Data Center

Practice
National Reputation
Quarles & Bradys Data Center Team includes
nationally recognized real estate and energy
law attorneys with extensive experience in all
aspects of sophisticated data center projects.
Having

represented

developers,

owners,

operators, and tenants, our lawyers understand

the challenges and opportunities involved
in designing, constructing, operating, and
maintaining Data Centers. The 24/7/365 nature
of data centers requires complex systems with an
extremely high level of security and redundancy,
including critical operational and backup
power, cooling, bandwidth and security. Our
lawyers understand these operational details
and requirements, as well as the relevant legal
issues and concerns that require experienced,
thoughtful counsel to maximize the success of a
data center project. We know how to get deals
done, while providing seasoned and effective
legal advice to protect our clients interests.
Quarles & Brady operates as an integrated
business unit across nine U.S. offices, calling

relationships with many of the most prominent national players in the data

upon resources throughout the organization

center world, as well as with regulated and alternative energy suppliers, lenders,

as needed to serve our clients as efficiently

consultants, construction companies, and other parties that play key roles in

and cost-effectively as possible.

data center project development and implementation.

We have

Chicago / Indianapolis / Madison / Milwaukee / Naples / Phoenix / Tampa / Tucson / Washington, D.C.

Teaming Up to Provide Solutions for Complex Data Center Projects

Quarles & Bradys Data Center Practice has in-depth real estate and
energy law experience to provide counseling and legal services to
clients nationwide. With nearly 50 attorneys in our national Real
Estate and Energy Law Practice Groups, we match attorneys skills
and experience with our clients individual needs and goals. The
collaborative environment and varied experiences of our lawyers
provides a level of service and responsiveness upon which Quarles
& Bradys reputation is built. Our specific data center capabilities
include:
identification of available public incentives (i.e., tax increment
financing, tax credits, sales tax abatements) to defray the cost
of development and location of data center facilities and the
negotiation and documentation of available incentives
initial design and construction of electric facilities (for
primary and backup power), including transmission and
delivery system interconnection and upgrades
due diligence analysis of land use and zoning regulations,
private covenants, and title and survey matters to
determine the feasibility of real estate for acquisition and/or
development as a data center use

counseling regarding power supply procurement

arrangements, analysis of utility tariffs, and negotiation of
contracts
negotiation of architect design agreements, construction
contracts and other related documentation
construction, term, mezzanine, and revolving credit line
financing
preparation and negotiation (for owners and users) of data
center lease agreements and collocation agreements for
purpose-built data center properties and within office
buildings
preparation and negotiation of agreements relating to data
center operations, such as electrical power agreements,
fiber connectivity agreements and licenses, master services
agreements, service level agreements, IRU agreements, and
managed service agreements
coordination with local utilities to ensure redundant power
supplies and maximize value realized from energy efficiency
and demand response programs

prepare, negotiate, and document zoning and entitlements

for the development and operation of data center uses,
including, zoning amendments, special or conditional
use permits, planned unit developments, variances, and
development agreements
For more information about Quarles & Bradys Data Center Practice, please contact the following:
Michael D. Rechtin Jr. / Partner
300 N. LaSalle Street, Suite 4000
Chicago, Illinois 60654
(312) 715-5016
michael.rechtin@quarles.com

Theodore l. Yi / Partner
Chicago Office Co-Managing Partner
300 N. LaSalle Street, Suite 4000
Chicago, Illinois 60654
(312) 715-5209
ted.yi@quarles.com

