation Transactions

In connection with the formation transactions, Messrs. du Pont and Fateh, or entities controlled by them, will exchange membership interests in the entities contributing property and other interests to us for OP units and cash, as described below:

Lammot J. du Pont. Mr. du Pont will receive aggregate consideration of $186.9 million, consisting of 7,580,092 OP units and $35.3 million in cash, with respect to his interests in certain property-holding entities which will be contributed to or merged with our OP (or its subsidiaries), based on previous elections made by Mr. du Pont. Mr. du Pont will also receive consideration of $75.4 million, consisting of 3,770,082 OP units, with respect to his interests in certain property management, development, leasing, asset management and technical services agreements and arrangements which will be contributed to our OP, based on previous elections made by Mr. du Pont.

Hossein Fateh. Mr. Fateh will receive consideration of $165.8 million, consisting of 6,526,450 OP units and $35.3 million in cash, with respect to his interests in certain property-holding entities which will be contributed to or merged with our OP (or its subsidiaries), based on previous elections made by Mr. Fateh. Mr. Fateh will also receive aggregate consideration of $75.4 million, consisting of 3,770,082 OP units, with respect to his interests in certain property management, development, leasing, asset management and technical services agreements and arrangements which will be contributed to our OP, based on previous elections made by Mr. Fateh.

Our sponsors intend to use a substantial portion of the cash proceeds they receive in connection with the formation transactions to repay borrowings outstanding under lines of credit. These include $36.0 million expected to be outstanding upon completion of this offering under a loan with an affiliate of one of the underwriters, Lehman Brothers Inc. This loan is secured by our sponsors’ interests in some of our initial properties and is required to be repaid upon completion of this offering. In addition, our sponsors will be released from certain non-recourse carve-out guarantees and environmental indemnity obligations under the CH1 mortgage in connection with the formation transactions.

Partnership Agreement

Concurrently with the completion of this offering, we will enter into a partnership agreement with the various limited partners of our OP, of which we will be the general partner. Upon completion of this offering and the formation transactions, Messrs. du Pont and Fateh, and entities collectively controlled by them, will own an aggregate of approximately 34.8% of the partnership interests of our OP. Pursuant to the partnership agreement, persons holding OP units as a result of the formation transactions will have rights, beginning 12 months after the completion of this offering, to cause our OP to redeem each of their OP units for cash equal to the then-current market value of one share of common stock, or, at our election, to exchange their OP units for shares of our common stock on a one-for-one basis. See “Description of the Partnership Agreement of DuPont Fabros Technology, L.P.”

Employment Agreements

Upon completion of this offering, each of Messrs. du Pont and Fateh will enter into an employment agreement with us. The employment agreements with each of Messrs. du Pont and Fateh will be for a three-year term with automatic one-year renewals. We entered into an employment agreement with Mr. Osgood effective on July 26, 2007, that has a one-year term. See “Management—Employment Agreements.”

 

 

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Our employment agreements with Messrs. du Pont and Fateh will each provide for a base salary of $250,000, a grant of $1.0 million of shares of our common stock and a grant of $2.0 million of long-term incentive plan units, or LTIP units, which are a special class of partnership interest in our OP that provide the holder with economic value that is comparable to the value associated with ownership of shares of our common stock if certain events occur. The actual number of shares of common stock and LTIP units to be granted to Messrs. du Pont and Fateh will be based on the initial public offering price per share of our common stock. The shares of common stock and LTIP units to be granted to Messrs. du Pont and Fateh will be fully vested upon grant. Holders of LTIP units are entitled to receive distributions in the same amount and at the same time that we pay dividends to holders of our common stock.

Our employment agreement with Mr. Osgood provides for a base salary of $250,000 and a grant upon completion of this offering of $1.5 million of restricted shares of our common stock, or restricted stock, with the actual number of shares of restricted stock to be determined based on the initial public offering price per share of our common stock. These shares of restricted stock will be subject to forfeiture restrictions that will lapse, subject to continued employment, with respect to one-half of the shares in January 2008 and with respect to the second half of the shares in July 2008. Holders of shares of restricted stock are entitled to receive dividends during the restricted period.

Messrs. du Pont and Fateh will be eligible to receive a cash bonus, subject to determination by our compensation committee. However, our management intends to recommend to the compensation committee that no cash or equity bonuses be awarded to Messrs. du Pont or Fateh in respect of their performances for the balance of fiscal year 2007 and all of fiscal year 2008. Mr. Osgood is not entitled to receive a cash bonus under his employment agreement.

For a description of other terms of the employment agreements of Messrs. du Pont, Fateh and Osgood, see “Management—Employment Agreements.”

Director Compensation

Upon completion of the offering, each of our independent directors will receive 2,000 shares of common stock and other cash compensation as set forth in “Management—Director Compensation.”

Registration Rights

All holders of OP units, including Messrs. du Pont and Fateh, will receive registration rights with respect to shares of our common stock that may be issued to them upon the redemption of OP units. See “Shares Eligible for Future Sale—Registration Rights.”

Indemnification Agreements

Effective upon completion of this offering, we will enter into an indemnification agreement with each of our executive officers and directors as described in “Management—Indemnification Agreements.”

Tax Protection Agreements

Effective upon completion of this offering, we will enter into tax protection agreements with some of the contributors of the initial properties including Messrs. du Pont and Fateh. Pursuant to the terms of these agreements, if we dispose of any interest in ACC2, ACC3, VA3, VA4 or CH1 that generates more than a certain allowable amount of built-in gain for the contributors, as a group, in any single year through 2016, we will indemnify the contributors for tax liabilities incurred with respect to the amount of built-in gain and tax liabilities incurred as a result of the reimbursement payment. The required indemnification will decrease ratably over the course of each year of tax protection by 10% of the estimated tax on the built-in gain, declining to zero by the

 

 

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end of 2016. The aggregate built-in gain on the initial properties upon completion of this offering is estimated to be approximately $722.7 million. Any sale by us that requires payments to any of our executive officers or directors pursuant to these agreements requires the approval of at least 75% of the disinterested members of our board of directors. In addition, these investors will be given the opportunity to guarantee a portion of our OP’s indebtedness to provide them with certain tax protection, and we will agree to indemnify them in certain circumstances for any tax liability that they may incur. See “Structure and Formation of Our Company—Tax Protection Agreements.”

Restrictions on Ownership and Transfer of Our Stock

In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, our charter generally prohibits any person (other than a qualified institutional investor or a person who has been granted an exception, or an excepted holder) from actually or constructively owning more than 3.3% of our common stock by value or by number of shares, whichever is more restrictive, or 3.3% of our outstanding capital stock by value. However, our charter permits exceptions to be made for stockholders provided our board of directors determines such exceptions will not jeopardize our qualification as a REIT. In addition, our charter permits any qualified institutional investor to actually or constructively own up to 9.8% of our common stock by value or by number of shares, whichever is more restrictive, or 9.8% of our outstanding capital stock by value. In addition, our charter permits Mr. du Pont, certain of his affiliates, family members and trusts formed for the benefit of the foregoing to actually or constructively own up to 20.0% of our common stock by value or by number of shares, whichever is more restrictive, or 20.0% of our outstanding capital stock by value, and Mr. Fateh, certain of his affiliates, family members and trusts formed for the benefit of the foregoing shall be permitted to actually or constructively own up to 20.0% of our common stock by value or by number of shares, whichever is more restrictive, or 20.0% of our outstanding capital stock by value.

In addition, under the agreement governing our OP, holders of OP units received in connection with the formation transactions do not have redemption or exchange rights, and may not otherwise transfer their OP units, except under certain limited circumstances, for a period of 12 months following completion of this offering. In addition, our executive officers, directors and certain stockholders have agreed with the underwriters of this offering, subject to certain exceptions, not to sell or otherwise transfer or encumber any shares of our common stock or securities convertible or exchangeable into common stock (including OP units) owned by them at the completion of this offering or thereafter acquired by them for a period of 12 months in the case of Messrs. du Pont and Fateh and for a period of 180 days for all other executive officers, directors and certain stockholders, after the date of this prospectus, subject to a limited extension under certain circumstances. Such transfer restrictions may be waived with the consent of each of Lehman Brothers Inc. and UBS Securities LLC. See “Description of Securities—Restrictions on Ownership and Transfer.”

Conflicts of Interest

Following completion of this offering, there will be conflicts of interest with respect to certain transactions between the holders of OP units and our stockholders. In particular, the consummation of certain business combinations, the sale of any properties or a reduction of indebtedness could have different tax consequences to holders of OP units, which would make those transactions more or less desirable to holders of such units. Messrs. du Pont and Fateh will hold OP units upon completion of this offering and the formation transactions. In addition, Messrs. du Pont and Fateh have certain outside business interests. For more information regarding these conflicts of interests, see “Certain Relationships and Related Transactions—Outside Business Interests” and “Investment Policies and Policies with Respect to Certain Activities—Conflicts of Interest Policies.” In addition, we did not conduct arm’s-length negotiations with Messrs. du Pont and Fateh with respect to the terms of the formation transactions. In the course of structuring the formation transactions, Messrs. du Pont and Fateh had the ability to influence the type and level of benefits that they would receive from us.

 

 

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This Offering

 

Common stock offered by us

30,500,000 shares(1)

 

Common stock to be outstanding upon completion of this offering

30,971,750 shares(1)(2)

 

Common stock and OP units to be outstanding upon completion of this offering

62,438,647 shares and OP units(1)(2)(3)

 

Use of proceeds

We intend to use the net proceeds from this offering to repay existing indebtedness, including any loan exit fees and prepayment penalties, and for other purposes, as follows:

 

   

approximately $304.9 million to repay mortgage and mezzanine indebtedness on ACC4 of $210.8 million, related exit and prepayment fees of $64.4 million and related development costs payable of $29.7 million;

 

   

approximately $22.5 million to fund the purchase price of the land in Santa Clara, California;

 

   

approximately $99.6 million to purchase property interests from certain of our contributors (including $70.5 million to Messrs. du Pont and Fateh) who have elected to receive cash in the formation transactions(4);

 

   

approximately $130.3 million to repay amounts outstanding under our revolving facility; and

 

   

approximately $3.0 million to fund working capital.

 

 

We currently expect that additional net proceeds, if any, will be used to fund ongoing development costs, for general working capital and potentially to fund future acquisitions.

 

 

Included in the $210.8 million in mortgage and mezzanine indebtedness on ACC4 is the amount of $87.3 million provided to us by an affiliate of Lehman Brothers Inc. which loans we intend to repay in full with a portion of the net proceeds of this offering. In addition, affiliates of the underwriters of this offering are lenders on our secured credit facilities including our revolving facility, which we intend to pay down with a portion of the net proceeds of this offering. See “Underwriting—Relationships.”

 

New York Stock Exchange symbol

DFT


(1) Excludes shares issuable upon the exercise of the underwriters’ option to purchase up to an additional 4,575,000 shares.
(2) Includes 1,000 shares issued to Messrs du Pont and Fateh on our initial capitalization and 470,750 shares of common stock (including 75,000 shares of restricted stock) to be issued to certain of our directors, director nominees, executive officers, employees and consultants upon completion of this offering.
(3) Includes OP units and LTIP units that will be issued and fully vested upon completion of this offering.
(4) Our sponsors intend to use a substantial portion of the cash proceeds they receive in connection with the formation transactions to repay borrowings outstanding under lines of credit. These include $36.0 million expected to be outstanding upon completion of this offering under a loan with an affiliate of one of the underwriters, Lehman Brothers Inc. This loan is secured by our sponsors’ interests in some of our initial properties and is required to be repaid upon completion of this offering.

 

 

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Dividend Policy

We intend to make quarterly distributions to holders of our common stock. We intend to make a pro rata distribution with respect to the period commencing after the completion of this offering and ending on December 31, 2007, assuming a distribution of $0.1875 per share for a full quarter. On an annualized basis, this would be $0.75 per share, or an annual distribution rate of approximately 3.75%, based on an initial public offering price of $20.00 per share, the mid-point of the range set forth on the cover page of this prospectus. We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. Distributions made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and the capital requirements of our company. We do not intend to reduce the expected distribution per share if the underwriters’ option to purchase additional shares is exercised.

Our Tax Status

We intend to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ending December 31, 2007. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes, but we cannot assure you that our operations will allow us to satisfy the requirements for qualification and taxation as a REIT. To qualify and maintain our qualification as a REIT, we must meet a number of organizational and operational requirements on a continuing basis, including the requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, to our stockholders. As a REIT, we generally will not be subject to federal income tax on REIT taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory savings provisions, we will be subject to federal, state and local income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income and property, and our TRS will be subject to federal, state and local income taxes. See “Federal Income Tax Considerations.”

 

 

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Summary Historical and Pro Forma Financial Data

The following table sets forth summary selected financial data on a historical basis for our accounting predecessor, or our Predecessor. Our Predecessor is comprised of the real estate activities of one of our operating properties, ACC3. As part of our formation transactions, our Predecessor will acquire our other data center properties and land held for development of data centers, which we refer to in this prospectus as our Acquired Properties. Our Acquired Properties include the continuing real estate operations of VA3, VA4, ACC2 and ACC4 (the first phase of ACC4 commenced operations in July 2007, and the second phase is scheduled for completion in November 2007), a property currently under development, CH1 and undeveloped parcels of land in Northern Virginia and Piscataway, New Jersey related to ACC7 and NJ1, respectively. In addition, in August 2007, we acquired two undeveloped parcels of land in Northern Virginia related to ACC5 and ACC6. In addition, we will acquire certain contract rights to acquire land in Santa Clara, California related to SC1 and SC2. The historical operating results of our Predecessor include external management expenses, as our Predecessor was not self-managed. Following completion of this offering, we will be self-managed. For accounting purposes, our Predecessor is considered to be the acquiring entity in the formation transactions and, accordingly, the acquisition of our Acquired Properties will be recorded at fair value. For more information regarding the formation transactions, please see “Structure and Formation of Our Company.”

The unaudited pro forma financial data for the six months ended June 30, 2007 and for the year ended December 31, 2006 are presented as if the refinancing of our four stabilized properties and the acquisition of the land underlying our planned ACC5 and ACC6 development, using the proceeds of our term loan and revolving credit facility arranged by KeyBank National Association, which transactions we collectively refer to in this prospectus as the KeyBank Refinancing, this offering and the formation transactions each had occurred on January 1, 2006. Pro forma balance sheet data as of June 30, 2007 is presented as if the KeyBank Refinancing, the offering and the formation transactions had occurred on June 30, 2007. The pro forma data does not purport to represent what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

The summary historical financial information as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 has been derived from our Predecessor’s audited financial statements included elsewhere in this prospectus.

The summary historical financial information as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 and as of December 31, 2004 has been derived from our Predecessor’s unaudited financial statements. In the opinion of the management of our company, the unaudited interim financial information included herein includes any adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein.

You should read the following summary selected financial data in conjunction with our pro forma financial statements, our Predecessor’s historical financial statements and the related notes thereto, and our Acquired Properties combined historical financial statements and the related notes thereto, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

 

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    Six months ended June 30,     Year ended December 31,  

(in thousands except

per share data)

  Pro Forma
Consolidated
    Historical Predecessor     Pro Forma
Consolidated
    Historical Predecessor  
    2007     2007     2006     2006     2006     2005     2004  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                    

Statement of Operations Data

             

Revenue:

             

Operating revenues

  $ 44,046     $ 12,551     $ —       $ 69,383     $ 10,685     $ —       $ —    
                                                       

Expenses:

             

Real estate taxes

    920       123       —         1,145       99       161       129  

Insurance

    284       66       —         430       65       43       41  

Property operating costs

    13,067       2,694       46       19,084       1,823       9       11  

Management fees

    —         696       —         —         616       —         —    

Depreciation and amortization

    12,669       2,180       —         23,167       2,186       177       193  

General and administrative

    5,050       65       135       10,100       278       174       —    
                                                       

Total operating expenses

    31,990       5,824       181       53,926       5,067       564       374  
                                                       

Operating income (loss)

    12,056       6,727       (181 )     15,457       5,618       (564 )     (374 )

Other income and expense

             

Interest income

    381       84       81       375       157       —         —    

Interest expense

    (8,738 )     (5,762 )     (732 )     (17,417 )     (6,280 )     (44 )     —    
                                                       

Income (loss) from continuing operations

    3,699       1,049       (832 )     (1,585 )     (505 )     (608 )     (374 )

Non-controlling interests in continuing operations of operating partnership

    (1,855 )     —         —         795       —         —         —    
                                                       

Income (loss) from continuing operations(1)

  $ 1,844     $ 1,049     $ (832 )   $ (790 )   $ (505 )   $ (608 )   $ (374 )
                                                       

Net income (loss)

    N/A     $ 1,049     $ (832 )     N/A     $ (505 )   $ (608 )   $ (374 )
                                                       

Pro forma earnings (loss) per share—basic and diluted

             

From continuing operations

  $ 0.06         $ (0.03 )      
                         

Pro forma weighted average common shares outstanding

    30,971,750           30,971,750        
                         
                            Historical Predecessor  
   

Pro Forma
Consolidated

   

Historical
Predecessor

                As of December 31,  
   

As of

June 30,
2007

   

As of

June 30,
2007

                2006     2005     2004  
(in thousands)   (unaudited)     (unaudited)                             (unaudited)  

Balance Sheet Data

             

Real estate, net

  $ 923,099     $ 91,169         $ 92,021     $ 15,972     $ 6,671  

Total assets

    1,033,096       125,409           113,905       36,561       6,693  

Mortgages and notes payable

    255,689       125,756           112,490       27,803       —    

Non-controlling interests—operating partnership

    349,860       —             —         —         —    

Shareholders’ equity/members’ equity (deficit)

    347,722       (5,956 )         (7,005 )     6,500       6,693  
    Six months ended June 30,     Year ended December 31,  

(in thousands, unaudited )

  Pro Forma
Consolidated
    Historical Predecessor     Pro Forma
Consolidated
    Historical Predecessor  
    2007     2007     2006     2006     2006     2005     2004  

Other Data:

             

Funds from operations(2)

             

Net income (loss) (1)

  $ 1,844     $ 1,049     $ (832 )   $ (790 )   $ (505 )   $ (608 )   $ (374 )

Adjustments:

             

Real estate depreciation and amortization

    12,669       2,180       —         23,167       2,186       177       193  

Non-controlling interests in operating partnership

    1,855       —         —         (795 )     —         —         —    
                                                       

Funds from operations

  $ 16,368     $ 3,229     $ (832 )   $ 21,582     $ 1,681     $ (431 )   $ (181 )
                                                       

 

 

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(1) The unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus are presented through income from continuing operations. As a result, our pro forma funds from operations calculations begin with income from continuing operations. For the historic operations of our Predecessor, net income was the same as income from continuing operations, as our Predecessor did not have any discontinued operations.
(2) We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents income (loss) (computed in accordance with accounting principles generally accepted in the United States of America, or GAAP), excluding gains (or losses) from sales of depreciable operating property, real estate depreciation and amortization (excluding amortization of deferred financing costs) and non-controlling interests and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because, in excluding real estate depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that results from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Other equity REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to FFO as reported by other companies. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used as a substitute for cash flow from operating activities computed in accordance with GAAP. The above table presents the reconciliation of FFO to our income (loss), which we believe is the most directly comparable pro forma GAAP measure to our FFO. See Note (1) above.

 

 

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RISK FACTORS

Investment in our common stock involves a high degree of risk. In addition to other information contained in this prospectus, you should carefully consider the following factors before acquiring shares of our common stock offered by this prospectus. The occurrence of any of the following risks might cause you to lose all or a part of your investment. These risks are not the only ones that we may face. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations and hinder our ability to make expected distributions to our stockholders. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Special Note Regarding Forward-Looking Statements and Market Data.”

Risks Related to Our Business and Operations

Any decrease in the demand for data centers, including resulting from a downturn in the technology industry, could harm our business.

Our portfolio of properties consists entirely of data centers. A decline in the technology industry could lead to a decrease in the demand for space in our data centers, which may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are also susceptible to adverse developments in the technology industry such as business layoffs or downsizing, industry slowdowns, relocations of businesses, costs of complying with government regulations or increased regulation and other factors. We also may be harmed by any downturns in the market for data centers such as oversupply of or reduced demand for space and a slowdown in web-based commerce. Also, a lack of demand for data center space in other industries that we serve or intend to serve, including healthcare, could have a significant adverse effect on our business and business prospects. In addition, the rapid development of new technologies or the adoption of new industry standards could render many of our tenants’ current products and services obsolete or unmarketable and contribute to a downturn in their businesses, increasing the likelihood of a default under their leases or that they become insolvent or file for bankruptcy.

Our initial portfolio of operating properties are all located in Northern Virginia and any adverse developments in the area’s economy may negatively affect our operating results.

Because all of our operating properties are located in Northern Virginia, we are exposed to greater economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the Northern Virginia economic and regulatory environment (including, but not limited to, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors). Any adverse developments in the economy or real estate market in Northern Virginia in general, or any decrease in demand for data center space resulting from the Northern Virginia regulatory or business environment, could adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to make distributions to you.

Our growth depends upon the successful development of our properties and any delays or unexpected costs in such development may delay and harm our growth prospects, future operating results and our financial condition.

Upon completion of this offering and the formation transactions, we will own certain development projects, including CH1 and ACC4 Phase II, land held for development and contract rights to acquire land. Our future growth in 2008 and later years depends upon the successful completion of these development projects. With respect to our current and any future developments, we will be subject to certain risks, including risks related to financing, zoning, regulatory approvals, construction costs and delays. In addition, we will be subject to risks and, potentially, unanticipated costs associated with obtaining access to a sufficient amount of power from local utilities, including the need, in some cases, to develop utility substations on our properties in order to

 

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accommodate our power needs, constraints on the amount of electricity that a particular locality’s power grid is capable of providing at any given time, and risks associated with the negotiation of long-term power contracts with utility providers. We cannot assure you that we will be able to successfully negotiate such contracts on acceptable terms or at all. Any inability to negotiate utility contracts on a timely basis or on acceptable financial terms or in volumes sufficient to supply the critical load presently anticipated for each of our development properties would have a material negative impact on our growth and future results of operations and financial condition.

These and other risks could result in delays or increased costs, which could prevent completion of development activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to make distributions to you. In addition, we are developing these and may develop future properties prior to obtaining commitments from tenants to lease them. This is known as developing “on speculation” and involves the risk that we will be unable to attract tenants to the properties we are developing on a timely basis or at all. If our properties remain vacant for a significant amount of time, our financial condition, results of operations and ability to make distributions to you would be materially adversely affected.

As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, collectively accounted for 85.8% of our annualized rent, and the loss of either tenant or any other significant tenant could have a materially adverse impact on our business.

As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, accounted for 85.8% of our annualized rent. Our tenants may experience a downturn in their businesses, which may weaken their financial condition and result in their failure to make timely rental payments or their default under their leases. In the event of any tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. This risk would be particularly significant if one of our largest tenants were to default under its lease. In addition, if one or more of our significant tenants fail to renew their leases with us and we cannot find new tenants to utilize this space at the same rental rates, the expiration of these leases, as well as any future expirations, could have a material negative impact on our business.

Some of our largest tenants may compete with one another in various aspects of their businesses. We cannot assure you that the competitive pressures on our tenants will not have a negative impact on our operations. For instance, one tenant could determine that it is not in that tenant’s interest to house mission-critical servers in a facility operated by the same company that relies on a key competitor for a significant part of its annual revenue. Our loss of a large tenant for this or any other reason could have a material adverse effect on our results of operations.

Our tenants may choose to develop new data centers or expand their existing data centers, which could result in the loss of one or more key tenants or reduce demand for our newly developed data centers.

Although our tenants generally enter into long-term leases with us and make considerable investments in housing their servers in our facilities, we cannot assure you that our largest tenants will not choose to develop new data centers or expand any existing data centers of their own in the future. In the event that any of our key tenants were to do so, it could result in a loss of business to us or put pressure on our pricing. If we lose a tenant, there is no guarantee that we would be able to replace that tenant at a competitive rate or at all.

Our data center infrastructure may become obsolete and we may not be able to upgrade our power and cooling systems cost-effectively or at all.

The markets for the data centers we own and operate, as well as the industries in which our tenants operate, are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing tenant demands. Our data center infrastructure may

 

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become obsolete due to the development of new systems to deliver power to or eliminate heat from the servers we house. Additionally, our data center infrastructure could become obsolete as a result of the development of new server technology that does not require the levels of critical load and heat removal that our facilities are designed to provide and could, possibly, be run less expensively on a different platform. In addition, our power and cooling systems are difficult and expensive to upgrade. Accordingly, we may not be able to efficiently upgrade or change these systems to meet new demands without incurring significant costs that we may not be able to pass on to our tenants. The obsolescence of our power and cooling systems could have a material negative impact on our business.

Our properties are not suitable for lease other than as data centers, which could make it difficult to reposition them if we are not able to lease available space.

Our data centers are highly specialized real estate containing extensive electrical and mechanical systems that are designed uniquely to run and maintain banks of computer servers, and, as such, have little, if any, traditional office space. As a result, they are not suited for use by tenants as anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease vacant space for more traditional commercial or industrial uses, or for us to sell a property to a buyer for use other than as a data center.

The departure of any key personnel, including either Messrs. du Pont or Fateh, who have developed significant relationships with leading technology tenants in the highly specialized data center business, could have a material adverse impact on our business.

We depend on the efforts of key personnel, particularly Messrs. du Pont, Fateh and Osgood, the Executive Chairman of our board of directors, our President and Chief Executive Officer and our Chief Financial Officer, respectively. In particular, our reputation among and our relationships with our key tenants are the direct result of a significant investment of time and effort by Messrs. du Pont and Fateh to build our credibility in a highly specialized industry. If we lost their services, our business and investment opportunities and our relationships with lenders, existing and prospective tenants and industry personnel and our reputation among our key tenants could be diminished. In addition, Mr. Osgood’s employment agreement is only for a one-year term. We may find it difficult or costly to replace him if his employment agreement is not renewed and his employment relationship is terminated.

