This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields Transactions

| 3 minutes read

Sale and leaseback of data centres: reality or wishful thinking?

There is a distinction between corporations continuing to rely on their own data centres (DCs) and those choosing to move to the cloud. Who is right? What are the challenges? And what will sale and leaseback transactions look like? 

Banco Santander’s website says it built its first DC in 2004 in Boadilla del Monte and built the Cantabria DC in 2011, laying the foundations for the rest of the group’s DCs. These DCs are apparently the "safe deposit box" safeguarding operations and customers’ data. Today Santander also has DCs in Mexico, the UK and Brazil. 

In 2021, BBVA announced with great fanfare the inauguration of its data centre in Tres Cantos. However, they announced in February 2023 that its investment banking platform would be moved to the Amazon Web cloud, and in June 2023 that they will be moving the entire data infrastructure to the same platform in 2024.

Will such moves to the cloud become the norm? Or will corporations prefer to keep their physical DCs to preserve, like Gollum in Lord of the Rings, their "precious" data? 

Indeed, security and lack of opportunities for external actors to meddle is attractive to many organisations, despite the sacrifice this may entail in costs or even technological advancement. The question is, with the level of constant innovation and the still-limited number of DC specialists or "gurus", is this strategy sustainable in organisations whose business is not DCs?

On the other hand, what does the move to the cloud mean? In this scenario, DC servers will be "switched off" meaning the DC has essentially lost its reason to exist. Is this the future of many DCs from large corporations: to end up as unused "ghost boxes"?

Powering data centres

The reality is that technological evolution in DCs, as in so many other industries, is constant. The added factor of energy consumption requirements makes the search for efficiency a "must" in coming years. Spain has the added problem of the difficulties in accessing sufficient power given networks’ insufficiency (see our previous blog). DCs are putting a lot of pressure on Red Eléctrica and the Spanish cabinet to solve this problem.

Could "old" DCs be part of a solution? The rapid pace of technological advance, changes in required standards and the high cost of renewal make obsolescence a challenge.

Data centre sale and leaseback

In this "race to the future" primary question seems to be whether sale and leaseback transactions make sense. Lawyers are probably not best placed to answer this question, but can offer some thoughts on what sale and leaseback transactions might look like. 

In the classic sale and leaseback model so typical of the first decade of this century, the investor "sat on the brick" waiting for fixed cash flows. Bank branch transactions were very popular, and years later, having since made a substantial reorganisation (branch closures), many banks ended up buying them back. Will some organisations find it attractive to remove the DC from their balance sheet, in exchange for liquidity and, at the same time, maintain full control over the DC’s activity (the investor has no obligation or responsibility for the DC’s operations and its only obligations are focused on the pure and simple brick)?

In the more advanced or hybrid sale and leaseback model, the lessor/owner is no longer passive; precisely what the lessor/owner offers to these large corporations, whose business is different, is expertise and the ability to innovate and keep the facilities up-to-date with an offer of high-level service standards in a much more competitive way (vs the DIY model). DCs are the lessor’s/owner’s business (vs a mere instrument) and they can afford to have the best professionals and more advanced equipment since they take advantage of economies of scale.

Switched off data centres

And what about DCs that have already been "switched off"? It remains to be seen whether corporations, consultants and operators will be able to bring these DCs back to life, either as a sale and leaseback, or in the hands of a DC operator which will market them to third parties, or just take advantage of their connections. Others will probably be worth only the value of the land they are built upon, or because of possibilities to expand construction.

At Freshfields we understand the data centre business, and we encourage you to reach out to discuss this asset class and its challenges across investment, taxfinancing and regulatory frameworks.

Our Technology Quotient blog covers the latest developments in data centres and other tech-related trends.