Christopher J. Townsend / Partner

300 N. LaSalle Street, Suite 4000
Chicago, Illinois 60654
(312) 715-5255

Christopher N. Skey / Partner

300 N. LaSalle Street, Suite 4000
Chicago, Illinois 60654
(312) 715-5022

chris.townsend@quarles.com

christopher.skey@quarles.com

Robert L. Gamrath / Partner

300 N. LaSalle Street, Suite 4000
Chicago, Illinois 60654
(312) 715-5037
robert.gamrath@quarles.com

The Devil Is In The Data Center Occupancy Agreement

Law360
November 6, 2014
By Michael Rechtin
Computer data storage needs can be dealt with in many, many ways,
ranging from a company that builds its own data center on real estate
that it owns to outsourcing the data storage needs to the "cloud." This
article will not deal with "cloud" or "hosting" offerings but instead those
situations where a company places its servers and equipment in a data
center facility operated by a third party.
Real estate and data centers have been strange bedfellows since day
one. It is a relatively new category of real estate and, as such, the
providers of space for companies wanting to locate their computer
servers and data storage equipment in a noncompany-owned location
were borne out of different fields of business thus the contracts
dealing with these arrangements are quite different. In general, the legal
documentation of a data center transactions has many unique issues
and concerns and this uniqueness is further compounded by the form in
which the transactions are documented.
Michael Rechtin

On one side, we have data center landlords who came from other
types of real estate products where the preferred form of contract is a
lease to document the contractual relationship between the company (the "tenant") and the owner of the
property where the data center is located (the "landlord"). Real estate leases are universally used for what
are called "wholesale" data center transactions, which are the larger variety (where the tenant will be
using roughly 300kW of power or more and will have its own demised space).
On the other side, we have data center owners who evolved from computer data "hosting" companies
where data storage was provided to clients on servers owned by the hosting company. Over time, these
hosting companies began to offer their clients the ability to locate the client-owned servers and equipment
in the data center operated by the hosting company. These data center operators grant licenses, rather
than leases, under master services agreement with related service orders.
Notwithstanding the differences between the data center operators who provide leases and those who
provide master services agreements/licenses, they each tend to operate their respective data centers in a
consistent way that is tied to the data center industry as a whole so one type of documentation over
another does not necessarily yield a "better" data center experience for the customer.
Within the leasing model, some landlords have opted for leases that look and feel like a traditional office
or industrial warehouse lease whereas some landlords have architected completely different looking and
sounding lease forms that are very, very defined-term driven. I would not say that there is any benefit to
either one of these approaches, but the heavily defined term approach often makes for a more
complicated document.
If a data center customer has the ability to influence the type of document that will be used, in most
circumstances the customer should push for a lease, rather than a license. There are many reasons why
a lease is preferable over a license and here are a few:

First and foremost, a lease is a real property interest whereas a license is just a contractual right.
Tenants have more heightened rights than licensees so usually a statutory process will need to
be satisfied by the landlord in order to have a tenant removed from possession or its lease
terminated, whereas a licensee will have much fewer protections and is not considered a holder
of a real property interest. Tenant defenses will include the right to be heard in court in an action
to evict and to raise defenses challenging the eviction, including attacking the landlord's conduct
and raising affirmative defenses. A licensee will not have the same defenses nor have the right to
be heard in an eviction proceeding. As to a lease, it will take anywhere from two to six months for
a tenant to be evicted, depending on the jurisdiction. Depending on the language of the license, it
may be able to be terminated immediately upon a default.

If a tenant holds over after the expiration of the term, that tenant is still considered a tenant and
the landlord will need to adhere to the eviction process to rid the property of the tenant. If the
licensee holds over after expiration of the license, the licensor (absent language to the contrary in
the license), can immediately remove the licensee and its property and deem the license
terminated.

In the case of a lease that is either prior in time to a mortgage or where the lease has been made
subordinate to a mortgage but the tenant has received a non-disturbance and attornment
agreement from the landlord's lender, the lease will remain in effect in the event of a foreclosure.
A license will not benefit from being prior in time to a mortgage as it is not a real property interest
and a lender will not grant a licensee a non-disturbance and attornment agreement.

