In the data center industry, Service Level Agreements (SLAs) are often viewed as a technical necessity, but for investors, lenders, and asset owners, they represent something far more consequential: a direct financial exposure that can quietly erode returns and destabilize cash flows if not properly understood, priced, and protected.

The recent AWS outage was a reminder that as data centers increasingly underpin the world’s digital infrastructure, from AI workloads to hyperscale cloud environments, SLA performance has become a key determinant of asset value, creditworthiness, and resilience.

1. What an SLA really means to investors

At its core, an SLA defines the operational commitments that a data center must meet, covering uptime, power availability, environmental controls, connectivity, and security. Breaches of these commitments trigger penalties in the form of Service Credits, which are typically deducted directly from rent or recurring service payments.

From an investment perspective, these credits function as variable cash flow deductions, often with material magnitude. For example, the SLA in a standard colocation lease might impose:

• 15% of Monthly Base Rent (MBR) for a delayed incident notification,
• 25% to 200% of MBR for falling below 99.999% uptime,
• and up to 500% of MBR per month for critical connection outages.

In other words, a single severe downtime event, like a deviation from pre-agreed temperature range for a few hours, could wipe out multiple months of rental income- impacting debt service coverage ratios, yield projections, and investor distributions.

‍

2. The impact of SLA penalties on cash flow

SLAs are written to protect the tenant, not the asset owner. They operate automatically, meaning credits are applied without the need for tenant claims or negotiation. This gives tenants immediate relief but leaves landlords and investors exposed to - unpredictable revenue losses. For example, under a typical hyperscale colocation SLA, a 26-second power outage can reduce annual NOI by roughly 6.7%, and an outage lasting over an hour can wipe out more than 40%.

For data center portfolios financed with structured debt and equity, these SLA breaches can:

•  Force owners to over-invest in redundancy and standby capacity
• Trigger loan covenant breaches if cash flow coverage ratios decline
• Lower valuation multiples due to perceived operational instability, and
• Increase risk premiums on refinancing or recapitalization.

‍

3. Termination rights: the silent deal breaker

Many SLAs give tenants the right to walk away entirely if repeated service failures occur - typically, three or more power, environmental, or connection downtime events lasting from several minutes, to over an hour within a calendar year. In some cases, tenants can also walk away after a single outage lasting more than 24 hours.

For investors, this introduces an additional layer of volatility:

• Loss of anchor tenants can create sudden vacancies
• Reputational damage affects future re-leasing
• Reserves for re-leasing costs must increase and
• Capitalization rates widen to reflect operational uncertainty

In short, repeated SLA violations don’t just affect monthly rent, they can undermine the entire investment thesis.

‍

4. Why you need to assess SLA exposure upfront

When underwriting or financing a data center, SLA risk should be treated with the same rigor as power redundancy, cooling design, or tenant credit quality. Investors should ask:

• What are the maximum potential Service Credits as a percentage of total revenue?
• How are credits applied (monthly, cumulative, or capped)?
• Are termination rights clearly defined or open-ended?
• What performance metrics validate the operator’s ability to meet SLA standards?

These details directly influence revenue predictability, valuation stability, and exit options. A data center may appear high-performing on paper, but a poorly structured SLA can turn operational hiccups into disproportionate financial shocks. Understanding the precise terms and modeling them into downside scenarios is essential for accurate risk-adjusted return analysis.

‍

5. Protecting against SLA risk

To protect against SLA-related volatility, investors are increasingly turning to SLA insurance solutions that bridge the gap between operational performance and financial exposure. The coverage pays out automatically when predefined service metrics (such as uptime or availability ) fall below thresholds, mirroring the SLA itself.

Such solutions enable investors and lenders to:

• De-risk cash flows by offsetting SLA penalties or lost rent
• Enhance credit terms, as lenders gain confidence in protected income
• Provide immediate liquidity for owners to settle an SLA claim by investing in system repairs or upgrades
• Stabilize valuations through insured revenue continuity, and
• Support capital recycling, allowing faster exits and redeployment of capital

As digital infrastructure becomes more interconnected and performance-sensitive, protecting against SLA breaches is no longer optional, it’s part of prudent investment management. For capital providers and investors, understanding them means distinguishing between resilient, income-stable assets and those vulnerable to hidden performance liabilities.

Before closing your next data center transaction, ask not only how much power and cooling capacity the facility provides - but what happens when it doesn’t. Because in today’s digital economy, SLA risk is investment risk.

‍

Originally published on DatacenterDynamics