PRIVILEGED AND CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Counselors at Law
125 Broad Street New York, New York 10004 Telephone: (212) 455-7000 Facsimile: (212) 455-7100 www.calderwoodharkness.com
May 15, 2024
Matter No.: 1043-00001
Crescent Harbor Bank, N.A. as Administrative Agent, in its individual capacity as a Lender, and as Sole Lead Arranger and Sole Bookrunner 1200 Harbor Point Drive Charlotte, North Carolina 28202
Pinnacle Trust Company, N.A. as Collateral Agent 101 Constitution Avenue NW Washington, D.C. 20001
Each of the Lenders party to the Credit Agreement referenced herein:
Ridgeline National Bank 500 Federal Street Boston, Massachusetts 02110
Marlowe Asset Management Meridian Capital, LLC 300 Madison Avenue, 40th Floor New York, New York 10017
Atlas Peak Credit Partners, LP 2200 Sand Hill Road, Suite 150 Menlo Park, California 94025
NordBrücke AG Neue Mainzer Straße 72 60311 Frankfurt am Main, Germany
Pacific Rim Institutional Lending Corp. 600 Montgomery Street, Suite 2800 San Francisco, California 94111
Osprey Insurance Capital, Ltd. Clarendon House, 2 Church Street Hamilton HM 11, Bermuda
Ladies and Gentlemen:
Re: Supplemental Opinion — US Regulatory Matters in connection with the Senior Secured Term Loan B Credit Agreement, dated as of May 15, 2024 (the "Credit Agreement"), among Ironhaven Data Centers LLC, a Delaware limited liability company (the "Borrower"), Ironhaven Frankfurt GmbH, a German Gesellschaft mit beschränkter Haftung (the "Co-Borrower"), Ironhaven Holdings Inc., a Delaware corporation (the "Parent Guarantor"), Crescent Harbor Bank, N.A., as Administrative Agent, Pinnacle Trust Company, N.A., as Collateral Agent, and the Lenders party thereto. Aggregate commitments: $950,000,000. CUSIP: 46283LAA5.
1. INTRODUCTION AND BASIS OF OPINION
1.1 Engagement and Role
Calderwood & Harkness LLP ("we," "us," or "our") acts as counsel to the Borrower, the Co-Borrower, and the Parent Guarantor (each as defined above and, collectively, the "Loan Parties") in connection with the Credit Agreement and the transactions contemplated thereby. We have been engaged by the Loan Parties to render certain legal opinions in connection with the closing of the $950,000,000 Senior Secured Term Loan B facility (the "Term Loan") evidenced by the Credit Agreement.
This Supplemental Opinion (this "Opinion") is being delivered to you pursuant to Section 4.01(a)(vii) of the Credit Agreement as a condition precedent to the initial funding of the Term Loan on the Closing Date, which is expected to occur on June 3, 2024. Delivery of this Opinion on the date hereof, in advance of the Closing Date, is being made in connection with the execution and delivery of the Credit Agreement on the date hereof in order to satisfy the documentary requirements set forth therein and to permit the Administrative Agent and the Lenders to complete their respective internal credit approvals.
This Opinion supplements, and should be read in conjunction with, the legal opinion of Calderwood & Harkness LLP of even date herewith addressed to the same parties and relating to the due authorization, execution, and delivery of the Loan Documents, the enforceability of the Loan Documents against the Loan Parties, and the creation and perfection of security interests under the Uniform Commercial Code as in effect in the State of New York and the State of Delaware (the "Primary Opinion"). Except as expressly stated herein, this Opinion does not address the matters covered by the Primary Opinion, and the Primary Opinion does not address the matters covered by this Opinion. Each opinion should be read as an independent and self-contained expression of professional judgment, subject to the qualifications and limitations expressly stated therein.
1.2 Defined Terms
Capitalized terms used and not otherwise defined herein have the meanings assigned to such terms in the Credit Agreement. For purposes of this Opinion, the following terms have the meanings indicated below:
"Credit Agreement" means the Senior Secured Term Loan B Credit Agreement, dated as of May 15, 2024, among the Borrower, the Co-Borrower, the Parent Guarantor, the Administrative Agent, the Collateral Agent, and the Lenders, as in effect on the date hereof (and without giving effect to any amendment, modification, supplement, or waiver thereof after the date hereof).
"Guarantee Agreement" means the Guarantee Agreement, dated as of the date hereof, made by Ironhaven Holdings Inc. in favor of the Collateral Agent for the benefit of the Secured Parties, pursuant to which the Parent Guarantor has unconditionally guaranteed the Obligations (as defined in the Credit Agreement) of the Borrower and the Co-Borrower under the Credit Agreement and the other Loan Documents.
"US Security Agreement" means the Pledge and Security Agreement, dated as of the date hereof, made by the Borrower and the Parent Guarantor in favor of Pinnacle Trust Company, N.A., as Collateral Agent for the benefit of the Secured Parties, pursuant to which the Borrower and the Parent Guarantor have granted a first-priority security interest in substantially all of their respective personal property assets and equity interests.
"Equity Pledge Agreement" means the Equity Interest Pledge Agreement, dated as of the date hereof, made by the Parent Guarantor in favor of the Collateral Agent, pursuant to which the Parent Guarantor has pledged 100% of the membership interests in Ironhaven Data Centers LLC and 100% of the equity interests in Ironhaven Frankfurt GmbH.
"Deed of Trust" means the Deed of Trust, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, dated as of the date hereof, from the Borrower to the trustee named therein, for the benefit of the Collateral Agent, encumbering the real property located in Loudoun County, Virginia, and to be recorded in the Clerk's Office of the Circuit Court of Loudoun County, Virginia.
"Loan Documents" means, collectively, the Credit Agreement, the Guarantee Agreement, the US Security Agreement, the Equity Pledge Agreement, the Deed of Trust, and each of the other agreements, instruments, certificates, and documents defined as "Loan Documents" in the Credit Agreement.