The other senior members of our executive team also have strong technology development, management and real estate industry reputations, which aid us in identifying acquisition opportunities and negotiating with tenants and build-to-suit prospects. The loss of any of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel.

We have not relied on third-party appraisals to establish the purchase price to be paid for our initial properties and other interests to be acquired by us in connection with this offering and the consideration paid by us in exchange for them may exceed their fair market value.

We have not relied on third-party appraisals to establish the purchase price to be paid for our initial properties and other interests to be acquired by us in connection with this offering. The amount of consideration that we will pay is based on management’s estimate of fair market value, including an analysis of market sales comparables, market capitalization rates for other properties and general market conditions for such properties. The amount of consideration that we will pay was not determined as a result of arm’s-length negotiations and management’s estimate of fair market value may exceed the appraised fair market value of these assets.

We have no operating history as a REIT or a public company, and our inexperience may impede our ability to successfully manage our business.

We were formed on March 2, 2007 and have no operating history as a REIT or a public company. We cannot assure you that our past experience will be sufficient to successfully operate our company as a REIT or a public

 

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company. Although our executive officers and directors have extensive experience in the real estate industry, only Mr. Osgood, our Chief Financial Officer, has prior experience in operating a business in accordance with the Code requirements for REIT qualification or in operating a public company in accordance with Securities and Exchange Commission, or SEC, requirements. After this offering and our formation transactions, we will be required to develop and implement substantial control systems and procedures in order to qualify and maintain our qualification as a REIT and satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with NYSE listing standards. Failure to qualify and maintain our qualification as a REIT would have a material adverse effect on our company, our stock price and cash available for distribution to stockholders.

Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.

In connection with the formation transactions we will enter into tax protection agreements that provide that if we dispose of any interest in ACC2, ACC3, VA3, VA4 or CH1 in a taxable transaction through 2016, we will indemnify certain investors, including Messrs. du Pont and Fateh, for their tax liabilities attributable to the built-in gain that exists with respect to such property interest as of the time of this offering (and tax liabilities incurred as a result of the reimbursement payment) if those tax liabilities exceed a certain amount. Therefore, although it may be in our stockholders’ best interest that we sell one of these properties, it may be economically prohibitive for us to do so because of these obligations. In addition, any such sale must be approved by at least 75% of our disinterested directors.

Our tax protection agreements may require our OP to maintain certain debt levels that otherwise would not be required to operate our business.

Our tax protection agreements will provide that during the period from the closing of the offering through December 31, 2007, our OP will offer each holder of OP units who continues to hold the units received in respect of the formation transactions the opportunity to guarantee debt. If we fail to make such opportunities available, we will be required to deliver to each holder a cash payment intended to approximate the holder’s tax liability resulting from our failure to make such opportunities available to that holder, including any gross up necessary to cover any income tax incurred by the holder as a result of such tax protection payment. See “Structure and Formation of Our Company—Tax Protection Agreements.” We agreed to these provisions in order to assist our investors in deferring the recognition of taxable gain as a result of and after the formation transactions. These obligations may require us to maintain more or different indebtedness than we would otherwise require for our business.

We have owned our properties for a limited time and may not be aware of significant deficiencies involving any one or all of them.

Upon completion of this offering and the formation transactions, we will own five operating properties, only four of which we consider to be stabilized and each of which will have been in service as wholesale data centers under our management for less than five years. We will also own certain properties under development, including CH1, and certain properties held for development. The properties may have characteristics or deficiencies unknown to us that could affect such properties’ valuation or revenue potential. We cannot assure you that the operating performance of the properties will not decline under our management.

We may be unable to identify and complete acquisitions, which could harm our operating results.

We continually evaluate the market of available properties and may acquire data centers or property suited for data center development when opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them may be subject to the following significant risks:

 

   

we may be unable to acquire a desired property because of competition from other real estate investors with significant capital, including publicly traded REITs and institutional investment funds;

 

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even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;

 

   

even if we enter into agreements for the acquisition of technology-related real estate, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;

 

   

we may be unable to finance an acquisition on favorable terms or at all;

 

   

converting a building to serve as a data center requires significant capital expenditures, and we may spend more than budgeted amounts to make necessary improvements or renovations to retrofit acquired properties;

 

   

acquired properties may be subject to reassessment, which may result in higher than expected tax payments;

 

   

market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

 

   

we may acquire properties subject to liabilities and with limited or no recourse, with respect to certain liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot finance property acquisitions on favorable terms, or operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flow, cash available for distribution to you, the per share trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected.

A portion of our land under contract in Santa Clara, California is currently occupied by a tenant in an unrelated business and if we are unsuccessful in relocating this tenant, we may be unable to develop the second of our planned data centers, SC2, in this location.

In connection with the formation transactions, we expect to receive contract rights to acquire land in Santa Clara, California, that we intend to use for the development of two data centers, SC1 and SC2. As of October 1, 2007, a portion of the land was occupied by one tenant engaged in a business unrelated to data centers. Our sponsors are currently negotiating to relocate this tenant to another parcel of land in Santa Clara that they currently have rights to acquire. However, there can be no assurance that they will be successful in doing so. If our sponsors or we are unable to effect the relocation of this tenant, we will be unable to develop SC2 on this site, and there can be no assurance that we will be able to locate a replacement property in Silicon Valley for this data center. Any inability or delay in the development of SC2, or additional expense associated with that development, could have a materially negative impact on our proposed development pipeline, liquidity and results of operations.

We may be unable to locate and acquire properties prior to being widely marketed.

A key component of our growth strategy is to continue to acquire additional technology-related real estate. To date, certain of our properties were acquired before they were widely marketed by real estate brokers, in so-called “off-market” acquisitions. Properties that are acquired off-market are typically more attractive to us as a purchaser because of the absence of a competitive bidding environment, which could potentially lead to higher prices. We obtain access to off-market deal flow from numerous sources, including the personal contacts of Messrs. du Pont and Fateh. We cannot assure you that we will continue obtaining off-market deal flow in the future. If we cannot obtain off-market deal flow in the future, our ability to locate and acquire additional properties at attractive prices could be adversely affected, which would lead to higher acquisition costs, resulting in less cash available for distribution to our stockholders.

 

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We may have difficulty internalizing certain management functions, which may result in an increase in our operating expenses and negatively affect our operating results.

Prior to this offering, our property and asset management functions were performed by entities affiliated with our sponsors. As part of the formation transactions, we will be acquiring the rights to perform these management functions internally and we will undertake accounting and financial reporting obligations and carry out the majority of our general and administrative functions directly. We cannot assure you that we will successfully internalize these functions on the anticipated timetable. In addition, the process of internalizing these functions may result in higher general and administrative costs than anticipated, which could harm our operating results.

Any losses to our properties which are not covered by insurance, or which exceed our policy coverage limits, would harm our financial condition and operating results.

Upon completion of this offering, we plan to carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy. We will select policy specifications and insured limits which we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. All of our operating properties are located in proximity to Washington, D.C. However, many of our insurance policies may not cover losses such as loss from riots, war, terrorist attacks, or acts of God. In addition, some of our policies, like those covering losses due to floods, will be insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover potential losses. If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.

We face significant competition and may be unable to renew existing leases, lease vacant space or re-lease space as leases expire, which may have a material adverse impact on our operating results.

If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. We compete with numerous developers, owners and operators of technology-related real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. In addition, some of our tenants, including Google, Microsoft, and Yahoo!, own or may in the future develop their own data centers, which could increase the risk that such tenants fail to renew their leases by, among other things, making it easier for such tenants to transfer their server functions. We cannot assure you that we will be able to renew leases or re-lease at net effective rental rates equal to or above the current average net effective rental rates. If the rental rates for our properties decrease, or our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases are scheduled to expire, our financial condition, results of operations, cash flow, cash available for distribution to you, the per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected.

We will have a substantial amount of indebtedness outstanding following this offering, which may negatively impact our ability to make distributions, may expose us to interest rate fluctuations and may expose us to the risk of default under our debt obligations.

After giving effect to the formation transactions, this offering and the application of the net proceeds therefrom, we expect our total consolidated indebtedness upon the completion of this offering to be approximately $370.4 million. We may incur significant additional debt for various purposes, including, without limitation, to fund future acquisition and development activities and operational needs. Payments of interest on borrowings may leave us with insufficient cash resources to operate our properties or to make the distributions

 

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currently contemplated or necessary to qualify and maintain our qualification as a REIT. Our substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have other significant adverse consequences, including the following:

 

   

our cash flow may be insufficient to meet our required principal and interest payments;

 

   

we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon emerging acquisition opportunities or meet operational needs;

 

   

we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants that we may be subject to;

 

   

we may violate restrictive covenants in our loan documents, which would entitle our lenders to accelerate our debt obligations; and

 

   

we may default on our obligations, and lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of our rents and leases.

If any one of these events were to occur, our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to make distributions to you could be materially adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code.

The amounts available under our revolving credit facility may be reduced in the event that we do not realize at least $500.0 million in net proceeds from this offering.

At any time after the completion of this offering, the maximum availability of funds under our revolving credit facility will be the lesser of $475.0 million, 65% of the as-is appraised value of our borrowing base properties and limited by 1.35 times our borrowing base debt service coverage ratio. If the net cash offering proceeds, including any proceeds realized from the exercise by the underwriters of their option to purchase additional shares, do not exceed $500.0 million, the availability of funds under our revolving facility would be reduced. Any decrease in the amount of funds available under our revolving facility could have a material adverse effect on our business and business prospects, including our ability to fund future acquisitions and current and future development projects, and to make distributions to our stockholders.

Properties included in the borrowing base of our revolving facility may not be sold without the approval of our lender, which could reduce our liquidity.

We expect that all of our initial stabilized properties will be included in the borrowing base for our revolving facility. In addition, any equity interest that we may have in any other properties being contributed to us will also collateralize our senior secured facilities, although these properties will not automatically become a part of the borrowing base of our revolving facility. We do not, at this time, have any plans to add any properties to our borrowing base. However, we may in the future choose to add to the borrowing base properties owned by us or other property interests that we may acquire in order to, among other things, increase the amount that we may borrow under the revolving facility. Once added to the borrowing base, properties may only be removed with the approval of our lender and only if such removal will not cause our borrowing base to have fewer than three properties or less than $250.0 million in value. If our lender declines to approve of any such sales, our liquidity will be reduced and we may be required to sell or encumber non-borrowing base properties, at less advantageous terms, in order to meet our ongoing liquidity needs.

 

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Our senior secured credit facilities will restrict our ability to engage in some business activities, which could harm our growth prospects, future operating results and financial condition.

Our senior secured credit facilities will contain customary negative covenants and other financial and operating covenants that, among other things, will:

 

   

restrict our and our subsidiaries’ ability to incur additional indebtedness;

 

   

restrict our and our subsidiaries’ ability to make certain investments;

 

   

restrict our and our subsidiaries’ ability to merge with another company;

 

   

restrict our and our subsidiaries’ ability to create, incur or assume liens;

 

   

restrict our ability to make distributions to our stockholders;

 

   

require us to maintain financial coverage ratios; and

 

   

require us to maintain a pool of unencumbered assets approved by the lenders.

These restrictions could cause us to default on our secured credit facilities or negatively affect our operations and our ability to make distributions to our stockholders.

Our growth depends on external sources of capital which may not be available to us on commercially reasonable terms or at all.

In order to qualify and maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our net taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources to fund a substantial amount of our future capital needs. We may not be able to obtain such financing on favorable terms or at all. Any additional debt we incur will increase our leverage, expose us to the risk of default and impose operating restrictions on us. In addition, any shares that we issue in any equity financing could be materially dilutive to the equity interests held by our stockholders. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our growth potential;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

our cash flow and cash distributions; and

 

   

the market price per share of our common stock.

If we cannot obtain capital when needed, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT, which would expose us to significant penalties and corporate level taxation.

Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a facility or group of facilities subject to mortgage debt.

Incurring mortgage and other secured debt obligations (including any increase in the amount outstanding under our revolving facility) increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing

 

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any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds.

As we execute our business plan, we will assume mortgage indebtedness or incur substantial new mortgage indebtedness with respect to properties that we own or in connection with property acquisitions. Any default under any one of our mortgage debt obligations may increase the risk of our default on our other indebtedness.

As the present or former owner or operator of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.

Under various federal, state and local laws, regulations and ordinances relating to the protection of the environment, a current or former owner, operator or tenant of real property may be liable for the cost to remove or remediate contamination resulting from the presence or discharge of hazardous or toxic substances, wastes or petroleum products on, under, from or in such property. These costs could be substantial and liability under these laws may attach without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the liability may be joint and several. Previous owners used some of our properties for industrial and retail purposes (CH1, NJ1, SC1 and ACC7). As a result, those properties may contain some level of environmental contamination. In addition, many of our properties presently contain large underground fuel storage tanks for emergency power, which is critical to our operations. If any of our tanks has a release of fuel to the environment, we would likely have to pay to clean up the contamination. Moreover, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability or materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral.

Our property in Piscataway, New Jersey, is subject to New Jersey’s Industrial Site Recovery Act, or ISRA. Under ISRA, the state’s Department of Environmental Protection, or NJDEP, can require a landowner to undertake efforts to remediate pollution caused by its activities on the site. In our case, the prior owner of our New Jersey site, GlaxoSmithKline, ceased operation at the site in 2004 and has undertaken remediation efforts in accordance with ISRA, including removal of certain structures on the site and remediation of soil and groundwater. We were not involved in the activities that led to the pollution of this site and the seller remains liable for the clean up costs. In addition to its responsibilities under ISRA, the seller is obligated under the surviving provisions of our purchase contract to diligently proceed with ISRA compliance, to take all reasonable action to complete the work set forth in the NJDEP-approved remedial actions work plan, and to obtain no further action letters with regard to soils and groundwater. The seller has applied to self-insure its obligations to NJDEP, and the seller’s certified application sets forth a company net worth of approximately $67 billion. The seller has indemnified us with regard to any fines, charges or liability in connection with ISRA and compliance therewith. Moreover, we are named as an additional insured on a number of the seller’s environmental, worker’s compensation, and professional liability insurance policies, and we carry insurance regarding some of the risks associated with the known contamination as well. Nonetheless, as the current landowner, under ISRA, we may be held liable for all or a portion of the cost to clean up the site to the extent that GlaxoSmithKline is unable or is otherwise not required to pay for the cleanup. The seller is legally obligated to continue to operate the existing groundwater remediation system for 8 to 13 more years in accordance with the Remedial Action Work Plan approved by NJDEP in accordance with ISRA. If the seller were to cease its monitoring activities, we could be required to continue them under applicable law. However, we do not anticipate that such costs would be material and we would seek to recover them from the seller. The existence of this system has the potential to interfere with the future development of the property. However, the NJDEP has already approved the abandonment of monitoring wells presently located within the proposed footprint of the facility, so we do not expect the groundwater remediation system to have a material impact on the development of the site as presently planned, although it could make it more difficult to sell the property in the future. As a result of the contamination, there are or will be restrictions on certain uses of the property, such as for residential use. However, our proposed use

 

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is not subject to such restrictions and, furthermore, has been confirmed as a permitted use under applicable zoning regulations and ordinances by the relevant zoning authority, so we do not expect such restrictions to have a material impact on us. We are also aware that we may incur additional construction costs associated with the removal and disposal of contaminated soils, and that we may be required to install a vapor intrusion barrier or system in any building constructed on the site for indoor air quality purposes. We do not anticipate these costs will be material. However, if we were to be held liable for any unanticipated costs associated with the environmental contamination or on-going cleanup of this site, such costs could be material and could have a material adverse impact on our financial condition and results of operations.

As the owner of real property, we could become subject to liability for failure to comply with environmental requirements regarding the handling and disposal of regulated substances and wastes or for non-compliance with health and safety requirements.

Environmental laws and regulations regarding the handling of regulated substances and wastes apply to our properties, in particular, regulations regarding the storage of petroleum for auxiliary or emergency power. The properties in our portfolio are also subject to various federal, state and local health and safety requirements, such as state and local fire requirements. If we or our tenants fail to comply with these various requirements, we might incur governmental fines or private damage awards. Moreover, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution to you, the per share trading price of our common stock and our ability to satisfy our debt service obligations. Environmental noncompliance liability could also affect a tenant’s ability to make rental payments to us.

In March 2007, we were cited by the Virginia Department of Environmental Quality (“VDEQ”) compliance office about our emissions from the ACC2 diesel generators exceeding short-term emission limits. We commenced a study to develop a remediation plan and currently estimate future capital expenditures with respect to ACC2 of approximately $650,000 to reduce that facility’s emissions to be in conformance with state limits. In September 2007, VDEQ issued a proposed consent order imposing a fine in the amount of $169,372. We are in the process of seeking to have this fine reduced, although we may not be able to do. The proposed order also requires the ACC2 facility to follow a corrective action plan to bring it into compliance with applicable air regulations. The expected cost to implement the proposed corrective action plan matches our estimated capital expenditures for compliance. We intend to enter this consent order, or a similar consent order, with VDEQ in the near future. If we were not to comply with the order, we could be subject to further fines, which could have a material adverse effect on our results of operations.

Hedging transactions may limit our gains or result in losses.

The terms of our loan agreements require us to maintain certain hedges with respect to our variable rate loans to the extent those loans were to exceed 35.0% of our gross asset value. Subject to the REIT qualification requirements, we may also use derivatives to hedge other liabilities of ours. As of October 1, 2007, we had entered into an interest rate swap with KeyBank National Association, effectively fixing the interest rate on $200.0 million of our KeyBank credit facility at 4.997% plus the applicable credit spread. This and any future hedging transactions expose us to certain risks, including:

 

   

losses on a hedge position may reduce the cash available for distribution to stockholders and such losses may exceed the amount invested in such instruments;

 

   

counterparties to a hedging arrangement could default on their obligations; and

 

   

we may have to pay certain costs, such as transaction or brokerage fees.

The REIT rules impose certain restrictions on our ability to utilize hedges, swaps, and other types of derivatives to hedge our liabilities. We expect that our board of directors will adopt a general policy with respect to our use of interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage

 

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derivatives and other hedging instruments in order to hedge all or a portion of our interest rate risk, given the cost of such hedges and the need to qualify and maintain our qualification as a REIT. We may use these hedging instruments in our risk management strategy to limit the effects of changes in interest rates on our operations. However, neither our current nor any future hedge may be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of derivatives.

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument lengthens and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

In addition, hedging instruments involve risks since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we have entered or may enter into a hedging transaction would most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Failure to abide by applicable service level commitments could subject us to material liability under the terms of our leases, which could harm our operating results.

Our leases generally include terms requiring us to meet certain service level commitments in terms of electrical output, cooling levels and levels of redundancy in all key systems. Any failure to meet these commitments, including as a result of mechanical failure, power outage, human error or for other reasons, could subject us to liability under our lease terms, including loss of management fee reimbursements and rent abatement. Any such failures could also harm our reputation and adversely impact our ability to lease our properties, which could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that we will be able to maintain all systems at levels necessary to avoid such penalties, which could be material.

The bankruptcy or insolvency of a major tenant would have a material adverse impact on our business.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In either case, our claim for unpaid rent would likely not be paid in full. Our revenue and cash available for distribution to you could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, suffer a downturn in its business, or fail to renew its lease at all or renew on terms less favorable to us than its current terms.

 

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Your investment may be subject to additional risks if we make international investments.

We may purchase properties located outside the United States. These investments may be affected by factors peculiar to the laws and business practices of the jurisdictions in which the properties are located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments could be subject to the following risks:

 

   

changing governmental rules and policies, including changes in land use and zoning laws;

 

   

enactment of laws relating to the foreign ownership of real property and laws restricting the ability of foreign persons or companies to remove profits earned from activities within the country to the person’s or company’s country of origin;

 

   

variations in currency exchange rates;

 

   

adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions;

 

   

the willingness of domestic or foreign lenders to make mortgage loans in certain countries and changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies;

 

   

the imposition of unique tax structures and changes in real estate and other tax rates and other operating expenses in particular countries, which could affect our ability to qualify as a REIT; and

 

   

general political and economic instability.

In the event that we acquire and develop properties overseas, the realization of any of these risks could have a material adverse impact on our business, financial condition and results of operations.

We depend on third parties to provide Internet connectivity to the tenants in our data centers and any delays or disruptions in connectivity may adversely affect our operating results and cash flow will be adversely affected.

We are not a telecommunications carrier. Although our tenants are responsible for providing their own network connectivity, we still depend upon the presence of telecommunications carriers’ fiber networks serving the locations of our data centers in order to attract and retain tenants. We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results. We cannot assure you that any carrier will elect to offer its services within our data centers or that once a carrier has decided to provide Internet connectivity to our data centers that it will continue to do so for any period of time. Further, some carriers are experiencing business difficulties or have announced consolidations. As a result, some carriers may be forced to downsize or terminate connectivity within our data centers, which could have an adverse effect on the business of our tenants and our own operating results.

Our new data centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiple carrier facilities to our data centers is complex and involves factors outside of our control, including regulatory requirements and the availability of construction resources. If the establishment of highly diverse Internet connectivity to our data centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow will be adversely affected. Any hardware or fiber failures on this network may result in significant loss of connectivity to our data centers. This could affect our ability to attract new tenants or retain existing tenants.

If we are not successful in efficiently integrating and operating the properties we acquire, the attention of our management may be diverted from our day-to-day operations and we may experience other disruptions which could harm our results of operations.

We will be required to integrate properties we acquire into our existing portfolio. These and future acquired properties may turn out to be less compatible with our growth strategy than originally anticipated, because, for

 

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example, we do not realize anticipated operational or geographical synergies, which may cause disruptions in our operations or may divert management’s attention away from our day-to-day operations, which could harm our results of operations.

If in the future we elect to make joint venture investments, we could be adversely affected by a lack of sole decision-making authority, reliance on joint venture partners’ financial condition and any disputes that might arise between us and our joint venture partners.

We may invest in the future with third parties through joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, joint venture or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, joint venture or other entity. Investments in joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners might become bankrupt, fail to fund their share of required capital contributions or operate the joint venture in a manner that would cause us to fail to qualify as a REIT. Likewise, partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also have the risk of creating impasses on decisions, because neither we nor our partner would have full control over the joint venture or other entity. Disputes between us and partners may result in litigation or arbitration that would increase our expenses and prevent management from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners might result in subjecting properties owned by the joint venture to additional risk. In addition, we may, in certain circumstances, be liable for the actions of our joint venture partners.

We may become subject to litigation or threatened litigation which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.

We may become subject to disputes with commercial parties with whom we maintain relationships or other parties with whom we do business, including as a result of any breach in our security systems or downtime in our critical electrical and cooling systems. Any such dispute could result in litigation between us and the other parties. Whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement with terms that restrict the operation of our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary information, including our engineering designs, we rely in part on confidentiality agreements with our employees, consultants, outside collaborators, and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, we do not hold any patents or registered trademarks, which could make it more difficult to defend any intellectual property rights that we may have in the event of any disclosure of our confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

The loss of access to key third-party service providers could adversely affect our current and any future development projects.

Our success depends, to a significant degree, on having timely access to certain key technical personnel who are in limited supply and great demand, including architects capable of executing our proprietary designs and engineering firms capable of developing our properties. For our current and any future development projects, we

 

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will continue to rely on these personnel who have the requisite expertise in the technical environments necessary to develop wholesale data centers. Competition for such technical expertise is intense and we cannot assure you that we will always have or retain access to the key third-party service providers that we currently rely on or may rely on in the future.

Any acts of terrorism may directly or indirectly harm our financial condition and operating results.

The strength and profitability of our business depends on the demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, or other acts of terrorism or war may directly or indirectly adversely affect our properties, financial condition and operating results. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties. The lack of sufficient insurance for these types of acts could expose us to significant losses and could have a negative impact on our financial condition and operating results.

In addition, the events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002, or TRIA, and the subsequent enactment of the Terrorism Risk Insurance Extension Act of 2005, which extended TRIA through the end of 2007, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the overall liquidity of the real estate lending market and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties in which we invest are unable to obtain affordable insurance coverage, the value of those investments could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.

Risks Related to the Real Estate Industry

Our operating performance is subject to risks associated with the real estate industry and we cannot assure you that we can achieve our return objectives.

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease our cash available for distribution, as well as the value of our properties. These events include, but are not limited to:

 

   

adverse changes in international, national or local economic and demographic conditions;

 

   

vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options;

 

   

adverse changes in financial conditions of buyers, sellers and tenants of properties, including data centers;

 

   

inability to collect rent from tenants;

 

   

competition from other real estate investors with significant capital, including other real estate operating companies, publicly traded REITs and institutional investment funds;

 

   

reductions in the level of demand for data center space;

 

   

increases in the supply of data center space;

 

   

fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of properties, including data centers, to obtain financing on favorable terms or at all;

 

   

increases in expenses that are not paid for by or cannot be passed on to our tenants, such as the cost of complying with laws, regulations and governmental policies; and

 

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changes in and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990, or ADA.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial expectations, our financial condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to make distributions to you could be adversely affected. We cannot assure you that we can achieve our return objectives.

Our performance and value are subject to risks associated with real estate assets and with the real estate industry.

Our ability to make expected distributions to our stockholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution to you and the value of our properties. These events include:

 

   

local oversupply, increased competition or reduction in demand for technology-related space;

 

   

inability to collect rent from tenants;

 

   

vacancies or our inability to rent space on favorable terms;

 

   

inability to finance property development and acquisitions on favorable terms;

 

   

increased operating costs to the extent not paid for by our tenants;

 

   

costs of complying with changes in governmental regulations;

 

   

the relative illiquidity of real estate investments, especially the specialized real estate properties that we hold and seek to acquire and develop; and

 

   

changing submarket demographics.

