The specific covenant that a hyperscaler provides — or withholds — determines whether a project is bankable, at what cost of capital, and on whose terms. Developers who treat “a letter of intent from AWS” and “an executed lease from AWS” as equivalent instruments are building financial models on incorrect foundations.
The Covenant Ladder
Level 0: Expression of Interest (EOI) / Site Visit
An EOI or confirmed site visit indicates that a hyperscaler’s real estate or infrastructure team has assessed the site and is continuing discussions. It does not commit the hyperscaler to any capacity, timeline, or price. It does not give the developer any priority in the hyperscaler’s capacity planning.
An EOI is worth one thing: it tells you that the site is not disqualified on first-pass criteria (geography, grid access, fibre, planning zone). It is the beginning of a process, not a commitment.
Bankability: Zero. No lender or equity investor treats an EOI as a covenant.
Level 1: Heads of Agreement (HoA) / Letter of Intent (LoI)
An HoA or LoI is a non-binding document in which the hyperscaler indicates its intention to execute a lease or capacity agreement subject to conditions. Typical conditions include: completion of hyperscaler due diligence (technical, legal, regulatory), execution of definitive lease documentation, planning approval, power connection confirmation, and sometimes board/investment committee approval.
An LoI from a major hyperscaler (AWS, Azure, Google, Oracle) in the AU market in 2026 is worth more than it was three years ago, because the demand environment has shifted: hyperscalers are now competing for supply in Australia rather than developers competing for hyperscaler tenants. A credible hyperscaler LoI with a named capacity and a defined timeline can support a fundraising process — but it is not a bankable instrument in the same way an executed lease is.
Bankability: Partial. Some specialist infrastructure lenders and development equity funds will engage with a project at LoI stage if the sponsor is credible, the project fundamentals are strong, and the construction timeline is tight. Major bank lending for construction finance typically requires a stronger covenant — usually an executed lease agreement or a pre-commitment covering > 60% of contracted capacity.
The critical HoA variable: Whether the HoA is exclusive. A hyperscaler may hold discussions with multiple developers simultaneously and issue parallel LoIs while it compares sites and finalises its capacity decision. An exclusive HoA — in which the hyperscaler commits to proceeding only with this developer for a defined period — is a materially more valuable document than a non-exclusive LoI.
Level 2: Executed Lease / Master Service Agreement (MSA)
An executed lease or MSA is the bankable covenant. It specifies: contracted capacity (MW IT, kVA, or MW total power draw); minimum term (typically 10–20 years for hyperscale agreements); rent escalation mechanism (CPI-linked in most AU agreements); expansion options (contracted rights to additional capacity at defined pricing or at market rate); termination provisions (typically very limited tenant termination rights); and performance specifications (power availability, cooling availability, uptime SLA).
With an executed hyperscaler lease, a developer can access: major bank construction lending (typically 60–70% LTV against contracted income); infrastructure fund equity (which prices return on contracted cash flow NPV); sale-and-leaseback to an infrastructure REIT or sovereign fund at practical completion.
The gap between LoI and executed lease is where projects stall. The hyperscaler’s internal process from LoI to executed documentation — legal review, compliance, investment committee, network planning, regulatory sign-off — takes 6–18 months for first-time relationships and 3–9 months for repeat relationships.
The critical lease variable: Rent commencement date and construction risk. Most hyperscaler leases are structured so that rent commences on “practical completion” of the agreed specification — not on lease execution. The developer carries construction risk. Construction management and schedule discipline are the developer’s principal risk in this arrangement.
Level 3: Hyperscaler-Funded Development (Build-to-Suit)
In a build-to-suit (BTS) arrangement, the hyperscaler provides either capital or a binding pre-payment commitment that enables the developer to begin construction without accessing external project finance. A BTS arrangement typically involves: a development management fee paid to the developer during construction; a pre-agreed handover price; and hyperscaler approval rights over design, specification, and major contractor selection.
BTS is only available to developers who have an established hyperscaler relationship. It is not a first-transaction structure. It represents the hyperscaler taking on development risk mitigation in exchange for price and timeline certainty — a trade they make only with parties they trust to execute.
The Covenant Mismatch Problem
The most common capital structure failure in AU data centre development is a misalignment between the covenant level achieved and the capital being raised.
Scenario 1: Developer has an LoI and raises development equity from a family office on the basis that “the hyperscaler is committed.” The hyperscaler’s LoI expires when they select a competing site. Development equity is stranded.
Scenario 2: Developer raises construction finance from a major bank on the basis of an executed lease. The lease includes an undisclosed “planning condition” — if planning approval is not received by a specified date, the lease is terminated. Planning is delayed. The lease lapses. Construction loan is in technical default.
Scenario 3: Developer presents an executed lease to infrastructure equity investors who price the investment on contracted cash flows. The lease’s expansion options are priced at “market rate” — meaning the developer gets no economic benefit from the options. The infrastructure fund models the expansion capacity as value. The developer’s equity upside depends on an expansion pricing mechanism that benefits the tenant, not the landlord.
Each of these scenarios is avoidable with careful lease and capital structure review. The covenant document and the capital structure need to be designed together, not sequentially.
Hyperscaler Preferences in the AU Market (2026)
AWS: Historically AU’s most active hyperscaler tenant. AWS has long-standing relationships with NEXTDC (anchor tenant in multiple NEXTDC facilities). AWS prefers established operators with demonstrated AU track records. AWS takes specific positions on power availability guarantee levels and cooling specification.
Microsoft Azure: Has executed long-term capacity agreements with AirTrunk and NEXTDC for its hyperscale Australian requirements. Microsoft’s AU sovereign cloud programme creates additional demand from its own government customers. Microsoft prefers Tier III or above and has specific requirements for connectivity redundancy (multiple diverse fibre paths).
Google Cloud: Less publicly disclosed in its AU capacity agreements. Google builds some owned capacity and uses third-party colocation for the remainder. Google’s sustainability requirements are strict — its data centres are required to achieve 24/7 carbon-free energy matching (not annual LGC matching), which affects PPA and BTM generation structure requirements significantly.
Oracle: Smaller footprint than AWS/Azure/Google but has executed AU sovereign cloud agreements with government clients. Oracle’s AU sovereign cloud facilities have specific security certification requirements.
Practical Implications
- Know exactly where you are on the covenant ladder before presenting to capital partners. The difference between “we have an LoI” and “we have an executed lease” is the difference between a development equity conversation and a construction finance conversation.
- Negotiate exclusivity into any LoI before investing significantly in design, planning, or connection applications. The cost of the exclusivity conversation is low; the cost of non-exclusivity is project-level capital waste if the hyperscaler selects a competitor.
- Get lease documentation reviewed independently before signing. Hyperscaler standard form leases are authored in the tenant’s interest. An independent review will identify the provisions that most affect the developer’s capital structure and exit optionality.
- Understand the expansion option economics. The option is often the most valuable part of a hyperscale land position. If the option is priced at market rate, it is worth less than an option priced at cost-plus from the original development.
Sources: NEXTDC Annual Report FY2025 (lease structure disclosures); AirTrunk investor materials (public, pre-Blackstone acquisition); JLL AU Data Centre Capital Markets Report 2025; CBRE Data Centre Perspectives Q4 2025; AWS Australia infrastructure announcements (public); Microsoft Azure Australia sovereign cloud program documentation (public).