The World of Data Centers - Greenfield development and brownfield investments: Success factors, pitfalls and lessons learned 2021 - Hogan Lovells
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The World of Data Centers
Greenfield development and brownfield
investments: Success factors, pitfalls
and lessons learned
2021
Connected
2 | Tech & Telecoms Hogan Lovells | 3
Your one-stop
Introduction adviser Project
Development
EU Green
Data centers are fundamental to today’s digital
society - successful development and roll out of Deal
new facilities and/or the acquisition or financing of
existing facilities require advisors with deep industry
knowledge who are fully aware of the legal and
commercial risks inherent in these projects, all
around the globe.
Our integrated dedicated data center team comprises
lawyers with an in-depth understanding of the
data center industry and its characteristics. When
providing you with closely coordinated one-stop
advice, we bring together our knowledge carriers
from various legal disciplines including Real Estate,
Infrastructure, Permitting, Energy Regulatory, Energy regulatory
Resources & Projects, Intellectual Property,
Project M&A, Data Security, Dispute Resolution, Operation and
Corporate, Commercial, Project Finance,
Employment Law and Sustainability as well as Tax Commercials
Law. This approach adopted by our integrated team
ensures that you receive consistent, industry specific
and solution-oriented advice which focuses on what
you really need.
This brochure summarizes key legal aspects to be
considered when buying, selling, financing and/or
constructing a data center, including data protection,
digitalization and cybersecurity.
Construction
Financing
M&A
What we offer
Many years of experience, a deep
understanding of your industry,
and a solution-oriented focus.
Dispute Resolution
4 | Tech & Telecoms Hogan Lovells | 5
Welcome to the World of Data Centers power, data storage space or networking
capabilities. It enables its customers to
expand or reduce the amount of server
— Models where the baseload provided
is priced differently as the offered and
used peak load whereby additional
capacity based on the respective demand load thresholds could be implemented
Data centers of the future: alternatively – they rely on a lower capacity,
based on two options: in order to be able to cater to the
Between Edge and Hyperscale but have to accept and absorb higher
latencies or even a failure of services due to customer’s needs;
Hyperscale data center – the future • Horizontal scaling (scaling out) which
is happening now server overload. Against this background, means that the number of server and — Option or package models in which
In the last four years the data center companies are asking themselves why they computing units are increased; and the customer can call up certain option
workload has grown on average by more should pay for unused IT infrastructure and rights (for example limited to a fixed
• Vertical scaling (scaling up) which means
than 20% worldwide. This development will if there are any other – scalable – options. number of days in the year or certain
that the power of the already used server
continue in the coming years Hyperscale data centers provide a days of the week/hours) for additional
and computing units is increased.
(Source: CISCO). possible answer and consequently, are capacity; or
This flexibility enables the customers to
Companies are moving more and more experiencing a significant boom. There is — The pricing of a single computing
react quickly to peak loads or low demand.
data into the cloud. There are over 2.5 no official definition of what hyperscale unit or a fixed amount of computing
As the risk to utilize the IT-infrastructure is
quintillion bytes of data generated every data centers are. Looking at it from the capacity and multiplying the pricing
shifted to the data center operator, the user
day. Computing power (IaaS), entire outset: Hyperscale data centers tend to have with the used units/amounts.
can benefit from the flexibility afforded by
applications (SaaS) and platforms (PaaS) a minimum of 5,000 servers and 10,000
the IT-infrastructure to save costs when the • The service agreement could include
are run from within the cloud. As a result, square feet. Studies by the Synergy Research
IT-infrastructure is not used. safeguards for the customer that ensure
the desire for reliable, low latency data Group indicate that currently 504 hyperscale
the customer always has access to
data centers are in operation, of which the To take full advantage of the technical
centers is rising constantly. Cloud providers, sufficient capacity (such as liquidated
majority are run by the four leading cloud scalability of hyperscale data centers the
big data applications, and IoT-providers damages or a sophisticated bonus-malus
providers. With a further 151 hyperscale data parties should ensure that this scalability is
however do not constantly need the same scheme).
centers being planned or currently under reflected within their service agreements.
amount of IT-resources. Depending on the
construction, this number is set to increase The standard approach for “classical” data • The hyperscale data center operator
business model, the required resources can
significantly. centers was to define precise service levels should not fail to mirror the flexibility
fluctuate considerably during any given
and combine the (non)achievement of these granted to its customers in its own energy
day, week or month. From Friday evening The main driver for companies to move
service levels with bonus-malus regulations supply agreements. If customers scale
to the end of the weekend, for example, data and applications to hyperscale data
or (liquidated) damages. up, the data center operator’s energy
food delivery services or taxi companies centers is the ability of these data centers
consumption will also go up. In order to
require significantly more resources than to scale their resources within a short This approach cannot be fully transferred
avoid costly surprises, the energy supply
on Mondays. The companies therefore time. The server architecture of hyperscale to hyperscale data centers. The fluctuant
agreement should include adequate
face a dilemma: either they maintain IT- data centers is designed for scalability and services might lead to a shortfall of service
safeguards or provide for sufficient
infrastructure which absorbs the high peaks, high-level performance in order to provide level due to downscaling of the actual
flexibility to be able to offer such services.
but other than that essentially remains their customers with a flexible and scalable services. Hence, the service agreements
unused while incurring additional costs, or – on-demand IT-infrastructure, computing should provide for the sufficient flexibility of Alternatively, onsite generation (in the near
the parties to increase and decrease the used future potentially provided by hydrogen
data center capacity. To secure a successful units) may allow the operator to produce the
implementation of hyperscale projects, peak energy themselves rather than relying
experience shows that the parties should on the energy utility.
