Fundamentals of Data Center Leases
David L. Orwick
Introduction
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What is a data center?
Unique features
Types of data center leases
Service level agreements
Drafting and negotiation
What is a Data Center?
 “A building or portion of a building whose
primary function is to house a computer room
and its support areas.”
"Network Aisle Front" by Robert.Harker - Own work. Licensed under
Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons
Types of Facilities
 Closet
 Office
 Repurposed facility (warehouse, distribution
center, office building)
 New construction
Unique Features - Physical
 Power
• Significant power needs
• Dedicated substation
• Cost of power
• Uninterrupted
• Redundant utility feeds
• Uninterrupted power supply (UPS)
• Generator backup
 Environmental controls
• Temperature and humidity
• Automated measurement and adjustment
Unique Features – Physical cont’d
 Connectivity
• Redundant fiber access
• Multiple carriers
 Access/security
 Physical integrity
• Weather events
• Natural disasters
• Location, location, location
Unique Features - Financial
 Capital markets have been slow to support
data center developers
• High infrastructure costs + single use facility =
higher credit risk
• Solutions have been private equity, REIT activity
 Tenants must satisfy credit requirements
• Enterprise users often must provide investmentgrade credit ratings
Unique Features - Legal
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Types of users
Types of agreements
Service level agreements
Specific drafting issues
Types of Data Center Leases - Users
 Enterprise/wholesale
 Retail
Enterprise/Wholesale Users
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Historically 1MW and up
Trend is going downmarket (~250kW)
Often operate own data center space
Type of lease depends on capital availability
and experience with facility operations
 User often choosing between companyowned data center and leased space (cost of
ownership and capital analysis)
Retail Users
 Smaller power and space needs
 Racks or space within racks
 Type of lease depends on power needs and
desire and experience with maintaining own
IT gear
Types of Data Center Leases
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Triple Net (NNN)
Powered Core and Shell
Wholesale Colocation
Retail Colocation
Managed Hosting/Cloud/SaaS
NNN
 Sophisticated users
 Lease of building or autonomous suite
 All fiber connections, utilities and
maintenance services procured by tenant
 Tenant or landlord may own facility
infrastructure (often depends on cost of
capital), but tenant maintains
• If tenant owns, then landlord should require
tenant to adhere to a maintenance schedule
NNN cont’d
 Similar to industrial lease, except:
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Long-term (initial term often 10-15 years)
Renewals
Purchase options
Obligations on surrender
 Often build-to-suit
 Base rent can be based upon square footage
or power availability
Powered Core and Shell
 Lease of building or autonomous suite
 Landlord provides:
• Raised floor
• Fiber connectivity
• Unconditioned power to premises
• Need to define demarcation point
 Tenant or landlord may own facility
infrastructure, but tenant maintains
Powered Core and Shell cont’d
 Tenant installs and maintains all power and
networking distribution, racks and IT gear
 Fiber access is typically direct to fiber
providers, but may be through meet-me room
 Landlord provides limited services
• Typically no SLAs
 Base rent can be based upon square footage
or power, but typically power
Wholesale Colocation
 Lease of building or autonomous suite
 Landlord provides:
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Fiber connectivity
Conditioned power (demarcation at PDU or RPP)
Environmental controls (cooling, humidity)
Facility-level maintenance
 Landlord usually owns facility infrastructure;
landlord maintains regardless
Wholesale Colocation cont’d
 Tenant installs and maintains all power
distribution downstream from PDU/RPP,
networking distribution, racks and IT gear
 Fiber access may be direct to fiber providers
or through meet-me room
 Environmental controls and facility
maintenance governed by SLAs
 Base rent is usually based upon power
Retail Colocation
 Lease of portion of building or suite
• Caged space, rack or space within rack
• Can be lease or license
 Landlord provides:
• Fiber connectivity; may provide
networking/Internet access
• Conditioned power at server-usable levels
• Environmental controls
• Cage; usually racks
• All maintenance
Retail Colocation cont’d
 Tenant installs and maintains IT gear
 SLAs for environmental controls; may also
cover connectivity
 Base rent may be gross, modified gross or
NNN.