"Transaction" means the transactions contemplated by the Loan Documents, including (i) the extension of the $950,000,000 Term Loan B by the Lenders, (ii) the granting of the guarantees and the security interests and liens contemplated by the Guarantee Agreement, the US Security Agreement, the Equity Pledge Agreement, and the Deed of Trust, (iii) the application of the proceeds of the Term Loan to the purposes specified in the Credit Agreement, and (iv) the execution, delivery, and performance of the Loan Documents by the Loan Parties.
1.3 Documents and Records Examined
In rendering the opinions expressed herein, we have examined originals, or copies certified or otherwise identified to our satisfaction as being true and complete copies of the originals, of the following documents, records, and other materials:
(a) a certified copy of the Certificate of Formation of Ironhaven Data Centers LLC, as filed with the Secretary of State of the State of Delaware on March 12, 2018, together with all amendments thereto, and the Third Amended and Restated Limited Liability Company Operating Agreement of Ironhaven Data Centers LLC, dated as of January 15, 2023, as currently in effect;
(b) a certified copy of the Certificate of Incorporation of Ironhaven Holdings Inc., as filed with the Secretary of State of the State of Delaware on February 28, 2018, together with all amendments thereto, and the Amended and Restated Bylaws of Ironhaven Holdings Inc., as adopted on January 15, 2023, and currently in effect;
(c) a Handelsregisterauszug (commercial register excerpt) for Ironhaven Frankfurt GmbH (HRB 129457, Amtsgericht Frankfurt am Main), dated April 22, 2024, certified by a German notary public, together with the current Gesellschaftsvertrag (articles of association) of Ironhaven Frankfurt GmbH;
(d) the Credit Agreement (execution version dated May 15, 2024), including all exhibits, schedules, and annexes thereto;
(e) the Guarantee Agreement, the US Security Agreement, the Equity Pledge Agreement, and the Deed of Trust (each in execution form);
(f) the schedules to the Credit Agreement, including the schedule of assets (Schedule 5.20), the schedule of existing indebtedness (Schedule 7.03), the schedule of existing liens (Schedule 7.01), the schedule of subsidiaries (Schedule 5.11), and the schedule of real property (Schedule 5.21);
(g) the Confidential Information Memorandum, dated March 2024, prepared by Crescent Harbor Bank, N.A. in connection with the syndication of the Term Loan;
(h) the audited consolidated financial statements of Ironhaven Data Centers LLC for the fiscal years ended December 31, 2022 and December 31, 2021, and the unaudited consolidated financial statements of Ironhaven Data Centers LLC for the twelve-month period ended September 30, 2023 (reflecting revenue of $412.6 million) and the twelve-month period ended March 31, 2024 (reflecting Adjusted EBITDA of $165.8 million), each as delivered to the Administrative Agent pursuant to the Credit Agreement;
(i) certificates of officers of each of the Loan Parties, including (A) an Officer's Certificate of Ironhaven Data Centers LLC, dated the date hereof, executed by its Chief Financial Officer, certifying as to certain factual matters relevant to the opinions expressed herein, (B) an Officer's Certificate of Ironhaven Holdings Inc., dated the date hereof, executed by its Secretary, certifying as to certain factual matters relevant to the opinions expressed herein, and (C) incumbency certificates of each of the Loan Parties;
(j) copies of written resolutions of the Board of Managers of Ironhaven Data Centers LLC, dated April 30, 2024, authorizing the execution, delivery, and performance of the Loan Documents to which the Borrower is a party, and written resolutions of the Board of Directors of Ironhaven Holdings Inc., dated April 30, 2024, authorizing the execution, delivery, and performance of the Loan Documents to which the Parent Guarantor is a party;
(k) pre-lease letters of intent, including (A) that certain Pre-Lease Letter of Intent, dated February 7, 2024, between Ironhaven Data Centers LLC and Stratos Cloud Services, Inc. for approximately 30 MW of critical IT load at the Virginia campus, and (B) that certain Pre-Lease Letter of Intent, dated March 1, 2024, between Ironhaven Frankfurt GmbH and Euronova Digital GmbH for approximately 20 MW of critical IT load at the Frankfurt campus; and
(l) such other documents, instruments, agreements, certificates of public officials, records, and other materials as we have deemed necessary or advisable for the purposes of this Opinion.
1.4 Assumptions and Qualifications
In rendering this Opinion, we have made, and our opinions are subject to and qualified by, the following assumptions and qualifications:
(a) We have assumed the genuineness of all signatures on documents examined by us, the legal capacity of all natural persons executing documents, the authenticity of all documents submitted to us as originals, and the conformity to authentic originals of all documents submitted to us as copies.
(b) We have assumed the accuracy and completeness of all factual representations and statements of fact made to us by the Loan Parties and their respective officers, directors, managers, and representatives, including the representations and warranties set forth in the Credit Agreement and the other Loan Documents and the factual matters set forth in the officer's certificates described in Section 1.3(i) above. We have not independently investigated or verified any such factual matters and have relied upon the foregoing representations and statements without independent inquiry.
(c) We have assumed that each party to the Loan Documents, other than the Loan Parties, has been duly organized or formed and is validly existing under the laws of its jurisdiction of organization, has the requisite power and authority to execute, deliver, and perform the Loan Documents to which it is a party, and has duly authorized, executed, and delivered such Loan Documents.
(d) We express no opinion herein as to the laws of any jurisdiction other than (i) the federal laws of the United States of America and (ii) the laws of the State of New York. Without limiting the foregoing, this Opinion does not address the laws of the Federal Republic of Germany, the Commonwealth of Virginia (which is the subject of our separate Virginia Law Opinion delivered simultaneously herewith), or the State of Delaware (which, to the extent applicable, is addressed in the Primary Opinion), except to the extent that the federal laws of the United States and the usury laws of the State of New York are expressly addressed in Sections 2, 3, and 4 below.
(e) This Opinion is limited to the specific legal matters expressly addressed in Sections 2, 3, and 4 below, and no opinion is to be implied or inferred beyond the matters expressly stated herein.
(f) We have assumed that the Loan Documents accurately describe the material terms of the Transaction and that the Transaction will be consummated in accordance with the terms described therein without any material modification or waiver.