focus on the following considerations:
A CAGR (compound annual growth rate) of
• Clearly defined KPIs as an indispensable over 9% during the period 2018 – 2024 for
factor for a successful contractual hyperscale data centers has led the world
relationship. of data centers to a new paradigm. A clear
There are over 2.5 quintillion bytes • Determining the available capacity and its
contractual framework can assist in turning
a hyperscale project into a successful one.
pricing via:
of data generated every day
6 | Tech & Telecoms Hogan Lovells | 7
5G and Edge data centers reality sickness”. 5G and edge will provide
In a nutshell: Edge data centers serve to great benefits for the healthcare sector
bring the network resources and computing (instant diagnosis, remote operations and
power closer to the end user and its autonomous operations), for the use of
(mobile) devices. Edge computing moves robots and related to smart city and IoT
the computing power from the center of the business models.
network – the data centers – to the edge of A report from Allied Market Research
the network, where the data is produced. predicts a CAGR of 32.8% for edge
Data which does not require low-latency computing in the period 2018-2025. Edge
processing, or which would still be stored, data centers have to fit into an urban
is expected to be transferred to the “core” landscape. While hyperscale data centers
data centers. are becoming increasingly large, edge data
With the development of IoT-Business centers lead to smaller deployments. As
models and autonomous driving on they require less space, the edge servers
the horizon, the requirements for data and edge infrastructure could be fitted into
centers are shifting. Machine-to-machine warehouses, distribution centers and empty
communication (“M2M”) – as a foundation factory buildings. It is possible that edge
for today’s IoT applications – requires fast data centers are getting even closer to the
and reliable internet connections with low 5G-infrastructure by establishing container
latencies. With the increasing requirements solutions at the 5G transmission masts. This
on computing power, network capacity and development illustrates the convergence of IT
latency, cloud computing is fast reaching and telecoms infrastructure as data centers
its limits as latency becomes too great. and the grid move closer together.
5G Technology, combined with edge data Many of the technical aspects are still under
centers, can help to unlock the full potential development and corresponding business
of M2M and are fast becoming a key aspect of models have yet to be created. In any
digitalization and the IoT. event, only a large scale rollout of the edge
Reducing the distance between the data computing and 5G infrastructure should
center and the device enables low-resource be cost and time efficient. Nevertheless it is
devices to run heavy-resource applications expected that the 5G rollout will cost even
in real time as the data does not need to be more than the 4G LTE deployment. Such
sent to data centers located far away and rollout requires considerable investments
which costs additional time. This is especially by the telecom operators and/or the data
critical when life-death decisions are to be center operators, which are likely to be
taken, for example by an autonomous car financed. In this case, the bankability of the
when it urgently must make the decision as to business model and constant cash flows
whether the breaks are to be applied or not. are crucial for the success of the rollout. In
The round-trip time to the cloud, the time addition, it is essential that the underlying
used in processing the data and then sending project agreements are drafted carefully and
it back may just lose the crucial millisecond efficiently. The good news is: The first to
which is necessary for the autonomous car successfully set up a large scale edge network
to effectively execute the emergency break. will be the one to define the market standard.
Virtual Reality applications also require
low-latencies to avoid the so-called “virtual
8 | Tech & Telecoms Hogan Lovells | 9
Lease or own your Data Center? • whether the tenant is prepared and willing
to accept (high) capital expenditures for
repairing and updating IT equipment; and
Lease or build a data center? hardware and software, technological • whether the tenant is prepared to employ
When a company is growing and wants to development, uncertainty surrounding and pay for the necessary personnel to
outsource servers and IT equipment, it must future business strategy and potential space operate and maintain the IT equipment.
decide on the best way to do this. problems, i.e. if the space later proves to be When taking this decision, the tenant should
too small or too big. Moreover, companies not only consider its present situation and
Such a decision can be crucial if the business
should be aware of the large number of its needs as a business, but also bear in mind
is expanding rapidly and therefore urgently
building regulations to be met, for example its future strategies and plans in order to
requires additional space for servers and IT
in the area of fire safety which may be very find the best solution. Overall, the
equipment. The choice it faces is whether to
strict in some jurisdictions. On balance, wholesale/colocation solution or a hybrid
lease data center space (by a co-location or
leasing is likely to be a better solution for solution might be the right choice for many
warehouse solution, which we will refer to as
many companies because it allows risks to bigger companies, whereas the managed
“leasing” or a “leasing solution”) or whether
be confined and gives companies the hosting solution could be the ideal solution
to build its own data center.
flexibility to adapt their space needs to their for smaller firms.
The obvious advantages of building over business needs.
leasing are that What a data center lease
Data center leasing strategies
• the company has maximum control over should cover
– the various types of contract First and foremost, it is vital to clarify the
the IT equipment and anything related
to it; structures legal relationship between the data center
The most common types of leasing provider/landlord and the occupier/
• there is no risk of “losing the lease”; and structures for data centers are: customer. Depending on the actual use
• any unused space can be leased out • Wholesale data center; and allocation of rights and obligations, a
to other companies, thus reducing lease agreement (triple net or double net),
electricity, cooling and security • Powered shell; a service agreement or an agreement with
infrastructure costs. • Colocation solutions; lease and service elements are possible
options. In most cases, the parties will
On the other hand, the main disadvantages • Server hosting – managed hosting;
sign a lease agreement which also includes
of building are upfront costs which can add
• Cloud computing. elements of a service agreement.
up quickly if not calculated thoroughly.
