The great recession was terrible in most ways, but it also gave us time to golf, spend time with the family and do research.  I chose to research the data center market; being in Silicon Valley it seemed to make sense.  Plus as most markets were crashing, the data center market seemed to be accelerating.  With the help of cloud computing, mobile apps and social media, the need for storage space grew.

As I started my research, you could tell quickly that this is the most guarded of industries.  Owners don’t want to talk about their tenants, tenants don’t want to talk about their leases and the data centers themselves are difficult to even find.  Brochures don’t have addresses and buildings don’t have signs.

I learned a few things fast; leases are measured in megawatts, not square feet.  Leases are a lot longer in duration than your typical office lease, and a lot more expensive.  Location revolves around the price of power, talent and latency.

The other thing I learned is that data centers are rarely insured to their improvements and the tenants never insure their leasehold positions.  A $300,000,000 data center might be sitting on a $3,000,000 title insurance policy.  The $3,000,000 represents the acquisition of the land and the remaining balance is the improvements.  A tenant may invest $100,000,000 in a 5MW deal and do no real estate due diligence.  I have seen large leases done on a data center that was in mid-construction and littered with mechanics liens.

So how does this happen?

There are a few answers.  First, the IT department handles all data center decisions.  They rarely interact with the real estate teams.  Secondly, this is a game of secrecy.  No one is supposed to know about it.  Third, there is a stack of insurance on every transaction from fire to earthquake to loss of business.  But no one seems to think about title insurance.  Maybe title insurance can relieve part of that insurance stack. 

Probably the most significant reason is that there has not been a catastrophic loss on a data center yet.  I emphasize “yet”.  The data center industry is so young that we have not seen any claims yet.  Every major developer and lender has filed and received a claim at some point.

What if Uncle Jed comes out of the woods with a deed claiming ownership to your data center?  What would happen if the general contractor foreclosed on their mechanics lien?  Who knew the rail road had an easement under that data center and now they want it back? 

Title insurance is a onetime fee and relatively cheap compared to the other forms of insurance.  Owners need to increase their owner’s policy and tenants need to contemplate a leasehold policy.  We have even tailored endorsements to include the tenants’ infrastructure.  Now that a leasehold position has been created, what if a tenant can now finance their lease?  Could this create some comfort now that there is a separation between the landlord and tenant?

Overall, there is a significant and unspoken amount of risk with data centers as far as underwriting and title insurance are concerned.  With a sector that is $45 billion and growing, we cannot wait for the first catastrophic loss.  Data centers may be the most elusive sector in our industry, but other sectors have seen the benefit of having a partner in the title insurance industry; maybe data centers will too.