Checking into Switch Hotels

A Primer for Telecommunications Tenants and Landlords

 

How the Intersection of Telecommunications and Real Estate

Has Led to the Creation of a Unique Set of "Rules of the Road"

for a New Class of Property Owners and Users

By Jeffrey A. Moerdler, Wolf, Block, Schorr and Solis-Cohen LLP

 

The evolution of technology and telecommunications has brought with it not only a whole new lexicon of terms and terminology but a whole new set of companies with a whole new set of physical space requirements. As a result, real estate owners and developers looking to serve this growing category of telecommunications tenants has been compelled to focus on their specific needs in designing, constructing and renovating properties for their use. In addition, traditional real estate leases have by necessity been modified to meet and mesh with these requirements. By the same token, these tenants and the brokers and consultants representing them, as well as those representing their landlords, have been required to redefine their approach and strategies for leasing space.

 

There is no single name for the facilities occupied by telecommunications tenants - they can be called switch hotels, data centers, telecom buildings, carrier hotels, collocation facilities, intelligent buildings, high-tech buildings, technology centers or new media buildings. Housing traditional telecommunications industry companies as well as newer players who require high-tech facilities such as web site hosting companies, switch hotels need to offer a range of services not found in more traditional commercial properties. Buildings housing these facilities may be offices, warehouse or warehouse-type structures, factories or other industrial buildings with high ceilings, open space configurations and reinforced floors.

 

Unlike typical office space, leases where extensive documentation is devoted to the description of and allocation of financial responsibility for “tenant improvements” (including the extent and quality of tenant finishes, such as wall coverings, carpeting and millwork), the major areas of focus for landlords and tenants in switch hotels are flexible space, large cooling capacity and a substantial, uninterrupted supply of power.

 

The most common specifications for these types of facilities include:

 

• Ceiling Height: The height of switching and computer control equipment together with the need for raised flooring and supplemental high capacity air conditioning, necessitates high ceiling height. Clear ceiling heights, free of pipes, beams and other obstructions, of a minimum of ten to twelve feet is generally required, while twelve to fourteen feet of clear ceiling height is strongly preferable.

 

• Floor Load: The weight of the switching and computer equipment requires sturdy floors with a minimum of 100 to 150 pounds per square foot of live load and preferably 150 to 300 pounds per square foot. Portions of these facilities, generally those containing backup battery power units will require floor loads of about 300 pounds per square foot and may, therefore, require reinforcing or will need to be located on slab or at grade level.

 

• Electrical Power: The intensive use of switching and computer equipment in these facilities requires very extensive electrical power capacity, preferably at 480/277 volts to avoid the need for additional transformers. While a typical office use utilizes four to six watts per square foot, these facilities require 100 or more watts per square foot. Diverse sources of power from separate power plants are desirable, although not generally an absolute requirement.

 

• Fiber Optic Access: Having multiple, or at least one fiber optic service at the property makes a property more desirable. Alternatively, fiber optic cables should be near the property. However, bringing fiber optics to the property may create a delay and an expense for the tenant if excess conduit space is not available in the streets, since tearing up streets to install new cables can be time consuming and expensive.

 

• Freight Elevators: At least one and preferably several oversized, heavy duty freight elevators, capable of holding small trucks that facilitate the installation of large, heavy equipment, without having to install the equipment in pieces or to remove windows and use exterior hoists or cranes.

 

• Roof Space: Rooftop space for antennas and supplemental air conditioning equipment is required. Particular locations on a roof may be necessary for line of sight microwave and similar antennas.

 

• Riser Space: Telecommunications tenants require significant riser space connecting the demised premises to the basement, fiber optic access points, electrical transformers, rooftop antennas, air conditioning equipment and other points at the property in multiple, diverse locations to bring additional and redundant electrical capacity, telecommunications wiring and supplemental air conditioning to the premises. Depending upon the size and type of tenant, the riser space can be several square inches, several square feet or more. Property owners may need to be creative to find additional riser space, such as by de-commissioning extra elevators that are no longer required because these tenants have much lower occupancy levels (machines don't require as many elevators as people).