The costs of building and maintaining a Balancing the need for control with As the lease agreement is the main legal
data center should not be underestimated the desire to cut costs document which governs the relationship
and may be a crucial factor in the decision Ultimately, the decision between a between the parties, particular care should
making process. When evaluating the costs wholesale/colocation structure and a be taken when negotiating “Provider
involved, the focus is mainly on power, purely managed hosting structure is one of Must-Haves” on the one hand, and
staffing and IT infrastructure. Real estate balancing the need to control the servers “Customer Must-Haves” on the other.
related costs are however often not taken and IT equipment with the desire to achieve Key topics to be considered in lease
into account sufficiently or at all. These the best possible cost savings by entering agreements include:
include architect, planning and design costs, into a data center lease. Important topics
Lease term and renewals
building costs including costs for permits, which need to be addressed before taking
Would the company prefer a long-term or
such as building permits, costs for fire such a decision include:
short-term lease taking into consideration
suppression and detection systems, notary • how much control is necessary with that the initial term is often 15 to 20 years?
costs, costs of registrations, etc. Nor should respect to operation of IT equipment and In addition, the number of renewal periods
companies underestimate the various risks the premises in which the IT equipment and any preemptive rights of the tenant
related to power and cooling infrastructure, is stored; should be considered.
10 | Tech & Telecoms Hogan Lovells | 11
or works, the EPC Contractor remains the
Rent payment levels are not met. For the customer, it
single point that is directly responsible for
Another important point is how the rent might be desirable to include a termination
ultimately delivering a project ready for
will be paid. The basic rent is usually right for continued breach of guaranteed
operation. This means for the Employer in
based either on square meters or on service levels.
an EPC project that the added risk of liaising
power availability. Liability, indemnification, data with various parties and allocating various
Space, permitted uses and equipment protection and security risks is avoided.
The leased space might not be enough for all A limitation of liability might be beneficial
Parties need to face reality in terms of
the equipment and infrastructure that the for both parties. The agreement should also
construction of a data center. According to
tenant requires. It is therefore advisable to include provisions regarding data protection,
a survey of the Queen Mary University of
stipulate in the lease agreement whether the security (e.g. access to the building) and
London, published in 2019, “the two main
tenant is allowed to use additional space, e.g. compliance with laws.
causes of disputes, in the respondents’
on the roof for antennas, shaft space within
In addition to the key topics mentioned experience, were late performance (68%)
the building or special support areas for the
above, it might be advisable to incorporate and poor contract management (63%),
placement of generators.
other provisions, depending on individual reflecting the difficulty of completing
Setup, alterations, maintenance, circumstances. sometimes very technically complex
repair and replacement engineering projects on tight schedules.”
Depending on who owns and who Avoiding pitfalls in
construction contracts Having this in mind, a clear contractual
will be obliged to maintain the facility
Unlike brownfield projects/transactions, framework including a fully functional
infrastructure, specific provisions must
developing greenfield data center (as well and efficient claims and risk management
be incorporated into the lease agreement
as expansion) projects are challenging and can assist in avoiding pitfalls as well as
regarding alterations, maintenance,
come with various risks with respect to significant delays and cost overruns.
repair and replacement. The tenant
and/or landlord might be required to delivering the project on time and within Under a powered shell lease agreement,
comply with certain standards and/or the preagreed cost frame. The developer the construction risk is partly shifted to the
maintenance schedules. Provisions on needs to decide on the right approach for tenant of the data center. While the landlord
services relating to data center equipment, such a development: Delivering the project remains responsible for the construction
heating, ventilation and infrastructure with various (multilot) contractors and a (and the permitting) of the main structure,
should also be included. potential designer/or engineer or choosing the tenant is responsible for the internal
a turnkey approach whereby an EPC- fitout. This includes sinking the cooling,
Power supply, cooling, humidity,
Contractor delivers the whole project and piping and cables which are necessary for the
connectivity and data capacity
agrees to engineer, procure and construct operation of the data center. Even though
Power supply, cooling, humidity,
the data center. While the first option may the landlord may benefit from such transfer
connectivity and data capacity are the core
deliver a more cost-efficient solution, a of risk, this business model includes several
topics of a data center lease. Provisions
turnkey EPC Contractor undertakes the interfaces between landlord and tenant
covering these areas must therefore be
full completion, turnkey and interface risk which must be managed.
included in the agreement. Specifically, the
of such a highly complex project. One of
following topics should be discussed and
the most obvious benefits of entering into
agreed: power requirements, cost of power
such a contract is having one single point of
and uninterrupted power supply as well as
contact and responsibility for the project,
redundant fiber access, multiple carriers and
thereby avoiding having to manage various
sufficient data capacity.
roleplayers that would otherwise have to be
Service level agreements involved in the construction and setting up
The parties should also consider including
service levels and reasonable support
of such a project. Power supply, cooling, humidity,
provisions. Moreover, the agreement
While it is, of course, commonplace for
an EPC Contractor to engage various
connectivity, and data capacity are
should describe what happens if service
subcontractors to provide certain services the core topics of a data center lease.
