Clark Hill 2025 Commercial Real Estate Outlook: Key Real Estate Considerations for Data Center Development

A rapidly growing area in the real estate industry is the development and operation of data centers. This growth market comes with its challenges for real estate developers and investors, and of course, the attorneys representing them. When evaluating data center real estate projects, attorneys play a key role in evaluating and advising on the critical factors to ensure operational efficiency, reliability, and long-term viability.

1. Power Requirements:

Data centers are highly energy-intensive, requiring substantial and reliable power sources. The availability of redundant power grids, high-capacity electrical infrastructure, and proximity to substations are key considerations. An electrical power report from a qualified energy consultant to analyze the site’s existing power capacity, redundancy levels, historical reliability of the local grid, and the potential for future scalability should be obtained early in the due diligence process. Attorneys should also evaluate agreements with utility providers to ensure that sufficient power is available, and identify any restrictions on increasing capacity. Understanding these factors is crucial, as power constraints can significantly impact operational efficiency and long-term expansion plans for the data center.

2. Water Requirements:

Many data centers rely on water for cooling, especially those using evaporative or liquid cooling systems. As a result, access to a stable water supply is essential. Local water rights, availability, and environmental regulations must be assessed, as water shortages or restrictions can impact operations. If the data center relies on water-intensive cooling methods, attorneys should verify that local water usage laws and environmental permits allow for sufficient consumption.

3. Title Insurance and Removing Certain Exceptions:

Given the significant investment in the development of data center facilities, title insurance plays a crucial role in protecting against ownership disputes, zoning issues, or undisclosed encumbrances. Since data centers often require specific easements (e.g., for fiber-optic cables or power lines), attorneys should carefully review title policies to ensure all necessary rights and access are secured and to obtain affirmative coverage insuring not only the primary facility but these fundamental, operational easements as well. During due diligence, attorneys should work to have certain title exceptions removed from the policy altogether, rather than merely addressed through endorsements.  While endorsements can provide additional protections, they often do not fully eliminate risk.

4. Security and Landlord Access Restrictions:

Security is a top priority for data centers, as they house sensitive and mission-critical data. These facilities often have strict access controls, surveillance systems, and multi-layered security protocols, limiting who can enter certain areas. Landlords, even though they own the property, may be restricted from accessing key areas such as server rooms, network hubs, or operational control centers. In some cases, lease agreements explicitly prohibit landlord access without prior approval from the tenant, even in emergencies. This can create challenges in situations requiring urgent property maintenance, inspections, or emergency response. As such, lease negotiations should address emergency protocols, landlord-tenant coordination, and predefined access procedures to balance security with operational and legal responsibilities.

6. Local and Environmental Regulations Impacting Data Centers:

Local zoning laws, environmental regulations, and energy efficiency mandates can significantly impact a data center’s ability to operate or expand, and therefore, attorneys should carefully review these laws to ensure compliance and identify any restrictions that could limit future scalability. Some key considerations include:

• Zoning Restrictions: Some municipalities have specific zoning requirements for data centers, including noise limitations (from cooling systems or generators), building height restrictions, and land use designations. Attorneys should review local zoning codes and land use plans to confirm that data center operations are permitted and adhered to.
• Energy Efficiency and Carbon Emission Regulations: Some jurisdictions impose strict energy efficiency requirements or carbon emissions limits on large power-consuming facilities. Attorneys should review state and federal energy regulations and determine whether compliance with programs like LEED certification or renewable energy mandates is required.
• Hazardous Materials Regulations: Data centers often store backup generators and fuel reserves on-site, which may be subject to hazardous materials storage regulations. Attorneys should review local fire codes and environmental safety laws to ensure compliance with fuel storage limits and emergency preparedness requirements.

7. Service Level Agreements (SLAs) and Master Service Agreements (MSAs):

Service Level Agreement (SLAs) and Master Service Agreements (MSAs) are customary agreements used to define the terms of service between the data center operator and its tenants or clients. Attorneys should review these agreements to assess risks and obligations. Attorneys should ensure that SLAs appropriately define performance guarantees for uptime, latency, power redundancy, cooling reliability, and maintenance response times. Additionally, MSAs should be reviewed to ensure that they establish liability limitations, data security obligations, indemnification provisions, termination rights, and dispute resolution mechanisms.

When acquiring an existing data center, the PSA should explicitly condition the assignment and assumption of SLAs and MSAs upon closing, to ensure operational continuity and revenue protection. If certain SLAs or MSAs cannot be assigned, attorneys should negotiate transitional service agreements (TSAs) to allow for continued service under the seller’s agreements for a defined period post-closing. Moreover, attorneys should ensure that the PSA contains an indemnification clause protecting the buyer from pre-closing breaches of SLAs and MSAs by the seller.

Conclusion

Each of these factors—power, water, title security, local regulations, restricted access, location risks, and contract terms—affects the feasibility, cost, and long-term success of a data center project, and attorneys should work closely with their clients to review and assess these matters. Comprehensive due diligence, legal structuring, and proactive risk mitigation are essential to protect investments and ensure uninterrupted operations for data center projects.

This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.