2. INVESTMENT COMPANY ACT ANALYSIS
2.1 Applicable Legal Framework
The Investment Company Act of 1940, as amended (15 U.S.C. §§ 80a-1 et seq.) (the "1940 Act"), provides a comprehensive regulatory framework governing entities that are "investment companies" as defined in Section 3 of the 1940 Act. An entity that falls within the definition of an "investment company" and does not qualify for an exclusion or exemption is required to register with the U.S. Securities and Exchange Commission (the "SEC") and is subject to substantial regulatory requirements, including limitations on its capital structure, leverage, transactions with affiliates, and other activities.
For purposes of this Opinion, the relevant definitional provisions are as follows:
(a) Section 3(a)(1) of the 1940 Act defines an "investment company" to include any issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.
(b) Section 3(a)(3) of the 1940 Act defines an "investment company" to include any issuer which is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire "investment securities" (as defined in Section 3(a)(2) of the 1940 Act) having a value exceeding 40 percent of the value of such issuer's total assets (exclusive of Government securities and cash items) on an unconsolidated basis (the "40% Test").
(c) Section 3(a)(2) of the 1940 Act defines "investment securities" to include all securities except (i) Government securities, (ii) securities issued by employees' securities companies, and (iii) securities issued by majority-owned subsidiaries of the owner which (A) are not themselves investment companies and (B) are not relying on the exclusions from the definition of "investment company" provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
In addition, the 1940 Act provides certain exclusions from the definition of "investment company" that are relevant to our analysis:
(d) Section 3(b)(1) of the 1940 Act provides that, notwithstanding the provisions of Section 3(a), an issuer is not an investment company if it is primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities. In determining whether an issuer qualifies for this exclusion, the SEC and courts have historically considered a number of factors, including the issuer's historical development, its public representations of policy, the activities of its officers and directors, the nature of its present assets, and the sources of its present income. See Tonopah Mining Co. of Nevada, 26 SEC 426 (1947).
(e) Section 3(c)(5)(C) of the 1940 Act excludes from the definition of "investment company" any entity that does not issue redeemable securities, face-amount certificates of the installment type, or periodic payment plan certificates, and that is primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
2.2 Analysis of Ironhaven Data Centers LLC (Borrower)
Ironhaven Data Centers LLC ("IHDC" or the "Borrower") is a Delaware limited liability company that was formed on March 12, 2018 and maintains its principal executive offices at 4500 Dominion Ridge Boulevard, Suite 300, Ashburn, Virginia 20147. Based upon the representations of the Loan Parties, the organizational documents of the Borrower, the financial statements and other documents examined by us, and the Officer's Certificate of the Borrower, we note the following:
IHDC is engaged in the development, ownership, and operation of hyperscale data-center campuses, providing colocation and wholesale hosting services to enterprise, cloud, and managed-services customers. The Borrower's primary business activities consist of (i) the acquisition and development of real property suitable for data-center use, (ii) the construction and equipping of data-center facilities on such properties, (iii) the leasing of data-center space, power, and connectivity to third-party customers under long-term colocation and wholesale hosting agreements, and (iv) the ongoing management and operation of its data-center campuses, including the provision of power, cooling, physical security, and network connectivity infrastructure. IHDC does not engage, and does not hold itself out as being engaged primarily or otherwise, in the business of investing, reinvesting, or trading in securities.
With respect to the composition of IHDC's assets, the unaudited consolidated balance sheet of IHDC as of the last twelve months ended September 30, 2023 reflects total assets of approximately $1.87 billion. These assets are predominantly composed of: (i) real property, consisting of the Virginia campus located at 4500–4550 Dominion Ridge Boulevard, Ashburn, Virginia (approximately 142 acres of land, together with all buildings, improvements, fixtures, and equipment thereon), and the Frankfurt campus parcel located at Hanauer Landstraße 188, Frankfurt am Main, Germany (approximately 18.7 hectares, held through the Borrower's wholly-owned subsidiary, Ironhaven Frankfurt GmbH); (ii) physical infrastructure assets, including electrical distribution systems, uninterruptible power supply units, diesel generators, cooling systems, and network connectivity equipment; (iii) construction-in-progress related to Phase I development at both the Virginia and Frankfurt campuses; (iv) accounts receivable arising from colocation and hosting agreements; and (v) cash and cash equivalents.
IHDC's revenue for the last twelve months ended September 30, 2023 was approximately $412.6 million. This revenue is derived entirely from the provision of colocation services and wholesale hosting services to the Borrower's customers, including enterprise information technology users, hyperscale cloud service providers, and managed service providers. No portion of the Borrower's revenue is derived from investment activities, securities trading, or the receipt of dividends, interest, or other investment income on a portfolio of securities.
The Borrower's sole equity interest in another entity consists of its 100% ownership of the equity interests (shares) in Ironhaven Frankfurt GmbH, a German Gesellschaft mit beschränkter Haftung. Ironhaven Frankfurt GmbH is a wholly-owned operating subsidiary of the Borrower that is engaged in the same data-center development and operations business as the Borrower. The equity interest in Ironhaven Frankfurt GmbH does not constitute an "investment security" within the meaning of Section 3(a)(2) of the 1940 Act because it is a security issued by a majority-owned subsidiary of the Borrower that (A) is not itself an investment company, and (B) is not relying on the exclusions from the definition of "investment company" set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
Accordingly, IHDC does not satisfy the definition of an "investment company" under either Section 3(a)(1) or Section 3(a)(3) of the 1940 Act. IHDC is not engaged primarily, and does not hold itself out as being engaged primarily, in the business of investing, reinvesting, or trading in securities. Furthermore, IHDC does not own "investment securities" having a value exceeding 40% of its total assets on an unconsolidated basis. In addition, IHDC would independently qualify for the exclusion set forth in Section 3(b)(1) of the 1940 Act as an entity primarily engaged, directly and through its wholly-owned subsidiary, in a non-investment business — namely, the development, ownership, and operation of data-center real estate and infrastructure.