12 | Tech & Telecoms Hogan Lovells | 13
Getting Your Contracts Right the operator in order to secure
quick troubleshooting and sufficient
redundancies of the contractor. In
cooling, humidity control, security)
should then be discussed with a
view to defining contractual service
some jurisdictions a well thought- levels, percentages of guaranteed
Service level agreements with guarantee the permanent availability of the
through drafting of contractual availability and preagreed reaction and
respect to data center leases data center.
predefined liquidated damages troubleshooting times. In particular, the
A service level agreement is the main The parties should not include a disclaimer is essential to avoid unenforceable contractual service levels should ensure
contract that defines the parties’ rights and regarding warranty claims. The statutory provisions. that the required times for (successful)
obligations under a data center lease. warranty obligations of the landlord or the troubleshooting and the points of
contractor cannot be excluded within the In order to achieve this, the party
Before signing such contracts, the parties measurement of the availability are
General Terms and Conditions in many engaging an operator should extensively
should assess the scope of services that the exactly defined. The better the parties
jurisdictions for instance. investigate and consider in detail all
data center landlord will perform under a describe such obligations and service
possible scenarios which may lead to
service level agreement. These services could Finally, the parties should assess the validity levels in the contracts, the better they
interruptions in the services. Especially
range from entire business processes or of any limitation of liability clause regarding may be able to link these times and
the core services (e.g. power supply,
merely IT processes, through to the exclusive strict liability on a case-by-case basis. percentages to an escalating mechanism
provision of IT infrastructure within the However, the limitation of the landlord’s of liquidated damages covering the
data center. liability should always consider the risk employer’s potential damage in a
of cyberattacks and appropriate realistic manner.
More elaborate service level agreements
may also stipulate the provision of certain preventive measures.
types of software (applications) by the Getting the operation
potential financiers (application service
structure right
providing, “ASP”).
When it comes to the operation and
Such an assessment is a key consideration maintenance of data centers, it is all about
for the validity of any service level availability, reliability and stability of
agreement. The scope of the data center the services. Just recently, some parts of
lease and the rights and obligations of each the World Wide Web were interrupted
party may vary according to what was agreed for several hours due to a downtime of
upon between the parties. In any case, it an internet hub as a result of an energy
sets the standard for the evaluation of the breakdown in a data center coupled with
agreement with regard to the law on General a crash of the energy redundancies in this
Terms and Conditions. data center. Even short outages of the
However, both IT and data center services energy supply, the cooling of the racks or
are prone to faults, require maintenance or the humidity control in the data center may
updates and may be subject to cyberattacks. cause enormous downtime costs and high
All these and other adverse effects may lead damage. Thus, uninterrupted availability
to downtimes and impact on the availability and fast troubleshooting services are
of the data center. With regard to the strict required and should be secured at all time.
applicability of the law on General Terms A key instrument for securing such
and Conditions, the parties are advised to availability and avoiding potential losses can
ensure that the availability of the data center be seen in liquidated damages. Liquidated
is laid down in the agreement. Conversely, damages are designed to meet the legal
the landlord faces the risk of having to requirements in the relevant jurisdictions
and may help to keep the pressure on
14 | Tech & Telecoms Hogan Lovells | 15
Data Center M&A and Financing asset deal is preferable cannot be answered
in general – the decision must be taken
following an assessment of the interests of
its financial model and accordingly the
success of the entire transaction.
Therefore: heads up! We mitigate
the respective party (seller or purchaser) and
Share vs. asset deal In the course of a share deal, the purchaser
the specific transaction.
such transaction risks by conducting
In an acquisition scenario it should be will acquire a certain percentage of the risk-based and tailored data center
decided as early as possible whether the shares in a target company from the Due diligence – the best of due diligence that analyses the
transaction will take the form of a “share shareholders of that company, including any commercial agreements as part of a stress
both worlds
deal” or an “asset deal”. and all of the target company’s contractual test and takes into account the specific
Our practical experience repeatedly confirms
relationships, receivables and liabilities on characteristics of the respective data center:
Under a share deal, all or part of the that due diligence in data center M&A
the basis of a share purchase agreement We review in detail any lease agreements,
shares in a business are transferred to transactions significantly differs from due
(“SPA”). Unless dedicated “change-of- power purchase agreements with a view to
the purchaser. If, for instance, a project diligence in traditional M&A transactions.
control” provisions apply, no consent from ensuring uninterrupted power supply and
company or holding company has been This aspect is frequently underestimated
the other contractual parties is required, as cooling of the facilities, as well as any other
set up as a limited liability company, and often leads to risks not being identified
it is only the shareholder of the counterparty operation and maintenance agreements
the purchaser – upon completion of the and therefore not reflected in the underlying
(the target company) that changes, not that are critical for the operation of the
purchase – becomes a shareholder of share (or asset) purchase agreement.
the counterparty itself. Potential risks, in data center. Ultimately, this means that our
that company. By nature, data center acquisitions require
particular on the investor/purchaser side, clients can be sure of correctly identifying
In contrast, under an asset deal, the seller arise not only from the acquired assets a different approach to due diligence. the risks inherent in the often complex
only disposes of and transfers individual themselves, but also potentially from the While it may be sufficient in “traditional” contractual documentation and of avoiding
assets (and liabilities) under an asset underlying entity that owns the assets and M&A to summarize the key provisions any unpleasant surprises later – this is a
purchase agreement (“APA”). Based on whose shares have now been acquired by of the commercial agreements (such as significant success factor for any data center
the principle of legal certainty in some an investor/purchaser. Consequently, since termination and change of control) and to transaction.
