Financing data centres under Swedish law

The answer depends on Swedish rules on real property, movable equipment, contracts, perfection and enforcement. Those rules should be taken into account when the structure is set. This article describes the main points for a lender.

Summary

• Swedish law divides a data centre into real property and movable property. The line between them (the fixture line) should be drawn and documented from the first delivery.
• New mortgage certificates carry 2 per cent stamp duty. At today’s facility sizes this needs to be planned for in the structure.
• The share pledge over the property-owning SPV is normally the preferred enforcement route, since it allows the business to be sold as a going concern.
• The grid connection is often the scarcest asset. Neither the connection nor the permits follow the security automatically.
• Customer contracts may in substance be leases of premises or service agreements, whatever they are called. A lease binds a new owner of the property, while a service agreement does not. Foreign lenders often expect an assignment of leases and rental income as security. Swedish lenders normally rely on the mortgage and the share pledge instead, which give equivalent protection since the rent follows the property.
• Direct agreements should be signed at the outset. Foreign direct investment and protective security clearance may be needed before an enforcement sale can close.

Types of data centre financing

“Data centre financing” covers several different transaction types. It can mean financing land, grid connection, building and cooling infrastructure. It can mean financing a colocation operator, which owns or runs the facility and sells space, power, cooling and connectivity to customers under long-term contracts. That is not the same as financing a hyperscaler itself. Hyperscalers such as Microsoft, Google or Meta typically fund data centre capex through their corporate balance sheets, bond programmes or group-level bank facilities, so that is less typical project-style data centre financing. The credit may still be hyperscaler-backed where the hyperscaler is the customer taking the capacity. It can mean financing GPUs, servers and networking equipment owned by a neocloud, meaning a specialist cloud provider built around GPU capacity, or another GPU platform that sells compute to end-users. It can also mean financing an integrated AI platform, where building, hardware, software and customer contract are presented as one product.

Each of these types of data centre financing looks to a different legal asset. If they are all described simply as data centre financing, the legal analysis starts in the wrong place. The table below summarises the primary repayment source / credit risk, the main security and the key Swedish-law issue for each type.

What the lender underwrites

The security package determines what a lender can recover on a default, but the credit analysis comes first. Debt capacity in data centres depends on demonstrable cash flow, and the analysis usually turns on four questions.

The first is contract tenor against debt tenor. A long facility loan against a five-year colocation contract, or a three-year GPU offtake, leaves a re-contracting risk that must be priced, swept or amortised away.

The second is the identity of the counterparty. An investment-grade hyperscaler and a neocloud with a short operating history are different credits, even when the contracts look alike. Where the customer is a subsidiary, any parent support must be enforceable.

The third is asset life. Land, buildings and grid connections last for decades, and electrical and cooling plant for a good part of that time. Accelerators lose most of their value within a few hardware generations. The repayment profile has to follow the shortest asset life the financing relies on.

The fourth is construction, ramp-up and power. Delay, cost overrun and slow take-up are normally absorbed by the sponsor, so the lender needs to know that the sponsor has the capacity to do so. Power availability and price, which differ between the Swedish bidding zones (Sw. elområden), affect the cash flow model.

Real property, movable property and the fixture line

The commercial description of a data centre bundles land, power, plant, hardware and contracts together. Swedish law separates them. The facility is real property (Sw. fast egendom) together with what belongs to it. It is secured by mortgage and enforced through the Enforcement Authority. The compute is movable property (Sw. lös egendom). It is secured by pledge, which depends on the pledgor being deprived of control. The customer contracts sit beside both. They are the source of value, but they are not property that travels automatically with either asset class. The first legal task in any transaction is to establish which assets fall on which side of the line, and to make sure they stay there.

Chapter 2 of the Land Code (Sw. jordabalken) draws that line. Building fixtures (Sw. byggnadstillbehör), meaning what a building has been fitted with for permanent use, belong to the property automatically. In a data centre, that includes much of the electrical and cooling plant. Industrial fixtures (Sw. industritillbehör) are machinery and equipment brought to a property set up for industrial activity. They also belong to the property, unless the owner registers a declaration in the land register that they shall not.

That rule helps the facility lender, whose mortgage then reaches transformers, switchgear and cooling systems installed by the property owner. For the compute lender it is a risk, because hardware that has become a fixture is no longer available as separate security. Under Chapter 2, Section 4 of the Land Code, equipment that belongs to someone other than the property owner does not become a fixture. That gives a legal reason, alongside the credit reason, for holding facility and compute in separate entities. It also means that the record of who acquired and installed what must be kept clean from the first delivery. Where the same entity will own both, the industrial fixtures declaration needs to be worked through before the equipment arrives. So does the treatment of retention of title, which Section 4 handles differently for building fixtures and industrial fixtures.

Security over the facility

The main security over the facility is the real property mortgage. The owner applies for mortgages (Sw. inteckningar) and receives mortgage certificates (Sw. pantbrev), which are now almost always electronic. The pledge is perfected by registering the lender, or its agent, as holder in the mortgage certificate register. New mortgages attract stamp duty of 2 per cent of the mortgaged amount. Existing certificates can be reused without new duty, but a greenfield site usually has none. The common answer is to mortgage in stages as construction value is created, and to combine this with security that carries no duty.

The most important duty-free security is the share pledge over the property-owning SPV. It is perfected by delivering the share certificates. Where no certificates are issued, it is perfected by notice to the company, although lenders should require share certificates for enforcement reasons. As discussed below, it is also the realistic enforcement route.

In more advanced project financings, the same point is sometimes used structurally. To reduce stamp duty on real property mortgages, the parties may agree that the property sits in a special purpose company, that the lender takes only a limited mortgage over the property, and that control over the property is obtained mainly through the share pledge over the company that owns it. That structure depends on the property company being a single-purpose vehicle, with no business other than owning and holding the property.

Not every site is owned. A site leasehold (Sw. tomträtt) can be mortgaged in the same way as freehold. An ordinary land lease is different. A building on another’s land is movable property (Sw. byggnad på ofri grund), its value depends on the landowner’s consent to a transfer, and the arrangement should be established at term sheet stage. The business mortgage (Sw. företagshypotek), at 1 per cent stamp duty, is a floating charge over the SPV’s movable business assets. It ranks behind specific pledges and is realised only through official proceedings, so it serves as a backstop.

The grid connection and the permits

In a Swedish project the grid connection is often a scarcer asset than the land. The legal sources are split, since the grid connection is governed by the Electricity Act (Sw. ellagen) and the connection agreement, the Land Code and the general rules on security determine what the security captures, and the Environmental Code and the Planning and Building Act (Sw. plan- och bygglagen) govern the permits. The connection agreement with the network owner is a contract, and the capacity it allocates does not automatically follow the property or the shares. Whether the agreement can be transferred, whether a change of control allows the network owner to terminate or reallocate capacity, and whether unused capacity can be withdrawn all depend on the contract and on the network owner’s terms. The same review should cover the environmental and building permits, which attach to the operation or the property and not to the financing. A security package that delivers the building but not the power is of limited value.

Customer contracts

The customer contract generates the cash flow that services the debt. For Swedish counsel, the first question is what legal character the contract has.

A colocation contract, or a contract under which a hyperscaler takes defined capacity, can be drafted as a lease of premises, as a service agreement or as a mixture of the two. The label does not decide the matter. If the customer in substance has exclusive use of defined space against payment, Chapter 12 of the Land Code (Sw. hyreslagen) applies, and much of it is mandatory. A lease binds a purchaser of the property on the conditions in Chapter 7 of the Land Code, while a service agreement does not follow the property at all. A lease also brings indirect security of tenure, and indexation clauses are permitted only for terms of at least three years. In an executive sale, a lease may in certain cases be set aside if it impairs the mortgagee’s position.

