What Nobody Tells You About Right of First Refusal in Data Center Deals!
Hi. I'm Max Clark. Doing a little q and a. And the question is, why do I hate ROFRs? K.
Speaker 1:What's ROFR? ROFR is right of first refusal. It is used in lease agreements. If you're negotiating a lease for office space, you potentially negotiate the right of first refusal on adjoining space. So that way, if it became vacant, you had the option to lease it as well.
Speaker 1:Roper's get used in data center licenses. Data center licenses are very similar to commercial lease agreements. There's a lot of similarities in the structure and the language and how they're put together. There's differences between a license and a lease. They have less rights and a license.
Speaker 1:That's why data center operators use licenses and not leases. But we see ROFRs as a common mechanism within a data center license all the time. When you're working on a data center deal for colocation, you know, whether that's cabinets cage, warm shell, whatever it is, the dominant thing that you're negotiating is the power allocation. Now there's a red herring that happens all the time, which is space and power density. How many watt per square foot are you getting into your cage?
Speaker 1:In the good old days, we're 50 watts per square foot and 75 and then a 100, 150. Now the sky is the limit with machine learning and artificial intelligence. So really GPU compute. We see wattage densities into a square foot just absolutely going through the roof like ridiculous numbers. Figuring out what your watt per square foot density is is probably not something that you care about too much.
Speaker 1:When the data center is built, the floor plate, there's so much power is provisioned. They get so much power from the utility. They get so many generators they put on-site. They switch gear. They have UPS's.
Speaker 1:They have distribution panels. The facility only has so much power. So when the facility says to you, hey, we're gonna give you, 250 watts per square foot. Like, well, all that means is that somewhere else in the facility, there's just gonna be blank space. And the facilities deal with this, by the way.
Speaker 1:You know, if it's a 100,000 square foot floor plate, a certain percentage of that floor plate is going to be aisle space. It's going to have equipment in it. It's going to have air handlers or air conditioners. It's it's going to have stuff, you know, like that just can't be used. So right.
Speaker 1:All of a sudden that that wattage density increases in the space that can be used, the critical loads. Anyways, I'm kind of going off on a tangent here. So why do I not like rovers and data centers? When you execute a license that has a roafer in it, you're designating area on the data center floor. There's some rectangle that becomes yours.
Speaker 1:And then the roafer says in this, this is our rectangle. And then this for this rectangle over here, if anybody else wants to license that space, we get the right of first refusal to license it instead. If the data center is empty, if you've got brand new floor space that's being built out and you manage to get yourself shoved all the way into this corner up here and you think that they're gonna build down here and then push this direction, just understand that there's nothing stopping that data center operator from coming back to you and saying, hey, we've got an interested party that wants to build out and giant l around your cage space. Do you want it or not? You know, do you wanna execute your over?
Speaker 1:Becomes a very easy thing to manipulate and create artificial urgency with you of, hey, you know, yeah, we're we're building cabinets over here, but we've got this power and it's gonna go right next to you and you're not gonna expand your cage. Maybe that roafer notice comes, you know, 6 months into your term. You know, you're not even finished building out your cage in the first place and you're getting a take it or lose it, you know, and all the expansion space around you. So what I've seen what I've seen with rovers is I've seen rovers used by data center operators to create artificial urgency for you to then execute scaling plans well before you actually need it or ever wanted it. There's different mechanisms that you can build into your license instead.
Speaker 1:If you're in a facility that's packed, that is completely at capacity and there's nothing around you, then maybe a roafer is interesting for you. And there's also different mechanisms that you can do to tie up space around you. I mean, if you want to expand and the floor is full, the power is full, and you want additional space and power allocation, there's levers that you can pull with that data center to then say when somebody moves out, we got we want first steps. Right. So that's a case where Rofer would make sense for you.
Speaker 1:But I mean, if you're going into into into blank space, when we have that Taylor Swift song in my head now for the rest of the day. If you're going into blank space, ROFR might not be what you want because it might just be used to, you know, force you to do things you're not ready for. And by the way, I spent a lot of time negotiating ROFRs a lot of time. I mean, take whatever time you're going to do to negotiate the main terms of the agreement. You know, how much power, what the cost is, what your POE is, you know, the things that actually really matter in terms of the levers you're trying to pull on that data center license, whatever time you spend negotiating those things, you'll spend almost the same amount of time negotiating that ROFR because there's so many additional terms you're gonna want to build into that rover in order to get your protection.
Speaker 1:Like, you ideally would want the data center to be forced to not use any space around your cage until the absolute end, you know. So now you have to tell the data center operator, okay, we want this rover for this expansion space around us. But as requirement of this rover, we're gonna force you to a different space plan on that data center floor where you can't touch the space until the absolute last possible second. You know, it's an interesting thing to go out and try to get. It depends on what's going on.
Speaker 1:It depends on how many other people have rovers. I mean, there's there's all these other parameters that maybe you're not aware of. So rovers create this, like, false sense of security for the future and expansion, and in reality, they can be used against you. They're complicated to negotiate. They waste a lot of time.
Speaker 1:You're probably not gonna get what you want out of it in the first place. And you you might be better off just negotiating a license with either built in ramps at set schedules because you know what your future capacity or what your your build in capacity needs to look like on that floor space. So you can negotiate ramps into it. You can renegotiate ramps that are fixed like you are taking the space at these times. You can negotiate options for ramps as kind of like a soft, committed future capacity.
Speaker 1:There's lots of different ways to get what you want depending on what it is that you actually want. Need don't necessarily get pushed into a roamer. They're not my favorite thing. I'm Max Clark. Let me know if you've had any issues with rovers and what you've seen.
Speaker 1:And have you seen them used? Feel it.
