Data Centers: Legal Implications and Transactional Considerations in the Age of AI and Hyperscale Growth

It is no surprise that data center projects are ever evolving, playing an important role for the development of artificial intelligence (AI), cloud computing and storage which ultimately impacts the legal landscape surrounding the construction of such projects. As a result, data center projects present a complex array of legal and transactional challenges that are not found on typical ground up commercial or residential projects. Given the criticalness of the data housed in such facilities, and the power consumption needed, ensuring compliance with applicable zoning and land use regulations, environmental impacts and energy permitting requirements are key factors to consider prior to commencing actual construction. Additionally, the cost impacts of a delayed project may be significantly greater than that of a standard construction project given the data to be stored/processed. Thus, having contracts that address, supply chain constraints, force majeure issues, delays, equipment warranties and other risk allocation considerations are vital in ensuring parties remain on schedule and risks are appropriately allocated. 

Zoning, Environmental Compliance and Permitting Issues

Traditionally, data centers were constrained to areas where power costs were low. However, given the exponential growth and need for such facilities and limited land for future expansion, data centers are moving into new regions where land is plentiful. This presents the need to understand local zoning laws in order to obtain the necessary approvals prior to actual construction of the project. Additionally, given the environmental impacts of such a facility, a comprehensive understanding of the local and federal environmental standards (Clean Air Act, Clean Water Act, Endangered Species Act to name a few) must be properly coordinated throughout the initial land procurement, construction and operational phases.

Regulation and Incentive Considerations

Regulations and incentives vary greatly by location however, it is important to review what state and federal programs may apply to your project. For example, in certain circumstances, accelerated permitting and financial support and/or tax incentives may be available for your project. Conducting a thorough due diligence at the onset is necessary to understand how applicable regulations and incentives may impact your project and potentially impact permitting schedules and financing allocations.

Contractual Risk and Supply Chain Considerations

Large scale projects, including many data center projects, not only involve countless trades but also equipment vendors whose products will ultimately be installed within the facility. Having a comprehensive understanding of the construction contract models available, whether EPC (Engineering, Procurement and Construction), EPCM (Construction Management), Design-Build or other appropriate contracting model is essential for establishing the necessary team members, allocating risks and coordination/scope issues to ensure the project runs smoothly. Furthermore, given the potential cost impacts of a delayed project, having contracts that mitigate risk associated with force majeure events, liquidated damages, and alternative sourcing provisions are also essential to protect owners and developers from costly delays and project overruns. Finally, given the reliance on the availability and continued operation of critical components within a facility, establishing the necessary commissioning standards is vital to ensure the components are operating as designed, appropriate warranties are in place, and any protocols are implemented to protect the data being stored/processed. 

Conclusion

In the ever changing world of data centers, AI and hyperscale growth, data centers are becoming the backbone of global innovation. As these facilities expand and become more and more complex, the legal and transactional considerations surrounding their development and construction become increasingly critical. From securing the necessary approvals and incentives to get the project off the ground to establishing a well structured and thought out legal contractual framework, understanding the legal and transactional implications is essential in keeping your project on schedule and ensuring a successful operational future. 

For more information or to discuss any of these topics, please contact Pat Johnson a member of Honigman’s Development and Regulated Real Estate Practice Group.