A number of factors determine whether a data centre project succeeds. One of the most critical is ensuring that the land, buildings and infrastructure are correctly structured from the outset. Deficiencies in this area can lead to unnecessary delays in the financing, construction or operation of the data centre.
Data centres are among the most real estate-intensive industrial projects on which we advise clients. The real estate structure typically involves several cadastral units that must be subdivided or merged, land rights that must be secured through freehold title or a long-term ground lease and an ownership structure that is often subject to change in the course of the project through reorganisations. In our experience, projects that address these matters at an early stage avoid costly delays when financing, construction or a sale is to be completed.
Ownership structure and restructuring
In many data centre projects, one entity acquires the land and enters into the construction contracts, while a separate operating company is to own and operate the completed facility. The transfer to the operating company is often effected through a demerger, pursuant to which freehold title, buildings and rights under the construction contracts are transferred to the operating company.
There is, however, no single way to structure a data centre project. Some structures involve a landowner leasing the site to an operator who constructs the building; others involve the landowner owning the data centre and leasing out server capacity in which the lessee provides the hardware; and in more vertically integrated models, the operator also supplies hardware and contracts directly with end users. The optimal real estate structure depends on the chosen model, making it essential to align the property structure with the business model from the outset.
The above gives rise to several practical questions that should be addressed at an early stage:
- Demerger process: The demerger process itself typically takes approximately 10–14 weeks from the date of submission of the demerger documents to the Norwegian Register of Business Enterprises (Nw. Brønnøysundregistrene), due to the six-week creditor notice period required under the Norwegian Private Limited Liability Companies Act (Nw. aksjeloven) and the processing time in the Norwegian Register of Business Enterprises. This timeline must be taken into account in the project’s financing and construction schedule.
- Property structuring: We frequently see that land from several properties is to form part of the data centre site. In our experience, when processing building permit applications and similar applications, municipalities will normally require the properties to be merged before construction can proceed. A subdivision of the data centre site must therefore also normally be carried out. The municipality’s processing time for a subdivision application is normally 3–12 weeks from receipt of a complete application, followed by the cadastral surveying procedure (Nw. oppmålingsforretning), which the municipality must complete with a statutory deadline of 16 weeks. Legal title to the data centre site can only be transferred to the operating company once the relevant cadastral unit has been established. These dependencies and timelines must be mapped and taken into account in the project’s progress plan.
- Stamp duty: Implications must be factored into the chosen structure from the outset, so that the project does not incur unexpected costs relating to registration in the Norwegian Land Registry. Registration of a transfer of real property will, as a general rule, trigger stamp duty (Nw. dokumentavgift) at a rate of 2.5% of the market value of the property, though important exemptions apply under which no stamp duty will be incurred: transfers effected pursuant to a demerger and to newly constructed buildings that have not yet been taken into use.
- Security: Lenders often require a mortgage over the property before the restructuring has been completed. A common solution is for the developer to register a legal mortgage in favour of the lender prior to completion of the subdivisions and mergers, such that the mortgage encumbers the property before the restructuring has been completed. The property is then transferred to the operating company subject to, and with the benefit of, such mortgage. In that case, the lenders must accept that the mortgage over areas falling outside the data centre site is released upon completion of the restructuring.
- Registered encumbrances: The land register entries for the data centre site should be reviewed at an early stage in order to identify existing encumbrances on the property. Easements, pipeline rights and other rights held by previous owners that are not identified early may not only complicate a due diligence process, but may in the worst case constitute an obstacle to the project at a stage when construction is already underway.
Leasing or owning the site
Some data centre operators choose to lease the site for the data centre rather than own it, often because the landowner wishes to retain freehold title, or because it results in a simpler transaction structure, or because it is less capital-intensive. Key provisions in ground lease agreements for data centre purposes include:
- A long and predictable lease term, normally with a right of renewal, tailored to the investment horizon and the financing requirements of the operating company.
- A general and unrestricted right to establish, operate and maintain technical infrastructure across the entire leased area – not only where the buildings are situated.
- Clear provisions governing assignment and pledge of the leasehold right, including consent to lenders stepping into the agreement upon default.
- A limited right of termination during an initial period if the necessary permits and approvals cannot be obtained, or if the project cannot be completed for reasons beyond the operating company’s control.
- Clear provisions on reinstatement obligations upon expiry or termination of the lease, including whether the operating company is required to demolish and remove the buildings and installations, or whether the landowner is entitled, but not obliged, to take these over, and on what terms. This allocation of risk should be assessed as part of the overall investment case. The developer should also seek to secure a right of first refusal in the event the landowner wishes to sell the property.
The structure lays the foundation
In our experience, the ownership and real estate structure should be clarified as early as possible in the project. Lenders scrutinise ownership structures closely as part of their due diligence, and unresolved matters are among the most common causes of delays in, or increased costs of, financing. Getting the structure right from the outset is one of the most effective steps a developer can take to ensure a smooth path to financial close and operational delivery.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
