Mastering Real Estate Acquisition for Data Centers: Guidelines from Womble Bond Dickinson
Womble Bond Dickinson Partners Kristen Thall Peters, Tara Gorman, and Jeff Golimowski, members of the Womble Data Center Team provide guidance for data center developers acquiring real estate. The discussion covers critical considerations, from title insurance to force majeure clauses, ensuring a comprehensive understanding of the complexities involved that data center developers must consider whether purchasing or leasing property, reviewing title reports, and obtaining title insurance. They address unique risks faced by data centers in acquiring real estate such as specific force majeure events and allocation of material costs in their contracts. Properly drafted agreements and thorough due diligence are essential for successful data center projects.
Tara Gorman: Kristen, could you please elaborate on the initial considerations a data center developer should take into account when acquiring real estate?
Kristen Thall Peters: When acquiring real estate for a data center, the initial considerations should include the type of project including whether the developer will purchase the property or lease it. It is essential to review current title reports and title insurance policies to ensure there are no encumbrances or limitations on the use of the property. These encumbrances could be easements or covenants, conditions, and restrictions (“CC&R”), which are contractual restrictions that bind the property and run with the land.
Tara Gorman: What are the advantages of fee ownership compared to leasing the property for a data center project?
Kristen Thall Peters: Fee ownership is generally preferred by most developers and lenders because it easily allows for constructive notice of rights to the land through the recording of documents in the county. This provides security for lenders and tenants, who can obtain title insurance and record security documents such as mortgages and leasehold mortgages. In contrast, a leasehold interest may not offer the same level of security especially if a landlord and its lender are unwilling to record lease memoranda and/or subordination agreements.
Tara Gorman: Jeff, could you provide insight into the unique risks associated with constructing data centers?
Jeff Golimowski: Certainly. Data centers are uniquely susceptible to risks based on outside events, such as governmental actions and permitting issues. Force majeure clauses, delay damages clauses, and the costs of demobilization and remobilization are critical areas to address in construction contracts. Additionally, material costs and consequential damages need to be carefully considered and mitigated through contract provisions.
Tara Gorman: How should developers approach the issue of title insurance for data center projects?
Kristen Thall Peters: Data center developers should obtain title insurance to indemnify against financial loss from defects in the title to the real property. Lenders, in particular, require special title insurance policies to protect against the invalidity or unenforceability of mortgage liens. It is also important to secure agreements related to the real estate facility itself, such as their licenses or easements, to ensure the project’s success.
Tara Gorman: What are the key terms and conditions that should be included in real estate agreements for data centers?
Kristen Thall Peters: Data center real estate agreements should cover access rights, assignment of obligations, casualty and liability, condemnation, consideration, default provisions, environmental matters, indemnification, insurance, maintenance and performance obligations, operations, recordation of rights, priority of liens, termination rights, and tax responsibilities. These terms ensure that all aspects of the project are adequately addressed and protected.
Tara Gorman: Jeff, could you elaborate on the importance of force majeure clauses in data center construction contracts?
Jeff Golimowski: Force majeure clauses are crucial for data center developers because they allocate risk for events beyond the control of the parties, such as natural disasters or governmental actions. These clauses must be carefully drafted to include all potential risks and specify who bears the costs of delays and demobilization. Properly addressing force majeure in the contract can prevent significant disputes and financial losses.
Tara Gorman: How can developers ensure that their construction contracts adequately manage risk?
Jeff Golimowski: Developers should include provisions for compensation, completion and transfer, diligence, dispute resolution, guarantees, insurance, and security bonds in their construction contracts. These provisions help manage risk by clearly defining responsibilities and expectations for all parties involved. Additionally, it is important to conduct thorough due diligence to ensure the site is suitable for construction and operation.
Tara Gorman: Kristen, what are the environmental considerations that developers should be aware of when acquiring real estate for data centers?
Kristen Thall Peters: Environmental considerations are particularly important for data center developers. They include conducting environmental surveys, geotechnical studies, and ensuring compliance with environmental regulations. Developers must also consider the impact of the project on the surrounding environment and address any potential environmental risks in their agreements. Properly addressing these considerations can prevent future legal and operational issues.
Tara Gorman: What advice would you give to developers to mitigate the risks associated with data center construction?
Jeff Golimowski: My advice to data center developers is to thoroughly understand the unique risks associated with data center construction and address these risks in their contracts. This includes carefully drafting force majeure clauses, managing material costs, and excluding consequential damages. Additionally, data center developers should work with experienced legal and construction professionals to ensure that all potential risks are identified and mitigated.
Tara Gorman: In conclusion, acquiring real estate for data centers involves a multitude of considerations, from title insurance and fee ownership to force majeure clauses and environmental compliance. Thes critical aspects, emphasizing the importance of thorough due diligence and well-drafted contracts. Data center developers must be vigilant in addressing potential risks and ensuring that all agreements are meticulously crafted to safeguard their interests. By following these guidelines, developers can navigate the complexities of data center real estate acquisition with confidence. Womble Bond Dickinson and the WBD Data Center Team remain committed to supporting developers in achieving successful and secure data center projects.
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