2.3 Analysis of Ironhaven Holdings Inc. (Parent Guarantor)
Ironhaven Holdings Inc. ("Holdings" or the "Parent Guarantor") is a Delaware corporation that was incorporated on February 28, 2018 and serves as the direct parent holding company of the Borrower. Based upon the representations of the Loan Parties, the organizational documents of Holdings, and the Officer's Certificate of Holdings, the sole asset of Holdings is its 100% membership interest in IHDC. Holdings has no employees, no independent business operations, and no assets other than its equity investment in IHDC. Holdings does not engage, and does not hold itself out as being engaged, in the business of investing, reinvesting, or trading in securities.
With respect to Section 3(a)(1) of the 1940 Act, Holdings is not engaged primarily in the business of investing, reinvesting, or trading in securities. Holdings' sole function is to serve as a holding company for IHDC, an operating company. The ownership of a 100% equity interest in a wholly-owned operating subsidiary does not, without more, constitute "investing in securities" for purposes of Section 3(a)(1). Holdings does not hold itself out as being engaged in any investment business.
With respect to Section 3(a)(3) of the 1940 Act, Holdings' sole asset — its 100% membership interest in IHDC — is not an "investment security" within the meaning of Section 3(a)(2) of the 1940 Act. As discussed in Section 2.2 above, IHDC is a majority-owned subsidiary of Holdings that is not itself an investment company and does not rely on Section 3(c)(1) or Section 3(c)(7). Because Holdings' only security holding is excluded from the definition of "investment securities," the value of "investment securities" held by Holdings is zero, which does not exceed 40% of Holdings' total assets.
In addition, Holdings independently qualifies for the exclusion set forth in Section 3(b)(1) of the 1940 Act. The SEC and courts have recognized that a holding company whose sole function is to hold the equity of one or more operating subsidiaries is "primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities." Applying the factors articulated in Tonopah Mining Co. of Nevada, 26 SEC 426 (1947), Holdings' historical development (organized solely to hold IHDC), the nature of its assets (100% equity in an operating subsidiary), and the activities of its officers and directors (managing a data-center operating company) all support the conclusion that Holdings is primarily engaged in a non-investment business through its wholly-owned subsidiary.
2.4 Analysis of Ironhaven Frankfurt GmbH (Co-Borrower)
Ironhaven Frankfurt GmbH ("IHDC Frankfurt" or the "Co-Borrower") is a German Gesellschaft mit beschränkter Haftung registered with the commercial register (Handelsregister) of the Amtsgericht Frankfurt am Main under HRB 129457. IHDC Frankfurt is a wholly-owned subsidiary of IHDC, organized under German law and engaged in the business of owning, developing, and operating the Frankfurt data-center campus.
IHDC Frankfurt's assets consist of real property (the Frankfurt campus parcel of approximately 18.7 hectares at Hanauer Landstraße 188, Frankfurt am Main), construction-in-progress relating to Phase I development of the Frankfurt campus, equipment, and other operational assets directly related to the data-center business. IHDC Frankfurt does not own any securities, does not engage in the business of investing, reinvesting, or trading in securities, and does not hold itself out as being engaged in any such business.
As a foreign private issuer operating a physical infrastructure business, IHDC Frankfurt does not fall within the definition of an "investment company" under Section 3(a)(1) or Section 3(a)(3) of the 1940 Act. Its assets are operational in nature, and it does not own "investment securities" in any amount, let alone in an amount exceeding 40% of its total assets. Moreover, Section 7(d) of the 1940 Act separately restricts foreign companies from using the instrumentalities of interstate commerce in the United States to offer or sell securities unless authorized by order of the SEC. This provision is inapplicable here because IHDC Frankfurt is not offering or selling securities to the public; the Term Loan is a private commercial lending arrangement, and the Co-Borrower's participation therein does not involve the issuance of "securities" within the meaning of the 1940 Act.
2.5 Analysis of the Transaction
The Transaction contemplated by the Loan Documents involves the extension of a $950,000,000 Term Loan B by the Lenders to the Borrower and the Co-Borrower. The Term Loan is a commercial lending facility structured as a senior secured term loan, and it does not constitute a public offering of securities. The proceeds of the Term Loan are to be applied as follows:
(a) approximately $475,000,000 for construction and development costs of Phase I of the Virginia data-center campus;
(b) approximately $275,000,000 (denominated in euros at an amount of €253,571,429) for construction and development costs of Phase I of the Frankfurt data-center campus;
(c) $130,000,000 for the refinancing and repayment in full of the outstanding 12.50% PIK mezzanine notes held by Greystone Mezzanine Fund II, LP (which mezzanine notes were originally incurred to fund data-center construction and were not incurred for the purpose of purchasing or carrying any securities);
(d) $32,500,000 for payment of transaction fees and expenses incurred in connection with the negotiation, documentation, and closing of the Credit Agreement and the other Loan Documents; and
(e) $37,500,000 for working capital and general corporate purposes.
None of the foregoing uses of proceeds involves the purchase, acquisition, or trading of securities. The proceeds are being applied to fund physical real estate and infrastructure development, refinance existing construction financing, and support the working capital needs of an operating business.
Furthermore, none of the Loan Parties is issuing "redeemable securities," "face-amount certificates of the installment type," or "periodic payment plan certificates" within the meaning of the 1940 Act in connection with the Transaction. The Term Loan is an obligation of the Borrower and the Co-Borrower that is not redeemable at the option of the holder in the manner contemplated by the 1940 Act's definition of "redeemable security." Accordingly, the consummation of the Transaction will not cause any of the Loan Parties to become an "investment company" required to register under the 1940 Act.
2.6 Conclusion — Investment Company Act
Based upon the foregoing analysis, and subject to the assumptions, qualifications, and limitations set forth in this Opinion, it is our opinion that:
None of Ironhaven Data Centers LLC, Ironhaven Holdings Inc., or Ironhaven Frankfurt GmbH is, or upon the consummation of the transactions contemplated by the Credit Agreement and the other Loan Documents will be required to register as, an "investment company" within the meaning of the Investment Company Act of 1940, as amended.
