Hyperscale Data Center Leasing
Definition
Hyperscale data center leases structure dedicated facilities (20MW-200MW power capacity, 100K-1M+ square feet) for single-tenant AI infrastructure deployments using triple-net lease frameworks: (1) Base rent $80-$150 per kW per month reflecting land, building shell, mechanical systems, (2) Operating expense pass-throughs covering utilities (excluding power), property taxes, insurance, maintenance, and (3) Capital improvement obligations where tenant funds build-out (raised floors, cooling systems, electrical distribution, fiber connectivity) amortized over lease term or absorbed upfront. Lease terms: 10-15 year initial with 2-3 renewal options (5-year increments), creditworthy tenant requirements (investment-grade rating preferred, otherwise guarantees/LC), rent escalations (2-4% annually or CPI-linked), early termination penalties (6-12 months base rent). Power components separate: Tenant executes power purchase agreement directly with utility securing capacity allocation (50MW-200MW) and locking electricity rates ($0.04-$0.12/kWh varying by market), landlord provisions substations and backup generators but tenant pays ongoing power consumption. Development timelines: 18-36 months from contract to delivery (permitting, construction, utility interconnection).
Why it matters
Hyperscale leasing creates $20B+ annual transaction volume as AI infrastructure scaling demands exceed ownership capital. Key economics: Meta/Microsoft/Google each require 1-2GW AI capacity (2025-2027) = 10-20 facilities at 100MW+ each, leasing 40-60% (4-12 facilities per hyperscaler) preserving $5B-$15B capital for GPUs/software versus real estate. Landlord perspective: Data center REITs (Equinix, Digital Realty) invest $300M-$1B per hyperscale facility earning 6-9% unlevered returns on long-term leases to creditworthy tenants, development risk (tenant defaults pre-completion, utility delays) mitigated through pre-leasing (break ground only with signed 10-year lease). Tenant perspective: Locking long-term capacity at predictable costs (rent escalations capped 2-4% annually) hedges AI infrastructure expansion while avoiding technology risk (if workload requirements change years 8-10, can choose not to renew rather than owning obsolete facility). Understanding leasing mechanics critical for: Infrastructure investors evaluating data center REIT valuations (enterprise value multiples 15-25x EBITDA driven by hyperscaler tenant credit quality and lease duration), AI companies planning capacity (owned versus leased trade-offs, lease negotiation leverage points), and developers timing facility construction (oversupply risk if multiple hyperscale facilities deliver simultaneously in same market compressing rents 20-40%).
Common misconceptions
- •Triple-net doesn't mean tenant pays all costs—landlord retains: building structure/roof repairs (major capital), property management overhead, lease commissions, debt service. Tenant pays: interior systems, utilities, operational expenses. Allocation disputes common—HVAC replacement capital or expense? Depends on specific lease terms.
- •Power capacity isn't guaranteed in perpetuity—utility commits to deliver specified capacity but reserves right to interrupt during extreme events (heatwaves, grid emergencies). Critical loads require on-site generation (diesel/natural gas backup) adding $50M-$150M capital costs. Some markets (Texas ERCOT) facing reliability concerns reducing facility valuations 10-20%.
- •Lease renewals aren't automatic—at option exercise (years 10, 15, 20), landlord can adjust rent to market rates if current rent below market by 20%+. Prevents tenants locking below-market rent indefinitely. Creates renegotiation risk—tenant invested $200M+ in facility improvements, landlord has leverage demanding rent increases or tenant faces costly relocation.
Technical details
Lease structure and financial terms
Base rent calculations: Per-kW pricing: $80-$150/kW/month typical range. Calculation: 50MW facility × 1,000 kW/MW × $100/kW = $5M monthly base rent = $60M annual. Geographic variance: Northern Virginia $120-$150/kW (premium market, high demand). Phoenix/Dallas $90-$120/kW (growth markets, moderate demand). Iowa/Nebraska $70-$90/kW (tier-2 markets, lower costs). Rent escalations: Fixed 2-4% annually, or CPI-indexed with caps (e.g., min 2%, max 5%), prevents hyperinflation exposure while providing landlord protection against costs.