Illiquidity of real estate investments and the terms of certain of our leases could significantly impede our ability to respond to adverse changes in the performance of our properties, which could harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to adverse changes in the performance of such properties may be limited, thus harming our financial condition. The real estate market is affected by many factors that are beyond our control, including:

 

   

adverse changes in national and local economic and market conditions;

 

   

changes in interest rates and in the availability, cost and terms of debt financing;

 

   

changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance with laws and regulations, fiscal policies and ordinances;

 

   

any ongoing need for capital improvements that are not passed through to our tenants, such as roof and other structural repairs;

 

   

changes in operating expenses; and

 

   

civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

 

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In addition, data centers represent an illiquid part of the overall real estate market. This illiquidity is driven by a number of factors, including the relatively small number of potential purchasers of such data centers—including other data center operators and large corporate users—and the relatively high cost per square foot to develop data centers, which effectively limits a potential buyer’s ability to purchase a data center property with the intention of redeveloping it for an alternative use, such as an office building, or may substantially reduce the price buyers are willing to pay.

In addition, the leases for certain of our facilities, including all of VA4 and ACC3 and a portion of ACC4, give the tenants of those facilities a right of first refusal to purchase those properties as well as the property upon which we intend to develop ACC5 if we propose to sell those properties to a third party. In addition, the leases in effect at VA4, ACC3 and ACC2 prohibit us, during the lease terms, from selling those properties to a third party that is a competitor of the tenant. The existence of such restrictions could hinder our ability to promptly sell one or more of these properties, which could harm our financial condition and results of operations.

We will assume potential unknown liabilities in connection with the formation transactions, which could materially adversely affect our financial condition.

As part of the formation transactions, we will assume existing liabilities of the entities that hold our initial properties, some of which may be unknown or unquantifiable at the time this offering is consummated. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants, vendors or other persons dealing with the entities prior to this offering, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise.

As the owner of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our property.

Some of our properties may contain asbestos-containing building materials. Environmental laws require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, these laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

 

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We may incur significant costs complying with the Americans with Disabilities Act and similar laws, which could harm our operating results.

Under the ADA, all places of public accommodation must meet federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws may also require modifications to our properties. Although we believe that our properties comply with the present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of the properties in our portfolio is not in compliance with the ADA, we would be required to incur additional costs to bring the property or properties into compliance. Additional federal, state and local laws may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition, results of operations, cash flow, cash available for distribution to you, the per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected.

We may incur significant costs complying with other regulations, which could harm our operating results.

The properties in our portfolio are subject to various federal, state and local regulatory requirements. If we fail to comply with these various requirements, we might incur governmental fines or private damage awards. In addition, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution to you, the per share trading price of our common stock and our ability to satisfy our debt service obligations.

Risks Related to Our Organizational Structure

Conflicts of interest exist or could arise in the future with holders of OP units, which may impede business decisions that could benefit our stockholders.

Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our OP or any partner thereof, on the other. Our directors and officers have duties to our company and our stockholders under applicable Maryland law in connection with their management of our company. At the same time, we, as general partner, have fiduciary duties to our OP and to its limited partners under Maryland law in connection with the management of our OP. Our duties as general partner to our OP and its partners may come into conflict with the duties of our directors and officers to our company and our stockholders. The partnership agreement of our OP provides that for so long as we are the general partner of our OP, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.

Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees, will not be liable or accountable to our OP for losses sustained, liabilities incurred or benefits not derived if we, or such officer, director, agent or employee acted in good faith. In addition, our OP is required to indemnify us, and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our OP, unless it is established that (1) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty, (2) the indemnified party received an improper personal benefit in money, property or services or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. The provisions of Maryland law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been resolved in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties that would be in effect were it not for the partnership agreement.

 

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We are also subject to the following additional conflicts of interest with holders of OP units:

We may pursue less vigorous enforcement of terms of the employment agreements with members of our senior management and their affiliates because of our dependence on them and conflicts of interest. Messrs. du Pont and Fateh will enter into employment agreements with us, including clauses prohibiting them from competing with us, subject to certain exceptions, in the data center market. None of these agreements were negotiated on an arm’s-length basis. We may choose not to enforce, or to enforce less vigorously, our rights under these employment agreements because of our desire to maintain our ongoing relationship with members of our senior management and their affiliates and because of conflicts of interest with them, including allowing them to devote significant time to non-data center projects outside of our company, to engage in activities that may compete with us, or to engage in transactions with us without receiving the appropriate board approval.

Tax consequences upon sale or refinancing. Sales of properties and repayment of related indebtedness will have different effects on holders of OP units than on our stockholders. The parties contributing properties to our OP may incur tax consequences upon the sale of these properties and on the repayment of related debt which differ from the tax consequences to us and our stockholders. Consequently, these holders of OP units may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While we have exclusive authority under the partnership agreement of our OP to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, any such decision would require the approval of our board of directors, and our ability to take such actions, to the extent that they may reduce the liabilities of our OP, may be limited pursuant to the tax protection agreements that we intend to enter into upon completion of this offering. Certain of our directors and executive officers could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could delay or prevent completion of a sale of a property or the repayment of indebtedness.

Messrs. du Pont and Fateh exercised significant influence with respect to the terms of the formation transactions. Messrs. du Pont and Fateh collectively control each of the entities that will contribute assets to our OP. We did not conduct arm’s length negotiations with Messrs. du Pont and Fateh with respect to the terms of the formation transactions. In the course of structuring the formation transactions, Messrs. du Pont and Fateh had the ability to influence the type and level of benefits that they and our other officers would receive from us. In addition, Messrs. du Pont and Fateh had substantial pre-existing ownership interests in all of the entities contributing property and business interests to us in the formation transactions, and they will receive substantial economic benefits as a result of the formation transactions. Also, Messrs. du Pont and Fateh will assume management and director positions with us, for which they will obtain certain other benefits such as their employment agreements. See “Management—Employment Agreements.”

Messrs. du Pont and Fateh have the right to hold a significant percentage of our stock. Our charter generally authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person (other than a qualified institutional investor) to actual or constructive ownership of no more than 3.3% of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive and 3.3% of our outstanding capital stock by value. However, our board of directors may grant an exemption from the ownership limits described above if such exemption does not jeopardize our status as a REIT. In addition, our charter provides that Mr. du Pont, certain of his affiliates, family members and trusts formed for the benefit of the foregoing, may own up to 20.0% of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, and 20.0% of our outstanding capital stock by value; and that Mr. Fateh, certain of his affiliates, family members and trusts formed for the benefit of the foregoing, may own up to 20.0% of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, and 20.0% of our outstanding capital stock by value. These exemptions from the general ownership limits could give Messrs. du Pont and Fateh the ability to own a combined interest in our stock equal to 40.0% of our shares outstanding as of the completion of this offering. In addition, pursuant to their employment agreements, each of Messrs. du Pont and Fateh, as long as he holds at least 9.8% of our outstanding shares on a fully diluted basis, will have a contractual right to be nominated to the

 

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board of directors. These exemptions and contractual rights could allow Messrs. du Pont and Fateh to exercise, individually or in concert, a substantial degree of control over our affairs even if they are no longer executive officers.

Our senior management team will have significant influence over our affairs. Upon completion of this offering, our senior management team, including Messrs. du Pont and Fateh, will own an aggregate of approximately 0.3% of our common stock and approximately 69.5% of our OP units (not including those units held by us), equal to approximately 34.8% of our common stock, on a fully diluted basis. As a result, our senior management team, to the extent they vote their shares in a similar manner, will have influence over our affairs and could exercise such influence in a manner that is not in the best interests of our other stockholders, including by attempting to delay, defer or prevent a change in control transaction that might otherwise be in the best interests of our stockholders. If our senior management team exercises their redemption rights with respect to their OP units and we issue common stock in exchange therefor, our senior management team’s influence over our affairs would increase substantially.

Messrs. du Pont and Fateh have outside business interests that could require time and attention and may interfere with their ability to devote time to our business and affairs. Messrs. du Pont and Fateh own interests in non-data center real estate assets that will not be contributed to us, including, among other investments, the office building where our corporate headquarters is located, approximately 40 acres of undeveloped land outside of Phoenix, Arizona and an aggregate of approximately 510 acres of undeveloped land in Northern Virginia. The office building is managed by an unaffiliated third party and our sponsors are not currently engaged in any development projects with respect to the land. Pursuant to the terms of our employment agreements with Messrs. du Pont and Fateh, each has agreed to devote substantially all of his business attention and time to our affairs. Our sponsors have also agreed, for the terms of their employment with us not to sell any of this land to a competitor of our company, as determined by at least 75% of our independent directors. Any purchase by us of the undeveloped land held by Messrs. du Pont and Fateh would require the approval of at least 75% of our independent directors. In addition, we will enter into non-compete agreements with Messrs. du Pont and Fateh pursuant to which each of them will agree not to compete with us. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements due to our ongoing relationship with Messrs. du Pont and Fateh and, as a result, our business could be harmed.

Our charter and Maryland law contain provisions that may delay, defer or prevent a change in control transaction, even if such a change in control may be in your interest, and as a result may depress our stock price.

Our charter contains a 3.3% ownership limit. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to ensure our qualification as a REIT and to limit any person (other than a qualified institutional investor or an excepted holder) to actual or constructive ownership of no more than 3.3% of the outstanding shares of our common stock by value or by number of shares, whichever is more restrictive, and 3.3% of our outstanding capital stock by value. This ownership limit may delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

We could increase the number of authorized shares of stock and issue stock without stockholder approval. Our charter authorizes our board of directors, without stockholder approval, to increase the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. Although our board of directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

 

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Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and

 

   

“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL by a provision in our bylaws. However, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.

The provisions of our charter on removal of directors and the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. Likewise, if our company’s board of directors were to opt in to the business combination provisions of the MGCL or adopt a classified board of directors pursuant to Title 3, Subtitle 8 of the MGCL, or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded, these provisions could have similar anti-takeover effects. Further, our partnership agreement provides that we may not engage in any merger, consolidation or other combination with or into another person, sale of all or substantially all of our assets or any reclassification or any recapitalization or change in outstanding shares of our common stock, unless in connection with such transaction we obtain the consent of holders of at least 50% of the OP units of our OP (not including OP units held by us) and/or certain other conditions are met. See “Description of the Partnership Agreement of DuPont Fabros Technology, L.P.—Restrictions on Mergers, Sales, Transfers and Other Significant Transactions.”

Certain provisions in the partnership agreement for our OP may delay or prevent unsolicited acquisitions of us. Provisions in the partnership agreement for our OP may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

   

redemption rights of qualifying parties;

 

   

transfer restrictions on our OP units;

 

   

our ability, as general partner, in some cases, to amend the partnership agreement without the consent of the limited partners; and

 

   

the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.

 

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Our board of directors has no policy regarding the level of indebtedness that we may incur.

Our board of directors has not adopted a policy regarding the maximum level of indebtedness, as a percentage of our market capitalization, that we may incur. Accordingly, we could, without your approval, become more highly leveraged which could result in an increase in our debt service and which could materially adversely affect our cash flow and our ability to make expected distributions to the holders of our shares of common stock. Higher leverage also increases the risk of default on our obligations. Even in the event that our board does adopt a policy regarding maximum indebtedness, our board of directors may alter or eliminate our current investment and financing policies at any time without stockholder approval.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Upon completion of this offering, as permitted by the MGCL, our charter will limit the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services; or

 

   

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter will authorize us to obligate our company, and our bylaws will require us, to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.

In connection with our operation as a public company, we will be required to report our operations on a consolidated basis and, in some cases, on a property by property basis. We are in the process of implementing an internal audit function and modifying our company-wide systems and procedures in a number of areas to enable us to report on a consolidated basis as we continue the process of integrating the financial reporting of the entities we intend to acquire in connection with this offering. If we fail to implement proper overall business controls, including as required to integrate the entities contributing property interests to us in connection with the formation transactions, our results of operations could be harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness could result in errors in our consolidated financial statements that could require a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the market value of our common stock.

Compensation awards to our management may not be tied to or correspond with improved financial results or share price.

The compensation committee of our board of directors will be responsible for overseeing our compensation and employee benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make compensation decisions based on a number of factors. As a result, compensation awards may not be tied to or correspond with improved financial results at our company or

 

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the share price of our common stock. In addition, all of our initial grants of restricted stock to our key employees other than Mr. Osgood will be 100% vested upon the date of grant. This could increase the risk of departure from the company of any of the recipients. The loss of any of the key personnel identified in “Management” could have a materially negative impact on our business.

We will be required to pay cash consideration to Messrs. du Pont and Fateh in respect of the contract to acquire land in Santa Clara even if we fail to acquire these properties.

After completion of this offering, we intend to exercise certain rights under a contract to purchase land in Santa Clara, California, which will be used to support the development of two new data centers. We have committed to pay, upon completion of the offering, $2.3 million in cash to Messrs. du Pont and Fateh in return for the contribution of their contractual rights to acquire the land. However, we cannot guarantee that we will be able to complete this acquisition. If, for any reason, we are unable to complete the acquisition of this land on the terms currently contemplated or at all, we may not be able to develop one or both of the data centers currently contemplated for Santa Clara. Our inability, or any delay in our ability, to pursue the development of these data centers could have a material adverse impact on our future growth. In addition, we will still be obligated to pay the consideration to Messrs. du Pont and Fateh in respect of their contractual rights to purchase this land. As a result, Messrs. du Pont and Fateh could receive consideration in return for the contribution of their rights to acquire this land that ultimately does not become a part of our portfolio. If this occurs, it will result in an expenditure by the company without a corresponding benefit.

Risks Related to Our Status as a REIT

Failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.

We intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Code. Requirements for qualification and taxation as a REIT are extremely complex, however, and interpretations of the federal income tax laws governing qualification and taxation as a REIT are limited. Accordingly, we cannot be certain that our organization and operation will enable us to qualify as a REIT for federal income tax purposes. In addition, new laws, regulations, interpretations, or court decisions subsequent to this offering may change the federal income tax laws or the federal income tax consequences of our qualification and taxation as a REIT. As a result, no assurance can be provided that we will qualify as a REIT or that new legislation, treasury regulations, administrative interpretations or court decisions will not significantly change the federal income tax laws with respect to our qualification and taxation as a REIT or the federal income tax consequences of our qualification and taxation as a REIT. In addition, the statements in this prospectus are not binding on the Internal Revenue Service, or IRS, or any court. If we lose our REIT status, we will face serious tax consequences that would substantially reduce our cash available for distribution to you for each of the years involved because:

 

   

we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The additional tax liability to us for the year or years in which we did not qualify as a REIT would reduce our net earnings available for investment, debt service or distribution to our stockholders. Furthermore, if we failed to qualify as a REIT, non-U.S. stockholders that otherwise might not be subject to federal income tax on the sale of our shares might be subject to federal income tax with respect to any gain on a net basis similar to the

 

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taxation of a U.S. stockholder, if the non-U.S. stockholders own 5% or more of any class of our shares. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as ordinary dividend income to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would materially adversely affect the value of our common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets, the sources of our income and the diversity of our stock ownership. Also, we must make distributions to stockholders aggregating annually at least 90% of our net taxable income, excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

Failure to qualify as a domestically-controlled REIT could subject our non-U.S. stockholders to adverse federal income tax consequences.

We will be a domestically-controlled REIT if, at all times during a specified testing period, less than 50% in value of our shares is held directly or indirectly by non-U.S. stockholders. However, because our shares are expected to be publicly traded following this offering, we cannot guarantee that we will in fact be a domestically-controlled REIT. If we fail to qualify as a domestically-controlled REIT, our non-U.S. stockholders that otherwise would not be subject to federal income tax on the gain attributable to a sale of our shares of common stock would be subject to taxation upon such a sale if either (a) the shares of common stock were not considered to be regularly traded under applicable Treasury Regulations on an established securities market, such as The New York Stock Exchange, or the NYSE, or (b) the selling non-U.S. stockholder owned, actually or constructively, more than 5% in value of the outstanding shares of common stock being sold during specified testing periods. If gain on the sale or exchange of our shares of common stock was subject to taxation for these reasons, the non-U.S. stockholder would be subject to regular U.S. income tax with respect to any gain on a net basis in a manner similar to the taxation of a taxable U.S. stockholder, subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals, and corporate non-U.S. stockholders may be subject to an additional branch profits tax, as described in “Federal Income Tax Considerations—Taxation of Stockholders—Taxation of Foreign Stockholders.”

If the structural components of our properties were not treated as real property for purposes of the REIT qualification requirements, we would fail to qualify as a REIT.

A significant portion of the value of our properties is attributable to structural components related to the provision of electricity, heating ventilation and air conditioning, humidification regulation, security and fire protection, and telecommunication services. We have received a private letter ruling from the IRS holding, among other things, that our buildings, including the structural components, constitute real property for purposes of the REIT qualification requirements. We are entitled to rely upon that private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request we submitted to the IRS and that we operate in the future in accordance with the material facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the private letter ruling. If our structural components are determined not to constitute real property for purposes of the REIT qualification requirements, including as a result of our being unable to rely upon the private letter ruling or the IRS revoking that ruling, we would fail to qualify as a REIT, which could have a material adverse impact on the value of our common stock.

 

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If our OP failed to qualify as a partnership for federal income tax purposes, we would fail to qualify as a REIT and suffer other adverse consequences.

We believe that our OP is organized and will be operated in a manner so as to be treated as a partnership, and not an association or publicly traded partnership taxable as a corporation, for federal income tax purposes. As a partnership, it will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated that partner’s share of the OP’s income. No assurance can be provided, however, that the IRS will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our OP as an association or publicly traded partnership taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT. Also, the failure of our OP to qualify as a partnership would cause it to become subject to federal corporate income tax, which would reduce significantly the amount of its cash available for debt service and for distribution to its partners, including us.

We will be subject to some taxes even if we qualify as a REIT.

Even if we qualify as a REIT for federal income tax purposes, we will be subject to some federal, state and local taxes on our income and property. For example, we will pay tax on certain types of income that we do not distribute. We will incur a 100% excise tax on transactions with our TRS that are not conducted on an arm’s-length basis. A TRS is a corporation which is owned, directly or indirectly, by us and which, together with us, makes an election to be treated as our TRS. In addition, our TRS will be subject to federal income tax as a corporation on their taxable income, if any, which is initially expected to consist of the revenues mainly derived from providing technical services, on a contract basis, to our tenants. The after-tax net income of our TRS will be available for distribution to us but is not required to be distributed.

Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. The need to avoid prohibited transactions could cause us to forgo or defer sales of properties that our Predecessor and the entities that held our Acquired Properties otherwise would have sold or that might otherwise be in our best interest to sell.

Increases in our property taxes could adversely affect our ability to make distributions to our stockholders if they cannot be passed on to our tenants.

Each of our properties will be subject to real and personal property taxes. These taxes on our properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase and we cannot pass these increases on to our tenants, our ability to make distributions to our stockholders would be adversely affected.

Changes in taxation of corporate dividends may adversely affect the value of our shares.

The maximum marginal rate of tax payable by domestic noncorporate taxpayers on dividends received from a regular “C” corporation under current law is 15% through 2010, as opposed to higher ordinary income rates. The reduced tax rate, however, does not apply to distributions paid to taxpayers taxed at individual rates by a REIT on its stock, except for certain limited amounts. Although the earnings of a REIT that are distributed to its stockholders generally remain subject to less federal income taxation than earnings of a non-REIT “C” corporation that are distributed to its stockholders net of corporate-level income tax, legislation that extends the application of the 15% rate to dividends paid after 2010 by “C” corporations could cause taxpayers taxed at individual rates to view the stock of regular “C” corporations as more attractive relative to the stock of a REIT, because the dividends from regular “C” corporations would continue to be taxed at a lower rate while distributions from REITs (other than distributions designated as capital gain dividends and qualified dividend income) are generally taxed at the same rate as the taxpayer’s other ordinary income.

 

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We will have a reduced carryover tax basis on certain of our assets as a result of the formation transactions, which could reduce our depreciation deductions.

Certain of the properties that we are acquiring in the formation transactions, including VA3, VA4 and CH1, will have a carryover tax basis that is lower than the fair market value of the property. This position could give rise to lower depreciation deductions on these assets that would have the effect of (1) increasing the distribution requirement imposed on us which could adversely affect our ability to satisfy the REIT distribution requirement, and (2) decreasing the extent to which our distributions are treated as tax-free “return of capital” distributions.

Risks Related to this Offering

Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected levels, nor can we assure you of our ability to make distributions in the future, and we may need to borrow in order to make such distributions or may not be able to make such distributions at all.

Our expected annual distributions for the 12 months following the consummation of this offering of $0.75 per share are expected to be approximately 117% of estimated cash available for distribution. We expect that our initial estimated annual distributions will exceed cash available from operations. As a result, we intend to fund the difference out of excess cash or borrowings under our revolving facility. If cash available for distribution generated by our assets for such 12-month period is less than our estimate, or if such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common stock. See “Dividend Policy.” All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, our REIT qualification and other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. See “Federal Income Tax Considerations—Taxation of Stockholders.” If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

Increases in market interest rates may cause potential investors to seek higher dividend yields and therefore reduce demand for our stock and result in a decline in our stock price.

One of the factors that may influence the price of our common stock will be the dividend yield on the common stock (amount of dividend as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher dividend yield, which we may not be able, or may choose not, to provide. Higher interest rates would likely increase our borrowing costs and potentially decrease cash available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline.

The number of shares available for future sale could materially adversely affect the market price of our common stock.

We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open market will decrease the market price per share of our common stock. Sales of a substantial number of shares of our common stock in the public market, or upon exchange of OP units, or the perception that such sales might occur, could materially adversely affect the market price of the shares of our common stock.

All holders of the OP units to be issued to the contributors in the formation transactions will have the right to require us to register the common stock issuable upon redemption of these OP units with the SEC after 12

 

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months. The holders of these OP units are restricted, except under limited circumstances, from exercising their redemption rights, and may not otherwise transfer their OP units, for a period of 12 months. Our officers and directors have agreed not to sell or otherwise transfer any of the OP units granted to them in connection with this offering for a period of 12 months from the date of grant. In addition, after completion of this offering, we intend to register the remaining shares of common stock that we have reserved for issuance under our 2007 Plan, and once we register these shares they can generally be sold in the public market after issuance without restriction, assuming any applicable vesting requirements are satisfied. In addition, our directors and executive officers have agreed with the underwriters not to offer, sell, contract to sell, pledge or otherwise dispose of any shares of common stock or other securities convertible or exchangeable into our common stock for a period of 180 days after the date of this prospectus in the case of our directors and executive officers other than Messrs. du Pont and Fateh, and 12 months in the case of Messrs. du Pont and Fateh. If any or all of these holders cause a large number of their shares to be sold in the public market, the sales could reduce the trading price of our common stock and could impede our ability to raise future capital.

The exercise of the underwriters’ option to purchase up to an additional 4,575,000 shares, the exchange of OP units for common stock, the exercise of any options granted to certain directors, executive officers and other employees under our 2007 Plan, the issuance of our common stock or OP units in connection with property, portfolio or business acquisitions and other issuances of our common stock could have a material adverse effect on the market price of the shares of our common stock, and the existence of OP units, options, shares of our common stock reserved for issuance as restricted shares of our common stock or upon exchange of OP units may materially adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. In addition, future sales of shares of our common stock may be dilutive to existing stockholders.

Differences between the book value of properties we are acquiring and the price paid for our common stock will result in an immediate and material dilution of the book value of our common stock.

As of June 30, 2007, the pro forma net tangible book value of the interests and assets to be transferred to our OP before this offering was $277.9 million, or $4.47 per share of our common stock. As a result, the pro forma net tangible book value per share of our common stock after the completion of this offering and consummation of the formation transactions will be less than the initial public offering price. The purchasers of our common stock offered hereby will experience immediate and substantial dilution of $9.12 per share in the pro forma net tangible book value per share of our common stock.

There is currently no public market for our common stock and an active trading market for our common stock may not develop following this offering, and you may be unable to sell your stock at a price above the initial public offering price or at all.

There has not been any public market for our common stock prior to this offering. Our common stock has been approved for listing on the NYSE, subject to official notice of issuance. We cannot assure you, however, that an active trading market for our common stock will develop after this offering or, if one develops, that it will be sustained. In the absence of a public market, you may be unable to liquidate an investment in our common stock. We and the underwriters have determined the initial public offering price. The price at which shares of our common stock trade after the completion of this offering may be lower than the price at which the underwriters sell them in this offering.

The market price and trading volume of our common stock may be volatile following this offering.

Even if an active trading market develops for our common stock, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

 

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Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results or dividends;

 

   

changes in our funds from operations or earnings estimates;

 

   

publication of research reports about us, our significant tenants, the real estate industry or the technology industry;

 

   

increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to any additional debt we incur in the future;

 

   

additions or departures of key management personnel;

 

   

actions by institutional stockholders;

 

   

speculation in the press or investment community;

 

   

the realization of any of the other risk factors presented in this prospectus;

 

   

adverse developments in the business prospects of one or more of our significant tenants; and

 

   

general market and economic conditions.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this prospectus that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, our pro forma financial statements and all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates” or “predicts” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous known and unknown risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

   

adverse economic or real estate developments in our markets or the technology industry;

 

   

national and local economic conditions;

 

   

the increasingly competitive environment in which we operate;

 

   

defaults on or non-renewal of leases by tenants;

 

   

increased interest rates and operating costs;

 

   

our failure to obtain necessary outside financing;

 

   

decreased rental rates or increased vacancy rates;

 

   

difficulties in identifying properties to acquire and completing acquisitions;

 

   

our failure to successfully develop and operate acquired properties and operations;

 

   

our failure to qualify and maintain our qualification as a REIT;

 

   

environmental uncertainties and risks related to natural disasters;

 

   

financial market fluctuations; and

 

   

changes in real estate and zoning laws and increases in real property tax rates.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section above entitled “Risk Factors,” beginning on page 20.