3. FEDERAL RESERVE MARGIN REGULATION ANALYSIS
3.1 Applicable Legal Framework
The Board of Governors of the Federal Reserve System (the "Federal Reserve") has promulgated regulations governing the extension of credit for the purpose of purchasing or carrying "margin stock." The relevant regulations are:
(a) Regulation T (12 C.F.R. Part 220), which governs the extension of credit by brokers and dealers for the purpose of purchasing or carrying securities;
(b) Regulation U (12 C.F.R. Part 221), which governs the extension of credit by any person (including banks and non-bank lenders) that is secured, directly or indirectly, by margin stock, for the purpose of purchasing or carrying margin stock; and
(c) Regulation X (12 C.F.R. Part 224), which applies to borrowers who obtain credit within the United States for the purpose of purchasing or carrying margin stock.
For purposes of these regulations, "margin stock" is defined in Section 221.2 of Regulation U to include (i) any equity security registered on, or having unlisted trading privileges on, a national securities exchange; (ii) any OTC security designated as an "OTC margin stock" by the Federal Reserve; (iii) any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock; (iv) any warrant or right to subscribe to or purchase a margin stock; and (v) any security issued by an investment company registered under Section 8 of the Investment Company Act of 1940. The term "purpose credit" refers to credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any margin stock.
The central inquiry under Regulation U is whether any part of the proceeds of the Term Loan will be used, directly or indirectly, to "purchase" or "carry" margin stock, or to refinance indebtedness that was originally incurred for such purpose. A loan is considered to be for the purpose of purchasing or carrying margin stock if, at the time the credit is extended, the lender knows or has reasonable cause to believe that the borrower will use the proceeds (or any portion thereof) for such purpose. See 12 C.F.R. § 221.3(a).
3.2 Analysis of Borrower's Use of Proceeds
The Credit Agreement specifies the permitted uses of the proceeds of the Term Loan as follows:
(a) $475,000,000 for Phase I construction and development costs of the Borrower's Virginia data-center campus located in Loudoun County, Virginia, including land improvements, building construction, electrical and mechanical infrastructure, and equipment acquisition and installation;
(b) $275,000,000 (€253,571,429, converted at the Closing Date exchange rate) for Phase I construction and development costs of the Frankfurt data-center campus owned by IHDC Frankfurt, including land improvements, building construction, electrical and mechanical infrastructure, and equipment acquisition and installation;
(c) $130,000,000 for the refinancing and repayment in full of the outstanding 12.50% PIK mezzanine notes issued to Greystone Mezzanine Fund II, LP, which notes were originally incurred to fund data-center construction activities and were not, at any time, incurred for the purpose of purchasing or carrying margin stock;
(d) $32,500,000 for payment of fees, costs, and expenses incurred in connection with the Transaction, including arrangement fees payable to Crescent Harbor Bank, N.A. as Sole Lead Arranger and Sole Bookrunner, legal fees, due diligence costs, and other customary closing expenses; and
(e) $37,500,000 for working capital and general corporate purposes of the Borrower and its subsidiaries, including operational expenses related to the data-center business.
None of the foregoing uses of proceeds involves, directly or indirectly, the purchase or carrying of "margin stock" within the meaning of Regulation U. The proceeds are dedicated entirely to real estate development, construction, refinancing of construction-related indebtedness, transaction expenses, and working capital for an operating data-center business.
Furthermore, none of the Loan Parties is listed on a national securities exchange, and no equity security of any Loan Party is traded on any national securities exchange or designated as an OTC margin stock. The membership interests in IHDC (a Delaware limited liability company), the shares of IHDC Frankfurt (a German GmbH), and the shares of common stock of Ironhaven Holdings Inc. (a privately-held Delaware corporation) are privately held and do not constitute "margin stock" under any provision of Regulation U.
The Credit Agreement contains express representations and covenants addressing margin stock compliance. Specifically:
(i) Section 5.17 of the Credit Agreement contains a representation and warranty by the Borrower that no proceeds of the Term Loan will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or for any other purpose that would be inconsistent with or in violation of the provisions of Regulation T, Regulation U, or Regulation X.
(ii) Section 7.09 of the Credit Agreement contains a negative covenant prohibiting the use of any proceeds of the Term Loan, directly or indirectly, for the purpose of purchasing or carrying any margin stock.
(iii) Section 5.17 of the Credit Agreement further represents that the Borrower does not own any margin stock and that none of the Collateral (as defined therein) constitutes margin stock.
We have relied upon the foregoing representations and covenants, and upon the officer's certificates delivered to us by the Loan Parties, in reaching the conclusions expressed herein.
3.3 Analysis of Collateral Package
The obligations of the Loan Parties under the Credit Agreement are secured by a comprehensive collateral package consisting of both domestic and foreign assets. We have reviewed the collateral descriptions set forth in the US Security Agreement, the Equity Pledge Agreement, and the Deed of Trust to assess whether any of the pledged collateral constitutes "margin stock."
Domestic Collateral. The domestic collateral package includes:
(a) the real property comprising the Virginia data-center campus in Loudoun County, Virginia, consisting of approximately 142 acres of land identified by Tax Parcel Nos. 087-27-1234 and 087-27-1235 in the records of the Loudoun County Commissioner of the Revenue, together with all buildings, improvements, fixtures, and appurtenances thereon;
(b) all tangible personal property of the Borrower and the Parent Guarantor, including equipment, inventory, furniture, and fixtures;
(c) all intellectual property of the Borrower, including trademarks, trade names, patents, copyrights, trade secrets, and licenses;
(d) all deposit accounts maintained by the Borrower and the Parent Guarantor, including the Revenue Account and the Reserve Account at Crescent Harbor Bank, N.A.;
(e) all accounts receivable and payment intangibles of the Borrower arising from colocation and hosting agreements;
(f) 100% of the membership interests in Ironhaven Data Centers LLC, pledged by the Parent Guarantor; and
(g) 100% of the equity interests (shares) in Ironhaven Frankfurt GmbH, pledged by the Borrower.