jurisdictions, the transferred assets and under a share deal the transaction does examine whether the agreements are legally
In this regard, we believe that a careful
liabilities must be clearly defined in the APA not affect any existing contracts – claims binding, this is not enough when dealing
examination of the data center specific
together with any required particular kind of by employees, third parties as well as with data center projects. The traditional
agreements yields the best results if it is
transfer method to the purchaser. Therefore, long-term contractual relationships approach tacitly assumes many commercial
carried out by lawyers with appropriate
an asset deal initially also involves increased potentially unknown to the purchaser will agreements and that these agreements are
drafting and negotiating experience.
costs and effort on the part of the seller be assumed – this risk should be mitigated implemented according to their provisions,
Only they are able to rapidly and reliably
and the purchaser to establish and agree by way of indepth due diligence as well as without any “problems” arising.
understand which scenarios will have
on the “object of the purchase” and the by imposing an appropriate guarantee and This approach is too simple for the data which effect on the project agreements. Our
contractual documentation (i.e. the “APA”). liability regime on the seller in the SPA. center world. It tends to be the rule rather experience of providing legal advice for data
However, the advantage of an asset deal lies than the exception that for instance
Nonetheless, transactions involving data center project developments means that we
in the possibility to select individual assets only a limited number of (long-term)
centers are typically implemented as share know what can go wrong and are thus able to
and liabilities for transfer. Any ancillary and commercially highly relevant lease
deals, because they allow a clean exit for identify typical risks.
contracts (including rights and obligations agreements are in place – and the loss of
the seller and a comprehensive acquisition
e.g. power purchase agreements, commercial As a result, our clients are aware not only of
of rights and assets for the purchaser. just one of those agreements may
agreements such as lease agreements for the current status of the agreements, but also
However, asset deals may be preferable if jeopardize the buyer’s assumptions in
the provision of data center services) will of precisely what may lie ahead – and what
the target company bears major liability
have to be transferred to the purchaser does not.
risks (e.g. from other operations or from
separately by way of novation. It should
pending disputes with customers), or if the
be noted here that – in contrast to a share
transaction takes place in the context of a
deal – both the sale and transfer of the
crisis or insolvency proceedings of the target
contractual relationship require the
consent of the counterparty.
company (distressed M&A). In summary,
the question of whether a share deal or an
Our experience of providing legal advice for
data center project developments means that
we know what can go wrong and are thus able
to identify typical risk
16 | Tech & Telecoms Hogan Lovells | 17
Focus on cash flows – that such representations and warranties are Project finance vs. center and the expected return. Securing
not on warranties usually time barred for 12 to 18 months after corporate finance a long-term lease agreement with at least
The approach to share (or asset) purchase closing, often leaving the major part of the Data centers involve significant capital once anchor tenant which accounts for
agreements in a data center transaction contract term unprotected. investment. A data center’s operator may a substantial part of the business case is
differs significantly from “traditional” M&A. wish to finance either the development and therefore key.
As a consequence, we have adopted our
approach to the “data center SPA”. Instead construction or the acquisition of a data PropCo – OpCo structures with
In contrast to traditional M&A transactions
of having lengthy and costly discussions on center with debt. Whilst it is possible to
cash flow and profit are often not generated respect to data center leases
partially meaningless representations and source funds with all the usual instruments
via the sale of goods and services to a Tax optimization helps: A PropCo-OpCo
warranties, we focus our efforts to ensure of corporate finance, the revenue stream
market, but via a small number of key lease structure can be used e.g. to reduce
that the cash flow from the relevant data generated by operating a data center can
contracts – and sometimes only one. This exposure to German trade tax, a tax levied
center is protected in the SPA, as this is the also be suitable for project finance. Project
makes investment attractive for long-term by German municipalities (around 15-16% in
real asset which is bought in a data center finance is typically described as the long-
strategic and financial investors, but also larger cities).
M&A transaction. This approach only term financing of infrastructure and energy
shows that the return is dependent on
requires a limited set of representations projects held in a special purpose vehicle Real estate companies, i.e. companies
these contracts.
and warranties but needs to ensure that if (“SPV”) with a non-recourse or limited engaged exclusively in the mere leasing
In addition, data center deals often have those turn out to be wrong, the entire loss recourse financing structure. The key and letting of their own real estate, are
a simpler asset structure than “normal” in cash flow is compensated. By focusing characteristic is that the project debt is able to reduce their trade tax exposure to
transactions. A lot of representations and the SPA discussions on the relevant issues, exclusively repaid by the cash flow generated zero. A company owning and operating the
warranties which are market standard in we are usually able to significantly reduce by the project. No other income is typically data center cannot apply this exemption
traditional M&A are not required in data negotiation time and to ensure that the SPA available and the providers of both types of because it also provides a number of services
center M&A or, even worse, give a false sense is structured and easy to understand. This debt must rely on the success of the project that go beyond the leasing of real estate to
of security. It would be fatal if a buyer of approach also frequently helps our buy side to generate sufficient and stable cash flows. its customers.
a data center that generates profits under clients to strengthen their position in auction The project’s assets, rights and interests Thus, the data center building and the
one or two long-term lease agreements only processes in the highly competitive and serve as collateral. Compared to project underlying real estate, excluding all fixtures
relied on an extensive set of representations seller-friendly data center market. finance in other sectors, the financing of a and fittings, needs to be allocated to a
and warranties and did not take into account data center also includes elements of real different entity (“PropCo”) than the entity
estate finance: operating the data center (“OpCo”), which
Given that the owner of a data center is in turn leases the data center building from
normally also the owner of the land, one PropCo. As the business activities of PropCo
of the main security rights provided to the are limited to mere leasing, the PropCo can
debt providers is a land charge in many make use of the specific exemption for real
jurisdictions. estate companies.
