Downside Protection in a Data Center Sale-Leaseback

Asset & Counterparty

The transaction involved a portfolio of Tier III data centers in secondary U.S. markets, leased on a long-term triple-net basis to an investment-grade tenant with a strong on‑premise and cloud‑connect strategy. The sponsor sought to recycle capital via a sale‑leaseback while retaining operational control of the facilities.

• Weighted-average remaining lease term above 15 years with extension options.
• Lease structure with inflation-linked escalators and strong parent guarantee.
• Mission‑critical facilities embedded in the tenant’s network topology.

Underwriting Framework

Our starting point was not the headline cap rate, but the question: “What is the hard asset value under a tenant default or early termination scenario?” We built the underwriting around three pillars:

1. Contracted cash flows: base rent, escalators, and credit quality of the tenant.
2. Re‑letting prospects: depth of alternative demand in each market, including cloud providers and enterprise colocation users.
3. Replacement cost and floor value: cost to rebuild equivalent capacity and residual land value.

Structuring for Downside

Although the cash flows were long‑dated, we structured the investment with a conservative leverage profile and multiple layers of protection that are more typical of project finance.

• Conservative loan‑to‑value based on stressed re‑letting assumptions, not headline cap rate.
• Cash sweep triggers if the DSCR fell below a pre‑defined threshold or if credit ratings deteriorated.
• Restrictions on additional pari passu indebtedness at the asset level.
• Information and inspection rights, including quarterly KPI packages on utilization and power redundancy metrics.

Governance & Control

To avoid being a passive landlord in a highly technical asset class, we embedded practical governance protections in the documentation.

• Major decision rights over asset sales, additional leverage, and material lease amendments.
• Step‑in rights and cure periods in the event of tenant default or covenant breaches.
• Requirements for fully funded maintenance reserves to protect uptime and SLA performance.

The result was an exposure that captured secular demand for data infrastructure while anchoring our downside to tangible real-asset value and contractual protections.