 

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USE OF PROCEEDS

We estimate we will receive net proceeds from this offering of $560.3 million, or approximately $645.4 million if the underwriters exercise their option to purchase additional shares to the extent the underwriters sell more than 30,500,000 shares in this offering, based on an assumed initial public offering price equal to the mid-point of the price range indicated on the front cover of this prospectus and after deducting the underwriting discount, financial advisory fees and estimated offering expenses payable by us (including approximately $7.0 million to repay advances made to us by an affiliate of our sponsors in respect of costs and fees incurred in connection with this offering and the formation transactions).

We will use the net proceeds to repay existing indebtedness and for other purposes, as follows:

 

   

approximately $304.9 million to repay indebtedness related to ACC4 including development costs payable of $29.7 million, exit and prepayment fees of $64.4 million, a senior mortgage loan in principal amount of $123.5 million with an interest rate of LIBOR (5.32% as of June 30, 2007) plus 3.5% (including a floor of 8.32%) that matures on December 1, 2009; a senior mezzanine loan in principal amount of $47.3 million with an interest rate of LIBOR (5.32% as of June 30, 2007) plus 10.0% that matures on December 1, 2009; and a junior mezzanine loan in principal amount of $40.0 million with an interest rate of 15.0% that matures on December 1, 2009;

 

   

approximately $22.5 million to fund the purchase of the land in Santa Clara, California;

 

   

approximately $99.6 million to purchase property interests from certain of our contributors, including $70.5 million from our sponsors, who have elected to receive cash in the formation transactions;

 

   

approximately $130.3 million to repay amounts outstanding under our revolving facility. This loan has an interest rate of LIBOR (5.32% as of June 30, 2007) plus 1.70% and matures on August 7, 2010; and

 

   

approximately $3.0 million to fund working capital.

Exact payment amounts with respect to indebtedness may differ from our estimates due to amortization of principal, accrual of additional interest or prepayment or exit fees and the incurrence of additional transaction expenses. Any net proceeds remaining after the uses set forth above will be used to fund our development projects and future potential acquisitions and for general working capital. Pending application of the cash proceeds, we will invest the net proceeds in interest-bearing accounts and short-term, interest-bearing securities, which are consistent with our intention to qualify for taxation as a REIT.

Included in the $210.8 million in mortgage and mezzanine indebtedness on ACC4 is the amount of $87.3 million provided to us by an affiliate of Lehman Brothers Inc. which loans we intend to repay in full with a portion of the net proceeds of this offering. In addition, affiliates of the underwriters of this offering are lenders on our secured credit facilities including our revolving facility, which we intend to pay down with a portion of the net proceeds of this offering. See “Underwriting—Relationships.”

Our sponsors intend to use a substantial portion of the cash proceeds they receive in connection with the formation transactions to repay borrowings outstanding under lines of credit. These include $36.0 million expected to be outstanding upon completion of this offering under a loan with an affiliate of one of the underwriters, Lehman Brothers Inc. This loan is secured by our sponsors’ interests in some of our initial properties and is required to be repaid upon completion of this offering.

 

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DIVIDEND POLICY

We intend to make regular quarterly distributions to holders of our common stock. We intend to make a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending December 31, 2007, based on $0.1875 per share for a full quarter. On an annualized basis, this would be $0.75 per share, or an annual distribution rate of approximately 3.75% based on an estimated initial public offering price at the mid-point of the price range indicated on the front cover of this prospectus. We estimate that this initial annual distribution rate will represent approximately 117% of estimated cash available for distribution for the 12 months ending June 30, 2008. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the 12 months ending June 30, 2008, which we have calculated based on adjustments to our pro forma loss for the year ended December 31, 2006. This estimate was based on the historical operating results of our Predecessor and our Acquired Properties and does not take into account our growth strategy. In estimating our cash available for distribution for the 12 months ending June 30, 2008, we have made certain assumptions as reflected in the table and footnotes below.

Our estimate of cash available for distribution does not include the effect of any changes in our working capital resulting from changes in our working capital accounts. Our estimate also does not reflect the amount of cash estimated to be used for investing activities for acquisition and other activities. It also does not reflect the amount of cash estimated to be used for financing activities, other than scheduled loan principal payments on mortgage and other indebtedness that will be outstanding upon completion of this offering. Any such investing and/or financing activities may have a material effect on our estimate of cash available for distribution. Because we have made the assumptions set forth above in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations or our liquidity and have estimated cash available for distribution for the sole purpose of determining the amount of our initial annual distribution rate. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to make distributions or make other distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future dividends or other distributions.

We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. Dividends and other distributions made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and other factors described below. We believe that our estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate; however, we cannot assure you that the estimate will prove accurate, and actual distributions may therefore be significantly different from the expected distributions. We do not intend to reduce the expected distributions per share if the underwriters exercise their option to purchase additional shares; however, this could require us to borrow under our credit facilities to pay distributions.

Distributions in excess of our current and accumulated earnings and profits will not be taxable to a taxable U.S. stockholder under current federal income tax law to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but rather will reduce the adjusted basis of the common stock. In that case, the gain (or loss) recognized on the sale of that common stock or upon our liquidation will be increased (or decreased) accordingly. To the extent those distributions exceed a taxable U.S. stockholder’s adjusted tax basis in his or her common stock, they generally will be treated as a capital gain realized from the taxable disposition of those shares. The percentage of our stockholder distributions that exceeds our current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Federal Income Tax Considerations.”

We cannot assure you that our estimated distributions will be made or sustained or that our board of directors will not change our dividend policy in the future. Any dividends or other distributions we pay in the future will depend upon our actual results of operations, economic conditions, debt service requirements and

 

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other factors that could differ materially from our current expectations. If our operations do not generate sufficient cash flow to enable us to pay our intended distributions, we may be required to fund distributions from borrowings under our revolving facility. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Risk Factors.”

Federal income tax law requires that a REIT distribute annually at least 90% of its net taxable income excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income including capital gains. For more information, please see “Federal Income Tax Considerations.” We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to borrow funds to make some distributions.

The following table describes our pro forma loss from continuing operations before minority interests for the year ended December 31, 2006, and the adjustments we have made thereto in order to estimate our initial cash available for distribution for the twelve months ending June 30, 2008 (amounts in thousands except share data, per share data, square footage data and percentages):

 

Pro forma loss from continuing operations attributable to our common stockholders for the twelve months ended December 31, 2006

   $ (790 )

Less: Pro forma loss from continuing operations available to our common stockholders for the six months ended June 30, 2006

     2,034  

Add: Pro forma income from continuing operations available to our common stockholders for the six months ended June 30, 2007

     1,844  
        

Pro forma income from continuing operations available to our common stockholders for the twelve months ended June 30, 2007

     3,088  

Add: Pro forma non-controlling interests for the twelve months ended June 30, 2007

     3,106  
        

Pro forma income from continuing operations before non-controlling interests for the twelve months ended June 30, 2007

     6,194  

Add: Pro forma real estate depreciation and amortization

     25,440  

Add: Net increases in contractual rent income in our portfolio(1)

     19,530  

Less: Net decreases in contractual rent income due to lease expirations, assuming no renewals(2)

     (652 )

Less: Net effects of straight line rents and fair market value adjustments to tenant leases(3)

     (13,540 )

Add: Non-cash compensation expense(4)

     750  

Add: Amortization of deferred debt financing costs(5)

     2,310  
        

Estimated cash flow from operating activities for the twelve months ending June 30, 2008

     40,032  

Estimated cash flows used in investing activities:

  
Less: Estimated annual provision for leasing commissions(6)      0  
Less: Estimated annual provision for recurring capital expenditures(7)      (207 )
        

Total estimated cash flows used in investing activities

     (207 )
        

Estimated cash available for distribution for the twelve months ending June 30, 2008

     39,825  

Our share of estimated cash available for distribution(8)

     19,853  

Non-controlling interests’ share of estimated cash available for distribution

     19,972  
        

Total estimated initial annual distributions to stockholders

   $ 23,229  
        

Estimated initial annual distributions per share(9)

   $ 0.75  

Payout ratio based on our share of estimated cash available for distribution(10)

     117 %
        

(1) Represents the net increases in contractual rental income from new leases and renewals that were not in effect for the entire twelve month period ended June 30, 2007 or that will go into effect during the twelve months ending June 30, 2008 based upon leases entered into by October 1, 2007.

 

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(2) Assumes no lease renewals or new leases for leases expiring after June 30, 2007 unless a new or renewal lease had been entered into by October 1, 2007.
(3) Represents the conversion of estimated rental revenues for the twelve months ending June 30, 2007 from a straight-line accrual basis, which includes amortization of lease intangibles, to a cash basis recognition.
(4) Pro forma compensation expense related to restricted stock awards for the twelve months ended June 30, 2007.
(5) Pro forma amortization of financing costs for the twelve months ended June 30, 2007.
(6) No gross building area expires in the period from June 30, 2007 to June 30, 2008. Thus, no leasing commissions have been reflected. One tenant terminated its lease in August 2007 and the space was re-leased to two existing tenants with no leasing commissions incurred. We anticipate that any future leasing commissions will be at a rate of up to $150,000 per MW leased.
(7) For the twelve months ending June 30, 2008, the estimated cost of recurring capital expenditures is approximately $0.2 million, based on the weighted average annual capital expenditures cost of $0.21 per square foot of gross building area incurred during 2004, 2005 and 2006 and for the six months ended June 30, 2007, multiplied by 970,000 square feet of gross building area in our portfolio, which includes the pro-rata square feet of gross building area for completed developments of ACC4 Phase I and ACC4 Phase II during the period.

 

      Year Ended December 31,   

Six Months Ended
June 30,

2007

   Weighted Average
2004-June 30,
2007
     2004    2005    2006      

Recurring capital expenditures (excluding tenant improvements and leasing commissions) per square foot of gross building area

   $ 0.24    $ 0.16    $ 0.24    $ 0.20    $ 0.21

Total square feet of gross building area

                 970,000
                  

Total estimated recurring capital expenditures (in thousands)

               $ 207

 

(8) Our share of estimated cash available for distribution and estimated initial annual cash distributions to our stockholders is based on an estimated approximate 49.8% aggregate partnership interest in our OP.
(9) Based on a total of 30,971,750 shares of our common stock to be outstanding after this offering, consisting of 30,500,000 shares to be sold in this offering (assuming no exercise of the underwriters’ option to purchase additional shares), 1,000 shares of initial capitalization and 470,750 shares of common stock (including 75,000 shares of restricted stock) with an approximate aggregate value, based on the mid-point of the price range indicated on the cover page of this prospectus, of $9,415,000 million to be issued to certain of our directors, director nominees, executive officers, employees and consultants upon completion of this offering.
(10) Calculated as estimated initial annual distribution per share divided by our share of estimated cash available for distribution per share for the twelve months ending June 30, 2008. We expect that our initial estimated annual distributions will exceed cash available from operations. As a result, we intend to fund the difference out of borrowings under our revolving facility.

 

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CAPITALIZATION

The following table sets forth the historical capitalization of our Predecessor as of June 30, 2007 and our capitalization as of June 30, 2007, as adjusted to give effect to the KeyBank Refinancing, the formation transactions, this offering and the use of the net proceeds from this offering as set forth in “Use of Proceeds.” You should read this table in conjunction with “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and our consolidated financial statements and the notes to our financial statements appearing elsewhere in this prospectus.

 

    

June 30, 2007

(in thousands except share and per share amounts)   

Predecessor

Historical

(unaudited)

   

As
adjusted

Mortgages and notes payable

   $ 125,756     $ 255,689

Non-controlling interests in our OP(1)

     —         349,860

Members’ (deficit)/stockholders’ equity:

    

Preferred stock, $0.001 par value per share, 50,000,000 shares authorized, no shares issued and outstanding, as adjusted

     —         —  

Common stock, $0.001 par value per share, 250,000,000 shares authorized, 30,971,750 shares issued and outstanding, as adjusted(2)

     —         31

Additional paid in capital

     —         347,691

Members’ deficit

     (5,956 )     —  
              

Total members’ (deficit)/stockholders’ equity

     (5,956 )     347,722
              

Total capitalization

   $ 119,800     $ 953,271
              

(1) As adjusted non-controlling interests in the OP results from an aggregate of 31,162,272 OP units to be issued upon completion of this offering and the formation transactions. Based on a pre adjusted stockholders’ equity of $697.6 million and non-controlling ownership interests of 50.2%, a total of $349.9 million has been reclassified to non-controlling interests. Upon completion of this offering and the formation transactions, non-controlling interests will own 50.2% of our aggregate outstanding shares of common stock and OP units, which excludes 304,625 LTIP units to be issued in connection with this offering. For a discussion of the redemption/exchange rights to be granted to the OP unitholders, see “Description of the Partnership Agreement of DuPont Fabros Technology, L.P.—Redemption/Exchange Rights.”
(2) As adjusted outstanding shares of common stock include (i) 1,000 shares of common stock issued to Messrs. du Pont and Fateh in connection with our initial capitalization, (ii) 30,500,000 shares of common stock to be sold in this offering, and (iii) 470,750 shares of common stock (including 75,000 shares of restricted stock) to be issued upon completion of this offering to certain directors, director nominees, executive officers, employees and consultants. Amount excludes: (i) 4,575,000 additional shares of common stock issuable upon exercise of the underwriters’ option to purchase additional shares, and (ii) 3,885,175 additional shares of common stock reserved for future issuance under our 2007 Plan.

 

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DILUTION

Dilution After This Offering

Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value of our common stock from the initial public offering price. At June 30, 2007, our Predecessor had a negative net tangible book value of approximately $17.5 million, or a negative $0.28 per share of our common stock. After giving effect to the KeyBank Refinancing, this offering and the formation transactions, and the deduction of underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value at June 30, 2007 attributable to common stockholders would have been $675.7 million, or $10.88 per share of our common stock. This amount represents an immediate increase in net tangible book value of $6.41 per share to our existing investors and an immediate dilution in pro forma net tangible book value of $9.12 per share from the public offering price of $20.00 per share of our common stock to our new investors.

 

Initial public offering price per common share

     $ 20.00

Net tangible book value per share of our Predecessor as of June 30, 2007 before the acquisition of the Acquired Properties, the KeyBank Refinancing, the formation transactions and this offering(1)

   $ (0.28 )  

Increase in pro forma net tangible book value per share attributable to the acquisition of the Acquired Properties and the KeyBank Refinancing(2)

   $ 4.75    
          

Pro forma net tangible book value per share after the formation transactions, but before this offering

   $ 4.47    

Increase in pro forma net tangible book value per share attributable to this offering(3)

   $ 6.41    
          

Pro forma net tangible book value per share after the formation transactions and this offering(4)

     $ 10.88
        

Dilution in pro forma net tangible book value per share to new investors(5)

     $ 9.12
        

(1) Pro forma net tangible book value per share of our Predecessor as of June 30, 2007 was determined by dividing the pro forma net tangible book value of our Predecessor by the number of shares of common stock and OP units to be issued in connection with the contribution of the Predecessor’s properties. Net tangible book value has been adjusted in all calculations to remove our intangibles related to leasing commissions and acquired net lease intangibles.
(2) The increase in pro forma net tangible book value per share attributable to the business combination under Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”) of Predecessor companies under common management and the related KeyBank Refinancing, but before this offering, was determined by dividing the difference between (a) the pro forma net tangible book value before these transactions and this offering and (b) the pro forma net tangible book value after the formation transactions and before this offering, by the number of shares of common stock and OP units to be issued in connection with the contribution of the Predecessor’s properties and the formation transactions.
(3) The increase in pro forma net tangible book value per share attributable to this offering was determined by subtracting the pro forma net tangible book value per share attributable after the formation transactions, but before this offering, from the pro forma net tangible book value per share after the formation transactions and this offering.
(4) The pro forma net tangible book value per share after the formation transactions and this offering was determined by dividing pro forma net tangible book value of approximately $675.7 million by 62,134,022 shares of common stock and OP units, which amount excludes the shares and the related proceeds that may be issued by us upon exercise of the underwriters’ option to purchase additional shares.

 

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(5) The dilution in pro forma net tangible book value per share to new investors was determined by subtracting pro forma net tangible book value per share after the formation transactions and this offering from the assumed initial public offering price paid by a new investor for our common shares. For the purpose of calculating our Predecessor’s pro forma book values, we have assumed that, as of June 30, 2007, the common shares, OP units and LTIP units to be issued as part of the formation transactions were outstanding as of such date.

Differences Between New Investors and Existing Investors in Number of Shares and Amount Paid

The table below summarizes, as of June 30, 2007, on a pro forma basis after giving effect to the formation transactions and this offering, the differences between the number of shares and OP units to be received by the existing investors in the formation transactions and the new investors purchasing shares in this offering, the total consideration paid and the average price per share paid by the existing investors in the formation transactions and paid in cash by the new investors purchasing shares in this offering (based on the net tangible book value attributable to those existing investors receiving OP units in the formation transactions). In calculating the shares to be issued in this offering, we used an assumed initial public offering price of $20.00 per share, which is the mid-point of the price range indicated on the front cover page of this prospectus.

 

     

Shares / OP

Units Issued

   

Net Tangible Book Value

of Contribution / Cash(1)

   

Average Price

Per Share

($ in thousands, except per share data)    Number    Percentage     Amount    Percentage      

Existing investors(2)

   31,634,022    50.9 %   $ 141,404    18.8 %   $ 4.47

New investors

   30,500,000    49.1       610,000    81.2     $ 20.00
                          

Total

   62,134,022    100.0 %   $ 751,404    100.0 %  
                          

(1) Represents pro forma net tangible book value as of June 30, 2007 of the assets contributed to our OP in the formation transactions, giving effect to the formation transactions, this offering and prior to deducting the estimated costs of this offering.
(2) Includes 1,000 shares of common stock representing our initial capitalization, 31,162,272 OP units to be issued in connection with the formation transactions, and an aggregate of 470,750 shares of common stock (including 75,000 shares of restricted stock) to be issued to certain of our directors, director nominees, executive officers and employees upon completion of this offering. Amount excludes 304,625 LTIP units to be issued in connection with this offering.

 

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SELECTED FINANCIAL DATA

The following table sets forth selected financial data on a historical basis for our Predecessor. Our Predecessor is comprised of the real estate activities of one of our operating properties, ACC3. As part of our formation transactions, our Predecessor will acquire our Acquired Properties. Our Acquired Properties include the continuing real estate operations of VA3, VA4, ACC2 and ACC4 (the first phase of ACC4 commenced operations in July 2007, and the second phase is scheduled for completion in November 2007), a property currently under development, CH1 and undeveloped parcels of land in Northern Virginia and Piscataway, New Jersey related to ACC7 and NJ1, respectively. In addition, in August 2007, we acquired two undeveloped parcels of land in Northern Virginia related to ACC5 and ACC6. In addition, we will acquire certain contract rights to acquire land in Santa Clara, California related to SC1 and SC2. The historical operating results of our Predecessor include external management expenses, as our Predecessor was not self-managed. Following completion of this offering, we will be self-managed. For accounting purposes, our Predecessor is considered to be the acquiring entity in the formation transactions and, accordingly, the acquisition of our Acquired Properties will be recorded at fair value. For more information regarding the formation transactions, please see “Structure and Formation of Our Company.”

The unaudited pro forma financial data for the six months ended June 30, 2007 and for the year ended December 31, 2006 are presented as if the KeyBank Refinancing, this offering and the formation transactions each had occurred on January 1, 2006. Pro forma balance sheet data as of June 30, 2007 is presented as if the KeyBank Refinancing, offering and the formation transactions had occurred on June 30, 2007. The pro forma data does not purport to represent what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

The selected historical financial information as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 has been derived from our Predecessor’s audited financial statements included elsewhere in this prospectus.

The selected historical financial information as of December 31, 2004, 2003 and 2002 and for the two years ended December 31, 2003 has been derived from our Predecessor’s unaudited financial statements. The selected historical financial information as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 has been derived from our Predecessor’s unaudited financial statements included elsewhere in this prospectus. In the opinion of the management of our company, the unaudited interim financial information included herein includes any adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein.

You should read the following selected financial data in conjunction with our pro forma financial statements, our Predecessor’s historical financial statements and the related notes thereto, and our Acquired Properties’ combined historical financial statements and the related notes thereto, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

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    Six months ended June 30,     Year ended December 31,  

(in thousands except

per share data)

  Pro Forma
Consolidated
    Historical Predecessor     Pro Forma
Consolidated
    Historical Predecessor  
  2007     2007     2006     2006     2006     2005     2004     2003     2002  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                       (unaudited)     (unaudited)  

Statement of Operations Data

                 

Revenue:

                 

Operating revenues

  $ 44,046     $ 12,551     $ —       $ 69,383     $ 10,685     $ —       $ —       $ —       $ —    
                                                                       

Expenses:

                 

Real estate taxes

    920       123       —         1,145       99       161       129       175       161  

Insurance

    284       66       —         430       65       43       41       42       27  

Property operating costs

    13,067       2,694       46       19,084       1,823       9       11       34       35  

Management fees

    —         696       —         —         616       —         —         —         —    

Depreciation and amortization

    12,669       2,180       —         23,167       2,186       177       193       193       1,158  

General and administrative

    5,050       65       135       10,100       278       174       —         2       8  
                                                                       

Total operating expenses

    31,990       5,824       181       53,926       5,067       564       374       446       1,389  
                                                                       

Operating income (loss)

    12,056       6,727       (181 )     15,457       5,618       (564 )     (374 )     (446 )     (1,389 )

Other income and expense

                 

Interest income

    381       84       81       375       157       —         —         —         —    

Interest expense

    (8,738 )     (5,762 )     (732 )     (17,417 )     (6,280 )     (44 )     —         —         —    
                                                                       

Income (loss) from continuing operations

    3,699       1,049       (832 )     (1,585 )     (505 )     (608 )     (374 )     (446 )     (1,389 )

Non-controlling interests in continuing operations of operating partnership

    (1,855 )     —         —         795       —         —         —         —         —    
                                                                       

Income (loss) from continuing operations(1)

  $ 1,844     $ 1,049     $ (832 )   $ (790 )   $ (505 )   $ (608 )   $ (374 )   $ (446 )   $ (1,389 )
                                                                       

Net income (loss)

    N/A     $ 1,049     $ (832 )     N/A     $ (505 )   $ (608 )   $ (374 )   $ (446 )   $ (1,389 )
                                                                       

Pro forma earnings (loss) per share—basic and diluted

                 

From continuing operations

  $ 0.06         $ (0.03 )          
                             

Pro forma weighted average common shares outstanding

    30,971,750           30,971,750            
                             
    Pro Forma
Consolidated
    Historical Predecessor           Historical Predecessor  
            As of December 31,  

(in thousands)

 

As of

June 30,
2007

   

As of

June 30,

2007

          2006     2005     2004     2003     2002  
    (unaudited)    

(unaudited)

                      (unaudited)     (unaudited)     (unaudited)  

Balance Sheet Data

                 

Real estate, net

  $ 923,099      
$91,169
 
    $   92,021     $ 15,972     $ 6,671     $ 6,864     $ 7,057  

Total assets

    1,033,096      
125,409
 
      113,905       36,561       6,693       6,864       7,057  

Mortgages and notes payable

    255,689      
125,756
 
      112,490       27,803       —         —         —    

Non-controlling interests—operating partnership

    349,860      
—  
 
      —         —         —         —         —    

Stockholders’ equity/members’ equity (deficit)

    347,722      
(5,956)
 
      (7,005 )     6,500       6,693       6,819       6,373  
    Six months ended June 30,    

Year ended December 31,

 
(in thousands, unaudited)   Pro Forma
Consolidated
    Historical Predecessor    

Pro Forma
Consolidated

    Historical Predecessor  
  2007     2007     2006     2006     2006     2005     2004     2003     2002  

Other Data:

Funds from operations(2)

                 

Net income (loss)(1)

  $ 1,844     $ 1,049     $ (832 )   $ (790 )   $ (505 )   $ (608 )   $ (374 )   $ (446 )   $ (1,389 )

Adjustments:

                 

Real estate depreciation and amortization

    12,669      
2,180
 
    —         23,167       2,186       177       193       193       1,158  

Non-controlling interests in operating partnership

    1,855       —         —         (795 )     —         —         —         —         —    
                                                                       

Funds from operations

  $ 16,368     $ 3,229     $ (832 )   $ 21,582     $ 1,681     $ (431 )   $ (181 )   $ (253 )   $ (231 )
                                                                       

 

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(1) The unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus are presented through income from continuing operations. As a result our pro forma FFO calculations begin with Income from continuing operations. For the historic operations of our Predecessor, net income was the same as income from continuing operations, as our Predecessor did not have any discontinued operations.
(2) We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents income (loss) (computed in accordance with accounting principles generally accepted in the United States of America, or GAAP), excluding gains (or losses) from sales of depreciable operating property, real estate depreciation and amortization (excluding amortization of deferred financing costs) and non-controlling interests and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because, in excluding real estate depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that results from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Other equity REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to FFO as reported by other companies. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used as a substitute for cash flow from operating activities computed in accordance with GAAP. The above table presents the reconciliation of FFO to our income (loss), which we believe is the most directly comparable pro forma GAAP measure to our FFO. See Note (1) above.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data,” the historical financial statements of our Predecessor and Acquired Properties, the pro forma financial statements, and related notes, appearing elsewhere in this prospectus.