German Collateral. The German collateral package, which is governed by German law and documented under separate agreements (and as to which we express no opinion as to enforceability or validity under German law), includes:
(h) a Grundschuld (land charge) over the Frankfurt campus parcel;
(i) a global assignment (Globalzession) of receivables of IHDC Frankfurt;
(j) bank account pledges (Kontenpfandrecht) over accounts maintained by IHDC Frankfurt;
(k) a security transfer (Sicherungsübereignung) of movable assets of IHDC Frankfurt; and
(l) a share pledge (Anteilsverpfändung) of the shares in IHDC Frankfurt.
None of the foregoing pledged assets constitutes "margin stock" within the meaning of Regulation U. The real property, equipment, intellectual property, deposit accounts, and accounts receivable are tangible and intangible business assets that do not fall within the definition of margin stock. The equity interests in IHDC (LLC membership interests) and IHDC Frankfurt (GmbH shares) are not equity securities listed on a national securities exchange, are not designated as OTC margin stock, and are not debt securities convertible into margin stock or carrying warrants or rights to subscribe to margin stock. Accordingly, the collateral securing the Term Loan does not include any margin stock.
3.4 Regulation U — Lender Compliance
We note that certain of the Lenders are "banks" as defined in Section 221.2 of Regulation U, and that all Lenders (whether banks or non-bank lenders) are subject to the requirements of Regulation U with respect to extensions of purpose credit secured by margin stock.
(a) Bank Lenders. Crescent Harbor Bank, N.A. is a national banking association organized under the laws of the United States and chartered by the Office of the Comptroller of the Currency, with its main office in Charlotte, North Carolina. Ridgeline National Bank is a national banking association organized under the laws of the United States and chartered by the Office of the Comptroller of the Currency, with its main office in Boston, Massachusetts. Each of these entities is a "bank" within the meaning of Section 221.2 of Regulation U. Under Section 221.3(a) of Regulation U, a bank may not extend or maintain credit secured, directly or indirectly, by margin stock in an amount that exceeds the maximum loan value of the collateral, if the credit is for the purpose of buying or carrying margin stock. Because the Term Loan is not for the purpose of buying or carrying margin stock, and the collateral does not include margin stock, the extension of credit by these bank lenders does not violate Regulation U.
(b) Non-Bank Lenders. Marlowe Asset Management Meridian Capital, LLC; Atlas Peak Credit Partners, LP; NordBrücke AG; Pacific Rim Institutional Lending Corp.; and Osprey Insurance Capital, Ltd. are non-bank lenders. Under Section 221.3(b) of Regulation U, a non-bank lender may not extend or maintain purpose credit secured, directly or indirectly, by margin stock if the lender is required to register with the Federal Reserve as a non-bank lender making margin loans. Because the Term Loan is not for the purpose of buying or carrying margin stock and the collateral does not include margin stock, the extension of credit by these non-bank lenders does not implicate the registration or compliance requirements of Regulation U applicable to non-bank lenders.
3.5 Conclusion — Margin Regulations
Based upon the foregoing analysis, and subject to the assumptions, qualifications, and limitations set forth in this Opinion, it is our opinion that:
The execution, delivery, and performance of the Credit Agreement and the other Loan Documents by the Loan Parties, and the use of proceeds of the Term Loan as described in the Credit Agreement, will not violate or be inconsistent with Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221), or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System.
4. NEW YORK USURY ANALYSIS
4.1 Applicable Legal Framework
The usury laws of the State of New York impose limitations on the maximum rate of interest that may be charged in connection with a loan or forbearance of money. The principal statutory provisions governing usury in New York are as follows:
(a) New York General Obligations Law § 5-501 provides that the maximum rate of interest shall be as prescribed in Section 14-a of the Banking Law, except as otherwise provided by law. Section 14-a of the New York Banking Law establishes a civil usury limit of sixteen percent (16%) per annum.
(b) New York Penal Law § 190.40 provides that a person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes, or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five percent (25%) per annum or the equivalent rate for a longer or shorter period.
(c) New York Penal Law § 190.42 provides that a person is guilty of criminal usury in the first degree when, not being authorized or permitted by law to do so, he knowingly charges, takes, or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five percent (25%) per annum or the equivalent rate for a longer or shorter period, and either the loan or forbearance has a principal amount exceeding $2,500,000 or the person has previously been convicted of the crime of criminal usury.
Critically, New York law provides several exemptions from these usury limitations:
(d) GOL § 5-501(6)(b) provides that no maximum rate of interest shall be prescribed for any loan or forbearance in the amount of two million five hundred thousand dollars ($2,500,000) or more, other than a loan secured primarily by an interest in real property improved by a one- or two-family residence. This exemption eliminates the civil usury ceiling for qualifying loans.
(e) New York Banking Law § 14-a(1) exempts certain enumerated financial institutions from the civil usury limit, including national banking associations, savings banks, savings and loan associations, credit unions, and other specified entities. National banks are separately exempt from state usury laws pursuant to federal preemption under 12 U.S.C. § 85 (the National Bank Act), as discussed in Section 4.4 below.
(f) Under New York case law, obligations that are payable in a currency other than United States dollars have been held to be exempt from the New York usury statutes on the ground that such obligations do not involve a "loan or forbearance of any money" within the meaning of the New York usury law. See Corporación Venezolana de Fomento v. Vintero Sales Corp., 477 F. Supp. 615 (S.D.N.Y. 1979); Swiss Credit Bank v. Virginia Int'l Terminals, Inc., No. 84 Civ. 4546, 1985 U.S. Dist. LEXIS 16834 (S.D.N.Y. Apr. 8, 1985).
4.2 Application to the Term Loan
The Term Loan under the Credit Agreement has an aggregate commitment amount of $950,000,000, consisting of a USD tranche and a EUR sub-tranche. This aggregate principal amount substantially exceeds the $2,500,000 threshold established by GOL § 5-501(6)(b) for the exemption from the civil usury ceiling, as discussed in greater detail in Section 4.3 below.