 

• Column spacing: Column free spaces are preferable, however, the combination of free spaces with the desired floor loads and ceiling heights are not common. Minimum spacing between columns should be about 20 feet and preferably 25 to 30 feet to maximize equipments layout efficiency and allow for over sized equipment.

 

• Back up Electrical Power: Switch hotel tenant facilities generally install their own sources of backup electrical power and battery backup for instantaneous protection against power outages and coverage. Diesel generators are used for longer outages, and outside plugs are used for a mobile generator for redundant backup if the generator fails. In facilities serving smaller tenants, the owner may install these backup electrical facilities and charge the tenants for the shared or allocated capacity there of.

 

• Generator and Equipment Space: Additional space outside the demised premises is also generally necessary for the installation of back-up generators, diesel fuel tanks (unless they are located in the base of a modular generator unit), electricity transformers and similar equipment. Since these tenants tend to use less parking spaces, subject to zoning requirements, excess parking spaces can often be used for generators, tanks, and equipment rooms. Alternatively, they can be placed in excess loading docks, on rooftops or roof setbacks (subject to weight limitations), in garages, or in basements.

 

• Access and Security: Telecommunications tenants require 24 X 7 access to these spaces. High level security systems, including key card entry systems, or even better, fingerprint, retina or hand measurement systems, covering not only tenant spaces but the entire property are desirable.

 

• Reliability and Experience of Ownership: In light of the specialized nature of these properties and the requirement to move at “Internet Speed”, telecommunications tenants strongly prefer to deal with well established, financially solvent ownership, having established track records with similar spaces, uses and tenants.

 

Switch Hotel Leasing Issues

The special needs of telecommunications tenants and the requirements of switch hotel landlords impact the negotiation and structure of a number of lease provisions. Outlined below are some of the key issues and areas that distinguish switch hotel leases from more traditional space leases.

 

Installation

Because in a switch hotel the tenant provides substantially all of its own installation, including raised floors, supplemental air-conditioning, generating facilities, and fiber optic cable installation, the landlord will require covenants from the tenant, that the tenant will perform its work in accordance with the landlord's requirements.

 

Tenants are typically required to

• provide the landlord detailed plans and specifications for its alterations
• secure necessary permits, certificates, approvals, and if required, have the plans prepared by an architect or engineer
• provide adequate evidence of insurance
• demonstrate adequate evidence of credit worthiness and ability to complete and pay for the work

 

Collocation

Because many telecommunications tenants provide space for their customers’ telecommunications equipment in their own space, it is essential for switch hotel tenants to be able to enter into the “collocation agreements” with their customers. Consequently typical “subletting” restrictions must be modified to accommodate this need and provide collocation rights to the tenant without eliminating the landlord's typical rights to approve all subleases and control the use and occupancy of its space.

 

Non-disturbance Agreements

Because of the extent and expense of their installations, switch hotel tenants often request non-disturbance agreements. Typically, lenders restrict the provision of non-disturbance agreements to tenants of a minimum size. Consequently, the tenant needs to ascertain up front if the landlord has enough flexibility with its lender to provide the required non-disturbance protection.

 

Security Deposit

Despite a tenant expending large sums on its installation, it may not have traditional credit or earnings track record to support its rent obligation. It is not unusual for a landlord to insist on a large security deposit, sometimes as much as two years' rent.

 

Financial Credibility of Landlord

Likewise, given the investment in their space, tenants will look for credible and credit worthy landlords who cannot only meet their space delivery time requirements, but ongoing operational requirements of their tenants as well.

 

Conclusion

As the growth of wireless communications continues to grow and new telecommunications applications are developed, the need for “Switch Hotels” where the tenant guests “check in” but rarely “check out” will continue to expand. At the same time the “rules of the road” governing how telecommunications tenants and switch hotel landlords meet their mutual obligation to one another will continue to evolve.

 

About the Author

Jeffrey A. Moerdler, Esq. is a member of the New York and Florida bars, and is the partner in charge of the Real Estate Department of the New York office of Philadelphia’s Wolf, Block, Schorr and Solis-Cohen LLP. The author may be reached with questions or comments via email at jmoerdler@wolfblock.com