Overview

DuPont Fabros Technology, Inc. is a leading owner, developer, operator and manager of wholesale data centers. We were formed to continue the wholesale data center operations of our Predecessor and Acquired Properties, and to internalize the property management, asset management, development and leasing functions associated with those properties going forward. Upon completion of this offering and the formation transactions described below, we will own a 100% interest in our initial portfolio, including our operating properties (VA3, VA4, ACC2, ACC3, and ACC4), our current development property (CH1), and certain parcels of land in Northern Virginia and Piscataway, New Jersey. We also will have contractual rights to acquire land in Santa Clara, California. We believe the land parcels in Northern Virginia, Piscataway, New Jersey and Santa Clara, California are suitable for the development of six new data centers with an aggregate critical load of 187.2 MW.

To date, our growth has primarily resulted from bringing new wholesale data centers into service and leasing these data centers to tenants. In most instances, our data centers have been substantially pre-leased prior to being placed in service. In 2003, we brought our first wholesale infrastructure data center, VA3, into service. Since 2003, the combined revenue from our initial properties has grown from $2.1 million in 2003, to $65.5 million in 2006, and the combined revenue from these properties was $42.1 million in the six months ended June 30, 2007. This combined revenue does not include any operating activity for ACC4 Phase I because it was not placed in service until July 2007.

The table below shows the growth of our wholesale data centers since we brought the first one into service in 2003:

 

   

In Service
Date

 

Raised
Square
Feet

 

Critical
Load

  % Leased Rate as of  

Properties Brought
Into Service

        June 30,
2007
    December 31,
2006
    December 31,
2005
    December 31,
2004
    December 31,
2003
 

VA3 (Reston, VA)

  Mar 2003   144,901   13.0 MW   100 %   100 %   100 %   89.4 %   50.3 %

VA4 (Bristow, VA)

  June 2005   90,000   9.6 MW   100 %   100 %   100 %   N/A     N/A  

ACC2 (Ashburn, VA)

  Oct 2005   53,397   10.4 MW   100 %   100 %   100 %   N/A     N/A  

ACC3 (Ashburn, VA)

  June 2006   79,600   13.0 MW   100 %   100 %   N/A     N/A     N/A  
                   

Subtotal as of March 31, 2007

    367,898   46.0 MW          

ACC4 Phase I (Ashburn, VA)

  July 2007   85,700   18.2 MW   N/A     N/A     N/A     N/A     N/A  
                   

Total as of October 1, 2007

    453,598   64.2 MW          
                   

Note: for definitions of the terms used in this table, please see “Business and Properties—Description of Properties.”

We derive substantially all of our revenue from rents received from tenants under existing leases at each of our initial operating properties. Because we believe that critical load is the primary factor that tenants evaluate in choosing a data center, we establish our rents based on both the amount of power that we make available to our tenants and the amount of raised square footage that our tenants are occupying. The relationship between raised square footage and critical load can vary significantly from one facility to the next. For example, a data center that is smaller in terms of raised square footage may contain infrastructure that provides its tenants with critical load that exceeds the power capacity of a data center with a significantly larger footprint. Nonetheless, as noted, within each data center the distribution of critical power across raised square feet is roughly proportional.

 

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With respect to operating expenses, we have negotiated expense pass-through provisions in each of our leases under which our tenants are required to pay for most of our operating expenses. In particular, our tenants are required to pay all of their direct operating expenses, including direct electric, as well as their pro rata share of indirect operating expenses, including real estate taxes and insurance. As we complete the build-out of our development properties, we intend to continue to structure our future leases to contain expense pass-through provisions, which are also referred to as triple net leases.

In the future, we intend to continue our focus on the performance of our initial portfolio of operating properties, as well as pursuing growth through the build out and leasing up of our portfolio of development properties. Although each of our initial operating properties is located in Northern Virginia, as we complete the build out of our development properties, including the development of planned data centers in suburban Chicago, Piscataway, New Jersey and Santa Clara, California, our portfolio of data centers will become more geographically diverse in the future.

Upon completion of the KeyBank Refinancing, this offering and the formation transactions, we expect to have approximately $370.4 million of total debt and a ratio of debt to total market capitalization, which represents the market value of both our outstanding shares of common stock and OP units not owned by us and the book value of our consolidated indebtedness, of 23.0% based on the mid-point of the price range set forth on the front cover page of this prospectus. We expect that upon closing of this offering we will have $130.3 million of additional borrowing capacity under our $275.0 million revolving credit facility, which may be increased with the consent of our lenders up to $475.0 million under certain circumstances. We also expect to be able to secure additional long-term debt by collateralizing ACC4, which we expect to be unencumbered after the completion of this offering.

Historically, we have paid property management and asset management fees to affiliates of our sponsors. Although, under the terms of our leases, we charge our tenants property management fees as additional rent, we do not pass through the asset management fees to our tenants. In connection with the formation transactions, our sponsors are contributing these management agreements to us and, as a result, we will not be required to pay these management fees following the completion of this offering. We will, however, continue to charge property management fees to our tenants in the future.

We expect to pay consideration of 4,737,161 OP units (with a value of approximately $94.7 million based on the mid-point of the price range on the cover page of this prospectus) in respect of certain asset management, leasing and development contracts we will acquire from an affiliate of our sponsors. We also expect to pay consideration of 3,128,829 OP units (with a value of approximately $62.6 million based on the mid-point of the price range on the cover page of this prospectus) and cash of $4.9 million in respect of certain property management contracts we will acquire from an affiliate of our sponsors. The consideration paid represents a settlement of these arrangements and will be reflected as a one-time expense in the quarter in which this offering and the formation transactions are completed.

Following this offering, we intend to make regular quarterly distributions to our common stockholders in amounts that meet or exceed the requirements to qualify and maintain our qualification as a REIT and to avoid corporate level taxation. We currently anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs to avoid corporate level taxation.

Factors Which May Influence Future Results of Operations

Scheduled lease expirations. The amount of net rental income generated by the properties in our portfolio will depend on our ability to maintain the historical lease rates of currently leased space and to re-lease space available from lease terminations. As of October 1, 2007, 6.0% of our total raised square footage and 4.0% of our total critical load, accounting for 1.4% of our annualized rent, is subject to leases expiring by December 31, 2009. Negative trends in these factors could adversely affect our rental income or revenue growth in future periods.

 

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Capacity utilization. Since a portion of our revenue consists of those expenses reimbursed to us by our tenants under the terms of our triple net leases, in any given period our revenue will be determined in part by the amount of expenses that are reimbursed by our tenants. Reimbursements are, in turn, influenced by the amount of capacity utilized by our tenants. Fluctuations in capacity utilization will have no material impact on our reportable net operating income, because our tenants pay the same base rent regardless of how much capacity they utilize in any month. However, such fluctuations will impact our reportable operating revenue.

Acquisitions and development projects. The amount of rental revenue generated by the properties in our portfolio will also depend on our ability to successfully acquire, develop and lease up new data centers. ACC4 Phase I, with 85,700 raised square feet and 18.2 MW of critical load, was brought into service during July 2007. Our current development efforts are focusing on the completion and lease-up of ACC4 Phase II and CH1. ACC4 Phase II is scheduled for completion in November 2007 and, as of October 1, 2007, we had pre-leased 43.8% of the expected raised square footage and critical load of this phase. CH1 Phase I is scheduled for completion in 2008. In addition, our development and leasing effort will also focus on our development properties held for development in Northern Virginia and Piscataway, New Jersey and land under contract to be acquired in Santa Clara, California. We will also continue to seek to acquire properties for future date center development. Trends in any of these factors could affect our rental income or revenue growth in future periods.

Management fees. Historically, we have paid property management fees and asset management fees to affiliates of our sponsors. Our leases charge property management fees to tenants generally equal to 5% of the sum of a tenant’s contractual base rent plus operating expenses other than direct electric, which we define as the cost of power used by the tenant to power and cool its servers. In connection with the formation transactions, our sponsors are contributing these management agreements to us and, as a result, we will not be required to pay these external management fees following the completion of this offering. We will, however, continue to charge our tenants these property management fees. We anticipate that the elimination of external property management expenses will partially offset the increase in non-reimbursable overhead costs that we will incur as a result of going public and the internalization of certain back-office functions formerly outsourced to affiliates of our sponsors.

Technical services. Our TRS, DF Technical Services, LLC, will generate revenue from providing certain technical services to our tenants on a contract or purchase-order basis, which we commonly refer to as “a la carte” services. Our TRS will generally charge our tenants for its services on a cost-plus basis. Because the degree of utilization of these services is within the control of our tenants, we will have limited ability to forecast future revenue from this source. Moreover, as a taxable corporation, our TRS will be subject to federal, state and local corporate taxes and will not be required to distribute its income, if any, to us for purposes of making additional distributions to our stockholders. Because demand for its services will be unpredictable, we anticipate that our TRS may retain a significant amount of its revenue to fund future services, and therefore we may not be able to regularly receive distributions from our TRS.

Conditions in significant markets. Our initial portfolio is geographically located in Northern Virginia. Positive or negative changes in conditions in this market will impact our overall performance. Future economic downturns or regional downturns affecting our submarkets or downturns in the technology industry that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental income will also partially depend on our ability to acquire additional technology-related real estate suitable for data center development that meets our investment criteria.

Operating expenses. We control our operating expenses, in part, by negotiating expense pass-through provisions in tenant leases for most operating expenses. Leases covering 100% of the leased portfolio as of June 30, 2007 required tenants to pay all of their direct operating expenses as well as their pro rata share of indirect operating expenses, including real estate taxes and insurance. Following this offering, our property and asset management functions will be internalized and, as a result, we will not incur third-party property and asset

 

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management expenses in the future. Instead, we will directly incur general and administrative expenses. Moreover, as a public company, we will incur significant legal, accounting and other expenses related to corporate governance, public reporting, and compliance with the various provisions of the Sarbanes-Oxley Act of 2002, and we will not be able to pass through a significant amount of these costs to our tenants. These additional expenses will have a significant impact on our results of operations.

Discontinued operations. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify a data center property as held-for-sale when it meets the necessary criteria, which include when we commit to and actively embark on a plan to sell the asset, the sale is expected to be completed within one year under terms usual and customary for such sales, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation ceases when an asset is classified as held-for-sale. Data center properties held-for-sale are carried at the lower of cost or fair value less costs to sell. The operations of properties held-for-sale are classified as discontinued operations for all periods presented. As of December 31, 2006, one of our historical properties, ACC1, reflected in the financial statements of our Acquired Properties, was identified and classified as held-for-sale in December 2006, and was sold in February 2007. ACC1’s operations for all periods presented have been included in discontinued operations of our Acquired Properties.

Equity grants. In connection with this offering, we will grant an aggregate of 304,625 LTIPs units and an aggregate of 470,750 shares of common stock (including an aggregate of 75,000 restricted shares) to certain of our executive officers, directors, director nominees, employees and consultants. Pursuant to these grants, we expect to incur a one-time, non-cash expense of $13.5 million in the quarter in which this offering is completed, which we currently expect to be the fourth quarter of 2007.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Predecessor’s and Acquired Properties’ historical financial statements, which have been prepared in accordance with GAAP. We have provided a summary of our significant accounting policies in Note 1 to our Predecessor’s and Acquired Properties’ financial statements included elsewhere in this prospectus. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our actual results may differ from these estimates. We describe below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Subsequent to the completion of this offering and the formation transactions, these same critical accounting policies and estimates will also be used in our consolidated financial statements. Our management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believes are reasonable as of the date hereof.

Investments in Real Estate

Revenue Recognition. Rental income is recognized using the straight-line method over the terms of the tenant leases. Deferred rents included in our balance sheets represent the aggregate excess of rental revenue recognized on a straight-line basis over the contractual rental payments that will be recognized under the remaining terms of the leases. Our leases generally contain provisions under which the tenants reimburse us for a portion of property operating expenses incurred by us. Such reimbursements are recognized in the period that the expenses are incurred. As discussed below, we recognize amortization of the value of acquired above or below market tenant leases as a reduction of rental income in the case of above market leases or an increase to rental revenue in the case of below market leases.

 

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We must make subjective estimates as to when our revenue is earned and the collectibility of our accounts receivable related to minimum rent, deferred rent, expense reimbursements, and other income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a direct impact on our net income because a higher bad debt allowance would result in lower net income, and recognizing rental revenue as earned in one period versus another would result in higher or lower net income for a particular period.

Acquisition of real estate. The price that we pay to acquire a property is impacted by many factors including the location, the condition of the property and improvements, and numerous other factors, including the occupancy of the building, the existence of above and below market tenant leases, the creditworthiness of the tenants, and favorable or unfavorable financing.

Accordingly, we are required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on our estimate of their fair values in accordance with SFAS No. 141, “Business Combinations.” This includes determining the value of the property and improvements, land, in-place tenant leases, the value (or negative value) of above (or below) market leases and any debt assumed from the seller or loans made by the seller to us. Each of these estimates requires judgment and some of the estimates involve complex calculations.

These allocation assessments have a direct impact on our results of operations. For example, if we were to allocate more value to land, there would be no depreciation with respect to such amount. If we were to allocate more value to the property as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time. This potential effect occurs because the amounts allocated to property are depreciated over the estimated lives of the property whereas amounts allocated to tenant leases are amortized over the terms of the leases. Additionally, the amortization of value (or negative value) assigned to above (or below) market rate leases is recorded as an adjustment to rental revenue as compared to amortization of the value of in-place leases and tenant relationships, which is included in depreciation and amortization in the statements of operations.

Capitalization of costs. We capitalize pre-acquisition costs related to probable property acquisitions. We also capitalize direct and indirect costs related to construction and development, including property taxes, insurance and financing costs relating to properties under development. Costs previously capitalized related to any potential property acquisitions no longer considered probable are written off, which may have a material adverse effect on our net income. The selection of costs to capitalize and the determination of whether an acquisition is probable is subjective and depends on many assumptions including the timing of potential acquisitions and the probability that future acquisitions occur. Variations in these assumptions would yield different amounts of capitalized costs in the periods presented. All capital improvements for the income producing properties that extend the property’s useful life are capitalized.

Useful lives of assets. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

Asset impairment evaluation. We review the carrying value of our properties when circumstances, such as adverse market conditions and loss of tenants, indicate potential impairment may exist. We base our review on an estimate of the undiscounted future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a direct impact

 

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on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

Since cash flows from properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether an asset has been impaired, our strategy of holding properties over the long-term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date. We estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.

Results of Operations

Since our formation on March 2, 2007 we have not had any corporate activity other than the issuance of shares of common stock in connection with the initial capitalization of our company. Because we believe that a discussion of the operating results for this limited period would not be meaningful, we have set forth below a discussion of the results of operations of our accounting predecessor, or our Predecessor, which consisted of the operations of ACC3. Separately, we have presented a discussion of the combined results of operations of our other initial properties, or our Acquired Properties, VA3, VA4, ACC2, ACC4, ACC7, CH1 and NJ1. The results of our Acquired Properties also include the results of ACC1, which is characterized as a discontinued operation. Our Acquired Properties do not comprise a legal entity, but rather a combination of limited liability companies, and their respective wholly owned subsidiaries, that have common management. The historical combined financial statements of our Acquired Properties contained in this prospectus represent the combination of the financial statements of those entities.

Our results of operations discussed below include the operating results of our Predecessor and, presented separately, the combined operating results of our Acquired Properties. We believe that the results of our Acquired Properties, when considered along with the results of our Predecessor, present a more comprehensive picture of our historical operating results than our Predecessor alone. In addition, the historical results of operations presented below should be reviewed along with the pro forma financial information contained elsewhere in this prospectus, which includes adjustments related to the effects of the KeyBank Refinancing, and the completion of this offering and the formation transactions.

Results of Operations of Our Predecessor

Our Predecessor consists of one operating property, ACC3, which we brought into service as a wholesale data center in June 2006. Since ACC3 was not placed in service until June 2006, no meaningful comparison to the prior year periods can be made. In addition, information related to our operating results for the year ended December 31, 2006 reflects the operation of ACC3 for only the second half of 2006. Accordingly, results of operations for the year ended December 31, 2006 are not indicative of the full-year results that we anticipate for ACC3 for 2007 or future periods.

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Operating Revenue. Operating revenue for the three months ended June 30, 2007 was $6.4 million. This is based on a percentage leased rate of 100% for the period and includes both base rent of $4.5 million and tenant recoveries of $1.9 million, which includes our property management fee. Because ACC3 was in development during the prior period, our Predecessor did not have operating revenue for the three months ended June 30, 2006.

 

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Operating Expenses. Operating expenses for the three months ended June 30, 2007 were $3.0 million, consisting primarily of property operating costs, substantially all of which were passed through to our tenant under the triple net terms of our lease, as well as depreciation and amortization of $1.1 million. Operating expenses for the prior period were $0.2 million, as ACC3 was in development until June 2006.

Interest Expense. Interest expense for the three months ended June 30, 2007 was $2.9 million as compared to $0.6 million in the prior period. We began expensing development related interest costs when ACC3 was placed in service in June 2006.

Net Income (Loss). As a result of ACC3 being placed in service in June 2006, our Predecessor’s net income for the three months ended June 30, 2007 was $0.6 million, compared to a net loss of $0.7 million for the prior period.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Operating Revenue. Operating revenue for the six months ended June 30, 2007 was $12.6 million. This is based on a percentage leased rate of 100% for the period and includes both base rent of $9.0 million and tenant recoveries of $3.6 million, which includes our property management fee. Because ACC3 was in development during the prior period, our Predecessor did not have operating revenue for the six months ended June 30, 2006.

Operating Expenses. Operating expenses for the six months ended June 30, 2007 were $5.8 million, consisting primarily of property operating costs, substantially all of which were passed through to our tenant under the triple net terms of our lease, as well as depreciation and amortization of $2.2 million. Operating expenses for the prior period were $0.2 million as ACC3 was in development until June 2006.

Interest Expense. Interest expense for the six months ended June 30, 2007 was $5.8 million compared to $0.7 million for the prior period. We began expensing development related interest costs when ACC3 was placed in service in June 2006.

Net Income (Loss). As a result of ACC3 being placed in service in June 2006, our Predecessor’s net income for the six months ended June 30, 2007 was $1.0 million, compared to a net loss of $0.8 million for the prior period.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Operating Revenue. Operating revenue for the year ended December 31, 2006 was $10.7 million. This includes base rent of $8.2 million and tenant recoveries of $2.5 million, which includes our property management fee. ACC3 was not in operation during 2005.

Operating Expenses. Operating expenses for the year ended December 31, 2006 were $5.1 million. This compares to operating expenses of $0.6 million for the year ended December 31, 2005. The increase of $4.5 million is primarily the result of a $1.8 million increase in property operating costs, a $0.6 million increase in management fees, and an increase in depreciation and amortization expense of $2.0 million due to the property being placed into service in June 2006.

Interest Expense. Interest expense for the year ended December 31, 2006 was $6.3 million. This compares to $44,000 for the year ended December 31, 2005. Our Predecessor began expensing interest costs related to the development of ACC3 when the facility was placed in service in June 2006.

Net Income (Loss). As a result of ACC3 being placed in service in June 2006, our Predecessor incurred a net loss for the year ended December 31, 2006 of $0.5 million, compared to a net loss of $0.6 million in 2005.

 

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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Our Predecessor was not in operation during 2005 or 2004. Accordingly, we do not believe that a comparison is meaningful to investors.

Results of Operations of Our Acquired Properties

Our Acquired Properties consist of our three other properties that were in service as of June 30, 2007, VA3, VA4, and ACC2, as well as two properties that were under development as of June 30, 2007, ACC4 and CH1, and two undeveloped parcels of land, related to ACC7 and NJ1. As discussed above, our Acquired Properties also include ACC1, which is included in the statements of operations of our Acquired Properties as a discontinued operation, as it was sold in February 2007.

We acquired the undeveloped land related to ACC1 and ACC2 in September 2000. We constructed the building shells in 2001. These facilities were leased from mid-2001 through late 2003 to a provider of colocation services. We purchased VA3 and VA4 in March 2003 and June 2005, respectively, and placed these properties into service immediately on acquisition. In the first quarter of 2005, we began developing the infrastructure of ACC2, and in October 2005 we brought the property into service as a wholesale data center.

We acquired the undeveloped land for ACC4 and the land and building shell for CH1 in 2006 and 2007, respectively. We completed development of ACC4 Phase I in July 2007. As of October 1, 2007, ACC4 Phase II and all of CH1 were under development. We acquired the undeveloped land for ACC7 and NJ1 in 2007. The development and the lease up of new properties and the lease up of continuing properties are the primary factors that explain a significant amount of the changes in the results of operations for our Acquired Properties for the periods discussed below.

Three Months Ended June 30, 2007 Compared to June 30, 2006

Operating Revenue. Operating revenue for the three months ended June 30, 2007 was $15.0 million. This compares to $13.5 million for the prior period, an increase of $1.5 million, or 11.1%, attributable to the increase in tenant reimbursement revenue resulting from an increase in tenants’ capacity utilization.

Operating Expenses. Operating expenses for the three months ended June 30, 2007 were $8.9 million. This compares to $7.4 million for the prior period, an increase of $1.5 million, or 20.3%, substantially all of which was attributable to increased operating costs resulting from an increase in our tenants’ capacity utilization, which were passed through to our tenants.

Interest Expense. Interest expense for the three months ended June 30, 2007 was $5.9 million. This compares to $5.5 million in prior period, an increase of $0.4 million, or 7.3%, primarily attributable to the refinancing of VA3, which resulted in an increase in the amount of indebtedness on this property from $41.6 million to $63.5 million.

Income from Continuing Operations. Income from continuing operations for the three months ended June 30, 2007 was $0.4 million. This compares to $0.7 million for the prior period, a decrease of $0.3 million. This decrease is primarily due to the increase in interest expense.

Income from Discontinued Operations. Income from discontinued operations for the three months ended June 30, 2007 was zero. This compares to income from discontinued operations of $0.4 million for the prior period, a decrease of $0.4 million. This decrease was attributable to sale of our only discontinued property, ACC1, in February 2007 for $42.5 million.

Net Income. Net income for the three months ended June 30, 2007 was $0.4 million, compared to $1.1 million in the prior period. The decrease in net income is primarily due to an increase in interest expense and a decrease in income from discontinued operations due to the sale of ACC1 in February 2007.

 

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Six Months Ended June 30, 2007 Compared to June 30, 2006

Operating Revenue. Operating revenue for the six months ended June 30, 2007 was $29.5 million. This compares to $26.4 million for the prior period, an increase of $3.1 million, or 11.7%, attributable to the increase in tenant reimbursement revenue resulting from an increase in tenants’ capacity utilization.

Operating Expenses. Operating expenses for the six months ended June 30, 2007 were $17.3 million. This compares to $14.1 million for the prior period, an increase of $3.2 million, or 22.7%, substantially all of which was attributable to increased operating costs resulting from an increase in our tenants’ capacity utilization, which were passed through to our tenants.

Interest Expense. Interest expense for the six months ended June 30, 2007 was $12.0 million. This compares to $10.6 million in prior period, an increase of $1.4 million, or 13.2%, primarily attributable to the refinancing of VA3, which resulted primarily from an increase in the amount of indebtedness on this property from $41.6 million to $63.5 million and an increase in the debt outstanding and interest rate of VA4.

Income from Continuing Operations. Income from continuing operations for the six months ended June 30, 2007 was $0.5 million. This compares to $1.7 million for the prior period, a decrease of $1.2 million primarily due to the increase in interest expense partially offset by an increase in interest income of $0.2 million.

Income from Discontinued Operations. Income from discontinued operations for the six months ended June 30, 2007 was $28.5 million. This compares to income from discontinued operations of $0.7 million for the prior period, an increase of $27.8 million. This increase was attributable to the gain on sale of our only discontinued property, ACC1, in the amount of $28.4 million which was sold in February 2007 for $42.5 million.

Net Income. Net income for the six months ended June 30, 2007 was $29.0 million, compared to $2.5 million in the prior period. The increase in net income was primarily attributable to the gain on sale of ACC1 in the amount of $28.4 million, which was sold in February 2007.

Year Ended December 31, 2006 Compared to December 31, 2005

Operating Revenue. Operating revenue for the year ended December 31, 2006 was $54.8 million. This compares to $25.7 million for 2005, an increase of $29.1 million, or 113.2%, primarily attributable to an increase in revenue of $16.4 million and $12.2 million from VA4 and ACC2, respectively, which is a result of both properties being in service for all of 2006. VA4 and ACC2 were placed in service in June 2005 and October 2005, respectively.

Operating Expenses. Operating expenses for the year ended December 31, 2006 were $30.2 million. This compares to $15.9 million for 2005, an increase of $14.3 million, or 89.9%, attributable to the operating expenses associated with VA4 and ACC2, which were placed in service during 2005. Of the total increase, $8.0 million was attributable to increased property operating costs, $4.3 million was attributable to increased depreciation and amortization expense, and $1.5 million was attributable to an increase in our property management fees.

Interest Expense. Interest expense for the year ended December 31, 2006 was $25.5 million. This compares to $9.0 million in 2005, an increase of $16.5 million, or 183.3%. The increase was a result of increased interest expense of $6.5 million related to VA4, $3.3 million related to VA3 and $6.7 million related to ACC2. The results for 2006 reflect a full year of expensing of interest costs related to debt on ACC2, whereas prior to October 2005 interest costs attributable to the infrastructure development of ACC2 were capitalized. With respect to VA4, interest expense incurred in 2006 represents a full year of expense, whereas the 2005 amount reflects only six months of expense, since we acquired the property in June 2005. With respect to VA3, the interest expense increase in 2006 included charges of $1.8 million related to the refinancing of debt and additional interest of approximately $1.5 million due to higher debt outstanding in 2006 versus 2005. Primarily as a result of the refinancing of the property in August 2006, which increased the indebtedness by $21.8 million and resulted in the write-off during 2006 of unamortized loan fees of $0.6 million associated with the prior loan.