The interest rate applicable to the Term Loan is as follows:
(a) USD Tranche: SOFR (Secured Overnight Financing Rate) plus a margin of 425 basis points (4.25%) per annum, subject to a SOFR floor of 0.50% per annum. As of the date hereof, three-month term SOFR is approximately 5.33%, resulting in a current all-in interest rate of approximately 9.58% per annum.
(b) EUR Sub-Tranche: EURIBOR (Euro Interbank Offered Rate) plus a margin of 425 basis points (4.25%) per annum, subject to a EURIBOR floor of 0.00% per annum. As of the date hereof, three-month EURIBOR is approximately 3.89%, resulting in a current all-in interest rate for the EUR sub-tranche of approximately 8.14% per annum.
Even under a stressed interest rate scenario — assuming, for example, that term SOFR were to increase to levels observed during the most recent period of monetary policy tightening — the all-in interest rate on the USD tranche would remain well below the criminal usury ceiling of 25% per annum. For illustrative purposes, if term SOFR were to reach 10.00% (a level not observed in recent history), the all-in interest rate would be 14.25% per annum, which is still below the civil usury limit of 16% per annum and substantially below the criminal usury limit of 25% per annum.
In addition to the contractual interest rate, we have analyzed the fees and other charges payable under the Credit Agreement and the other Loan Documents that could, under the most conservative analytical framework, be characterized as "interest" for usury purposes. Under New York law, courts have adopted a substance-over-form approach and have considered whether certain fees and charges, though denominated as something other than "interest," are in substance charges for the use or forbearance of money and should therefore be included in the computation of the effective interest rate. See Seidel v. 18 East 17th Street Owners, Inc., 79 N.Y.2d 735, 586 N.Y.S.2d 240 (1992). The relevant fees and charges are as follows:
(a) Original Issue discount ("OID"): 50 basis points (0.50%), resulting in an issue price of 99.50. The OID represents a discount from the face amount of the Term Loan, and the aggregate dollar amount of OID is $4,750,000.
(b) Arrangement Fee: $14,250,000, payable to Crescent Harbor Bank, N.A. as Sole Lead Arranger and Sole Bookrunner, representing 1.50% of the aggregate commitments.
(c) Administrative Agent Fee: $175,000 per annum, payable to Crescent Harbor Bank, N.A. in its capacity as Administrative Agent.
(d) Ticking Fee: $527,778, calculated as 0.25% per annum on $950,000,000 for 80 days (from the date hereof through the expected Closing Date of June 3, 2024 and the period of delayed draw availability thereafter), representing compensation for the Lenders' commitment during the period between the execution of the Credit Agreement and the initial funding.
(e) Late Payment Charges and Default Interest: In the event of a payment default, the Credit Agreement provides for default interest at a rate of 2.00% per annum above the otherwise applicable interest rate. Even under a stressed scenario in which default interest is applied, the combined rate (base rate plus margin plus default premium) would not approach the criminal usury ceiling of 25% per annum.
(f) Soft Call Premium: The Credit Agreement provides for a prepayment premium of 1.00% (101) on any voluntary prepayment made during the first six months following the Closing Date (i.e., through December 3, 2024). This premium is a charge for the Borrower's option to prepay and has been held by New York courts to constitute a permissible charge that is not inherently "interest" for usury purposes, particularly in the context of sophisticated commercial transactions. See Kraus v. Mendelsohn, 97 Misc. 2d 454, 411 N.Y.S.2d 823 (Sup. Ct. 1978).
(g) Change of Control Premium: The Credit Agreement provides for a mandatory prepayment premium of 1.00% (101% of par) upon the occurrence of a Change of Control. As with the soft call premium, this charge is contingent upon a future event and is not analogous to a periodic charge for the use of money.
Under New York law, even when applying the most conservative approach and treating all of the foregoing fees and charges as "interest" — aggregating the OID, arrangement fee, administrative agent fee, ticking fee, and the soft call premium (assuming it were triggered at the earliest opportunity) and amortizing such charges over the life of the Term Loan — the effective annualized interest rate would remain well below 25% per annum. We have performed this computation and determined that the maximum effective annual rate, under the most aggressive assumptions, would not exceed approximately 11.5% per annum, which is below even the civil usury ceiling of 16% per annum.
4.3 Exemption Analysis — GOL § 5-501(6)(b)
New York General Obligations Law § 5-501(6)(b) provides:
"No maximum rate of interest shall be prescribed for any loan or forbearance in the amount of two million five hundred thousand dollars ($2,500,000) or more, other than a loan secured primarily by an interest in real property improved by a one or two family residence."
The aggregate principal amount of the Term Loan is $950,000,000, which clearly and unambiguously exceeds the $2,500,000 threshold established by this provision. Furthermore, the Term Loan is not "secured primarily by an interest in real property improved by a one or two family residence." While the Deed of Trust encumbers real property in Loudoun County, Virginia, such real property is improved by a commercial data-center facility and not by a one- or two-family residence. The exception to the exemption is therefore inapplicable.
Accordingly, under GOL § 5-501(6)(b), no maximum rate of interest is prescribed for the Term Loan. The civil usury limit of 16% per annum established by Banking Law § 14-a does not apply to the Term Loan.
It is important to note, however, that the GOL § 5-501(6)(b) exemption from the civil usury ceiling does not extend to the criminal usury statutes. See Adar Bays, LLC v. Larkspur Solutions ID, Inc., 37 N.Y.3d 320, 154 N.Y.S.3d 67 (2021). Nevertheless, as demonstrated by our analysis in Section 4.2 above, the effective interest rate under the Credit Agreement, inclusive of all fees and charges, is well below the criminal usury ceiling of 25% per annum established by New York Penal Law § 190.40.
4.4 Federal Preemption — National Bank Lenders
Two of the Lenders party to the Credit Agreement are national banking associations chartered by the Office of the Comptroller of the Currency:
(a) Crescent Harbor Bank, N.A. is a national banking association with its main office located in Charlotte, North Carolina.
(b) Ridgeline National Bank is a national banking association with its main office located in Boston, Massachusetts.