Operating expense pass-throughs: Property taxes: $5-$15/kW/month (varies dramatically by jurisdiction). Insurance: $2-$5/kW/month (all-risk property, earthquake where applicable). Common area maintenance: $3-$8/kW/month (landscaping, security, access roads). Reconciliation: Annual true-up comparing actual expenses to estimates, tenant pays or receives credit for variance. Caps: Some leases cap expense increases at 5-7% annually protecting tenants from cost explosions.
Tenant improvement allowances: Landlord contribution: $50-$150 per square foot toward tenant build-out (electrical distribution, cooling systems, security). Amortization: Added to base rent over 10-15 year lease term at 6-9% interest rate. Example: $100M TI allowance, 10-year amortization, 7% rate = $14.2M annual rent add ($1.18M monthly). Tenant pays upfront: Advanced cooling (liquid vs air), premium finishes, redundant systems beyond landlord minimums. Typical total tenant investment: $200M-$500M for hyperscale facility.
Security deposits and guarantees: Cash deposits: 3-6 months base rent held as security. For $5M monthly rent = $15M-$30M deposit. Alternatives: Letter of credit from bank (annual fee 1-2% of LC value, preserves cash). Parent guarantee: Corporate parent guarantees subsidiary tenant obligations (common for startup AI infrastructure companies backed by large tech firms). Step-down provisions: After 3-5 years of timely payments, reduce LC from 6 months to 3 months, or release entirely if tenant achieves investment-grade rating.
Power and utility considerations
Utility capacity allocation: Dedicated substation: For 50MW+ facilities, utility builds dedicated substation and transmission lines. Cost: $20M-$80M (sometimes tenant-funded, sometimes utility-funded passed through rates). Timeline: 18-36 months from approval to energization. Capacity commitment: Utility reserves power capacity for facility—if tenant delays/cancels, may owe liquidated damages ($5M-$20M) compensating utility for stranded investment.
Power purchase agreement structures: Rate structures: Fixed rate: $0.06-$0.10/kWh locked for 10-20 years providing cost certainty. Index rate: Tracks utility published rates with negotiated discount (10-20% below retail). Hybrid: Fixed base + commodity pass-through (separate energy from distribution). Minimum take obligations: Tenant must purchase 60-80% of reserved capacity annually or pay shortfall penalties. Prevents speculative capacity hoarding. Renewable energy options: Physical delivery (utility builds dedicated solar/wind farm delivering to facility). Virtual PPAs (financial hedge—tenant pays utility variable rate, receives renewable energy credits offsetting costs).
Backup power and reliability: On-site generation: Diesel or natural gas generators providing 2N redundancy (double capacity needed, either can fail). Cost: $30M-$100M for 50MW facility. Uninterruptible power supply (UPS): Battery systems bridging 10-30 second gap between grid failure and generator startup. Cost: $10M-$30M. Fuel storage: 24-72 hour on-site diesel storage (500K-2M gallons), permits and environmental compliance expensive in urban markets. Annual testing: Monthly generator tests, annual full-load exercises, maintenance contracts $1M-$3M annually.
Utility interconnection risks: Delivery failures: If utility cannot deliver promised capacity (transformer shortages, permitting delays, grid constraints), tenant may terminate lease without penalty or receive rent credits during delay period. Historical precedent: Northern Virginia 2022-2024 saw 12-24 month delays on multiple projects as Dominion Energy struggled with demand surge. Mitigation: Tenants negotiate detailed milestone schedules with liquidated damages for utility delays ($100K-$500K per month), right to terminate if delay exceeds 6-12 months.
Lease obligations and risk allocation
Maintenance and capital responsibilities: Landlord obligations: Structural integrity (roof, exterior walls, foundation). Common infrastructure (access roads, parking, perimeter security). Major capital replacements (HVAC chillers end-of-life after 15-20 years). Tenant obligations: Interior systems (electrical distribution, cooling within facility, backup power systems). All operational maintenance (filters, repairs, testing). Technology upgrades and capacity expansions. Gray areas: HVAC replacement—capital (landlord) or maintenance (tenant)? Disputes common, requires detailed lease definitions.