 

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Income (Loss) from Continuing Operations. Income from continuing operations for the year ended December 31, 2005 decreased by $1.6 million from income of $0.8 million to a loss of $0.8 million for the year ended December 31, 2006 as a result of the increase in interest expense and operating expenses partially offset by the increase in operating revenues.

Income from Discontinued Operations. Income from discontinued operations for the year ended December 31, 2006 was $1.6 million. This compares to $1.5 million in the prior period.

Net Income. Net income for the year ended December 31, 2006 was $0.8 million, compared to $2.3 million for the prior year primarily due to the $1.6 million decrease in income from continuing operations, which resulted from the increase in interest expense and operating expenses partially offset by the increase in operating revenues.

Year Ended December 31, 2005 compared to December 31, 2004

Operating Revenue. Operating revenue for the year ended December 31, 2005 was $25.7 million. This compares to $10.9 million for 2004, an increase of $14.8 million, or 135.8%. Of the total increase, $10.8 million was attributable to leases representing 100% of two new properties, VA4 and ACC2, commencing in September 2005 and October 2005, respectively. The remainder of the increase was attributable to an increase of $2.5 million in tenant reimbursements and $1.3 million in base rent at VA3, primarily as a result of an increase in the percentage leased rate of VA3 compared to 2004 from 50.0% to 89.3%.

Operating Expenses. Operating expenses for the year ended December 31, 2005 were $15.9 million. This compares to $7.5 million for 2004, an increase of $8.4 million, or 112.0%, primarily attributable to a $6.5 million increase in operating expenses related VA4 and ACC2, which were placed in service in June 2005 and October 2005, respectively. The balance of the increase, $1.9 million, was attributable to VA3 as a result of the higher percentage leased rate discussed above.

Interest Expense. Interest expense for the year ended December 31, 2005 was $9.0 million. This compares to $7.8 million for 2004, an increase of $1.2 million, or 15.4%. This increase is primarily attributable to the acquisition of VA4 in June 2005 and ACC2 being placed in service in October 2005 which increased interest expense by $3.9 million and $1.1 million, respectively. This is partially offset by a decrease in interest expense of $3.8 million at VA3 as 2004 included charges of $5.1 million related to the refinancing of debt, partially offset by $1.3 million of interest due to the higher debt outstanding in 2005 versus 2004.

Income (Loss) from Continuing Operations. Income from continuing operations for the year ended December 31, 2005 was $0.8 million. This compares to a loss of $4.4 million for the year ended December 31, 2004. The increase is primarily due to the placement of VA4 and ACC2 in service in 2005 and the increase in the percentage leased rate of VA3.

Discontinued Operations. Income from discontinued operations for the year ended December 31, 2005 was $1.5 million. This compares to a loss from discontinued operations of $2.3 million in 2004. This increase was attributable to ACC1, our discontinued property, being fully leased for the entire year ended December 31, 2005; the property was only leased for two months in 2004.

Net Income (Loss). Net income for the year ended December 31, 2005 was $2.3 million compared to a net loss of $6.7 million in the prior year. The increase primarily is due to the placement of VA4 and ACC2 in service in 2005, the increase in the percentage leased rate of VA3 in 2005 and ACC1 being fully leased for the entire year ended December 31, 2005, as compared to ACC1 being leased for two months in 2004.

 

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Liquidity and Capital Resources

As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annualized basis. Therefore, as a general matter, it is unlikely that we will have any substantial cash balances that could be used to meet our liquidity needs. Instead, we will need to meet these needs from cash generated from operations and external sources of capital. In addition, our liquidity may be negatively impacted by unanticipated increases in project development cost (including the cost of labor and materials and construction delays), and rising interest rates.

We believe that this offering and the formation transactions will improve our financial performance through changes in our capital structure, including a reduction in our leverage ratio. Upon completion of the formation transactions and this offering, we expect to have approximately $370.4 million of aggregate consolidated indebtedness. We expect that we will have $130.3 million of additional borrowing capacity on our $275.0 million revolving facility, and this credit facility has an accordion feature whereby it can be increased up to $475.0 million under certain circumstances. Additionally, upon completion, ACC4 will be unencumbered and available to collateralize additional long-term debt. However, the availability of funds under our revolving facility and our ability to encumber ACC4 will depend on, among other things, compliance with applicable restrictions and covenants set forth in our loan agreements and market conditions and there can be no assurance that additional credit would be available to us at acceptable terms or at all.

Short-term Liquidity

Our short-term liquidity requirements primarily consist of the costs to complete the development of ACC4 Phase II in November 2007, and Phase I of CH1 in 2008, the costs to complete the acquisition of the land in Santa Clara, California in early 2008, operating expenses and other expenditures associated with our properties, distributions, and potential acquisitions. Additional short-term liquidity needs include future distributions, interest expense, operating carrying costs of properties not fully leased, and certain non-recurring capital expenditures and expenses that, pursuant to the obligation under our tax protection agreement and terms of our leases, may not be passed through to our tenants, which expenses to date have not been material. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, the net proceeds from this offering, and to the extent necessary, by incurring additional indebtedness, including by drawing on our revolving facility, entering into development loans and/or collateralizing ACC4. Upon completion of this offering and the formation transactions, we expect that cash from operations and our available capital resources will be sufficient to meet our short-term liquidity needs for the foreseeable future.

Long-term Liquidity

Our long-term liquidity requirements primarily consist of the costs to begin development of our additional data centers scheduled for delivery in 2009, including ACC5 Phase I, SC1 Phase I and NJ1 Phase I, costs to fund the development of facilities that are not currently scheduled, and costs to fund property acquisitions, scheduled debt maturities and non-recurring capital improvements. We expect to meet our long-term liquidity requirements primarily through entering into long-term indebtedness, drawing on our revolving facility, entering into development loans and/or collateralizing assets placed in service. We also may raise capital in the future through the issuance of additional equity and debt securities, subject to prevailing market conditions, and/or through the issuance of OP units.

In view of our strategy to grow our portfolio over time, we do not, in general, expect to meet our long-term liquidity needs through sales of our properties. In the event that, notwithstanding this intent, we were in the future to consider sales of our properties from time to time, our ability to sell certain of our assets could be adversely affected by obligations under our tax protection agreements, the general illiquidity of real estate assets and certain additional factors particular to our portfolio such as the specialized nature of our target property type, and property use restrictions.

 

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Pro Forma Indebtedness

On a pro forma basis, assuming that the KeyBank Refinancing, the offering and the formation transactions occurred on June 30, 2007, we would have $255.7 million of consolidated indebtedness, as outlined in the table below:

 

Pro forma debt

   Interest Rate(1)     Principal
Amount
(in thousands)
   Annual Debt
Service
(in thousands)(2)
   Maturity Date(3)

CH1

   LIBOR plus 3.5 %   $ 24,746    $ 2,183    March 1, 2008

Term loan(4)

   6.497 %     200,000      12,994    August 7, 2011

Revolver

   LIBOR plus 1.7 %     30,943      2,172    August 7, 2010
                  

Total pro forma debt

     $ 255,689    $ 17,349   
                  

(1) LIBOR is 30 day LIBOR (5.32% as of June 30, 2007); there are no market rate adjustments for debt on acquired properties; the acquired properties were subject to variable rate debt that approximated market. The interest rate on the CH1 note is subject to a floor rate of 8.5% and requires payment of an exit fee of approximately $300,000 at maturity or prepayment.
(2) Annual debt service includes payments for interest only. The weighted average stated interest rate of our debt was 6.8% on a pro forma basis as of June 30, 2007.
(3) Maturity date represents the date on which the principal amount is due and payable, assuming no payment has been made in advance of the maturity date.
(4) On August 15, 2007 we entered into a $200.0 million interest rate swap with KeyBank National Association to manage the interest rate risk associated with a portion of the KeyBank debt that became effective August 17, 2007 through the maturity of this loan. This swap agreement effectively fixes the interest rate on $200.0 million of the KeyBank credit facility at 6.497%. We have designated this agreement as a hedge for accounting purposes.

Material Provisions of Consolidated Indebtedness to be Outstanding After this Offering

The KeyBank Term Loan and Revolving Facility. Upon the completion of this offering and the formation transactions, our OP will assume a $275.0 million revolving facility and a $200.0 million term loan, both of which are arranged by KeyBank National Association and each of which is secured by VA3, VA4, ACC2 and ACC3. The terms of the revolving facility include an accordion feature, which would enable us to increase the amount of the revolving facility by up to $200.0 million to a total borrowing capacity of $475.0 million depending on certain factors, including the value of and debt service on the properties included in our borrowing base, the possibility that we may need to add properties to the borrowing base and the agreement of participating lenders to fund the increased amount. The revolving facility matures on August 7, 2010, but includes an option whereby we may elect, once, to extend the maturity date by 12 months. The term loan is an interest only loan with the full principal amount due on maturity at August 7, 2011, with no option to extend.

Upon completion of this offering, we expect $200.0 million to be outstanding under our term loan and $144.7 million to be outstanding under our revolving facility. Upon the completion of this offering, the interest rate on our term loan will be LIBOR plus 1.50%, which we have effectively fixed at 6.497% through the use of an interest rate swap, and the interest rate associated with the revolving facility will depend on our applicable leverage ratio, which is defined by our credit agreement as the ratio of our total consolidated indebtedness to our gross asset value, as set forth in the following schedule:

 

Applicable Leverage Ratio

 

Applicable Interest Rate

Less than 40%

  LIBOR plus 1.25%

Greater than or equal to 40% but less than 50%

  LIBOR plus 1.40%

Greater than or equal to 50% but less than 60%

  LIBOR plus 1.60%

Greater than or equal to 60%

  LIBOR plus 1.70%

 

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Our four stabilized properties comprise our current borrowing base. In the future, we may add additional properties to our borrowing base, which would subject those properties to additional restrictions. Also, any equity interest that we may hold in any of our properties, whether or not included in our borrowing base, will provide additional collateral with respect to our term loan and revolving facility.

The credit agreement contains affirmative and negative covenants customarily found in facilities of this type, including limits on our ability to engage in merger and other similar transactions, as well as requirements that we comply with the following covenants of the OP on a consolidated basis: (i) consolidated total debt shall not exceed 65% of our asset value, (ii) debt service coverage shall not be less than 1.35 to 1.0, (iii) total leverage shall not exceed 65% of the appraised value of the properties, (iv) adjusted consolidated EBITDA to consolidated fixed charges shall not be less than 1.45 to 1.0, (v) the consolidated net worth shall not be less than 85% of tangible net worth plus the sum of (a) 75% of the net proceeds of this Offering and (b) the value of interests in the Company issued upon the contribution of assets to the Company and (vi) unhedged variable rate debt of the company shall not exceed 35% of the company’s asset value. Upon completion of this offering, we intend to assume this credit agreement and will at that time become subject to these covenants. As of the date hereof, we are in compliance with all applicable covenants.

On August 15, 2007 we entered into a $200.0 million interest rate swap with KeyBank National Association to manage the interest rate risk associated with a portion of the KeyBank credit facility to be effective August 17, 2007. This swap agreement effectively fixes the interest rate on $200.0 million of the KeyBank credit facility at 4.997% plus the applicable credit spread. We have designated this agreement as a hedge for accounting purposes.

CH1 Mortgage. Upon completion of this offering, we intend to assume a $30.1 million mortgage loan to which CH1 is currently subject. On a pro forma basis, as of June 30, 2007, amounts outstanding under this loan totaled $24.7 million. This loan bears interest at LIBOR plus 3.5% with a floor of 8.5% and currently requires interest-only payments. This loan matures on March 1, 2008, with a one-time option to extend the maturity for a period 12 months subject to customary conditions. Prepayment is permitted subject to payment of certain breakage costs incurred by the lender. At the earlier of maturity or prepayment, we must pay outstanding principal, accrued unpaid interest and an exit fee of approximately $300,000. We intend to refinance this mortgage loan upon maturity, including any exercise of our option to extend the maturity of this loan. However, we have not entered into any agreements to do so and cannot assure you that we will be able to obtain financing at acceptable rates or at all.

Commitments and Contingencies

Upon completion of the KeyBank Refinancing, this offering and the formation transactions, on a pro forma basis, assuming these transactions occurred as of June 30, 2007 we would have indebtedness totaling $255.7 million. The following table summarizes our contractual obligations as of June 30, 2007, on a pro forma basis, including the maturities and scheduled principal repayments of our term loan, revolver and CH1 mortgage (in thousands):

 

Obligation(1)

   2007    2008    2009-2010    2011-2012    Total

Long-term Debt Obligations(2)

   $ 8,674    $ 40,576    $ 58,666    $ 207,758    $ 315,674

Operating Leases

     128      260      189      —        577
                                  

Total

   $ 8,802    $ 40,836    $ 58,855    $ 207,758    $ 316,251
                                  

(1) Excludes amounts payable pursuant to a construction contract for ACC4 executed on October 20, 2006 with an unrelated contractor. The balance of the contract, as adjusted for change orders, is $236.9 million. As of June 30, 2007, the amount incurred was $205.1 million.
(2) These amounts include obligations for payment of both principal and interest. All interest on our pro forma debt is variable rate with the exception of our term loan which is fixed at 6.497% through an interest rate swap. For purposes of this table, we have used the June 30, 2007 LIBOR rate of 5.32% for the variable rate debt.

 

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Off-Balance Sheet Arrangements

As of June 30, 2007 and December 31, 2006 and 2005, we did not have any off-balance sheet arrangements.

Discussion of Cash Flows

Our Predecessor

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Net cash used in operating activities was $0.5 million for the six months ended June 30, 2007, compared to cash provided by operations of $1.1 million for the prior period. This decrease was attributable to the fact that ACC3 was in operation during the six months ended June 30, 2007 and required working capital, primarily to reduce related party payables by $1.7 million. In contrast, for the six months ended June 30, 2006 ACC3 was in development until June 2006.

Net cash used in investing activities decreased by $49.8 million to $1.1 million for the six months ended June 30, 2007, compared to $50.9 million for the prior period. This decrease was attributable to the fact that ACC3 was in development until June 2006. For the six months ended June 30, 2007, cash used in investing activities represents amounts paid related to residual development accruals as of December 31, 2006. For the six months ended June 30, 2006, cash used in investing activities represents amounts paid related to the infrastructure development of ACC3 of $64.1 million, partially offset by a repayment received from an affiliate of $13.2 million.

Net cash provided by financing activities decreased by $42.5 million to $12.4 million for the six months ended June 30, 2007, compared to $54.9 million for the prior period. The decrease primarily resulted from the decrease in development related debt funding as ACC3 was placed into service in June 2006. During the six months ended June 30, 2007, development related increases in debt totaled $14.2 million, which were partially offset by principal repayments of $0.9 million and repayments to affiliates of $0.8 million. For the six months ended June 30, 2006, cash provided by financing activities represents proceeds from the issuance of debt of $69.9 million, partially offset by aggregate distributions to investors of $13.0 million and repayments to affiliates of $2.0 million.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Net cash used in operating activities decreased by $4.1 million to $0.9 million for the year ended December 31, 2006 as compared to $5.0 million for the prior year. The decrease is primarily due to an increase in accounts payable and accrued expenses of $2.3 million and receipt of advance rents of $1.6 million in 2006.

Net cash used in investing activities increased by $41.2 million to $63.8 million for the year ended December 31, 2006 compared to $22.6 million for the prior year. This increase is a result of an increase in development costs of $67.7 million offset by the repayment of a loan from an affiliate in the amount of $13.2 million. Development costs paid were $77.1 million in 2006 and $9.4 million in 2005 as development did not commence until December 2005.

Net cash provided by financing activities increased by $42.0 million to $69.6 million for the year ended December 31, 2006 compared to $27.6 million for the prior year. The increase resulted from the increase in the incurrence of debt of $56.9 million due to increased borrowings in connection with the development of ACC3 in the year ended December 31, 2006, compared to the prior year, partially offset by an increase in distributions to owners of $13.0 million.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net cash used in operating activities increased by $4.8 million to $5.0 million for the year ended December 31, 2005 compared to $0.2 million for the prior year. The increase was primarily the result of $4.6 million paid for leasing commissions and related costs during 2005.

 

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Net cash used in investing activities increased by $22.6 million to $22.6 million for the year ended December 31, 2005, compared to $0 for the prior year, primarily as a result of payment of infrastructure development costs of ACC3 incurred during the year ended December 31, 2005 of $9.4 million and the provision of a loan to an affiliate in the amount of $13.2 million.

Net cash provided by financing activities increased by $27.4 million to $27.6 million for the year ended December 31, 2005 compared to $0.2 million for the prior year. The increase primarily resulted from the increase in the incurrence of debt of $27.8 million due to borrowings incurred in connection with the infrastructure development of ACC3 in the year ended December 31, 2005.

Our Acquired Properties

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Net cash provided by operating activities increased by $3.0 million to $4.1 million, compared to $1.1 million for the prior period. The increase was primarily the result of leasing commissions of $6.2 million paid in 2006, partially offset by advance rents collected of $1.4 million collected at December 31, 2006 on ACC2 and VA4, which reduced rents received in 2007, and additional interest paid in 2007 of $1.5 million for ACC2 and VA4.

Net cash used in investing activities increased by $143.9 million to $146.0 million for the six months ended June 30, 2007 compared to $2.1 million for the prior period. Cash used in investing activities for the six months ended June 30, 2007 consists primarily of the use of $131.0 million in the development of ACC4, $44.9 million related to the acquisition and development of CH1, $6.8 million to acquire land held for development of NJ1 and $4.2 million to acquire land held for the development of ACC7, partially offset by the proceeds from the sale of ACC1 of $43.1 million. For the six months ended June 30, 2006, cash used in investing activities primarily consisted of capital expenditures of $1.2 million at ACC2 and $1.3 million for the development of ACC4.

Net cash provided by financing activities increased by $132.9 million to $143.1 million for the six months ended June 30, 2007 compared to $10.2 million for the prior period. Cash provided by financing activities for the six months ended June 30, 2007 reflects additional debt incurred of $131.5 million for the continued development of ACC4 and $24.7 million of debt incurred for the acquisition and development of CH1, $4.7 million received in connection with a contribution from members for the acquisition of CH1, $6.8 million received in connection with a contribution from members for the acquisition of land to be held for development of NJ1 and $4.2 million received in connection with a contribution from members for the acquisition of land to be held for development of ACC7. These amounts were partially offset by distributions of $5.5 million related to the sale of ACC1, $23.5 million used to repay indebtedness on ACC1 and $2.7 million of principal repayments related to the operating properties. Cash provided by financing activities for the six months ended June 30, 2006 represents $30.3 million of loan proceeds related to ACC2 and VA4, a contribution of $8.6 million from members to fund the development of ACC4 and advances from affiliates of $1.4 million partially offset by distributions of $26.8 million to members.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Net cash provided by operating activities increased by $4.8 million to $2.7 million, compared to net cash used during 2005 of $2.1 million. The increase was primarily the result of additional operating income from ACC2 and VA4 of approximately $8.0 million due to commencement of operations. ACC2 paid leasing commissions of $2.7 million and $3.6 million in 2006 and 2005, respectively. ACC4 paid leasing commissions of $5.3 million in 2006 and VA3 paid leasing commissions of $0.2 million in 2006. Additionally, VA3 collected advance rents in 2006 of approximately $0.7 million and VA3’s lender reserves of approximately $0.6 million were released in 2006.

Net cash used in investing activities decreased by $74.5 million to $81.3 million for the year ended December 31, 2006, compared to $155.8 million for the prior year. Cash used in investing activities for the year

 

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ended December 31, 2006 represents $80.5 million of costs incurred in the development of ACC4, $2.2 million of capital improvement costs on the operating properties and payment of $1.4 million of accrued development costs of ACC2 that were outstanding as of December 31, 2005, partially offset by repayments received from affiliates of $3.2 million. Cash used in investing activities for the year ended December 31, 2005 consisted primarily of $62.9 million of development costs related to the build-out of ACC2 and $90.4 million related to the acquisition of VA4.

Net cash provided by financing activities decreased by $70.9 million to $88.4 million for the year ended December 31, 2006, compared to $159.3 million for the prior year. Cash provided by financing activities for 2006 reflects additional indebtedness of $52.4 million, net of loan fees; $21.5 million; $63.1 million, net of loan fees; and $11.2 million related to ACC4, VA4, VA3 and ACC2, respectively, partially offset by repayments of indebtedness of $43.1 million, $2.4 million, $2.3 million and $1.9 million from VA3, VA4, ACC2 and ACC1, respectively. Additionally there were capital contributions related to ACC4 of $38.5 million and distributions of $4.7 million, $21.3 million, $15.4 million, $5.3 million and $1.5 million from ACC4, VA3, VA4, ACC2 and ACC1, respectively. Cash provided by financing activities for 2005 reflects additional debt, net of repayments, of $66.0 million related to the build-out of ACC2 and $85.5 million of debt, net of loan fees, and $12.0 million of capital contributions, related to the acquisition of VA4.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net cash used in operating activities increased by $3.6 million to $2.1 million used in operating activities in the year ended December 31, 2005, compared to $1.5 million for the prior year. The increase resulted primarily from a $5.6 million increase in leasing commissions paid in 2005, offset by the timing of payment of operating expenditures.

Net cash used in investing activities increased by $154.1 million to $155.8 million for the year ended December 31, 2005, compared to $1.7 million for the prior year. Cash used in investing activities for 2005 represents $90.4 million and $63.0 million for the acquisition of VA4 and build-out of ACC2, respectively, as well as $2.2 million in advances to affiliates. Cash used in investing activities for 2004 represents capital improvements of $1.3 million and $0.4 million at VA3 and ACC1, respectively.

Net cash provided by financing activities increased by $155.6 million to $159.3 million for the year ended December 31, 2005, compared to $3.7 million for the prior year. Cash provided by financing activities for 2005 reflects additional debt, net of loan fees, incurred of $66.0 million related to the build-out of ACC2 and $85.5 million, net of loan fees, and $12.0 million of additional debt and capital contributions, respectively, related to the acquisition of VA4. Cash provided by financing activities for 2004 represents $45.1 million and $3.0 million of additional debt related to the refinancing of VA3 and additional draws of ACC1, respectively, partially offset by repayment of indebtedness of $26.3 million and $6.5 million at VA3 and ACC1, respectively and distributions of $7.3 million at VA3.

Pro Forma Funds From Operations

Funds from operations, or FFO, is used by industry analysts and investors as a supplemental operating performance measure for REITs. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income (loss) determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

We use FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating expenses. We also believe

 

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that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited.

While funds from operations is a relevant and widely used measure of operating performance of equity REITs, other equity REITs may use different methodologies for calculating funds from operations and, accordingly, funds from operations as disclosed by such other REITs may not be comparable to funds from operations published herein. Therefore, we believe that in order to facilitate a clear understanding of our historical operating results, funds from operations should be examined in conjunction with net income (loss) as presented in the consolidated financial statements included elsewhere in this prospectus. Funds from operations should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the properties’ financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table sets forth a reconciliation of our pro forma income (loss) from continuing operations for the periods presented to pro forma FFO (in thousands):

 

    

Six months ended
June 30, 2007

(unaudited)

  

Year ended
December 31, 2006

(unaudited)

 

Pro forma income (loss) from continuing operations(1)

   $ 1,844    $ (790 )

Adjustments:

     

Real estate depreciation and amortization

     12,669      23,167  

Non-controlling interests in OP

     1,855      (795 )
               

Pro forma funds from operations

   $ 16,368    $ 21,582  
               

(1) The pro forma consolidated income statements are presented through income from continuing operations. As a result, our FFO reconciliation begins with income from continuing operations.

Related Party Transactions

Leasing Arrangements

Upon completion of the offering, we intend to assume a lease with an affiliate of our sponsors to occupy approximately 6,797 square feet of office space at 1212 New York Avenue in Washington, D.C., an office building owned by entities affiliated with our sponsors. In addition, an entity affiliated with our sponsors will assign to us any ownership interest it may have in the office furniture and other personal items currently in use by us for no consideration. Under the terms of the lease, which expires on September 17, 2009, we will be required to pay to an affiliate of our sponsors $21,535 per month in rent until September 17, 2008 and then $22,181 per month until the end of lease in addition to our pro rata share of any increase in real estate taxes over the base year. We will have four options to renew for periods of five years each. We believe that the terms of this lease are fair and reasonable and reflect the terms we could expect to obtain in an arm’s length transaction for comparable space elsewhere in Washington, D.C.

Services Performed by Affiliates of Our Sponsors

Messrs. du Pont and Fateh are co-owners of certain entities that have historically provided our Predecessor and Acquired Properties with property management, development, leasing and asset management services. Although we are not a party to these arrangements and will not be obligated to pay these fees in the future, $14.7

 

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million, $20.2 million, $17.7 million and $1.8 million of these fees were incurred by our Predecessor and the Acquired Properties for the six months ended June 30, 2007 and the years ended December 31, 2006, 2005 and 2004, respectively. In connection with the formation transactions, we will acquire the various rights that will permit us to internalize these functions going forward and we will not be obligated to make such payments in the future.

Policies Applicable to All Directors and Officers

We have adopted certain written policies that are designed to eliminate or minimize certain potential conflicts of interest. We have also adopted a code of business conduct and ethics that prohibits conflicts of interest between our employees, officers and directors and our company. In addition, our board of directors is subject to certain provisions of Maryland law, which are also designed to eliminate or minimize conflicts. See “Investment Policies and Policies with Respect to Certain Activities.”

