What a Hyperscaler Lease Actually Contains

The two product shapes a wholesale data center is let in, who pays for the fit-out, who reimburses operating expenses, and the lease-expiry figures a large REIT publishes — the terms that decide whether a projected yield survives.

"Leased to a hyperscaler on a long-term lease" is the sentence that sells a data center investment. It is also four separate claims, each of which is a term in a document: what is being let, for how long, at what rent with what increases, and who pays the costs. Get those four wrong and a correct-looking projection is still wrong.

The useful thing is that the largest listed operators describe all four in public filings, in ordinary language, because they must. This page uses their descriptions.

What is being let: two very different products

Digital Realty's annual report sets out the two shapes wholesale space is sold in, and the difference decides who spends the expensive money.

Powered Base Building. For "customers who possess the ability to build and operate their own infrastructure", this "provides the physical location, requisite power and network access necessary to support a state-of-the-art data center". The landlord delivers shell, power and fibre. The tenant fits out the inside.

Turn-Key Flex. Facilities that are "move-in ready, physically secure facilities with the power, cooling and interconnection capabilities to support customers requiring a single cabinet, cage suite or entire hall" — for customers who "may lack the bandwidth, capital budget, expertise or desire to provide their own extensive data center infrastructure" (Digital Realty 10-K, FY2025).

Why this matters to you as an investor in a single project:

• A powered-shell deal has lower capital cost per megawatt, a lower rent per kW, and the tenant's own equipment inside — which both reduces your capital at risk and gives the tenant a large sunk cost that makes renewal more likely.
• A turn-key deal commands higher rent because the landlord has paid for the mechanical and electrical plant. That plant is yours to maintain, refresh and eventually write off. It is also where cooling-technology obsolescence risk sits — see liquid cooling and what it means for your money.

So "10 MW at $200 per kW per month" is not one number: it is a different number depending on which of these two things is being sold, and a projection that borrows a turn-key rent for a powered-shell building is overstated before you reach the fees.

Who pays the operating costs

This is the single most commonly glossed term, and it changes NOI directly.

Digital Realty: "Many of our leases contain provisions under which tenants reimburse us for all or a portion of property operating expenses and real estate taxes incurred by us. However, in some cases we are not entitled to reimbursement of property operating expenses, other than utility expense, and real estate taxes under our leases for Turn-Key Flex facilities."

On power specifically, it notes that for its largest expense category "the vast majority of the expense is passed directly through to our customers which significantly mitigates our exposure to increases in power costs".

Two questions follow, and they are answerable from any real lease:

1. Is power a pass-through? If yes, the landlord is largely insulated from energy prices. If no, every cent of power-price movement lands on your NOI.
2. Are property taxes and operating expenses reimbursed? A projection built on a triple-net assumption against a lease that is not triple-net is wrong by the whole of those costs — and property taxes on a $78 million facility are not a rounding error. See data center tax incentives for why that line varies so much by state.

"Long-term" is an assumption, and here are the numbers

Data center leases have a reputation for being long. Across a real portfolio, many are not. Digital Realty's lease expiration schedule as of 31 December 2025 shows, by share of annualized rent:

About 47% of annualized rent is on leases expiring within three years (same filing). That portfolio mixes short colocation agreements with long wholesale leases, so this is not the term you would expect on a single 10 MW hall — but it does demolish the idea that "data center lease" implies a fifteen-year contract. The term is whatever the document says, and you can read it.

Two further details from the same schedule, both of which tell you what is in these leases:

• The table "assumes that tenants exercise no renewal options and early termination rights". Both exist. A lease with a tenant termination right at year five is, for risk purposes, a five-year lease.
• "Annualized rent represents the monthly contractual base rent (defined as cash base rent before abatements) under existing leases ... multiplied by 12." Rent-free periods sit outside that figure. A lease with twelve months of abatement produces a year of no cash while still being described by its contractual rent.

Escalators, and why they are not inflation protection

Almost every lease of this kind contains an annual increase. Whether it protects you depends on whether the increase beats cost inflation, and the operator's own filing is candid that it may not:

"there can be no assurance that the impact of inflation will be adequately offset by some of our annual rent escalations contained in our leases, and it is possible that the resetting of rents from our renewal and re-leasing activities would not fully offset the impact of higher operating expenses resulting from inflationary pressure."

A fixed 2% or 3% escalator is a cap on your revenue growth, not a floor on your real return. In a period when operating costs rise faster than the escalator, a fully leased building's real NOI falls. Ask for the escalator, in writing, as a number — and ask whether it is fixed or index-linked.

The ten lease terms to extract before you invest

For any private offering, these are the terms that decide the outcome. Every one of them is in the document, if there is a document.

1. Powered shell or turn-key — which product, and whose capital builds the fit-out.
2. Term, in years, from rent commencement rather than from signing.
3. Rent commencement date, and what triggers it. Rent that starts on energisation rather than on handover is a different investment.
4. Abatement: how many rent-free months.
5. Escalator: percentage, fixed or indexed, and whether it compounds.
6. Expense reimbursement: power, operating expenses, property taxes — each separately.
7. Renewal options: whose option, at what rent, with what notice.
8. Early termination rights: whose, when, at what penalty.
9. Tenant entity and guarantee: who signs, and whether a parent guarantees.
10. Assignment and sublet: can the tenant hand the lease to a weaker credit.

If the answer to any of these is "that will be agreed with the tenant", there is no lease yet, and the projection built on it is a hypothesis. That is the distinction the risks page is built around, and the reason single-tenant risk matters so much when there is only one lease to get right.

What to read next: how data center leases work for the basics, and cap rates and yield on cost for what these terms do to the valuation.

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