A few hints on Data Centres in Spain

1.- INTRODUCTION

Data centres represent a new category of real estate asset which particular features and requirements make them special when compared with traditional commercial real estate. In a nutshell, data centres are facilities used to house computer systems and other components, such as storage systems and telecommunications. The fact that their operation require specific locations and infrastructures aimed to ensure efficient and uninterruptable power supply, cooling, network connectivity and security make them an hybrid between industrial shell buildings and infrastructure assets which, as such, require high amounts of capital expenditure. In contrast with commercial real estate which describes rents in euros per square metre (or floor space is measured in square metres), data centres figures use the euro per kilowatt or capacities measured in megawatts as the variables of reference.

We have seen in recent years an increased focus on digital infrastructure generally and on data centres particularly. This growth had already led digital infrastructure to be considered a separate asset class prior to the pandemic, and the consequences of the pandemic have dramatically increased the relevance of and focus on such asset class. Moreover, Spain is currently being considered for many reasons, above all due to geography and connectivity, the ideal place to become a technology hub in Southern Europe for this sector, although it lacks of the necessary incentives and institutional willingness to definitely launch these investments.

2.- SOME FINANCING, TAX AND ZONING ASPECTS

When it comes to financing these assets or the acquisition thereof, players can take very different approaches, looking at the financing from a project finance angle (greenfield or brownfield), from a real estate finance perspective, from a leveraged angle or even as a receivables financing, and even look at possible securitisations down the line in CMBS form or as asset backed commercial paper (ABCP). The underlying business model is inevitably extremely relevant, and the approach is different if we are looking at a lease to a single hyperscaler or if the route is to use the data centre as a colocation facility (obviously the approach is completely different when the hyperscaler is buying the asset directly):

• when lenders look at it from a real estate finance perspective, a lot of weight is placed on value of the asset (possibly including a real estate mortgage in the security package since typically the owner would also own the land or a mortgageable title over the land) and preservation of such value and analysis of the lease agreement and possible ways of early termination by the tenant;
• when the data centre is looked at on a stand-alone basis and relying on the cash-flows, the financing takes more of a project finance angle, be it on the basis of non-recourse or limited recourse;
• when the focus is on the generation of cash-flow, it can be structured as a receivables financing;
• leveraged lenders will put the emphasis more on the net leverage.

The wide difference in the business model and the structure of the transaction will also impact the aspects that become relevant for the lenders:

• in some cases hyperscalers might not be the sole tenants but, akin to a commercial real estate finance, act as anchor tenants with smaller capacity being leased to other tenants;
• in the event the deal is structured as an acquisition financing of the company owning the data centre(s) financial assistance issues and their impact on (i) upstreaming of monies to service the acquisition debt; and (ii) available security package for the lenders will have to be considered, together with LBOs tax restrictions capping the amount the deductibility of financial expenses;
• from a green financing and sustainable financing perspective, data centres are deemed to contribute significantly to indirect carbon emissions: this has become increasingly relevant and on a EU basis there is a target to decarbonise data centres by 2030, which is likely to impact financings;
• the evolution of the cost of electricity in Spain and, particularly, its tax component, will directly impact the future of this sector in Spain and its financings, for which it would be key that one of the most relevant claims of the data centre sector, consisting in its consideration of an electro-intensive sector (which entails an 85% rebate in the Electricity Tax), is achieved;
• a common element of financing data centres is the request from lenders for the data centre to have a so-called subordination, non-disclosure and attornment agreement in place if the data centre is leased to a single hyperscaler, which work similarly as a direct agreement in project financing structures, allowing the lenders to have "step-in rights" and ensuring the off-taker that he will be spared any disturbance by the lenders in an enforcement scenario;
• in some cases the lease agreement of space in the data centre is executed by the owner with local subsidiaries of a hyperscaler (amongst others, due to the tax implications for a non-resident entity of having available a data centre in Spain which may be deemed a permanent establishment in Spain), the financial soundness of which might not provide adequate comfort to the lenders, who will (together with the relevant sponsor) require that the relevant parent provides a comfort letter in respect of the subsidiary's payment obligations; and
• in some cases we are seeing data centres being financed on a portfolio basis, in which case cross-collateralisation issues have to be analysed from a local perspective.
• in some scenarios, the borrower's structure and their specific tax features will have a relevant impact in the financing terms, such as the application by the borrowers of the SOCIMI special tax regime, which could be an efficient structure when the borrower owns the data centre and leases it to non-related tenants;

In short, we are far from seeing a standard in data centre financing, and hence an understanding of the dynamics and approach of both lenders and sponsors to the financing is key to determine the overarching issues in the structuring and documentation phase.

The particularities of data centres might represent a challenge in the context of zoning regulations that in most cases are not up to date on the rapid evolution of the market and the new asset classes being demanded. In addition Town Halls' criteria may vary when identifying the zoning use which permits the implementation of data centers projects: some might consider the "industrial use" as the right one while others might considered them as "private equipment". Therefore, the right analysis of the relevant zoning regulations and the way they are interpreted by the authorities are critical when developing data centres, with this being a relevant issue for lenders as well.