• Pre-RFS risks that can delay rent commencement before major lease backstops or residual value guarantees take effect
• Fitch says post-RFS backstops receive no credit in its completion-risk analysis
• Developers and lenders rely on separate protections such as completion guarantees, liquidity, yield-on-cost leases, and GMP construction contracts

Oracle’s move to invoke force majeure at the massive Project Jupiter data center in New Mexico is putting a spotlight on a less visible risk in the financing structures supporting the artificial intelligence infrastructure boom: what happens before the rent starts.

Oracle issued a force majeure notice to a Blue Owl unit developing the campus, citing potential delays in securing power, according to news reports. Oracle cannot terminate the lease, but the notice could defer payments if the project misses its planned 2028 completion.

The episode comes as technology companies including NVIDIA and Google are using their investment-grade balance sheets to support billions of dollars of data center development through lease backstops and residual value guarantees.

Those guarantees can make projects more financeable by protecting creditors against tenant default or declines in asset value. But some of the largest backstops do not cover a separate risk: whether the data center gets built and reaches the contractual milestone required for the guarantee to take effect.

“We attribute no credit to a post-RFS backstop when assessing completion risk,” said Anubhav Arora, senior director at Fitch Ratings. “Completion risk is assessed separately under our completion risk criteria, and that assessment is precisely why several of these ratings sit in the high-yield category despite lease backstops from investment-grade entities.”

If prolonged construction delays allow a tenant to terminate its lease before commencement, the backstop would not be triggered, Arora said. Tenants typically gain termination rights at an outside date around six months after scheduled completion, he said.

That distinction is apparent at SB Energy’s PORTS-Pike Technology Campus in Ohio. SB Energy has said NVIDIA’s residual value guarantees, covering an initial 4.25 GW with an aggregate guaranteed value of USD 105bn, were provided “to support the financeability” of the campus. Filings show the guarantees generally become effective upon lease commencement and phase in as data centers become ready for service.

PORTS-Pike separately has a completion guaranty from SB Energy parent Energy Global for the benefit of tenants. The project’s public lease also allows target commencement dates to move for force majeure, tenant delay, or utility delay, while the Work Letter governing construction-period delays and ready-for-service conditions was omitted from the SEC filing.

A similar dividing line exists at Cipher’s Barber Lake project in Texas. Google agreed to backstop certain obligations of Fluidstack, but Cipher says the backstop becomes effective only after rent commencement. If the lease fails to commence on its targeted date, Google’s protection does not switch on until Barber Lake is completed.

At the Oracle project in New Mexico, known as Project Miner, commercial banks lent some USD 18bn in construction loans. The loans were recently quoted at stressed levels around 90 cents on the dollar, according to news reports.

Absorbing risk

Developers and lenders use other contractual tools to absorb some of that pre-RFS risk.

One is the yield-on-cost lease, under which rent is tied to an agreed return on project costs. SB Energy says its data center rents are typically calculated using agreed total project costs – in some cases including land, management, and financing costs – with final rent reconciled to construction costs after completion. Cost overruns above an agreed cap generally remain with SB Energy unless the tenant agrees otherwise.

Such a structure can “rentalize” eligible cost increases, preserving a developer’s return even if construction becomes more expensive, a sector lawyer said. But caps mean the protection is not unlimited, and higher rent does not by itself solve a delay severe enough to trigger a tenant termination right.

Another protection is a guaranteed maximum price, or GMP, construction contract, under which a general contractor agrees that specified construction costs will not exceed an agreed amount. Digital Realty has said GMP contracts can shift some construction-cost inflation risk to general contractors. Applied Digital’s ELN-02 data center financing documents, for Polaris Forge 1 in Ellendale, ND, identify GMP construction agreements with McGough and Century.

Still, lenders can underwrite a construction loan knowing that if the project reaches completion, they will then have Google, NVIDIA or another investment-grade counterparty supporting the revenue or residual value that ultimately repays the debt. But during construction they are relying on different protections – sponsor completion guarantees, equity, contingencies, GMP contracts, liquidity and, in the Google deals, temporarily pledged warrants.

That layering can also make it difficult for investors to determine where risk sits before and after RFS. Moody’s noted in a report this week that data center commitments can be scattered across leases, purchase agreements and guarantees, concluding: “Putting these puzzle pieces together using current disclosures is difficult.”