“The ABCs Of Data Center Leasing”


One of the hottest, but least understood, real property types is the data center. Data centers house the computer servers and equipment that allow you to use your computer at work and stream a movie through Netflix, 24 hours a day, seven days a week. Demand for data centers is growing and will continue to grow for the foreseeable future. Depending on the target user of a data center, it may be located in a rural setting or immediately adjacent to a trading exchange in a major city.

Data centers are categorized by tiers (I to IV) based upon the expected amount of "up time." A Tier I data center will have expected up time of 99.671 percent and not contain any system redundancies. Up time increases as Tier levels increase, culminating with the Tier IV level where the expected up time is 99.995 percent with all building systems being redundant. A tenant will pay increasingly more the higher up the tier chain. Unlike all other property types, data centers are driven to a large extent by engineering concepts and these concepts make the legal documents governing them very unique and filled with highly technical jargon.

Some data center users build their own data centers (Facebook, Google), but most data center users will lease space in a data center facility either on a "collocation/retail" basis or on a “wholesale” basis. In the collocation/retail scenario, the landlord provides services down to the computer rack level and installs physical separations between tenants, usually in the form of a cage. In the wholesale scenario, the data center landlord will lease space directly to an end user and the landlord’s service obligation will stop at the PDU for the space (power distribution unit). The collocation and wholesale varieties of data centers are not always mutually exclusive and hybrids are commonplace. Within a data center, there will be the raised floor data center environment that enjoys the intensive power and cooling and then separate office space for network operations of the data center space (often called "NOC space" for net operation center). The redundant systems of a data center will usually not apply to the NOC space.

The power requirements for a data center can be massive. A typical 100,000 square foot data center will be serviced by 15-20 megawatts. One megawatt of power will power 1,000 homes so a 15-20 megawatt data center could power 15,000-20,000 homes. Because of these power requirements, it is not easy to locate a data center. A Tier III or IV data center will require electric feeds from two separate utility substations and obtaining a redundant feed can be cost prohibitive if not impossible. The electricity from the utility company is then backed up by a UPS system (uninterrupted power supply), which consists of a short-term battery backup and then a switch over to generators, which can run forever so long as they have fuel. The goal is to provide uninterrupted electricity to the equipment that is line conditioned from any spikes in voltage or current. The equipment emits heat, which must be properly ventilated and cooled with forced air or chilled water systems.

Access to fiber that carries the information stored in the equipment within the data center is also extremely important. Data centers usually have all of the various fiber providers bring the fiber in through various access points (to minimize the potential for lines being clipped in one central location taking down connectivity) and then have all of the external fiber collected into one room (often called a "Meet Me Room" or a "POP room") where each occupant will then bring its own fiber to make connections to the outside world in the Meet Me Room/POP room. This is a more manageable way to make these connections rather than having each tenant make its own connection to the outside world directly with the fiber providers. With respect to trading firms, the trading firms often want to be physically located as close as possible to the exchange to minimize any latencies (delays) in trading.

The data center will have a raised floor environment (often 3’ to 4’ tall) so that all of the wiring and connections can be made to the computer servers and equipment underneath the floor. Fire suppression is handled through pre-action systems that will minimize any damage to the equipment if activated. Data centers are built to withstand tornadoes, earthquakes, water intrusion, hurricanes and other natural disasters. Data centers minimize onsite personnel and have robust security screening (including the use of biometrics). Some data centers are even operated remotely with no people on site.

Data center leases and collocation agreements are unique. They tend to be long, 10 years or more, often with many renewal options, as it is an expensive proposition to move into and out of a data center. Rent may be based on the square footage leased or on the amount of power allocated to the space.

Landlords are very concerned about the potential for damages (including consequential damages) that could result from the data center not operating. If a successful trading firm was unable to trade for even a single day, the losses could be well into the millions of dollars. As such, landlords insist on the remedy for an “outage” only be in the form of rent credits. The rent credits are dealt with in a separate agreement between the landlord and tenant (which is often an exhibit to the lease or collocation agreement), called a “SLA” or service level agreement. The SLA is in fact a negotiable document, despite its appearance. Tenants are very limited in what types of alterations they may make within their space and the landlord will have extremely tight areas of control over all areas.

Because a tenant is probably migrating its data center from somewhere else, having the new data center ready and fully commissioned by a specific date will be important. If the target date is not met, the tenant should have penalties to be paid by the landlord (which may be equal to the holdover rent the tenant is paying in its former facility) and the right to terminate the new data center lease if the delay goes on too long.

A data center tenant should insist on its space being commissioned by an independent engineer so that when it is turned over to the tenant, it has been verified as functioning at the tier level the tenant is paying for. It is very important for a tenant to understand exactly what services their rent is covering. Oftentimes, services that a tenant may think are part of what they pay for are actually an additional charge from the landlord. Examples of services that are an additional cost are migration services, automated systems notifications and "remote hands" type-services.

A tenant's recourse for outages are contained in the SLA and it will be important for the tenant to understand that there are two types of outages: those that occur and are remedied quickly and those that go on for an extended period of time. A sophisticated tenant will negotiate for credits that apply in both situations and have termination rights if the frequency or duration of the outages is unacceptable.

As a tenant’s data center is “mission critical” to its business, tenants with significant leverage are often able to negotiate for the landlord to not have the right to terminate the lease in any circumstance, but only have the right to sue the tenant for damages and cut-off services to the tenant. Tenants should negotiate for a specific right to holdover past the natural expiration of the term for a specified period of time to give it a buffer period to migrate to its next data center.

Tenants also need to be mindful of the removal and restoration obligations at the end of the term so that they will not be obligated to remove and/or restore infrastructure-type items such as electrical wiring and HVAC distribution. If the landlord has debt on the property, the tenant should insist on a subordination, nondisturbance and attornment agreement that will include the obligation of the lender to complete construction if the landlord does not.

The technology surrounding data centers is constantly evolving. As servers can handle ever increasing data storage and transmission within the same footprint, the need for such storage and transmission is accelerating even faster. There are technologies on the horizon (such as storing data on synthetic DNA) that will lessen the demand for data centers as they currently operate but for the foreseeable future, data centers will be a hot field and a tricky one for those who have not had the opportunity to work on one.

Originally published in Law360, May 1, 2013


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