Under Section 85 of the National Bank Act (12 U.S.C. § 85), a national banking association may charge interest on any loan at a rate allowed by the laws of the state in which the bank is "located," which, for purposes of 12 U.S.C. § 85, means the state in which the bank's main office is located. See Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299 (1978). Pursuant to the Supremacy Clause of the United States Constitution, 12 U.S.C. § 85 preempts the application of state usury laws to national banks, including the New York usury statutes. Accordingly, the interest rate limitations imposed by New York General Obligations Law § 5-501, New York Banking Law § 14-a, and New York Penal Law §§ 190.40 and 190.42 are preempted by federal law with respect to extensions of credit by Crescent Harbor Bank, N.A. and Ridgeline National Bank.
With respect to Crescent Harbor Bank, N.A., whose main office is in North Carolina, the applicable rate is the rate permitted under the laws of North Carolina or the rate provided by 12 U.S.C. § 85 (whichever is greater). North Carolina's usury laws (N.C. Gen. Stat. § 24-1.1) provide for a maximum rate that, in any event, exceeds the interest rate charged under the Credit Agreement. With respect to Ridgeline National Bank, whose main office is in Massachusetts, the applicable rate is the rate permitted under the laws of Massachusetts, which similarly does not restrict the interest rate charged under the Credit Agreement. In each case, the interest rate under the Credit Agreement does not exceed the permissible limits under applicable law.
For the avoidance of doubt, our usury analysis in Sections 4.1 through 4.3 above demonstrates that the interest rate and charges under the Credit Agreement do not violate New York usury law even without resort to federal preemption. The preemption analysis is provided as an additional basis of comfort.
4.5 EUR Sub-Tranche Considerations
The Credit Agreement provides for a EUR sub-tranche in the amount of €253,571,429 (approximately $275,000,000 at the indicative exchange rate), which is denominated and payable in euros. This sub-tranche bears interest at EURIBOR plus 425 basis points per annum.
Under New York case law, obligations that are payable in a foreign currency have been held to be exempt from the New York usury statutes. In Corporación Venezolana de Fomento v. Vintero Sales Corp., 477 F. Supp. 615, 622 (S.D.N.Y. 1979), the court held that a loan payable in a foreign currency is not a "loan or forbearance of any money" within the meaning of the New York usury statutes, because the New York usury law was enacted for the protection of New York borrowers borrowing and repaying in United States dollars and was not intended to apply to obligations denominated in foreign currencies. Although this line of case law has not been extensively developed, the reasoning of the Vintero decision and subsequent decisions applying it provides a basis for the conclusion that the EUR sub-tranche may be independently exempt from the New York usury statutes.
In the alternative, and without relying on the foreign currency exemption, the GOL § 5-501(6)(b) exemption from the civil usury ceiling applies to the EUR sub-tranche. The dollar-equivalent of the EUR sub-tranche is approximately $275,000,000, which substantially exceeds the $2,500,000 threshold. Moreover, the interest rate on the EUR sub-tranche (currently approximately 8.14% per annum) is well below both the civil usury ceiling of 16% per annum and the criminal usury ceiling of 25% per annum.
4.6 Conclusion — Usury
Based upon the foregoing analysis, and subject to the assumptions, qualifications, and limitations set forth in this Opinion, it is our opinion that:
The interest rates, fees, and other charges payable under the Credit Agreement and the other Loan Documents do not violate the usury laws of the State of New York, including New York General Obligations Law § 5-501, New York Banking Law § 14-a, and New York Penal Law §§ 190.40 and 190.42.
5. GENERAL QUALIFICATIONS AND LIMITATIONS
5.1 Scope Limitations
The opinions expressed in this Opinion are limited solely to the specific legal matters expressly stated in Sections 2, 3, and 4 above. No opinion is expressed or implied with respect to any other legal matter, whether or not related to the Transaction or the Loan Documents. Without limiting the generality of the foregoing, we express no opinion as to:
(a) compliance by any Loan Party or any other party with the Bank Holding Company Act of 1956, as amended;
(b) compliance by any Loan Party or any other party with the Bank Secrecy Act of 1970, as amended, including the anti-money laundering provisions thereof;
(c) compliance by any Loan Party or any other party with the economic sanctions programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), which are the subject of a separate memorandum prepared by our firm and delivered to the Administrative Agent simultaneously herewith;
(d) compliance with any state banking law, state securities law (including any "blue sky" law), or state insurance regulation;
(e) compliance with any foreign regulatory requirement, including the regulatory requirements of the Federal Republic of Germany, the European Union, or any other foreign jurisdiction;
(f) the tax consequences of the Transaction, which are addressed in the separate Tax Opinion delivered simultaneously herewith by Sylvia Hartwell, a partner in our Tax Group; or
(g) any environmental, land use, zoning, or building code matter.
Furthermore, we express no opinion as to the law of any jurisdiction other than (i) the federal laws of the United States of America and (ii) the laws of the State of New York, in each case as in effect on the date hereof.
5.2 Reliance on Factual Representations
The opinions expressed herein are based upon and qualified by our reliance on factual matters that have been represented to us by the Loan Parties and their respective officers, directors, managers, and representatives, including without limitation:
(a) the description of the business, operations, and activities of each of the Loan Parties, as set forth in the Confidential Information Memorandum, the officer's certificates delivered to us, and the representations and warranties contained in the Credit Agreement;
(b) the composition of the assets of each of the Loan Parties, as reflected in the financial statements, the schedules to the Credit Agreement, and the officer's certificates delivered to us;
(c) the intended use of proceeds of the Term Loan, as specified in the Credit Agreement and confirmed by the officer's certificates delivered to us; and
(d) the representations and warranties set forth in Article V of the Credit Agreement, which we have assumed are true and correct in all material respects as of the date hereof and will be true and correct in all material respects as of the Closing Date.
We have not independently investigated or verified any of the foregoing factual matters. If any of the factual representations upon which we have relied are materially inaccurate or incomplete, or if the actual business, assets, or operations of any Loan Party differ materially from those represented to us, the opinions expressed herein may be adversely affected, and we assume no responsibility for any such inaccuracy or incompleteness.
5.3 Temporal Limitation