• NNN is rare
 Power charges may be based upon power
capacity (whether or not used) or actual usage
• Tenant issue: overselling power
Managed Hosting and Cloud Services
 NOT leases
 Managed hosting
• Provider owns and maintains the IT gear
• User provides and updates its own software
 Cloud/SaaS
• Provider provides and updates software
Service Level Agreements
 Purpose is to provide tenant with a remedy for
failure to maintain agreed-upon service levels
 Failure to meet a service level should not be a
breach of the lease – it is a compensatory
event
 Typical service level agreements:
• Power
• Environmental
• Notices, staffing, security
Service Level Agreements cont’d
 Power SLA
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Power availability / outage
Number of disruptions
Length of disruptions
Monitoring
 Environmental SLA
• Temperature range
• Humidity range
• Sensors – location, monitoring
Service Level Agreements cont’d
 Notice time for incidents
 Availability and response time following an
incident
• Time to respond
• Time to identify root cause and propose a solution
 Security breaches
SLA Remedies
 Rent credits or abatement
• Often tied to a percentage of monthly rent
• Can be capped
 Termination right
• Landlords strongly dislike
• Consider for repeat / chronic failures
 Exclusions
• Force majeure
• Planned maintenance
• Tenant work, changes, failures
Drafting and Negotiation
 Landlord typically provides the form of
agreement
 Sample forms are available online
• SEC/Edgar
• http://serviceguidenew.att.com/
• http://www.verizonenterprise.com/terms/us/prod
ucts/data_centers/premium/
Drafting and Negotiation cont’d
 Premises definition
• Space
• Raised floor
• Equipment
 Work letter / landlord construction
• Commissioning requirements
• Third party certifications
• Delay damages
 Common areas
• Access / alterations for IT connections
• Meet-me room
Drafting and Negotiation cont’d
 Term
• Longer terms are common, particularly for
enterprise / NNN data centers
• 10-15 year initial term, with multiple extension
options
• Negotiation point: reset rent to market
 Rent
• NNN vs. Modified Gross vs. Gross
• Often denominated as price per kW
• Power payments
Drafting and Negotiation cont’d
 Incentives
• Many states have enacted data center incentives
• Other incentives can be applied to data center
projects
• Can benefit landlord, tenant, or both
 Repairs and maintenance
• Varies greatly with type of lease
• Landlord obligations must be coordinated with SLAs
• In NNN lease where tenant leases equipment, tenant
should be obligated to comply with best practices/
industry standards
Drafting and Negotiation cont’d
 Alterations
• What can tenant do without landlord involvement
(“racking & stacking,” networking, IT gear)
• Requirements on surrender
 Surrender and restoration
• What is tenant required to remove?
• Obligations on early termination (extended period
for removal of tenant and customer equipment)
Drafting and Negotiation cont’d
 Insurance
• Identify responsibility for various property
insurance
• Consider technology E&O coverage if landlord has
access to data
• Waiver of subrogation
 Limitations of liability
• Landlord not liable for customer claims, data loss
and consequential damages
• SLAs as cap on liability
Drafting and Negotiation cont’d
 Casualty and condemnation
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Mutual termination rights
Tenant involvement in rebuilding
Disaster recovery plans
Business interruption insurance
 Assignment and subleasing
• Tenants desire broad rights
• Landlord should consider credit issues
• Exclude typical customer contracts,
interconnections
Drafting and Negotiation cont’d
 Defaults and remedies
• Tenant desires extensive notice and cure rights;
landlord’s interests can be aligned here (difficult
to replace tenant)
• Landlord desires no termination rights by tenant
 Preemptive rights
• Purchase options, ROFR, ROFO, ROFN
• Expansion rights (power, space)