Banks are increasingly financing data center projects, a booming asset class fueled by surging demand for cloud and AI computing capacity. In the United States alone, data center financings doubled from $30 billion in 2024 to an expected $60 billion in 2025, with similarly strong growth globally. However, lending to data centers comes with unique risks that banks must carefully evaluate. Unlike traditional real estate, data centers have critical technical performance obligations and development timelines that, if unmet, can directly threaten cash flows and collateral value.

Two major risks dominate the landscape: development delays and operational performance failures. Construction delays can trigger tenant penalties or even lease terminations, while performance-related Service Level Agreement (SLA) breaches during operations can have the same outcome. These risks are magnified by common financing structures that use stabilized data centers as collateral for new developments. If one facility fails, the financial ripple effects can destabilize the entire loan portfolio.
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Time is money

Data center leases, especially with hyperscale tenants, are structured around fixed delivery dates. If a facility is not delivered on time, the tenant can demand rent abatement or, worse, walk away altogether. In early 2025, Microsoft canceled leases equivalent to two entire data centers due to facility and power delays. Meta has also taken similar actions.

This kind of termination event leaves the developer with an unoccupied facility and no income to service the debt. Banks can’t afford to treat construction risk in data center loans as a secondary concern. Completion guarantees, conservative project timelines, draw schedules aligned with lease milestones, and reserves for grace periods should all be standard components of a lender’s toolkit.

Thorough review of the lease terms is equally important. Termination clauses tied to missed milestones, or liquidated damages for delays, are often non-negotiable in tenant contracts. Lenders must price for these risks and ensure that developers have the financial backing to deliver on time.
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When uptime fails

Even after a data center goes live, lenders face another major risk: operational performance. Unlike a traditional office lease, data center contracts include strict SLAs that promise strict standards for uptime, power, cooling, and environmental conditions. Breaching these terms can trigger penalties like service credits - or, in extreme cases, tenant termination.

A one-second outage, for example, might trigger a full month’s rent credit. A longer or repeat outage could result in early termination of the lease. Given that many data centers are single-tenant assets, the loss of a major tenant can slash income to near zero.

For lenders, this means that even a “stabilized” data center is not truly stable unless its SLA risk is accounted for. One performance failure could destabilize the asset’s cash flows and breach debt covenants. Underwriting must include stress testing against SLA-related revenue loss and tenant exit scenarios.
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Stability is not guaranteed

Many data center loans rely on cross-collateralization. Stabilized assets are used to support financing for new developments. While this strategy improves bankability, it also raises the stakes. If the income from the stabilized asset drops due to SLA penalties or tenant exit, the entire financing can unravel.

Banks need to be cautious. Underwriting should reflect the possibility that so-called “stable” assets might not be stable for long. Conservative loan-to-value ratios, tenant diversification, and strict monitoring of both financial and technical performance are key. Lenders should require regular reporting on uptime, major incidents, and tenant satisfaction.

Lenders also need to understand how lease provisions impact risk. Termination clauses, rent credits, and other contractual remedies must be assessed in light of the facility’s ability to maintain uninterrupted service. When underwriting, banks should stress-test loan scenarios based on hypothetical SLA breaches to determine whether the loan remains viable.
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How banks can adapt

Data centers are infrastructure, not just real estate. Their value lies in consistent digital performance. Lenders must move beyond traditional underwriting and treat operational resilience as part of the credit analysis.

Tier certifications, redundancy design (e.g., 2N), and operator track records should all be evaluated alongside tenant creditworthiness. Contracts must be examined for early termination rights, rent abatement clauses, and SLA enforcement mechanisms.

And, critically, financial institutions need new tools to transfer these risks. SLA insurance is one such tool. Purpose-built to mirror contractual SLA terms, it provides automatic payouts when performance failures occur. For lenders, this kind of protection turns SLA exposure into a manageable, insurable risk rather than a hidden threat to cash flow and asset value.
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Financing digital infrastructure requires a new risk playbook

As data centers power the next generation of AI and cloud infrastructure, banks have a critical role to play in supporting their growth. But lending to this sector demands more than standard real estate underwriting.

To secure their capital and support continued development, banks must prepare for the two biggest risks in the data center ecosystem: failing to deliver and failing to perform. Both can destabilize revenue, spook tenants, and impair collateral value.

Success will depend on understanding the true nature of operational risk and embracing new solutions, like SLA insurance, that can protect digital infrastructure in the moments it matters most.

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Originally published on DatacenterDynamics