The other major form of contractual document used to describe the relationship between the data center
operator and the company is the master services agreement/license and service order. The master
services agreement originates from the IT/software fields where one master services agreement is signed
between the parties to describe the overarching relationship between the parties and then separate
service orders are signed as to each requirement, which in this case would be a separate service order
for each individual data center. The theory is that the parties agree as to all the macro issues in the
master services agreement and then document the specific business terms for each of the data center
deployments.
Data center operators who insist on this documentation are considered colocation or "retail" operators
where the servers and equipment within the data center are often separated and secured from other
users by cages. If the data center customer's needs are small enough and do not warrant a cage, the
data center customer will have allocated to it a server rack or portion of a server rack. These
colocation/retail providers often offer more managed services to their customers than the wholesale
landlords.
Master services agreements and service orders are often presented as documents that are not negotiable
because they have a "printed form"-type look to them but my experience is that they are negotiable, just
not as much as a lease.
Regardless of the form of document that will govern a data center customer's use of space within a data
center, whether a lease or license, it is vitally important to prevent the arrangement from being terminated
without sufficient notice and opportunity to cure while ensuring that the data center operator will operate
the data center to the specifications required by the customer as the financial loss to a company of not
being able to operate its data center to its desired level can be catastrophic.
By Michael D. Rechtin Jr., Quarles & Brady LLP
Michael Rechtin is a partner in Quarles & Bradys real estate group and is based in the firm's Chicago
office.
Article Link: http://www.law360.com/articles/593045/the-devil-is-in-the-data-center-occupancyagreement

The ABCs Of Data Center Leasing

May 1, 2013
By Michael D. Rechtin

Michael D. Rechtin
Law360, New York (May 01, 2013, 3:23 PM ET) -- One of the hottest, but least understood, real property
types is the data center. Data centers house the computer servers and equipment that allow you to use
your computer at work and stream a movie through Netflix, 24 hours a day, seven days a week. Demand
for data centers is growing and will continue to grow for the foreseeable future. Depending on the target
user of a data center, it may be located in a rural setting or immediately adjacent to a trading exchange in
a major city.
Data centers are categorized by tiers (I to IV) based upon the expected amount of "up time." A Tier I data
center will have expected up time of 99.671 percent and not contain any system redundancies. Up time
increases as Tier levels increase, culminating with the Tier IV level where the expected up time is 99.995
percent with all building systems being redundant. A tenant will pay increasingly more the higher up the
tier chain. Unlike all other property types, data centers are driven to a large extent by engineering
concepts and these concepts make the legal documents governing them very unique and filled with highly
technical jargon.
Some data center users build their own data centers (Facebook, Google), but most data center users will
lease space in a data center facility either on a "collocation/retail" basis or on a wholesale basis. In the
collocation/retail scenario, the landlord provides services down to the computer rack level and installs
physical separations between tenants, usually in the form of a cage. In the wholesale scenario, the data
center landlord will lease space directly to an end user and the landlords service obligation will stop at
the PDU for the space (power distribution unit). The collocation and wholesale varieties of data centers
are not always mutually exclusive and hybrids are commonplace. Within a data center, there will be the
raised floor data center environment that enjoys the intensive power and cooling and then separate office
space for network operations of the data center space (often called "NOC space" for net operation
center). The redundant systems of a data center will usually not apply to the NOC space.
The power requirements for a data center can be massive. A typical 100,000 square foot data center will
be serviced by 15-20 megawatts. One megawatt of power will power 1,000 homes so a 15-20 megawatt
data center could power 15,000-20,000 homes. Because of these power requirements, it is not easy to
locate a data center. A Tier III or IV data center will require electric feeds from two separate utility
substations and obtaining a redundant feed can be cost prohibitive if not impossible. The electricity from
the utility company is then backed up by a UPS system (uninterrupted power supply), which consists of a
short-term battery backup and then a switch over to generators, which can run forever so long as they
have fuel. The goal is to provide uninterrupted electricity to the equipment that is line conditioned from
any spikes in voltage or current. The equipment emits heat, which must be properly ventilated and cooled

with forced air or chilled water systems.