It is also not uncommon to work with an Any rents payable by OpCo to PropCo will
Op-Co/PropCo which is also an element consequently be exempt from German trade
NDA/MoU Transaction known from real estate finance. One of the tax at the level of PropCo. Although OpCo
/IM structuring core elements for successful financing is a will have to consider an add back of a certain
well-structured and realistic business case. portion of the rent to its trade tax base,
STOP 62% The data center operator must therefore overall the trade tax exposure is reduced
SPA: Transaction Tax by such a structure. In other jurisdictions
Regulatory have a clear picture of the investment
documentation Structuring
Due costs, an appropriate contractual set up thoughtful structuring helps to reduce
Acquisition diligence for the reliable and secure performance of taxes as well.
/Disposal the development and construction as well
Post-closing claim as of the long-term operation of the data
management Restructuring
18 | Tech & Telecoms Hogan Lovells | 19
Green Data or how to supply your • A full supply contract with an
energy supplier;
In this context, green data describes
the operation of digital infrastructures
Data Center with sustainable Energy
with energy generated solely from
• Power Purchase Agreements (“PPAs”)
renewable energy resources. By adding
meaning agreements between the energy
green/renewable sources to their power
customer and the energy producer
supply chain, data center operators are in a
Energy: optimizing cost efficiency such measures, it is essential to meter their without any intermediary; whereas
position to show and promote their efforts
individual power consumption. Additional especially PPAs with operators of
and minimizing risk to contribute to a digitalized world that
incentives for tenants to reduce energy renewable energy installations can be
Every data center operator has to address conserves its resources. Big players like
consumption may be contractually agreed. taken into account;
one considerable cost driver: energy costs. Google, Facebook and others have already
Fortunately, operating a data center offers Finally, it may be possible to obtain long- • Procurement on the trading market under started to transform and are meeting
numerous opportunities for energy cost term loans at favorable interest rates for OTC contracts or at the energy exchange; their energy requirements by purchasing
optimization on both the operator and measures to increase energy efficiency. or renewable energy. We further see an
tenant side. upcoming trend to develop onsite hydrogen
Electricity Grid Connection • Own onsite energy production. solutions for onsite generation, both for
One of the goals for operators may be to Onsite power generation remains an
maximize their data center’s power usage “Green data” backup electricity as well as for baseload
exception for the core energy supply of data
efficiency (“PUE”). The PUE is the ratio The highpower consumption of data centers and peak load energy demand. Hydrogen
centers at present and probably for the
of a center’s overall energy consumption is not only a cost factor. The discussion about will also be considered as a renewable
foreseeable future. Hence, it is important
versus the energy used by the IT installation. “sustainability” of data is only beginning to energy source and whether additional
for a data center operator to secure a grid
Ideally, the PUE equals 1. In this case, gain more and more public attention. In the capacity is required to future proof growth or
connection which provides for the required
all energy consumed in the data center is future, data centers will likely have to deal expansion of the business.
external electricity power import capacity.
used to power the IT infrastructure and no When securing the network connection and with the questions about the sustainability Data center operators are already in a
additional energy is required for auxiliary capacity, it should be determined whether a of individual data consumption and what position to offer green products using the
equipment, i.e. for cooling or lighting. In connection at a specific voltage level impacts the carbon footprint is. Customers start electricity mix purchase from local energy
such a case the data center would be highly the network fees, since a connection on a questioning how much energy their internet suppliers via the “standard” energy supply
efficient and the operator could use the higher level can often result in lower consumption requires and whether this is agreements. In 2018, 35% of the electricity
entire electrical capacity available at the site network fees. inline with their overall sustainability goals. generated in Germany was already procured
for its core business. Corporate customers are predicted to also from renewable energies - and this is only
In addition, a data center operator may start asking these questions: With
Although a PUE of 1 is a theoretical value, set to increase. A data center could use
scrutinize whether there are specific society’s rising awareness of climate
there are several ways to get as close as this energy mix to offer around 30% of its
regulatory requirements to comply with change, ESG issues, and the significant
possible to this figure. One of the most capacity as “green data capacity”.
as a result of the operation of electricity increase of power consumption in data
promising methods is to use a combined heat infrastructure (e.g. transformer stations) To offer products which exceed this
centers, sustainable and renewable energy
and power plant (“CHP”), which converts onsite and within the data center premises. threshold, the data center would need
resources need to be considered in any
heat from the IT hardware into electrical to secure that more or all the energy it
Energy supply of data centers – business decision and can be a
energy and simultaneously provides cooling consumes was produced by renewable
decisive criteria for the selection of a
through absorption refrigeration. On the Exploring your options data center.
energy sources. PPAs directly agreed with
tenant side, an increase in energy efficiency Studies show that data centers can spend e.g. wind farms or solar parks are the best
can be achieved particularly by maximizing up to 50% of their operational expenditure
the efficiency of the hardware in use. This on electricity. Therefore, it is essential for
includes efforts such as virtualization. data center operators (or in case of powered
Other, physical measures comprise the use shell solutions for the tenant) to understand
of state-of-the-art energy-saving computing the various options in meeting their energy
platforms. It should be noted, however,
that in order to incentivize tenants to take
needs. In this regard, data center operators
have the following main options:
Studies show that data centers can
spend up to 50% of their operational
expenditure on electricity20 | Tech & Telecoms Hogan Lovells | 21
way to secure a “green” origin of the energy, “green” as – from a balance sheet which is needed to maintain the day-to- contractual regulations on down times of
in addition to potential onsite hydrogen perspective – it receives “only” the standard day operation. the grid connection for maintenance reasons
applications. electricity mix. should be reviewed carefully. Therefore, it
• Peak-load describes higher power
On-site energy generation is important to be familiar with applicable
PPAs – worth a closer look demands a data center experiences on
Operators should carefully assess options regulatory and market standards.