Insurance and liability: Property insurance: Tenant maintains all-risk coverage on tenant improvements ($200M-$500M value). Landlord maintains coverage on building shell. Business interruption: Tenant carries business interruption insurance covering lost revenue if facility inoperable (12-24 month coverage typical). Liability insurance: General liability $10M-$50M per occurrence, cyber liability $25M-$100M (covering data breaches), umbrella coverage $50M-$250M (excess of underlying). Indemnification: Tenant indemnifies landlord for tenant operations, landlord indemnifies tenant for building defects/landlord negligence. Mutual waiver of subrogation—insurers cannot sue opposing party after paying claim.
Default and remedies: Tenant defaults: Non-payment (30-day cure period), bankruptcy (automatic default in most leases), covenant violations (operating facility outside permitted uses). Landlord remedies: Termination and eviction (3-6 month process), damages (unpaid rent through lease term discounted to present value), mitigation duty (landlord must attempt to re-lease reducing damages). Landlord defaults: Failure to deliver facility on time, utility capacity not delivered, major building defects. Tenant remedies: Rent abatement (reduce payment during issue), termination rights (if defect uncured for 6-12 months), damages (tenant relocation costs, business interruption).
Assignment and subletting restrictions: Assignment restrictions: Tenant cannot assign lease without landlord consent (not to be unreasonably withheld). Landlord evaluates: Assignee creditworthiness (must meet or exceed tenant credit quality), use (cannot change from data center to general warehouse), strategic concerns (landlord may block assignment to competitor). Subletting prohibitions: Most leases prohibit subleasing entirely or cap at 10-20% of facility. Prevents tenant from becoming de facto data center operator competing with landlord. Exceptions: Transfers to affiliates (parent/subsidiary) permitted, assignments in merger/acquisition approved if surviving entity creditworthy.
Market dynamics and investment considerations
Supply-demand dynamics: Current supply: US data center market 5-10GW capacity, adding 1-2GW annually. Hyperscale demand: Meta, Microsoft, Google, Amazon each planning 1-2GW AI capacity 2025-2027 = 4-8GW combined. Market tightness: Constrained markets (Northern Virginia, Silicon Valley) seeing 2-4 year waitlists, pre-leasing driving speculative development. Oversupply risk: 2026-2027 delivery wave of 15-20 large facilities in Phoenix/Dallas could exceed demand compressing rents 20-40% if macro slowdown reduces AI capex.
Landlord competitive positioning: Public REITs (Equinix $70B market cap, Digital Realty $50B): Investment-grade balance sheets enabling $1B+ facility development, established hyperscaler relationships, diversified portfolios (100+ facilities) reducing single-tenant concentration. Private developers (QTS, CyrusOne, EdgeCore): Lower cost of capital through institutional LP backing (Blackstone, KKR, GIC), faster decision-making, customization flexibility. Owner-operators (Aligned, Stream): Vertical integration (land, development, operations), margins 10-20% higher but concentrated risks.
Development returns and exit strategies: Pro forma returns: Development cost: $800M-$1.2B for 100MW facility ($8M-$12M per MW). Annual NOI: Rent $60M-$90M - OpEx $10M-$15M = $50M-$75M stabilized NOI. Unlevered yield: 6-9% ($50M-$75M / $800M-$1.2B). Levered returns: 60% LTV debt at 6% = 12-18% equity returns. Exit multiples: Stabilized facilities with creditworthy 10-year leases trade at 15-25x EBITDA ($750M-$1.8B on $50M-$75M NOI) providing developers 50-100% profit on cost after 3-5 years.
Tenant negotiation leverage: Strong tenant leverage: Creditworthy (Meta, Microsoft, Google investment-grade rated), multi-facility pipeline (leasing 3-5 facilities worth $3B+ over 5 years creates volume discounts), competitive markets (landlords bidding for tenant creating 10-20% rent reductions). Weak tenant leverage: Non-investment grade startups (CoreWeave pre-debt raise), single facility (no volume discounts), monopolistic markets (Northern Virginia single dominant landlord controlling best sites), urgent timeline (needed capacity in 12 months versus typical 24-36 month development preventing shopping alternatives).