Checking Into A Telecom Hotel

Don’t be fooled by the media focus on the bear market, which has swept away hundreds of first generation dot coms. The real action in e-commerce is the convergence of the Internet and telecommunications, promising an economy in which web sites, phones, televisions, and computers become virtually indistinguishable. Few people will miss Pets.com, but millions of consumers will benefit from entirely new delivery systems for entertainment, communications, and shopping.

But realizing the dream of seamless, unlimited information flow depends on a massive investment in infrastructure to provide the power, bandwidth, and server capacity to shuttle unimaginable amounts of data. To build that infrastructure, technology companies are developing "telecom hotels" – highly specialized facilities designed to support the expansion of the Internet economy. The explosive growth of these technology hubs is pressuring landlords with demands that traditional tenants have never required.

Technology companies struggle with the unprecedented demands of their own customers. When web sites go down, or telecommunication connections fail, client companies face millions of dollars in lost revenues and productivity. More than anything else, customers at every junction in the telecom highway want reliable, uninterrupted service – and they pay handsomely to get it. Many landlords are scrambling to reposition their buildings to meet the needs of the new telecom tenants. As a result, the standard commercial lease is being reinvented in order to meet the special needs of the telecom industry:

Reliability. Technology companies now require what’s known as "5-9s" reliability – a standard that their systems be up and running 99.999% of the time. These tenants, with little faith in the generation capacity of utilities now or in the deregulated future, want to control their own environmentals, including electricity and HVAC, and often require redundant backups. In an "N+1" setup, tenants build a full backup for each system (i.e., backup generators that kick on when the power is interrupted and multiple fiber optic connections). In an "N+2" setup, even the backup systems have a full backup. This configuration is not uncommon for companies that handle web hosting, or that provide co-location services to customers by allowing them to locate their servers on-site. Traditional remedies like abatement and even self-help are likely insufficient for tenants that expect true 24-hour service 365 days a year.

Utilities. Many telecom hotels may require as much as 125 watts per square foot of electricity, as well as multiple fiber optic connections. In addition, the sheer volume of equipment often mandates underground storage tanks for backup power and heavy-duty floors to handle extra weight, sometimes as much as 250 pounds per square foot. These companies also often demand secure, dedicated space in risers for wiring, as well as roof space for satellite equipment and generators. Floors may also need to be reinforced to accommodate the hanging load of wires strung from the ceiling for easy access.

Security. Telecom hotels often "mask" their facilities so that it is not apparent from the exterior how the building is used. Access to the building and the premises are tightly controlled. Telecom tenants may wish to permit access to a landlord or its employees only under strict supervision, or they may wish to exclude the landlord altogether. The tenants may also seek strict confidentiality agreements regarding disclosure of any elements of the tenant’s operations, including finances, equipment, and security.

Growth. Successful technology companies often experience phenomenal growth, either through expanded customer contracts, joint ventures, or acquisitions. Growth generally triggers new demands for space and equipment, often on very short notice. As a result, technology tenants generally want greater freedom to sublease (at a profit) if they outgrow the current space, or to allow venture partners or customers to utilize their space and equipment (also at a profit).

Improvements. It’s not unusual for technology tenants to spend $250 to $300 per square foot to build out first generation space. Given this investment, most tenants will want a non-disturbance agreement with the property lender to assure that their lease is not extinguished if the lender ultimately forecloses on its mortgage.

Speed. Like their customers, telecom companies operate on "Internet time." Speed is a competitive advantage, because the faster they can put technology in place, the faster they can begin to generate a stream of revenue to offset their huge capital investments. Lengthy lease negotiations are out.

Aesthetics. This is one industry where function generally rules over form. Warehouse space in less desirable areas that might otherwise be relatively unattractive to commercial tenants may be ideal for telecom companies, assuming the building can be modified to accommodate the technology demands.

Not surprisingly, landlords have a love-hate relationship with technology companies. On one hand, telecom tenants often pay premium prices for space that might otherwise be hard to lease. And despite the market downturn, technology remains the hottest area for economic growth, which translates into intense demand.

On the other hand, technology companies bring their own share of headaches. Meeting the demands of these tenants often requires considerable improvements to the property itself, as well as an unprecedented flexibility regarding use, access, and subleases. There are other concerns, too:

Stability. Technology has proven to be a notoriously unpredictable industry, where this year’s winners can just as easily turn into next year’s (or next month’s) big losers. Many emerging technology companies don’t fit the standard profile of financial stability, even though they may be flush with venture capital. Landlords need to be concerned about offsetting the risk of these tenants, particularly if the landlord needs to make substantial improvements in the property upfront. Substantial security deposits are common for tenants that lack credit and a proven track record.

Leftovers. Chances are you’ve got one or more early-generation personal computers gathering dust in a closet or basement. Landlords face the risk of departing tenants leaving behind literally tons of equipment in risers or other areas that is either too old to be functional or cheaper to replace than it is to remove. As a result, landlords need to address the question of equipment removal – who does it, and how will it be paid for – in the lease.

After-Hours Services. For most telecom companies, there’s no such thing as "after-hours." Landlords need to assess how the 24/7 environment will affect their own operations, as well as their relationships with more traditional tenants.

Naturally, these issues translate into highly detailed lease provisions, often negotiated on exceedingly tight timeframes. Because many of these issues are outside the norm of traditional real estate transactions, landlords and technology tenants alike need to tread carefully before they sign on the dotted line.