Access to fiber that carries the information stored in the equipment within the data center is also
extremely important. Data centers usually have all of the various fiber providers bring the fiber in through
various access points (to minimize the potential for lines being clipped in one central location taking down
connectivity) and then have all of the external fiber collected into one room (often called a "Meet Me
Room" or a "POP room") where each occupant will then bring its own fiber to make connections to the
outside world in the Meet Me Room/POP room. This is a more manageable way to make these
connections rather than having each tenant make its own connection to the outside world directly with the
fiber providers. With respect to trading firms, the trading firms often want to be physically located as close
as possible to the exchange to minimize any latencies (delays) in trading.
The data center will have a raised floor environment (often 3 to 4 tall) so that all of the wiring and
connections can be made to the computer servers and equipment underneath the floor. Fire suppression
is handled through pre-action systems that will minimize any damage to the equipment if activated. Data
centers are built to withstand tornadoes, earthquakes, water intrusion, hurricanes and other natural
disasters. Data centers minimize onsite personnel and have robust security screening (including the use
of biometrics). Some data centers are even operated remotely with no people on site.
Data center leases and collocation agreements are unique. They tend to be long, 10 years or more, often
with many renewal options, as it is an expensive proposition to move into and out of a data center. Rent
may be based on the square footage leased or on the amount of power allocated to the space.
Landlords are very concerned about the potential for damages (including consequential damages) that
could result from the data center not operating. If a successful trading firm was unable to trade for even a
single day, the losses could be well into the millions of dollars. As such, landlords insist on the remedy for
an outage only be in the form of rent credits. The rent credits are dealt with in a separate agreement
between the landlord and tenant (which is often an exhibit to the lease or collocation agreement), called a
SLA or service level agreement. The SLA is in fact a negotiable document, despite its appearance.
Tenants are very limited in what types of alterations they may make within their space and the landlord
will have extremely tight areas of control over all areas.
Because a tenant is probably migrating its data center from somewhere else, having the new data center
ready and fully commissioned by a specific date will be important. If the target date is not met, the tenant
should have penalties to be paid by the landlord (which may be equal to the holdover rent the tenant is
paying in its former facility) and the right to terminate the new data center lease if the delay goes on too
long.
A data center tenant should insist on its space being commissioned by an independent engineer so that
when it is turned over to the tenant, it has been verified as functioning at the tier level the tenant is paying
for. It is very important for a tenant to understand exactly what services their rent is covering. Oftentimes,
services that a tenant may think are part of what they pay for are actually an additional charge from the
landlord. Examples of services that are an additional cost are migration services, automated systems
notifications and "remote hands" type-services.
A tenant's recourse for outages are contained in the SLA and it will be important for the tenant to
understand that there are two types of outages: those that occur and are remedied quickly and those that
go on for an extended period of time. A sophisticated tenant will negotiate for credits that apply in both
situations and have termination rights if the frequency or duration of the outages is unacceptable.
As a tenants data center is mission critical to its business, tenants with significant leverage are often
able to negotiate for the landlord to not have the right to terminate the lease in any circumstance, but only
have the right to sue the tenant for damages and cut-off services to the tenant. Tenants should negotiate
for a specific right to holdover past the natural expiration of the term for a specified period of time to give it
a buffer period to migrate to its next data center.

Tenants also need to be mindful of the removal and restoration obligations at the end of the term so that
they will not be obligated to remove and/or restore infrastructure-type items such as electrical wiring and
HVAC distribution. If the landlord has debt on the property, the tenant should insist on a subordination,
nondisturbance and attornment agreement that will include the obligation of the lender to complete
construction if the landlord does not.
The technology surrounding data centers is constantly evolving. As servers can handle ever increasing
data storage and transmission within the same footprint, the need for such storage and transmission is
accelerating even faster. There are technologies on the horizon (such as storing data on synthetic DNA)
that will lessen the demand for data centers as they currently operate but for the foreseeable future, data
centers will be a hot field and a tricky one for those who have not had the opportunity to work on one.
By Michael D. Rechtin, Quarles & Brady LLP
Michael Rechtin is a partner in Quarles & Brady's real estate group in the firm's Chicago office. His
practice focuses on commercial real estate, specializing in office, data center, industrial and retail leasing,
build-to-suit transactions, acquisitions, dispositions, financings, joint ventures and development.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice..