SEC Division of Corporation Finance no-action letter: Latham & Watkins LLP - Data Center Securitizations — SEC — US

US-DOCS\168789505.13
555 Eleventh Street, N.W., Suite 1000
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Tel: +1.202.637.2200 Fax: +1.202.637.2201 www.lw.com FIRM / AFFILIATE OFFICES Austin Milan Beijing Munich Boston New York Brussels Orange County Chicago Paris Dubai Riyadh Düsseldorf San Diego Frankfurt San Francisco Hamburg Seoul Hong Kong Silicon Valley Houston Singapore London Tel Aviv Los Angeles Tokyo Madrid Washington, D.C. Office of Structured Finance Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Attn: Kayla Roberts Chief, Office of Structured Finance Ted Yu Associate Director, Specialized Policy and Disclosure Re: Request for Interpretive Guidance Regarding Certain Data Center Securitizations Dear Ms. Roberts and Mr. Yu:
We are writing to seek interpretive guidance from the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff” and the “Commission,” respectively) regarding the application of the definition of “asset-backed security” in Section 3(a)(79) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Securities meeting that definition are referred to herein as “Exchange Act ABS.” We respectfully request that the Staff concur with our view that fixed-income or other securities issued in data center securitizations of the type described in this letter (“Data Center Securitizations” or “DCS”) are not Exchange Act ABS because the securitized assets are not “self-liquidating financial assets” and therefore payments to investors do not depend primarily on cash flows from self-liquidating financial assets. Latham & Watkins LLP has served as counsel in data center securitizations since the inaugural transaction of this type in 2018. Since that time, the data center securitization market has grown to represent over $50 billion in cumulative debt issuance, with growth in the number of transactions coming to market each year. Throughout this period, market participants have, out of an abundance of caution, complied with the requirements that apply to Exchange Act ABS, principally due to the explicit reference to “a lease” among the parenthetical examples of self-liquidating financial assets in Section 3(a)(79); however, as explained below, leases (if any)

comprise only a portion of the securitized assets. As set forth below, we submit that Data Center Securitizations do not meet the definition of Exchange Act ABS, and we seek interpretive guidance from the Staff to provide certainty for the market on this question.
I. Data Center Overview
A data center is a specialized facility designed to house and support computing infrastructure through the provision of buildings and data halls, electrical and backup power systems, cooling and environmental controls, network connectivity infrastructure, physical security systems, and related operational support facilities. Third-party data center operators develop, own, and operate data centers for customers rather than their own internal IT needs by providing colocation and hyperscale-oriented capacity. Retail colocation provides shared, multi-customer space for smaller deployments, while wholesale colocation typically consists of dedicated suites, data halls, or capacity blocks ranging from hundreds of kilowatts to multiple megawatts. Hyperscale facilities are purpose-built for large cloud, AI, and enterprise customers and may be developed as single-tenant facilities, buildto-suit deployments, or multi-tenant campuses supporting multiple large-scale customers. An operator or manager is generally responsible for developing, operating, or otherwise causing the operations of data centers in accordance with their respective business plans. The services provided by an operator generally fall within two main categories:
 Property Management Services: acquiring and developing new and existing data center assets; marketing site space and procuring customers; negotiating new contracts; renegotiating and extending existing customer contracts; monitoring, inspecting, and maintaining the data centers; arranging for utilities, equipment, and supplies; managing capital improvements; administering tenant leases/customer contracts (invoicing, collections, and delinquency management); and maintaining compliance with applicable laws and permits.  Administrative Services: accounting, litigation management, finance, maintenance of books and records, preparation of financial statements, reports, tax returns, and other related administrative services.
II. Data Center Securitizations
Data center operators use proceeds from securitization transactions for a variety of purposes, such as: to refinance construction loans, finance capital expenditures on existing or new data centers, build additional facilities, fund developments, and for other general corporate purposes. In a typical structure, securities are issued by a special-purpose entity (the “Issuer”) that owns, leases, or otherwise has rights to, directly or through wholly-owned subsidiary entities (collectively, “Asset Entities”), one or more data center facilities together with all related components and assets (e.g., buildings and data halls, electrical and backup power systems, network connectivity infrastructure, etc.) and contracts (e.g., service contracts, leases, colocation agreements, insurance policies, etc.) necessary to operate such facilities (collectively, the

“Securitized Assets”). The securities are direct obligations of the Issuer, and investors have recourse to the Securitized Assets. In general, investors do not have recourse to the sponsor or data center operator unless expressly provided, and any such recourse is typically limited to certain indemnities, such as for fraud, willful misconduct, and gross negligence in the management of the data centers. Nearly all Data Center Securitizations have utilized a “master trust” structure, which permits future issuances of securities (including refinancings of existing securities), additions of data centers (typically by adding the data center to the existing Asset Entity or creating an ownership interest in a new Asset Entity), as well as dispositions and, in certain cases, substitutions of data center assets. The Issuer and each of the Asset Entities enter into a management agreement with a data center operator to provide services required for the ongoing operation of the facilities and other related assets, including the functions described above. The Issuer services the payments on the outstanding securities from, among other things, the net cash flows generated from the operations of each of the Asset Entities (e.g., tenant and/or customer revenue (including service level agreements), less expenses, such as taxes, insurance, electricity, repairs and maintenance, security services, etc.). Pursuant to the management agreement, the operator or manager is expected to maximize revenue and minimize expenses of each data center, and accordingly has the obligation and broad authority to procure new customers, negotiate new contracts (e.g., tenant leases, customer service contracts, insurance policies, service providers, etc.), and renegotiate terms of existing contracts. The securities are generally structured with a loan-to-value ratio not exceeding 70% of the appraised value of the Securitized Assets at the time of issuance, with the remaining 30% of appraised value representing equity ownership, directly or indirectly, in the Asset Entity. The securities typically have an anticipated repayment date of approximately five years and a final maturity of 25-30 years.
III. Analysis
Section 3(a)(79) of the Exchange Act defines an “asset-backed security” as “a fixedincome or other security collateralized by any type of self-liquidating financial asset (including a
loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset.” We respectfully submit that the DCS are not Exchange Act ABS because the Securitized Assets, which include ownership of the Asset Entities that own and operate data centers, are not “self-liquidating financial assets.” In its recent concept release soliciting public input on modernizing the regulatory framework for asset-backed securities, the Commission reiterated that a core principle of both the Regulation AB and Exchange Act ABS definitions is that

payments to securityholders depend primarily on cash flows from the underlying self-liquidating financial asset. 1 Since 1992, the Commission has consistently interpreted “self-liquidating” to mean assets that “by their terms convert into cash within a finite time period.”2 Data center facilities and their supporting infrastructure are not “financial assets,” as referenced in the definition of Exchange Act ABS, but are tangible, physical assets that endure well beyond the tenor of the related securities. In fact, the data center facilities may appreciate in value through the success of ongoing operations and the increase in value of the real estate. Because the physical assets endure beyond the tenor of the related securities and have the potential to appreciate in value, the data center facilities held by the Issuer do not “by their terms convert into cash within a finite time period” and therefore are not “self-liquidating financial asset[s].” Although a portion of the Securitized Assets include customer contracts (including in some cases leases) that generate revenue necessary for the Issuer to make payments due on the securities, the revenue generated is reduced by expenses to operate and maintain the data center facility (e.g., taxes, insurance, electricity, repairs and maintenance, security services, etc.). Consequently, the payments to the holders of the securities do not “depend primarily on cash flow from the [self-liquidating financial] asset” because the amount of cash available to pay investors also depends on the effectiveness of the operator or manager to minimize the operating expenses of the Issuer. The investment opportunity in a DCS is most like an investment in a real estate investment company. In general, a real estate investment company acquires, owns, finances, manages, leases, and develops real estate and may raise capital to fund these operations. Similarly, an Issuer of a DCS acquires, finances, manages, and develops data centers and as discussed above, the proceeds from the issuance of DCS may be used for a variety of purposes. An investor in a real estate investment company is exposed to the entire operations and activities of the company and all assets and liabilities. In contrast, a DCS investor is isolated from the other activities of the operator or manager, a hallmark of securitization financing. However, this type of securitization directly funds the operations of a business, and the proceeds may be used for a variety of purposes, whereas Exchange Act ABS are issued to fund the purchase of a pool of self-liquidating financial assets. See Figure 1 (Data Center Securitization vs. Real Estate Investment Company). A DCS can be further differentiated from an Exchange Act ABS by comparing it to a single-asset single-borrower commercial mortgage-backed securities transaction (“SASB CMBS”). For example, in a SASB CMBS financing of a data center facility, the owner of the facility pledges it as collateral for a commercial
real estate mortgage loan. The issuer of the 1 See Concept Release on Residential Mortgage-Backed Securities Disclosures and Enhancements to Asset-Backed Securities Registration, SEC Release No. 33-11391 (Sept. 26, 2025) [90 FR 47254]. 2 See Simplification of Registration Procedures for Primary Securities Offerings, SEC Release No. 33-6964 (Oct. 22, 1992) [57 FR 48970]. See also Asset-Backed Securities, SEC Release No. 33-8518 (Dec. 22, 2004) [70 FR 1506].

SASB CMBS only holds the mortgage loan. As the underlying borrower repays the loan, the cash flows are passed on to holders of the SASB CMBS. Assuming all agreed-upon payments are made, the loan is extinguished and the issuer holds nothing, as the loan has self-liquidated by its terms. The underlying borrower continues to own and operate the data center facility. The SASB CMBS issuer only owns the data center facility in the event of non-payment by the borrower, through the process of foreclosure. Because the SASB CMBS is a security collateralized by a self-liquidating financial asset (the mortgage loan) that allows investors to receive payments that depend primarily on the cash flow from the mortgage loan payments, the SASB CMBS is unmistakably an Exchange Act ABS. See Figure 2 (Data Center Securitization vs. Single-Asset Single-Borrower CMBS). By contrast, in a DCS, when the Issuer repays the securities in full, the Issuer continues to own and operate the data center facility. Notably, for purposes of this analysis, the position of an Issuer of a DCS transaction is comparable to that of the underlying borrower in a SASB CMBS transaction. The Securitized Assets are not diminished or consumed by the repayment of the securities. Therefore, DCS are not Exchange Act ABS because the Securitized Assets are not self-liquidating financial assets and accordingly, payments to the noteholders do not depend primarily on cash flow from self-liquidating financial assets.
IV. Request
Based on the foregoing, we respectfully request that the Staff concur with our view that fixed-income or other securities issued in Data Center Securitizations are not Exchange Act ABS.

Should you require additional information or wish to discuss this request, we are available at your convenience. We appreciate your consideration of this matter and look forward to your response. Very truly yours, Kevin Fingeret David Siegel Rolaine Bancroft Matt Hays of LATHAM & WATKINS LLP Attachments:
Figure 1: Data Center Securitization vs. Real Estate Investment Company
Figure 2: Data Center Securitization vs. Single-Asset Single-Borrower CMBS

Figure 1. Data Center Securitization vs. Real Estate Investment Company
Data Center Securitization (DCS) Real Estate Investment Company (simplified) Initial Purchaser / Noteholders Notes ↑ Issuer (SPV) Data Center Operator management agreement 100% owned Asset Entity Master trust: future data centers are added to existing Asset Entity or by adding new Asset Entities Securitized Assets Data center facilities and all physical components (building, power, fiber, cooling, security), land, customer contracts (in some cases, leases) Investor isolated from other activities operating cash flow After repayment: Issuer CONTINUES to own & operate the data center After repayment: Issuer holds NOTHING (loan self-liquidates) Key points: * The investment opportunity in a DCS is similar to an investment in a real estate investment company

The key difference is that in a DCS, the securitized assets are isolated from other operations and activities
Contractual / operational relationship
Investors
Equity or Debt Securies ↑
Issuer: Real Estate Investment
Company
Real Estate Portfolio
Commercial & residential properties, land, leases and development projects. Future properties or projects may be added to the portfolio operating cash flow After repayment: Issuer CONTINUES to own & operate the assets in the real estate portfolio No structural isolation Investor exposed to all operations and activities Manager/Advisor management agreement

Figure 2. Data Center Securitization vs. Single-Asset Single-Borrower CMBS
Why securities issued in a Data Center Securitization are not Exchange Act ABS Data Center Securitization (DCS) Single-Asset Single-Borrower CMBS (SASB CMBS) Initial Purchaser / Noteholders Notes ↑ Issuer (SPV) Data Center Operator management agreement 100% owned Asset Entity Master trust: future data centers are added to existing Asset Entity or by adding new Asset Entities Securitized Assets Data center facilities and all physical components (building, power, fiber, cooling, security), land, customer contracts (in some cases, leases) Data center is INSIDE the Issuer's collateral operating cash flow After repayment: Issuer CONTINUES to own & operate the data center Initial Purchaser / Noteholders Notes ↑ Issuer (SPV) Underlying Borrower owns and operates facility Loan payments / debt service Mortgage / pledge of facility as collateral Asset Held by Issuer Mortgage loan on commercial property (only) — a self-liquidating financial asset Data center facility — owned and operated by Borrower (NOT held by Issuer) Data center is OUTSIDE what the Issuer holds only upon foreclosure (default) After repayment: Issuer holds NOTHING (loan self-liquidates) Key points: * The position of the DCS Issuer is comparable to the borrower in a SASB CMBS — not the SASB CMBS issuer.

In DCS, operating cash flow from the Securitized Assets service payments to investors. In SASB CMBS, only loan payments service payments to investors.
Financial-asset link (mortgage/notes) Contractual / operational relationship Party that owns the physical facility Contingent (default only) Amortizing trust: no future additions of mortgage loans

SEC Division of Corporation Finance no-action letter: Latham & Watkins LLP - Data Center Securitizations

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