Inflation

Our leases all contain annual rent increases. As a result, we believe that we are largely insulated from the effects of inflation. However, following the completion of this offering, we expect to incur significantly increased general and administrative expenses, most of which we do not expect that we will be able to pass along to our tenants. Additionally, any increases in the costs of development of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to develop our properties and increased depreciation expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these development costs to our tenants in the form of higher rents.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. On August 15, 2007 we entered into a $200.0 million interest rate swap with KeyBank National Association to manage the interest rate risk associated with a portion of the KeyBank credit facility to be effective August 17, 2007 through the maturity of this loan. This swap agreement effectively fixes the interest rate on $200.0 million of the KeyBank credit facility at 4.997% plus the applicable credit spread. We have designated this agreement as a hedge for accounting purposes. We do not intend to use derivatives for trading or speculative purposes and, to the extent we elect to enter into hedging arrangements under the terms of our loan agreement, we intend to enter into contracts only with major financial institutions based on their credit rating and other factors.

If interest rates were to increase by 1%, the increase in interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $0.6 million annually. If interest rates were to decrease 1%, the decrease in interest expense on the variable rate debt would be approximately $0.4 million annually. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments.

These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

 

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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

Data Center History and Business Models

Data centers are used for housing a large number of computer servers and the key related infrastructure, including generators and heating, ventilation and air conditioning, or HVAC, systems, necessary to power and cool them.

Colocation. The Internet was constructed during a time when small data transfers between a fairly well-defined group of users could be accomplished through the decentralized architecture of a public network. In the mid-1990s, as use of the Internet grew among technology firms, private companies, primarily from the telecommunications industry, entered the market. These companies, known as colocation providers, typically leased a warehouse, or shell, from a landlord and then retrofitted the shell with certain infrastructure, including power, cooling and telecommunications. Colocation customers generally paid a flat rate service fee in exchange for rack space in the colocation facility. These relationships were generally covered by short-term license agreements, as opposed to long-term leases. Some colocation providers, known as managed service providers, also provided their customers with additional connectivity and managed services, such as maintaining operating systems. Managed service providers generally bundled these services with power and cooling and sold them as a single product.

Colocation facilities, primarily from the telecommunications industry, met the needs of early technology companies that drew limited amounts of power but required a significant amount of managed services. Colocation providers expanded quickly as the Internet economy grew. Then, beginning in 2000, the colocation market underwent a period of severe contraction, following the bursting of the technology bubble. Some providers entered bankruptcy, providing opportunities to developers, including our sponsors, to enter the data center market at an advantageous price point. There are still a number of colocation providers in business today, including Equinix, Savvis, AT&T, Digex (a unit of Verizon) and InterNap, providers which are sometimes referred to as retail—as opposed to wholesale—data center operators. However, we do not believe that their offerings have materially changed, and that colocation facilities, which typically provide up to 5.0 MW to 6.0 MW of critical load, are still better suited to smaller power users seeking shorter-term solutions.

Wholesale Infrastructure. As technology companies grew, they began to demand data centers capable of producing significantly more power than typical colocation facilities were designed to provide. Wholesale infrastructure providers entered the market to meet the growing demand from technology companies by offering significantly greater power through a single facility than colocation providers. Wholesale providers view data centers as a special class of real estate. Tenants generally enter into long-term leases, as opposed to short-term licenses, covering all or a significant portion of each facility, and the data centers themselves are generally larger and more powerful than a typical colocation facility. Infrastructure providers are generally responsible for developing and maintaining the core power and cooling systems necessary to run a tenant’s servers continuously. However, installing and maintaining the servers themselves, including connecting them to a telecommunications network, generally remain the tenant’s responsibility.

Wholesale infrastructure providers seek to distinguish themselves from colocation providers in terms of the amount of power they can provide through a single facility and the long-term cost savings they can offer to tenants through economies of scale (including bulk purchases of power and the use of more efficient cooling technology) and the unbundling of services larger tenants do not require. This is facilitated by the ability of larger technology companies to maintain on-site staff. Some wholesale providers also utilize triple-net leases, under which the operating costs of a property are passed through to the tenants. This enables tenants to tie costs more closely to actual usage, which we believe saves them significant amounts, especially during any ramp-up phase prior to full utilization of available power.

 

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Rising Demand for Wholesale Infrastructure

In recent years, we believe there has been a significant increase in the demand for data centers in general, and wholesale infrastructure in particular. A number of factors have contributed to this increased demand:

Growth of the Internet. Growth in demand for data centers reflects the growth in consumer and enterprise-based Internet traffic for applications such as search, media, commerce and application processing, according to Tier1 Research, a data center industry analyst. IDC Research estimates that the U.S. web hosting market totaled $8.2 billion of revenue in 2006 and projects U.S. web hosting revenue to grow at a compounded annual growth rate of 14.7% over the next five years, reaching $16.3 billion in 2011. IDC Research cites the following factors as contributing to the strong projected growth: the evolution of hosting beyond marketing and commerce to core business processes, the continued pursuit of on-demand computing, and the growth of the home office and small and medium-sized business segments. In addition, we believe that demand is being driven by the continued growth of Internet-based business models, such as search, online auctions, social networking sites, and online music, and that new Internet-based business models—such as online video—will continue to put upward pressure on data center demand in the future. In addition, we believe the increasing penetration of broadband technologies is contributing to growth in the Internet and demand for data centers. According to the Organisation for Economic Co-operation and Development, the number of broadband subscribers per 100 inhabitants in OECD countries grew to 16.9 in 2006 from 2.9 in 2001.

Industry Growth and Consolidation. We believe that growth, consolidation and the increasing maturity of the technology industry have led to the emergence of a significant number of well-known, financially secure companies, including Internet companies, with long-term business prospects. Many of these companies are now profitable entities that are willing and able to enter into long-term leases for their data center needs—as opposed to the short-term licenses typical of traditional colocation facilities—and take advantage of the benefits such leases have to offer, including lower base rents and economies of scale.

Demand Increasing, Including Among Enterprise Tenants. According to industry analysts, demand is out-stripping supply by a ratio of 2-to-1, as both technology and non-technology businesses, and enterprise tenants, increasingly outsource their network server needs to third-party data centers. Enterprise tenants are generally Fortune 500 businesses that require significantly less critical load than large technology companies. As somewhat smaller, but still significant, users of power, we believe that these companies do not find it cost-effective to build and staff their own data centers, but instead prefer to outsource such functions in order to focus on their own core competencies.

Reduced Supply of Data Center Space; Increased Need for Power. Even as demand for data center space grows among technology and enterprise companies, many telecommunications companies have exited the data center business since 2000. As a result, the available inventory of space in traditional colocation facilities has become increasingly limited. In addition, most colocation facilities—which typically provide up to 5.0 to 6.0 megawatts of critical load—are not equipped to provide the heightened levels of power and cooling that large technology companies now demand, according to Tier1 Research. The amount of power required to operate modern servers and software applications has steadily increased, even as servers have become faster. These trends have further contributed to the demand for data centers.

Barriers to Entry to Data Center Business

Despite the increase in demand for wholesale infrastructure, there are significant barriers to entry that we believe would make it difficult for new companies to enter this specialized market.

Development Cost. We believe that the significant cost to build wholesale data center infrastructure—which varies by geographic location, but which we estimate to be approximately $1,000 per gross square foot based on our current CH1 project—presents a significant risk for a traditional real estate developer seeking to enter the data center market on a speculative basis.

 

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Key Expertise. The key personnel necessary to develop and maintain data centers have training that is highly sought after, which, we believe, can make it difficult to assemble a team capable of pursuing a wholesale infrastructure project. Some of the skill sets required include experience in commercial real estate, data center construction and technology, Internet technology, and electrical and mechanical engineering. Because of the very specialized nature of wholesale data centers, we believe it would be difficult for a new entrant seeking to provide tenants with a wholesale offering to assemble the in-house expertise necessary to develop and operate wholesale data centers.

Land Scarcity. We believe there is a shortage of land that is optimal for the development of the most efficient data centers near key U.S. population centers, relatively inexpensive sources of power and significant fiber optic connectivity. It has taken us approximately seven years to assemble the properties that comprise our pipeline. As the amount of available land suitable for wholesale data center development continues to shrink, we expect the cost to acquire such land will continue to rise, making it more difficult for new entrants to enter this market.

Track Record. We believe that our tenants consider the servers housed in our facilities to be the “crown jewels” of their businesses. Accordingly, we believe such companies would be less likely to enter into long-term leases with data center owners with limited track records of successfully operating large-scale facilities like ours. We believe this represents a significant barrier to new entrants while enabling more established providers, like us, to lease up facilities more rapidly by leveraging long-standing tenant relationships.

Key Elements of a Wholesale Data Center

The critical elements of a wholesale data center include:

Electrical System. Data centers are designed to provide electrical capacity well in excess of what a typical office user requires. For instance, our newest data centers provide over 200 watts of electrical capacity for each square foot of tenant space, whereas a typical office building requires only approximately 5 to 10 watts per square foot. A data center electrical system is designed to provide an uninterruptible, stable source of electric power to its tenants, 24 hours a day, 365 days a year. The main source of electrical power to a data center is a direct connection to the local utility company. In the event of a utility company power outage, the electrical system is designed to contain a fully-integrated uninterruptible power system, or UPS, and diesel engine generators, which ensure an uninterrupted power supply. The generators provide the main source of back-up electrical power at the data center. The UPS consists of either a rotary flywheel assembly that stores kinetic energy, or batteries, and functions to store power, which will be routed to the tenant’s space immediately and without interruption while the generators start up. The UPS also ensures a constant electrical current by intercepting spikes in the electrical current (i.e. “cleans” the current).

HVAC System. Data centers provide heating, ventilation and air conditioning, or HVAC, engineered to maintain a temperature that is optimal for the continuous operation of the tenants’ computer servers, and to provide a comfortable working environment for its employees. Due to the significant amount of heat generated from the continuous operation of the computer equipment, these HVAC systems are much more powerful than the systems used in conventional commercial office buildings. As with the electrical system, the HVAC system is designed with a specified level of redundancy in the event of a power outage.

Humidification System: Data centers provide certain levels of humidity in the tenants’ server spaces at all times to help provide the optimal environment for servers operating at high temperatures 24 hours a day. The humidification systems generally consist of water heaters that create steam and systems to inject this steam through supply ducts into server spaces.

Security System. Due to the critical nature of data center operations to tenants’ businesses, data center security systems are designed to satisfy tenants’ heightened security requirements. The security system includes a single point of entry that is manned 24 hours a day, 365 days a year. Additionally, data centers include closed-circuit television systems that monitor the tenant space, building common areas, as well as the parking lot,

 

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loading docks and access points to the building. Data centers often contain biometric identification systems supplemented by card access systems to access the building and the tenants’ spaces within the building.

Telecommunications Infrastructure. Data centers provide conduits to accommodate telecommunications wiring within the tenants space and connectivity to one or more internet fiber networks. However, it is the tenants’ responsibility to provide for their own connections to the local telecommunications provider.

Fire Suppression System. The fire alarm and fire suppression systems in our data centers are also designed to address the critical nature of the operations performed by the servers we support. These systems generally include sophisticated early-warning smoke-detection systems. Also, the portions of the sprinkler system located within the tenants’ server space are initially charged with air, in order to keep water out of the server locations. Water is only released into the piping if the fire alarm is triggered, thus minimizing the risk of accidental water discharge into the tenants’ space.

Raised Floor Space. The tenants’ space in a data center is designed and constructed to have raised floor space, which facilitates the operation of the electrical and HVAC systems. Electrical conduits and wiring, air handling units, and telecommunications fiber are all located under the raised flooring. The ratio of raised square footage (i.e. net rentable square feet) to gross building area varies by building configuration, but is generally approximately 50%.

 

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BUSINESS AND PROPERTIES

Overview

We are a leading owner, developer, operator and manager of wholesale data centers. Our data centers are highly specialized, secure facilities used by our tenants—primarily national and international technology companies, including Microsoft, Yahoo! and Google—to house, power and cool the computer servers that support many of their most critical business processes. We lease the raised square footage and available power of each of our facilities to our tenants under long-term triple-net leases, which contain annual rental increases. As used in this prospectus, the phrase “wholesale data center,” or “wholesale infrastructure,” refers to specialized real estate assets consisting of large-scale data center facilities provided to tenants under long-term leases.

We believe our data centers are engineered to the highest specifications commercially available and provide sufficient power to meet the needs of the world’s largest technology companies. We consider our newest data center in Northern Virginia, known as ACC4, to be our prototype for future ground-up developments due to its enhanced power capacity and flexible design, which will enable us to accommodate both smaller and larger tenants in a single facility. Upon completion, this data center will be capable of providing tenants with a total of 36.4 megawatts, or MW, of power, which we refer to in this prospectus as critical load, or IT load. Critical load is that portion of each facility’s total power capacity that is made available for the exclusive use by our tenants to operate their computer servers. Because we believe that critical load is the primary factor that tenants evaluate in choosing a data center, we establish our rents based on both the amount of raised square footage that our tenants are occupying and the amount of power that we make available to them. Accordingly, throughout this prospectus, where we discuss our operations in terms of raised square footage, which we consider to be the net rentable square footage of each of our facilities, we generally also provide a corresponding discussion of critical load, which is one of the primary metrics that we use to manage our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

Upon completion of this offering and the formation transactions described below, we will own a 100% interest in the following properties:

 

   

four stabilized data centers located in Northern Virginia, which we refer to as VA3, VA4, ACC2 and ACC3, having an aggregate critical load of 46.0 MW and which were, as of October 1, 2007, 100% leased;

 

   

our prototype ground-up development in Northern Virginia, ACC4, which is expected to have an aggregate critical load of 36.4 MW and is being developed in two equal phases. The first phase has been completed and, as of October 1, 2007, was 100% leased. The second phase currently is scheduled for completion in November 2007 and, as of October 1, 2007, 43.8% of this phase was pre-leased;

 

   

one data center under development in suburban Chicago, which we refer to as CH1, which also is expected to have an aggregate 36.4 MW of critical load and a flexible design. The CH1 development involves retrofitting an existing building, or shell, for use as a data center and is being developed in two phases, with the first phase scheduled for completion in 2008; and

 

   

undeveloped properties in Northern Virginia and Piscataway, New Jersey. We will also have a contract to acquire land in Santa Clara, California for $22.5 million. We believe that these properties will, in the aggregate, support the development of six new data centers with an aggregate critical load of 187.2 MW.

In addition to the properties described above, we also will acquire certain property management, development, leasing, asset management and technical services agreements and arrangements for these properties from entities affiliated with our sponsors, Lammot J. du Pont, the Executive Chairman of our board of directors, and Hossein Fateh, our President and Chief Executive Officer. By combining our properties with these core operating functions, we believe we will be well positioned as a fully-integrated wholesale data center provider, capable of developing, leasing, operating and managing our growing portfolio.

 

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We expect to qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2007. We intend to make regular quarterly distributions, beginning with a distribution for the period commencing upon the completion of this offering and ending on December 31, 2007.

History of Our Company and Management Team

Messrs. du Pont and Fateh, our sponsors, entered the real estate market in 1997 to pursue a broad array of commercial development opportunities. Following the downturn in the Internet beginning in 2000, however, they focused their efforts on data centers and began acquiring data centers that were distressed assets between 2000 and 2003. In connection with these acquisitions, they developed a new approach to owning and operating data centers compared to what had historically been viewed as a service-based market dominated by facilities that bundled telecommunications and networking services with the physical rack space in which to store a customer’s computer servers, or colocation facilities. Instead, they viewed data centers as a new class of real estate, one in which tenants, as opposed to customers, could realize significant cost-savings by signing long-term leases, as opposed to short-term license agreements, in a facility significantly larger and more energy-efficient than a typical colocation facility. As our sponsors adjusted their model to meet the needs of a changing marketplace—one that demanded increased power, maximum reliability, and cost-efficiency—Messrs. du Pont and Fateh sold off assets more suitable for colocation in favor of focusing exclusively on the market for wholesale infrastructure.

Our Competitive Strengths

We believe we distinguish ourselves from other data center providers through the following competitive strengths:

 

   

Data centers with high power capacity and long useful lives. With an average critical load of 11.5 MW, our four stabilized data centers offer tenants almost twice the power capacity of a typical colocation facility. Our facilities provide critical load sufficient to serve the world’s largest technology companies, which require significantly more power than colocation facilities are designed to provide. Our newest data centers under development, ACC4 and CH1, are each expected to have a critical load of 36.4 MW upon completion. In addition, all of our data centers have long useful lives of approximately 30 years or more. The core power and cooling infrastructure is based on stable technology that is not tenant specific and is less likely to become obsolete. Also, because we do not own any of the servers housed in our facility, we are not subject to the risk of obsolescence associated with their computer technology.

 

   

Strategically located data centers. Our operating and planned development properties are strategically located in four premium markets, including Northern Virginia, Piscataway, New Jersey near New York City, Elk Grove Village, Illinois in suburban Chicago and Santa Clara, California in Silicon Valley, each of which are located near sources of relatively inexpensive power, major population centers and significant fiber optic networks. Access to less expensive power yields significant cost savings for our tenants under the terms of our triple-net leases, and the proximity to large population centers enhances performance by reducing latency (the time it takes a packet of information to reach the end user). We believe that Northern Virginia, where all of our developed properties are currently located, is an ideal data center location due to its proximity to populous East Coast cities, relatively inexpensive coal and nuclear power, and abundant fiber optic network capacity. Our other locations are similarly strategic. For instance, our property in metropolitan New York addresses the heightened latency concerns of financial institutions located there.

 

   

Strong development pipeline and track record. In addition to the 36.4 MW planned for CH1, our development pipeline includes six new data centers comprising in the aggregate 187.2 MW of critical load in Northern Virginia, Piscataway, New Jersey, and Santa Clara, California. Since 2000, our managers have developed, redeveloped or purchased 11 data centers, including ACC4. Our managers have also acquired or contracted to acquire all of our development pipeline properties.

 

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We believe that our acquisition capability is driven by the broad network of contacts our managers have within a highly fragmented industry of sellers and brokers of properties suitable for the development of wholesale infrastructure. In addition, we believe that our in-house development expertise, including our key technical managers, as well as our extensive network of relationships with key providers who are experienced in the construction of data centers gives us a significant advantage over those of our competitors who must rely exclusively on third parties to develop and maintain their properties.

 

   

Industry-leading tenants with strong credit. Our tenant base consists primarily of leading national and international technology companies, such as Microsoft, Yahoo!, and Google, as well as leading non-technology, or enterprise, companies, such as FactSet Research Systems, Sanofi-Aventis, and UBS. As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, accounted for 85.8% of our annualized rent. In addition, unlike other data center operators, we have direct relationships with our tenants, which enables us to increase the speed with which we can lease up new properties. Also, unlike many colocation providers that service smaller companies with shorter track records, the majority of our annualized rent is comprised of tenants with investment grade or equivalent credit.

 

   

Long-term triple net leases with annual rent increases. We believe we distinguish ourselves from other data center owners because our tenants enter into long-term triple net leases under which our tenants generally occupy all or a significant percentage of each of our data centers and are obligated to reimburse us for property-level operating expenses. Our leases also contain annual rent increases and, with one exception, do not permit early termination. As of October 1, 2007, our weighted average remaining lease term was approximately 7.8 years. In addition, because all of our leases are triple-net, our tenants pay for only the power and cooling they use. We believe this enables our tenants to pay significantly less over time than they would in a comparable colocation setting where power costs are included in the license fee paid to the provider.

 

   

Seasoned management team with data center and public company experience. Our senior managers, Messrs. du Pont and Fateh and our Chief Financial Officer, Steven G. Osgood, have an average of 15 years of experience in the commercial real estate industry and, in the case of Messrs. du Pont and Fateh, a significant portion of this experience is in the data center business. We believe this experience gives us an advantage in leasing and managing our properties. In addition, Mr. Osgood has substantial public company experience serving as President and Chief Financial Officer of U-Store-It Trust from the company’s initial public offering in October 2004 through April 2006 and Executive Vice President and Chief Financial Officer of Global Signal, Inc. from April 2006 until its sale to Crown Castle International Corp. in January 2007. Upon completion of this offering, our senior management team is expected to collectively own 176,000 shares of common stock (including 75,000 shares of restricted stock), 200,000 LTIP units convertible into 200,000 OP units under specified circumstances, and, a 34.8% equity interest in our OP convertible at our election into a 34.8% equity interest in our company, which we believe will align management’s interests with those of our stockholders.

Business and Growth Strategies

Our primary business objectives are to maximize cash flow per share and returns to our stockholders through the prudent management of a balanced portfolio of operating and development properties. Our business strategies to achieve these objectives are:

 

   

Maximize cash flow from existing properties. We intend to continue to use the triple-net structure for our leases, under which our tenants are contractually obligated to reimburse us for property-level operating expenses, including power and other utilities, connectivity, real estate taxes, insurance, common area charges and other expenses, as well as certain capital expenditures. We will also continue to include annual rent increases, which are typically 3.0% to 4.0% in all of our leases, to provide for stable growth in operating cash flows from our operating properties. As of October 1, 2007, 6.0% of our total raised square footage and 4.0% of our total critical load, accounting for 1.4% of our annualized rent, is

 

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subject to leases expiring by December 31, 2009. However, it is technically difficult and expensive for a tenant to switch data centers (tenants must not only replicate their original installations prior to switching off the servers we support, but they would likely also have to develop new fiber optic network connectivity, a cost we estimate to be approximately $7.0 million per megawatt used). In light of these barriers, we expect most of our tenants will take advantage of their renewal options.

 

   

Build out our current development pipeline. Including CH1 Phase I, we expect to add data centers with an aggregate critical load of 223.6 MW to our portfolio in the coming years, with 72.8 MW expected to be available for lease by the end of 2009. Along with ACC4, these data centers will provide sufficient power to meet the needs of the world’s largest technology companies and will incorporate a modified, more flexible design able to accommodate a wider variety of tenants with different power needs. We intend to grow our portfolio of data centers primarily through the build out of our development pipeline.

 

   

Diversify tenant base to include additional enterprise companies. To date, our large technology tenants have absorbed most of our inventory as it has become available. However, we have identified significant potential demand from prospective enterprise tenants, such as financial services, entertainment, media and travel companies as well as local, state and federal governments and government agencies. With our new, scalable data centers we intend to continue to target prospective enterprise tenants with strong credit and to diversify our tenants base. We believe that our wholesale infrastructure model offers enterprise tenants, who generally require less than 10.0 MW of critical load, a number of important advantages compared to a typical colocation facility, including the ability to realize economies of scale (such as bulk-priced power contracts) by sharing the facility with larger users, while at the same time, enjoying controlled access to their own dedicated computer room. Our triple-net lease terms also enable enterprise tenants to control costs during any ramp-up phase (the period before they are utilizing all of the power they have contracted for).

 

   

Expand integrated platform to other domestic and international markets. We have taken the concept of wholesale infrastructure beyond mere ownership by also acting as the developer, operator and manager of each of our data centers. We believe that this fully-integrated approach sets us apart from our competitors in the wholesale infrastructure and colocation markets and makes us more attractive to large tenants that recognize the advantage of entering into a relationship with a single company that is directly responsible for all core functions. Currently, all of our operating data centers are located in Northern Virginia. With our current redevelopment project in suburban Chicago and our other development pipeline properties in New Jersey and California, we intend to expand our platform nationally in order to accommodate the needs of our growing technology tenants and to meet the needs of new potential tenants. We are actively seeking new opportunities to expand in key domestic areas, including the southwestern U.S., and in international markets.

Financing Strategy

We intend to meet our short-term liquidity needs through net cash provided by operations, reserves established from existing cash, the net proceeds of this offering and, to the extent necessary, through entering into long-term indebtedness, drawing on our revolving facility, entering into development loans and/or collateralizing ACC4. We expect to meet our long-term liquidity needs through long-term secured borrowings and the issuance of additional securities. In determining the source of capital to meet our long-term liquidity needs, we will evaluate our level of indebtedness and leverage ratio, our cash flow expectations, the state of the capital markets, interest rates and other terms for borrowing, and the relative timing considerations and costs of borrowing or issuing additional securities. Following the completion of this offering and the formation transactions, our long-term debt will include our revolving facility, our term loan, and other secured borrowing.

Upon completion of this offering and the formation transactions, we expect that our debt to market capitalization ratio will be 23.0%. We believe that our anticipated debt to market capitalization ratio at the close of this offering will give us significant flexibility to incur additional debt to fund future developments and acquisitions.

