Fundamentals of Data Center Leases David L. Orwick
Introduction 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 Types of users Types of agreements Service level agreements Specific drafting issues
Types of Data Center Leases - Users Enterprise/wholesale Retail
Enterprise/Wholesale Users 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 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: 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: 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 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 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)