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    4. Data center investment growth creates opportunities and challenges

      Articles

    Article

    Data center investment growth creates opportunities and challenges

    Jan 29, 2025

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    By Erica Buckley, Kristen Fallon, Jenny Holmes, Meredith LaMaster and Valerie Montague

    President Donald Trump’s support for data center investment underscores the importance of tackling the legal issues that accompany this industry’s growth.

    The Trump administration’s recent announcement of a $20 billion investment in data centers in the US by a Dubai-based developer represents yet another example of the explosive growth of this sector—a trend that is expected to continue for the foreseeable future.

    Data center expansion is driven by several factors, including the rapid advancement of artificial intelligence applications, the widespread adoption of cloud computing, and the ongoing digital transformation across industries. Key hubs for data center development have emerged in the United States, including Northern Virginia’s “Data Center Alley,” Texas’s growing technology corridors, and Arizona’s expanding digital infrastructure, attracted by favorable tax incentives, strategic geographic advantages, and robust access to renewable energy sources. The $20 billion investment will focus on those markets, in addition to Oklahoma and Louisiana, and Midwestern states including Ohio, Illinois, Michigan, and Indiana.

    As data center development accelerates, so do the legal complexities that accompany this digital transformation. Here are the leading challenges—and opportunities—facing stakeholders in the data center sector.

    Key takeaways

    • Opportunities for real estate developers: The data center market presents lucrative opportunities for developers, though challenges such as utility demands, community opposition, and financing constraints must be addressed.
    • Investor potential: Investors can capitalize on profitable ventures within the booming data center industry, with potential for high returns due to the growing need for data storage and processing capabilities.
    • Cybersecurity concerns: As critical hubs for digital operations, data centers face persistent threats, including ransomware, data breaches, and insider attacks, necessitating comprehensive security strategies.
    • Sustainability challenges: With their significant energy consumption and environmental impact, data centers must embrace renewable energy sources and innovative designs to mitigate ecological concerns.

    The role of data centers in the US economy

    Data centers provide the backbone for the digital economy, housing computer, telecommunications, and storage systems that support businesses, governments, and consumers. The increasing reliance on digital services—from streaming platforms to e-commerce—has made these facilities indispensable. Moreover, the emergence of AI and machine learning technologies requires robust data storage and processing capabilities, further accelerating demand.

    Government policies have also played a pivotal role in driving data center expansion. Incentive programs streamlined permitting processes, and public-private partnerships have created a fertile environment for growth. Trump’s latest announcement indicates a continued focus on bolstering this critical infrastructure to enhance the US’s competitiveness in the global digital economy.

    Navigating the challenges

    While data centers enable innovation and economic growth, their rapid expansion presents several challenges. These facilities are resource-intensive, consuming vast amounts of energy and water and often requiring extensive land use. Local communities frequently express concerns over environmental impact, zoning conflicts, and infrastructure strain. Moreover, the pace of technological change necessitates ongoing investment in upgrades to maintain competitiveness.

    Cybersecurity is another pressing issue. Data centers are attractive targets for cyberattacks, making robust security measures—both physical and digital—an essential component of any operation. Additionally, developers and operators must navigate an evolving regulatory landscape that addresses privacy, environmental standards, and energy efficiency.

    Our perspectives

    Health information privacy

    Healthcare providers, health plans, and other entities regulated under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), such as business associate vendors, who are contemplating using a data center, need to analyze whether they will be storing protected health information (PHI) at the data center. If so, the HIPAA-regulated entity next needs to determine if the arrangement with the data center operator triggers a business associate relationship. HIPAA-regulated organizations also should update their security risk analysis and corresponding risk management plan if they choose to store PHI in a data center.

    Additionally, healthcare entities that fall outside of HIPAA regulations, but that may hold identifiable health data that is regulated under other state or federal laws, should have a thorough understanding of the protections offered by the data center with respect to data privacy, availability, and security to ensure compliance with any appliable health data laws. Entities holding regulated health data also should ensure that they do not have any contractual restrictions that would hinder storing data in an offsite third-party data center.

    For data centers, contracting with HIPAA-regulated entities who will be storing PHI may bring the data center under the enforcement authority of the US Department of Health and Human Services, Office for Civil Rights (OCR) if they are deemed to be a business associate. This would require the data center to adopt a HIPAA compliance program, including training its personnel, adopting certain security policies, and conducting a security risk analysis, among other actions. As data centers grow in popularity, both the centers and healthcare organizations should watch for guidance from OCR or other health regulatory agencies seeking to monitor their use to store regulated health data.

    • Valerie Breslin Montague, Partner, Healthcare Group
    • Meredith LaMaster, Associate, Healthcare Group

    Cybersecurity

    As data is increasingly connected and our day-to-day lives increasingly reliant on data, data centers are a prime target for cybercriminals wanting to wreak havoc. We’ve seen how a cyberattack can disrupt supply chain and devastate public utilities. With data centers, in a single attack, cybercriminals could spread malware to multiple organizations, easily blackmail businesses for ransom, conduct significant corporate espionage, or shut down sweeping parts of the Internet. Data centers must undertake significant risk mitigation, such as implementing robust access controls, isolating critical data networks to limit potential damage from attack, encrypt data at rest and in transit, continuously monitor for suspicious activity, and conduct regular risk assessments. Above all, data centers should be prepared with a comprehensive incident response plan that is both regularly tested and updated.

    • Jenny Holmes, Partner, Privacy and Technology

    Condominium structure

    Condominiums can assist data center financing and development and should be considered during the initial planning stages.

    The condominium structure is ideal for data centers—it allows operators to share the costs and benefits of the utilities provided by the common infrastructure while retaining ownership and control of their individual units.

    Choosing the condominium structure maximizes optionality for financing data center facilities among one or more operators, allowing condo units to be financed separately. To meet rising demand, developers are building new data center facilities across the United States, which sometimes include utility service units constructed to limit the strain on local energy sources.

    • Erica F. Buckley, Partner, Cooperatives & Condominiums

    Financing data centers

    Financing of data centers on a speculative basis can be constraining from a lending perspective and may not provide adequate financial support to make the budget work. Thus, having a lease in place prior to construction is very helpful in securing beneficial financing terms for a single construction facility.

    If the data center developer has multiple properties being constructed at the same time, there has been an evolving trend to allow for revolving borrowing base construction facilities, which creatively add flexible ongoing construction monitoring and value step-ups for lease execution during the term.

    Depending upon the type and number of data centers under construction, the type and terms of the facility may vary. Being well versed in the possible optionality available to a data center developer (of course depending on size and scope of the project(s)) is critical to obtain flexible debt financing that streamlines some of the logistical hurdles in normal construction facilities.

    • Kristen J. Fallon, Partner, Real Estate Finance

    Conclusion

    As data centers continue to shape the digital economy, businesses, developers, and investors must proactively address the legal and operational complexities of this sector. Nixon Peabody remains committed to guiding stakeholders through these challenges, providing strategic advice to help clients capitalize on opportunities while mitigating risks.

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    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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