In 2018 data centre growth is expected to be even stronger. Gareth Planck, Partner at the Belfast office of Eversheds Sutherland outlines why having a local law firm with global reach in this area is vital.
Supporting data centre growth
Over the last 20 years, the demand for digital data has grown massively. Data centres now underpin our digital economy – for corporate IT services, digital media, financial services, mobile computing, social networking and internet access. Data centres have advanced dramatically over the past few years with outsourced data centre infrastructure in Europe likely to tip towards 40% by 2019.
The UK and Ireland are two of the most active data centre markets in the world today. With the demand for cloud storage growing, the need for local processing power closer to the customer base in Northern Ireland will become even more prevalent in 2018 as micro data centres begin to multiply. It will become increasingly important to have in place a local legal team with global connections.
This is due to fact that they will be best placed to understand the full range of tenant concerns, especially the complexities of different occupational structures (and the attendant tax and accounting treatments) and service level agreements. Data centres are energy-intensive, and electricity consumption is usually the single largest component of operational costs. We at Eversheds Sutherland also place an emphasis on thorough energy due diligence and – when handling leasing and customer contracts - clear and concise electricity charging regimes, particularly where the data centre is supported by private renewable energy sources.
The legal challenges facing data centres are unique, requiring a distinct blend of specialist legal advice. The looming Brexit divorce will also add a layer of complexity and uncertainty that previously didn’t exist.
It is best if the legal team you appoint are immersed in the sector, not only understanding the legal issues but also having a deep understanding of the data centre market. For decades, we have advised data centre developers, owners, operators, funders, and enterprises that need or use them on matters associated with all types of data centres, including enterprise, wholesale, co-location and managed services facilities.
Our extensive experience in this area on a global basis allows us to anticipate and manage the many challenges that are part of developing, owning and financing complex data centres, including site selection, due diligence, tax and structuring issues, operational and regulatory considerations, leasing and customer contracts.
Consideration needs to be given to the speed and ability to build and operate a data centre as opposed to acquiring an existing data centre which is readily adaptable for use. The basis of the owner or operator occupation will differ between jurisdictions with varying implications.
As an example, freehold acquisitions represent the most flexible form of land ownership, but most costly (and sometimes the slowest route to market) whereas leasehold acquisitions give ownership for a limited period (though often on longer terms, with options to renew) and therefore can be an attractive proposition for landlords, subject to extensive restrictions and conditions.
On expiry of the lease, all interests revert back to the landlord, including ownership of buildings constructed on the land (subject of course to business tenancy considerations in Northern Ireland). Care needs to be taken in negotiating the terms of the lease to ensure the owner/operator (and its funder) has sufficient flexibility in the use and occupation of the land and buildings for the purposes of its operations, that the period of the lease is sufficient to enable full recovery of any capped costs, and that sufficient protections are incorporated into the lease for funders and key customers.
Funding data centre growth
We are also advising on the funding of data centre projects and typically a funder will have separate concerns to an owner or operator. They will want to ensure title to the land/equipment is good and marketable to enable it to take adequate security over it. They will usually want independent legal advice and complex financing documents to be put in place prior to releasing funds at closing. This could impact on the ownership structure and timescales for any development. With increasing global focus on sustainability, the energy consumption and efficiency of a data centre is a significant concern with a huge impact on operating costs.
Temperate climates offer opportunities to reduce operating costs for free air cooling data centres against their chilled water counterparts. Small changes in Power Usage Effectiveness (PUE) can have a dramatic effect on energy costs (and often the costs arising from an increase in PUE will be a risk for the operator rather than the customer).
Even the most efficient data centres consume massive amounts of electricity, making energy-related strategic decisions key to successful development and operation. Interconnecting with the local grid and procuring electricity services at the most advantageous rates, including any economic development incentives, requires in-depth knowledge of the regulatory framework in Northern Ireland and practical experience in the relevant energy markets which we have.
Article first published in Business First Magazine