Against this background, green corporate short notice due to higher utilization of
PPAs are gaining market share and will for on-site power generation. Due to its capacities which cannot always be Due to the importance of energy supply
become even more popular in the future. the high energy consumption and large anticipated. and cooling systems, data center projects
There are two main models for PPAs: the amounts of roof space, data centers are in are in an excellent position to integrate
To be able to provide customers in peak-
“direct” PPA and the “virtual” PPA. an excellent position to integrate on-site onsite energy generation facilities such
load times with the data center capacity they
energy generation facilities such as hydrogen as solar panels or CHPs. If structured in
Under a direct PPA the renewable energy require, the data center operator needs to
applications, solar panels or CHPs into their compliance with the regulatory framework,
producer sells its energy directly to the take precautions that its flexibility provided
overall energy strategy. By using energy the advantage of such onsite generation is
customer. This electricity is delivered to towards the customer is mirrored in its own
that has been generated on-site, operators that it allows operators to avoid some of
the customer using the electricity grid. The energy supply agreements. Otherwise it will
may thus avoid paying grid usage fees or the taxes and levies that typically increase
price the customer pays consists of the not be able to meet the customers’ demands
system costs, electricity tax and, in certain energy costs. By using energy that has
PPA contract price plus its transmission- for capacity.
cases, even further levies. On-site energy been generated onsite, operators may thus
related expenses. A big advantage of this To sufficiently adapt the power supply, data
production is also a safeguard against rising avoid paying grid usage fees, electricity tax
model is that the corporate customer can center operators can:
energy prices. Furthermore, operators and in certain cases even further levies.
demonstrate that the power is procured
should consider opportunities to benefit • purchase energy on the energy exchange Furthermore, operators should assess
from a specific renewable source which can
from government subsidy programs for spot market; opportunities to benefit from government
provide reputational benefits.
investments in on-site renewable energy subsidy programs for investments in onsite
Virtual PPAs work differently: The energy facilities or CHPs. • agree with their energy supplier renewable energy facilities or CHPs.
producer feeds the electricity into the grid on baseload belt/peak-load belt
and receives the applicable market price. Flexibility or how to deal energy models; or In order to assess the options for on-
with peak loads site energy generation, operators may
The customer draws the energy from the grid • negotiate energy options or package
The data center operator needs to ensure consider entering into a so-called energy
but pays the fixed price agreed in the virtual models in which data center operators
that a sufficient energy supply is secured at contracting agreement with specialized
PPA. This PPA provides price certainty for can call up certain energy option rights.
all times while keeping its costs predictable. service providers. The scope of such
both contracting parties during a long-term
When offering flexible capacity models, two Energy regulatory agreements varies from a mere assessment
contractual relationship (approximately
key elements must be kept in mind: baseload Operators should carefully assess options and planning exercise for a project to the
ten to twenty years). It can be boiled down
and peak load. for onsite power generation because, if complete financing, planning and operation
to a financial hedge for fluctuating energy
structured appropriately, this could generate of on-site energy generation facilities. When
prices. It is important to note, that using • Baseload refers to the basic and constant
an additional income stream. Energy negotiating contracting agreements, it is
virtual PPAs the data center operator cannot energy consumption of the data center
produced by solar panels and/or a CHP vital to understand the applicable regulatory
label its energy consumption as particularly
on-site and fed into the public power grid framework in order to identify potential
is very often subsidized and operators pitfalls.
profit from comparably high feeding tariffs. For greenfield projects, there may be specific
Additionally, tax reductions may apply. energy regulatory requirements resulting
From a regulatory perspective, operators from European regulations. For example,
should ensure an adequately scaled grid landlords are obliged to use renewable
connection for the data center. In this energy sources up to a certain percentage for
regard, the relevant agreements with the heating and/or cooling of new builds. There
grid operator – and if applicable with are attractive ways to meet these obligations,
the landlord – need to be in place. As a for example by using a CHP.
stable and uninterrupted energy supply is
paramount for the operation of a data center,22 | Tech & Telecoms Hogan Lovells | 23
Data Protection – Beware and Data privacy
In view of the significant sanctions’ regime
– with fines of up to 4% of worldwide It is worth highlighting a few regulatory
protect your data
annual turnover – compliance with data requirements.
privacy requirements has become even more
The obligations that deserve particular
important to any entity handling personal
mention include compulsory cooperation
data.
From a data protection perspective, which requires storage and maintenance. requirements with the competent
running a data center is essentially about Handling such big amounts of data and However, it should be noted that the GDPR supervisory authorities, notification
storing, maintaining and processing offering services such as text and data is not the only new piece of legislation obligations as regards to infringements, data
digital information. In practice, however, mining algorithms are both a technical governing the storage and processing privacy by design and by default, the right
there are many more things to consider, challenge and a business opportunity. The of data. In January 2017, the European to be forgotten and various new
such as knowing your customer (“KYC”), increasing volume of machine generated Commission published a proposal for documentation requirements.
understanding their needs, providing data raises a whole new set of questions. an ePrivacy Regulation. Its core focus
It should also be noted that under the GDPR
tailored physical and digital infrastructure Who owns the data (e.g. data collected from is to ensure an adequately high level of
both the controller and the processor are
as well as suitable software architecture, cars on the road or home power systems)? confidentiality of electronic communications
responsible for privacy compliance. Fines
server capacity and staff. We understand What security level should be applied? Is throughout Europe. In pursuing this aim,
for non-compliance are substantial, not to
the need to combine both the legal and there a public interest in allowing authorities the draft Regulation goes beyond purely
mention the damage that would be caused
practical approaches. to demand disclosure (possibly through the personal data and covers all kinds of private
to a company’s image if it were accused of
data center)? The answers to these questions information. Until now, no further progress
After all, adequate data protection and failing to meet data protection requirements.
are still being debated. We advise our clients has been achieved. For more details,
security require a certain infrastructure
on exactly these issues. see our international blog at Accordingly, it is crucial to have adequate
and highly trained staff. Managing a data
http://www.hlmediacomms.com. and up-to-date privacy concepts in place
center therefore inevitably involves and rests The GDPR governing staff, services and infrastructure.
on a prudent and forward-looking privacy The General Data Protection Regulation Data processing agreements need to
concept. To-the-point internal guidelines as (GDPR) has been effective since 25 May be established and have to reflect the
comprehensive contractual agreements with 2018. It has replaced 28 domestic privacy regulations of the GDPR and the coming
suppliers, subcontractors and customers are laws throughout the European Union. ePrivacy Regulation. In this context,
key in this context. This is what we focus on National laws only continued to apply in
in our day-to-day advice. areas not fully harmonized by the GDPR.
The correct and legally compliant treatment The supervision of privacy compliance
of personal data is only one aspect to be differs from what we have been used to in
addressed but is probably the most obvious the past.
one. Confidentiality requirements are not Notably, the territorial scope of the GDPR
merely confined to personal data. There not only covers the activities of a processor
is plenty of digital information stored in or controller located in the EU. It also
data centers that may not be classified as applies as soon as the processing activities
data relating to an identified or identifiable are related to the offering of goods or
individual but may still be of crucial services to data subjects in the EU or the
economic value to the customer. Prime monitoring of behavior to the extent that it
examples of these are trade secrets and takes place within the EU. This means that
confidential technical information. processing personal data in data centers may
Moreover, machine-generated data has not only allude to EU data privacy law, but
become increasingly important. The also raise a wide array of complex challenges
“Internet of Things” (“IoT”) is an almost and questions in this field.
unlimited source of digital information24 | Tech & Telecoms Hogan Lovells | 25
multiple layers of subcontractors in cloud data. However, such scenarios rarely exist
infrastructures are a particularly common in practice.
source of difficulty and ambiguity. Clear
As we have seen, there are various ways
contractual structures and transparent
to “design” a data center service and each
technical architectures are recommended
design brings with it a slightly different set
safeguards in this respect.
of legal requirements.
Different business scenarios Cyber security
Privacy law generally differentiates between
Data centers are data hubs and therefore
“controllers” and “processors”. A different
susceptible to cyberattacks. Such attacks
set of obligations applies depending on
could result not only in data theft, but
which of these two roles a company has. A
also in the disruption of internet services
data center operator has various options to
of multiple customers and businesses.
choose from. The business model chosen by
Consequently, a data center operator faces
a firm will determine which legal regulations
high liability risks.
it must meet. Conversely, the respective
legal obligations can make certain business There have been many instances of
models more or less attractive. Therefore, high-profile cyberattacks such as:
taking an informed decision as to how the • (Distributed) Denial of Service (“DDoS”)
data center service will be structured is attacks where servers shut down due
essential for business success. to being overloaded by a flood of
Generally, a distinction can be incoming messages.
made between two common • Ransomware attacks, such as WannaCry
business scenarios: and NotPetya, where malicious software
Firstly, controllers deploying a hosting blocks access to a computer’s data,
provider. Here, processing and asking for a ransom to release the data or
infrastructure are part of the service otherwise threatening to destroy it.
rendered. Whereas the original controller
is still regarded as a controller, the hosting • Attacks against the data center
provider might either be a processor or a infrastructure to screen, control or
(secondary) controller, depending on the eventually destroy the facility such as
extent of autonomy involved in the service the Stuxnet virus.
rendered. The service contracts need to Recently, there has been a noticeable trend
be drafted accordingly to ensure adequate toward more sophisticated attacks. Such
justification for the agreed handling of data. unprecedented techniques render the data
Secondly, controllers deploying a mere center infrastructure even more vulnerable
housing provider providing only the data and are likely to result in liability claims by
center infrastructure. Under a “pure” version the data center’s customers.
of this scenario, i.e. where no (emergency) Unpredictable and unforeseen incidents –
services that potentially allow access to the also known as black swan events – may not
processed data are offered by the housing necessarily trigger fault-based liability of
provider, the latter may be deemed the data center operator. However, it can be
neither a processor nor a controller of the very challenging and practically impossible
for the operator to prove the existence ofYou can also read