 

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Our Portfolio Summary

Operating Properties. The following table presents an overview of our operating properties, including our four stabilized properties and ACC4, based on information as of October 1, 2007:

 

Property and Location

  Year Built/
Renovated
  Gross
Building
Area(1)
  Raised
Square
Feet(2)
 

Critical

Load(3)

 

%

Leased(4)

   

Annualized Rent

(in thousands)(5)(6)

  Annualized
Management
Fee Recoveries
(in thousands)(7)
 

VA3

    Reston, VA

  2003(8)   256,000   144,901   13.0 MW   100 %   $ 8,574   $ 660  

VA4

    Bristow, VA

  2005(8)   230,000   90,000   9.6 MW   100 %   $ 15,327   $ 1,080  

ACC2

    Ashburn, VA

  2001/2005   87,000   53,397   10.4 MW   100 %   $ 10,783   $ 704  

ACC3

    Ashburn, VA

  2001/2006   147,000   79,600   13.0 MW   100 %   $ 18,076   $ 1,156  
ACC4 Phase I
    Ashburn, VA
  July 2007   150,000   85,700   18.2 MW   100 %   $ 24,289     —   (9)
ACC4 Phase II
    Ashburn, VA
 

November 2007
(estimated)

  150,000
  85,600
  18.2 MW
  43.8
%(10)
   
n/a
   
n/a
 
                             

Totals

    1,020,000   539,198   82.4 MW     $ 77,049   $ 3,600  
                             

(1) The entire building area, including raised square footage (the portion of gross building area where our tenants’ computer servers are located), tenant common areas, areas controlled by us (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to our tenants.
(2) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(3) Critical load is the power available for exclusive use by our tenants expressed in terms of MW or kW (1 MW is equal to 1,000 kW). In addition to critical load, each of our data centers is designed to provide sufficient additional power to cool our tenants’ servers, which we refer to as essential load.
(4) Percentage leased is expressed as a percentage of raised square feet that is subject to a signed lease. With respect to any given facility, critical load is distributed approximately evenly to each raised square foot. Accordingly, percentage leased rates are not materially different when expressed as a percentage of a facility’s critical load.
(5) Annualized rent is presented for leases commenced as of October 1, 2007 on a straight-lined basis over the non-cancellable terms of the respective leases beginning from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended. Annualized rent includes base rent and other rents (including, as applicable, office, storage, parking and cage space) and all historical and future contractual increases to such rents, including any increases that are scheduled to occur subsequent to October 1, 2007. There is no annualized rent associated with ACC4 Phase II because these leases are not scheduled to commence until November 2007 and January 2008.
(6) Annualized rent based on actual base rental rates in effect as of October 1, 2007, without giving effect to any future contractual rent increases, equals $8.1 million, $14.6 million, $9.7 million, $16.5 million and $8.0 million for VA3, VA4, ACC2, ACC3 and ACC4 Phase I, respectively, or $56.9 million in the aggregate.
(7) Annualized management fee recoveries for all leases commenced as of October 1, 2007, as determined from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended, consists of our property management fee, which is a variable fee that our tenants pay in exchange for receiving property management services from us, including general maintenance, operations and administration of each facility. This fee is equal to approximately 5.0% of the sum of (i) base rent, (ii) other rents (including, as applicable, office, storage, parking and cage space) and (iii) estimated recoverable operating expenses allocable to each tenant over the term of the lease other than direct electric, which we define as the cost of the critical and essential load used by a tenant to power and cool its servers. For purposes of calculating annualized management fee recoveries with respect to each property, we have annualized the most recently reported half year of property operating expenses.
(8) Acquired as a fully-developed property.
(9) Annualized management fee recoveries are not calculated because ACC4 Phase I was not in service for the most recently reported half year.
(10) As of October 1, 2007, ACC4 Phase II was 43.8% pre-leased. Completion of this facility is expected in November 2007.

 

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Development Properties. The following table presents an overview of our development properties, based on information as of October 1, 2007. Other than ACC7, we intend to develop each of these facilities in two phases in terms of the critical load to be made available in each phase. Due to its smaller size, we plan to develop ACC7 in a single phase. One of the advantages of developing a larger facility in multiple phases is the phases can be developed independently, with the timing of the second phase to be determined in light of market conditions. We cannot guarantee that we will be able to develop these properties in accordance with the schedules, cost estimates and specifications set forth below, or at all:

 

Property and Location

   Expected
Completion
Date
   Estimated Total Cost
(in thousands)(1)
   Gross
Building
Area(2)
   Raised
Square
Feet(3)
   Critical
Load(4)

CH1 Phase I

    Elk Grove Village, IL

   2008    $ 240,000 - $300,000    285,000    121,223    18.2 MW

ACC5 Phase I

    Ashburn, VA

   2009    $ 180,000 - $230,000    150,000    85,600    18.2 MW

SC1 Phase I

    Santa Clara, CA(5)

   2009    $ 240,000 - $300,000    150,000    85,600    18.2 MW

NJ1 Phase I

    Piscataway, NJ

   2009    $ 220,000 - $280,000    150,000    85,600    18.2 MW

CH1 Phase II

    Elk Grove Village, IL

   not scheduled      *    200,000    89,917    18.2 MW

ACC5 Phase II

    Ashburn, VA

   not scheduled      *    150,000    85,600    18.2 MW

SC1 Phase II

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

NJ1 Phase II

    Piscataway, NJ

   not scheduled      *    150,000    85,600    18.2 MW

SC2 Phase I

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

SC2 Phase II

    Santa Clara, CA(5)

   not scheduled      *    150,000    85,600    18.2 MW

ACC6 Phase I

    Ashburn, VA

   not scheduled      *    120,000    77,500    15.6 MW

ACC6 Phase II

    Ashburn, VA

   not scheduled      *    120,000    77,500    15.6 MW

ACC7

    Ashburn, VA

   not scheduled      *    100,000    50,000    10.4 MW

 * Development costs for these projects have not yet been estimated as of date of this prospectus.

 

(1) Includes estimated capitalization for construction and development, including closing costs, capitalized interest, leasing commissions and capitalized operating carrying costs, as applicable. As of June 30, 2007, we had incurred development costs of $59.3 million, $6.8 million and $4.2 million in connection with CH1, NJ1 and ACC7, respectively.
(2) Gross building area is the entire building area, including raised square footage (the portion of gross building area where our tenants’ computer servers are located), tenant common areas, areas controlled by us (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to our tenants.

 

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(3) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(4) Critical load is the power available for exclusive use by our tenants expressed in terms of MW or kW (1 MW is equal to 1,000 kW). In addition to critical load, each of our data centers is designed to provide sufficient additional power to cool our tenants’ servers, which we refer to as essential load. Estimated critical loads for ACC5, SC1, NJ1 and SC2 are based generally on our present intention to employ designs for these facilities similar to our ACC4 prototype. The estimated critical loads for ACC6 and ACC7 are expected to be lower due to constraints imposed on us by the size of the properties.
(5) Upon completion of this offering, we will have contractual rights to acquire the land for these data centers, which we expect to acquire in the fourth quarter of 2007.

Description of Properties

VA3, Reston, Virginia. Acquired in 2003 as a fully developed data center, VA3 is situated on approximately 10 acres of land in the Lake Fairfax Business Center in Reston, Virginia, one of metropolitan Washington, D.C.’s largest suburban markets. The facility comprises approximately 256,000 gross square feet and 144,901 raised square feet divided into 10 computer rooms, with an aggregate critical load of 13.0 MW, or 1.3 MW per computer room. As of October 1, 2007, VA3 was 100% leased to four tenants. The 2007 tax rate for this property is $1.11 per $100 of assessed value, or $647,261 in property taxes annually.

VA4, Bristow, Virginia. Acquired in 2005 as a fully developed data center, VA4 is situated on 32 acres of land in Prince William County, Virginia. The facility comprises approximately 230,000 gross square feet and 90,000 raised square feet divided into six computer rooms with an aggregate critical load of 9.6 MW, with 3.0 MW available to each of two pairs of computer rooms and 3.6 MW available to a third pair of computer rooms. As of October 1, 2007, VA4 was 100% leased to one tenant. The 2007 tax rate for this property is $0.8379 per $100 of assessed value, or $497,976 in property taxes annually. Under the terms of the lease at VA4, the tenant has a right of first refusal to purchase the property if we propose to sell the property to a third party. In addition, under the terms of the lease, we are prohibited from selling the property to a third party that is a competitor of the tenant.

ACC2, Ashburn, Virginia. Completed in 2005, ACC2 is situated on 22 acres of land at the Ashburn Corporate Center Phase I Condominium in Loudoun County, Virginia. The facility is located within a half mile of the corporate offices of Verizon (formerly MCI’s world headquarters) and America Online’s corporate headquarters. Loudoun County is the fastest growing county in the region and the eighth fastest growing county in the U.S. ACC2 comprises approximately 87,000 gross square feet and 53,397 raised square feet, with an aggregate critical load of 10.4 MW evenly divided between two computer rooms. In 2000, we acquired the undeveloped land related to ACC2 and developed ACC2 as an empty shell. The shell was leased from mid-2001 through late 2003 to a provider of colocation services. Thereafter, ACC2 was vacant. In the first quarter of 2005, we began developing the infrastructure of ACC2, and in October 2005 we completed development and brought the property into service as a wholesale data center. As of October 1, 2007, ACC2 was 100% leased to one tenant. The 2007 tax rate for this property is $1.16 per $100 of assessed value, or $145,651 in property taxes annually. Under the terms of the lease, during the lease term, we are prohibited from selling the property to a third party that is a competitor of the tenant.

ACC3, Ashburn, Virginia. Completed in 2006, ACC3 is situated on 22 acres of land at the Ashburn Corporate Center Phase I Condominium in Loudoun County, Virginia. The facility comprises approximately 147,000 gross square feet and 79,600 raised square feet, with an aggregate critical load of 13.0 MW divided among four computer rooms, with 3.9 MW available to each of two computer rooms and 2.6 MW available to each of the remaining two computer rooms. In 2000, we acquired the undeveloped land related to ACC3 and developed ACC3 as an empty shell. The building was briefly leased to a provider of colocation services. This lease was terminated in early 2002 and ACC3 remained vacant. We began to develop the wholesale infrastructure of this facility in December 2005 and brought it into service in as a wholesale data center in June 2006. As of

 

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October 1, 2007, ACC3 was 100% leased to one tenant. The 2007 tax rate for this property is $1.16 per $100 of assessed value, or $241,314 in property taxes annually. Under the terms of the lease at ACC3, the tenant has a right of first refusal to purchase the property if we propose to sell the property to a third party. In addition, under the terms of the lease, we are prohibited from selling the property to a third party that is a competitor of the tenant.

ACC4, Ashburn, Virginia. ACC4 is situated on 17 acres of land at the Ashburn Corporate Center in Loudoun County, Virginia. Ground-up development began in 2006. We consider ACC4 to be our prototype for future ground-up development projects. We believe that its flexible design and enhanced power and cooling capacity make it one of the leading data center facilities in the world. The raised square footage is divided into 20 separate computer rooms, each of which is served by an independent and dedicated critical electrical backup system. This design enables each computer room to function independently and provides us with greater pricing power and the ability to structure flexible leases to meet the demands of our tenants.

In the aggregate, ACC4 will consist of approximately 300,000 gross square feet (not including 40,000 square feet dedicated to housing generators) and 171,300 raised square feet, with a critical load of 36.4 MW. The first phase of this facility, or ACC4 Phase I, was completed on July 1, 2007. ACC4 Phase I comprises approximately 150,000 gross square feet and 85,700 raised square feet with an aggregate critical load of 18.2 MW divided among 10 computer rooms as follows: 2.275 MW going to each of six computer rooms and 1.1375 MW to each of the remaining computer rooms. As of October 1, 2007, ACC4 Phase I was 100% leased to four tenants. The second phase of this facility, or ACC4 Phase II, is currently under development and is scheduled for completion in November 2007. ACC4 Phase II will be substantially identical to Phase I and as of October 1, 2007, we had pre-leased 43.8% of this phase. During the term of a lease of a portion of ACC4, the tenant has a right of first refusal to purchase the property if we propose to sell the property to a third party.

CH1, Elk Grove Village, Illinois. CH1 is being developed in two phases on 22.8 acres situated in Elk Grove Village, a suburb of Chicago, Illinois, in Cook County. Cook County is one of the most populous counties in the nation. Retrofit development began in 2006. In the aggregate, CH1 will consist of approximately 485,000 gross square feet and 211,140 raised square feet, with a critical load of 36.4 MW. The first phase of this facility, or CH1 Phase I, is currently under development and is scheduled for completion in 2008. This phase will comprise approximately 121,223 raised square feet with a critical load of 18.2 MW divided among 16 computer rooms. We have not yet finalized the development schedule for the second phase of this facility, or CH1 Phase II, which will consist of approximately 89,917 raised square feet, with a critical load of 18.2 MW.

ACC 5 and ACC6, Ashburn, Virginia. We expect to develop ACC5 and ACC6 each in two phases on approximately 30.4 acres of land at the Ashburn Corporate Center in Loudoun County, Virginia. We anticipate that ground up development of ACC5 will commence in 2008, with phase one of this development expected to be completed in 2009. We anticipate that ACC5 will comprise approximately 300,000 gross square feet and 171,200 raised square feet, with an aggregate critical load of 36.4 MW. The ACC6 floor plan has not yet been determined, but we plan for the facility to be built in two phases and have an aggregate critical load of 31.2 MW. During the term of a lease of a portion of ACC4, the tenant has a right of first refusal to purchase the property upon which we intend to develop ACC5 if we propose to sell the property to a third party.

ACC7, Ashburn, Virginia. ACC7 will be developed on approximately 10.4 acres of land at the Ashburn Corporate Center in Loudoun County, Virginia. Ground-up development of ACC7, which will be constructed in one phase, has not yet been scheduled. We anticipate that ACC7 will comprise 100,000 gross square feet and 50,000 raised square feet, with a critical load of 10.4 MW.

NJ1, Piscataway, New Jersey. NJ1 will be developed in two phases on approximately 38.1 acres of land in Piscataway, New Jersey, which is located less than 30 miles from New York City. It is presently anticipated that ground-up development of phase one of this development will be completed in 2009. We anticipate that NJ1 will comprise approximately 300,000 gross square feet and 171,200 raised square feet, and will have an aggregate critical load of 36.4 MW.

 

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SC1 and SC2, Santa Clara, California. Upon completion of this offering and the formation transactions, we will have a contract to acquire 17.2 acres of land in Santa Clara, California that, we believe, will support the development of two new data centers, which we refer to as SC1 and SC2 in this prospectus. We expect to complete our purchase of the Santa Clara land in the fourth quarter of 2007. We anticipate that SC1 and SC2 will each be developed in two phases. It is presently anticipated that ground up development of SC1 Phase I will be completed in 2009. Development of SC1 Phase II and all of SC2 has not yet been scheduled. We anticipate that, upon completion, SC1 and SC2 will each comprise 300,000 gross square feet and 171,200 raised square feet, with an aggregate critical load of 36.4 MW.

As of October 1, 2007, the Santa Clara property was occupied by one retail tenant. This tenant’s lease does not expire until December 31, 2014, with two five-year renewal options, and this tenant is not currently in default. Accordingly, the seller has no contractual ability to terminate the lease as of the date hereof. Our sponsors are currently negotiating to relocate this tenant to a new site. If our sponsors or we are unable to effect the relocation of this tenant, we may be able to build only one of the planned data centers for this property, and there can be no assurance that we would be able to acquire a replacement property to accommodate development of the second data center. Any delay in, or inability to effect, the development of SC2 could have a material negative impact on our development pipeline. See “Risk Factors—Risks Related to Our Business and Operations—A portion of our land under contract in Santa Clara, California is currently occupied by a tenant in an unrelated business and if we are unsuccessful in relocating this tenant, we may be unable to develop the second of our planned data centers, SC2, in this location.”

Form of Ownership of Our Properties. Following the completion of the offering, we will hold a 100% fee simple interest in the following operating and development properties: VA3, VA4, ACC2, ACC3, ACC4, and CH1. We will also hold a 100% fee simple interest in certain parcels of land being held for development in Northern Virginia and Piscataway, New Jersey. We will also hold a contract to purchase land in Santa Clara and, upon consummation of such sale, we expect to hold this land in fee simple, as well.

Property Indebtedness. Following the completion of this offering, our properties will have certain indebtedness, as described more fully in “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources—Material Provisions of Consolidated Indebtedness to be Outstanding After this Offering” and Note (4), “Notes to Financial Statements of Quill Ventures LLC” and Note (4), “Notes to Combined Financial Statements of DuPont Fabros Acquired Properties”.

Tenant Diversification

As of October 1, 2007, our portfolio was leased to eight data center tenants, many of which are nationally recognized firms in the technology industry, and one non-data center tenant. As of October 1, 2007, our two largest tenants, Microsoft and Yahoo!, accounted for 85.8% of our annualized rent. The following table sets forth our tenants by the percentage of our annualized rent attributable to each, as of October 1, 2007:

 

Tenant Name

   % Annualized Rent  

Microsoft

   43.3 %

Yahoo!

   42.5 %

UBS

   3.8 %

Google

   3.0 %

Fox Interactive Media

   2.3 %

IAC/InterActiveCorp

   2.1 %

Sanofi-Aventis

   1.8 %

FactSet Research Systems

   1.0 %

Other(1)

   0.2 %
      

Total

   100 %
 
  (1) The federal government leases parking spaces at one of our facilities.

 

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Lease Distribution

The following tables set forth information relating to the distribution of leases for VA3, VA4, ACC2, ACC3 and ACC4 Phase I (excluding ACC4 Phase II, which is scheduled for completion in November 2007), based on both raised square feet, which we consider to be the net rentable square feet in each of our facilities, and critical load, in terms of kilowatts or kW, under lease as of October 1, 2007.

Raised Square Feet Under Lease

 

Raised Square Feet Under Lease(1)

   No. of
Leases
   % of All
Leases
    Total
Leased
Raised
Square Feet
  

% of Portfolio

Leased

Raised

Square Feet

    Annualized Rent
(in thousands)(2)
  

% of Portfolio

Annualized

Rent

 

Available

               

2,500 or less

   —      0.0 %   —      0.0 %   $ —      0.0 %

2,501-10,000

   3    27.3 %   20,409    4.5 %     4,208    5.5 %

10,001-20,000

   2    18.2 %   25,120    5.5 %     4,330    5.6 %

20,001-50,000

   —      0.0 %   —      0.0 %     —      0.0 %

50,001-75,000

   4    36.3 %   238,469    52.6 %     35,108    45.6 %

Greater than 75,000

   2    18.2 %   169,600    37.4 %     33,403    43.3 %
                                   

Portfolio Total

   11    100 %   453,598    100 %   $ 77,049    100 %
                                   

(1) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(2) Annualized rent is presented for leases commenced as of October 1, 2007 on a straight-lined basis over the non-cancellable terms of the respective leases beginning from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended. Annualized rent includes base rent and other rents (including, as applicable, office, storage, parking and cage space) and all historical and future contractual increases to such rents, including any increases that are scheduled to occur subsequent to October 1, 2007. There is no annualized rent associated with ACC4 Phase II because these leases are not scheduled to commence until November 2007 and January 2008.

Critical Load Under Lease

 

kW of Critical Load

Under Lease(1)

   No. of
Leases
  

% of All

Leases

    Total kW
Under Lease
  

% of Portfolio

Leased

kW

    Annualized Rent
(in thousands)(2)
  

% of Portfolio

Annualized

Rent

 

Available

               

1,300 or less

   4    36.3 %   4,225    6.6 %   $ 5,622    7.3 %

1,301-2,600

   1    9.1 %   2,275    3.5 %     2,916    3.8 %

2,601-5,200

   1    9.1 %   5,200    8.1 %     2,334    3.0 %

5,201-10,400

   3    27.3 %   25,850    40.3 %     30,097    39.1 %

Greater than 10,400

   2    18.2 %   26,650    41.5 %     36,080    46.8 %
                                   

Portfolio Total

   11    100 %   64,200    100 %   $ 77,049    100 %
                                   

(1) Critical load is that portion of each facility’s total load that is made available for the exclusive use by our tenants to operate their computer servers. In addition to critical load, each of our data centers is designed to provide sufficient additional power to cool our tenant’s servers, which we refer to as essential load.
(2) Annualized rent is presented for leases commenced as of October 1, 2007 on a straight-lined basis over the non-cancellable terms of the respective leases beginning from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended. Annualized rent includes base rent and other rents (including, as applicable, office, storage, parking and cage space) and all historical and future contractual increases to such rents, including any increases that are scheduled to occur subsequent to October 1, 2007. There is no annualized rent associated with ACC4 Phase II because these leases are not scheduled to commence until November 2007 and January 2008.

 

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Table of Contents

Lease Expirations

The following table sets forth a summary schedule of lease expirations—and the corresponding effects in terms of both raised square feet and critical load—for VA3, VA4, ACC2, ACC3 and ACC4 Phase I (excluding ACC4 Phase II, which is scheduled for completion in November 2007) for each of the ten full calendar years and the partial year beginning October 1, 2007. The information set forth in the table assumes that tenants exercise no renewal options.

 

Year of Lease Expiration

  Property   Number of
Leases
Expiring(1)
  Total
Raised
Square
Footage
of
Expiring
Leases(2)
  % of
Portfolio
Leased
Raised
Square
Feet
    Total
kW of
Expiring
Leases(3)
  % of
Portfolio
Leased
kW
   

Annualized Rent

(in thousands)(4)

 

Annualized
Rent Per
Raised

Square
Foot

  % of
Portfolio
Annualized
Rent
 

2007

    —     —     —       —     —       $ —     $ —     —    

2008

    —     —     —       —     —         —       —     —    

2009

  VA3   1   27,268   6.0 %   2,600   4.0 %     1,107     40.60   1.4 %

2010

  VA3   1   66,661   14.7 %   5,688   8.9 %     3,751     56.27   4.9 %

2011

  VA3   1   14,320   3.1 %   1,300   2.0 %     1,414     98.73   1.8 %

2012(5)

  VA4   1   15,000   3.3 %   1,600   2.5 %     2,509     167.26   3.3 %

2013

  VA3   1   26,943   6.0 %   2,600   4.0 %     1,181     43.82   1.5 %
  VA4   1   15,000   3.3 %   1,600   2.5 %     2,542     169.46   3.3 %

2014

  VA3   1   9,709   2.1 %   814   1.3 %     1,121     115.56   1.5 %
  VA4   1   15,000   3.3 %   1,600   2.5 %     2,557     170.44   3.3 %

2015

  ACC2   1   53,397   11.8 %   10,400   16.2 %     10,783     201.94   14.0 %
  VA4   1   15,000   3.3 %   1,600   2.5 %     2,534     168.95   3.3 %

2016

  ACC3   1   39,800   8.8 %   6,500   10.1 %     9,399     236.16   12.2 %
  VA4   1   15,000   3.3 %   1,600   2.5 %     2,599     173.28   3.4 %

2017

  ACC3   1   23,600   5.2 %   3,900   6.1 %     5,244     222.21   6.8 %
  VA4   1   15,000   3.3 %   1,600   2.5 %     2,586     172.42   3.3 %
  ACC4   4   37,500   8.3 %   7,961   12.4 %     11,108     297.01   14.4 %

After 2017

  All   3   64,400   14.2 %   12,837   20.0 %     16,614     257.98   21.6 %
                                       

Portfolio Total

    21   453,598   100 %   64,200   100 %   $ 77,049     100 %
                                       

(1) Based on 11 separate leases. Five of these leases include staggered expiration dates. For purposes of the above chart, we have treated each staggered expiration as a separate lease.
(2) Raised square footage is that portion of gross building area where our tenants locate their computer servers. We consider raised square footage to be the net rentable square footage in each of our facilities. Office and storage space is de minimis.
(3) One megawatt is equal to 1,000 kW.
(4) Annualized rent is presented for leases commenced as of October 1, 2007 on a straight-lined basis over the non-cancellable terms of the respective leases beginning from the date of the most recent amendment to a lease agreement, or from the original date of an agreement if not amended. Annualized rent includes base rent and other rents (including, as applicable, office, storage, parking and cage space) and all historical and future contractual increases to such rents, including any increases that are scheduled to occur subsequent to October 1, 2007. There is no annualized rent associated with ACC4 Phase II because these leases are not scheduled to commence until November 2007 and January 2008.
(5) One lease at ACC4 accounting for 10,800 raised square feet includes a provision allowing tenant to terminate after five years, on June 30, 2012, subject to payment of a significant penalty.

 

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Table of Contents

Historical Percentage Leased and Annualized Rental Rates

The following table sets forth the percentage leased and annualized rental rates per leased raised square foot, or RSF for each of VA3, VA4, ACC2, ACC3 and ACC4 (excluding ACC4 Phase II, which is scheduled for completion in November 2007) since their dates of acquisition:

 

Property/ Date Acquired

   Year      %
Leased(1)
    

Annualized
Rent/Leased
RSF

VA3/2003

   2003      50.3 %(2)    $ 40.03
   2004      89.4 %(2)    $ 45.88
   2005      100 %(2)    $ 48.40
   2006      100 %(2)    $ 50.65
   2007      100 %(3)    $ 52.49

VA4/2005

   2005      100 %(2)    $ 170.30
   2006      100 %(2)    $ 170.30
   2007      100 %(3)    $ 170.30

ACC2/2001/2005(4)

   2005      100 %(2)    $ 197.47
   2006      100 %(2)    $ 201.94
   2007      100 %(3)    $ 201.94

ACC3/2001/2006(5)

   2006      100 %(2)    $ 224.33
   2007      100 %(3)    $ 224.33

ACC4 Phase I(6)

   2007      100 %(3)    $ 283.75

(1) Percentage leased is expressed as a percentage of raised square feet that is subject to a signed lease. With respect to any given facility, critical load is distributed approximately evenly to each raised square foot. Accordingly, percentage leased rates are not materially different when expressed as a percentage of a facility’s critical load.
(2) As of December 31.
(3) As of October 1, 2007.
(4) We have not calculated percent leased rates based on leases in place prior to placing infrastructure in service in October 2005.
(5) We have not calculated percent leased rates based on leases in place prior to placing infrastructure in service in June 2006.
(6) Development of ACC4 Phase I was completed in July 2007.

 

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Table of Contents

Primary Tenants

The following table summarizes information regarding primary tenants, which are those tenants occupying 10.0% or more of the raised square feet of any one of VA3, VA4, ACC2, ACC3 and ACC4 (excluding ACC4 Phase II, which is scheduled for completion in November 2007) as of October 1, 2007:

 

Property

  Nature of
Tenant
Business
    Lease
Expiration
  Renewal
Options
  Leased
Raised
Square
Feet(1)
  % of
Property
Raised
Square
Feet
    % of
Portfolio
Leased
Raised
Square
Feet
    Leased
kW(2)
  % of
Property
Leased
kW
    % of
Portfolio
Leased
kW
   

Annualized

Rent

(in thou-
sands)(3)

  % of
Portfolio
Annualized
Rent(4)
 

VA3(5)

  Technology(6)     2009   1 x 5
yrs(7)
  27,268   18.8 %   6.0 %   2,600   20.0 %   4.0 %   $ 1,153   1.5 %
    2013   None   26,943   18.6 %   6.0 %   2,600   20.0 %   4.0 %     1,181   1.5 %
  Technology     2010   1 x 5
yrs(8)
  66,661   46.0 %   14.7</