Data centers: the lease measures kilowatts, not square feet

Everything on the real estate core applies to data centers, except the most basic assumption underneath it. Every other asset class leases space. This one leases power, and the space comes along with it.

Kilowatts are the rent roll

A data center lease is priced per kilowatt of committed power capacity, not per square foot. A tenant taking 2 megawatts in a facility is buying the right to draw that power and reject that heat, and the floor area housing the racks is close to incidental.

This inverts diligence entirely. The core page says the lease is the asset; here, the power contract underneath the lease is the asset. A building with enormous square footage and a modest utility interconnection is a small data center. A modest building with a large, secured interconnection is a big one.

The structuring consequence: underwriting a data center means underwriting the utility relationship first, the interconnection agreement, its capacity, its transferability on sale, before anything about the building itself. A buyer who diligences the real estate and skims the utility documents has diligenced the wrapper.

The interconnection queue: the entitlement risk of this asset class

New data center capacity waits on utility interconnection, and in the busiest markets that queue now runs years, with utilities in some regions requiring real financial commitments just to hold a place in line.

This is this asset class’s version of the land and development entitlement problem, and the same structuring answer applies: option structures and milestone-based commitments tied to interconnection progress, not calendar dates that assume the utility delivers on schedule. A development pro forma that treats the interconnection date as fixed has assumed away the single biggest risk in the deal.

The SLA is the habitability clause, with actual teeth

An ordinary lease’s habitability and services obligations are broad and rarely litigated. A data center lease replaces them with a service level agreement: defined uptime percentages, temperature and humidity bands, redundancy commitments, with specified remedies, usually rent credits scaling with the outage, when the facility misses.

The negotiation that matters is the exclusions. Utility-caused outages, force majeure, maintenance windows: each carve-out shifts real risk back onto a tenant whose entire business may sit in those racks. A tenant’s counsel reads the SLA’s exceptions the way the core page reads an SNDA’s, the promise is only as good as what’s carved out of it.

Operating Agreement Specifics: Power Commitment Authority

Committing facility power capacity to a tenant is committing the asset’s actual scarce inventory, and an aggressive commitment to one hyperscale tenant can foreclose every future leasing decision.

The operating agreement should set a threshold, in megawatts or percentage of total capacity, above which a power commitment needs member approval rather than manager discretion. Square-footage thresholds borrowed from a generic real estate agreement measure the wrong thing entirely.

Operating Agreement Specifics: Capex Cadence Acknowledgment

Data center mechanical and electrical systems refresh on cycles far shorter than any other asset class’s capital rhythm, and falling behind the spec curve directly degrades what the facility can charge.

The operating agreement should build this cadence into its reserve and capital call structure explicitly, so members who priced the deal like stabilized real estate aren’t shocked by the third major systems refresh. This asset class spends like infrastructure, and the governing document should say so.

Where this hands off

The full lease-clause treatment lives on the real estate core. The entitlement-style risk logic lives on land and development. This page’s job was narrower: naming that this asset class’s real commodity is power, and rewiring the standard diligence and governance questions around that fact.