The classification should be made and recorded in the due diligence report at the outset.

It also decides what security can be taken. Rights under a service or construction contract can be pledged by notice to the counterparty. For leases, the prevailing view in the Swedish market is that effective security is hard to obtain. Rent is earned only as the premises are made available, and it follows the property. A tenant’s rights can generally not be transferred without the landlord’s consent. Swedish real estate lenders therefore rely on the mortgage and the share pledge. They do not normally look to an assignment of leases in the way lenders in some other jurisdictions would. A foreign lender should be told this early. The package may look thinner than it expects, without being weaker in substance.

Whatever the classification, a pledge transfers rights, not obligations. Swedish law has no statutory step-in. A lender that wants the project to continue after enforcement needs a direct agreement with each key counterparty, and assignability must be checked contract by contract.

Bank accounts and set-off

International lenders often expect a pledge over the project accounts. In Sweden this is uncommon, because perfection requires that the pledgor cannot dispose of the balance, which does not fit an operating account. In practice, the protection comes from holding the accounts with the lending bank, which then has a right of set-off.

The compute side

The hardware is secured by a possessory pledge (Sw. handpant), which we discussed in detail in our article Financing the compute build-out. Where the hardware sits with a data centre operator, the pledge is perfected by notice to the operator being a third party holding the relevant asset. The borrower may continue to run the hardware remotely, but must not be able to remove or dispose of it on its own. The direct agreement with the operator is the most important document in the package. It should subordinate or waive the operator’s customary right of retention for unpaid fees, bar release of the equipment without the lender’s consent, and give the lender access on enforcement. On enforcement, the lender may sell privately or at auction, with due care for the pledgor’s interests. It may not simply keep the asset, since forfeiture clauses are void as a matter of Swedish law.

Where both asset pools are financed at the same site, the compute lender’s direct agreement and the facility lender’s security meet at the operator, which is often the facility borrower. The two lender groups need to agree who may do what on enforcement, even without a formal intercreditor relationship. Hardware that cannot be operated is worth little more than its resale price.

Guarantees and corporate limits

Upstream and cross-stream guarantees and security from a Swedish company are limited by the value transfer rules in Chapter 17 of the Companies Act and the loan prohibition in Chapter 21. Where the structure relies on a Swedish SPV supporting debt elsewhere in the group, the lender should know what the standard limitation language leaves standing.

Enforcement through the share pledge

A Swedish real property mortgage is not a self-help remedy. It is enforced by an executive sale through the Enforcement Authority (Sw. Kronofogden), a process that is orderly but slow, and that sells a building rather than a business. A share pledge can be enforced by private sale under the pledge agreement, subject to the pledgee’s duty of care. It delivers the company with its permits, grid connection and contracts intact. For an asset whose value depends on continued operation, the documentation should therefore assume that enforcement will take place through the share pledge.

Two features of Swedish law affect that plan. First, a reorganisation under the Company Restructuring Act (Sw. lagen om företagsrekonstruktion) brings a stay on enforcement. How far the stay reaches a particular item of security, including possessory pledges, should be analysed when the structure is set. Second, a change of control on enforcement may itself need clearance. Data centres can fall within the Foreign Direct Investment Act (Sw. lagen om granskning av utländska direktinvesteringar) and, where operations are security-sensitive, within the consultation requirements of the Protective Security Act (Sw. säkerhetsskyddslagen). A purchaser in an enforcement sale may need approval before it can close. The lender should identify this at signing.

Conclusion

The practical conclusion is that Swedish data centre financing should be structured around the asset that carries the credit. The mortgage, the share pledge, the contract review and the direct agreements each solve a different problem. If that is recognised at the outset, the security package is less likely to leave the lender with control over an asset that cannot be operated or sold as a going concern.