Data centers and their development have been in the news a great deal. Not headlined quite so much are the legal and regulatory issues connected with this asset type, such as zoning, use cases and purpose.
Connect CRE recently posed questions to Margo Bradish and Arielle Harris, partners at Cox, Castle & Nicholson, who share their insights about the regulatory issues connected with data center builds.
Q. From a real estate law perspective, is data center development different from more traditional industrial development?
A. Data centers are different from other industrial developments because of the massive tax revenues that they can bring to local jurisdictions, including property taxes, utility users tax, business license taxes, and discretionary general fund revenues that jurisdictions can use to fund critical community priorities.
Also, data centers generate very few passenger or truck trips during operation compared to other industrial uses.
Depending on state and municipal zoning laws, there might not be much of a categorical difference. California cities mostly seem to analyze data centers under their “most similar” use, whether that is office, research and development (R&D), or industrial. Often, the size and scale of a data center drive the zoning conversation.
This approach can work because, from a land-use consistency perspective, data centers are a form of modern industrial infrastructure, sharing characteristics with research and development facilities and other industrial uses, and can be appropriately sited in existing zones that permit these uses.
A. What seems to be the main legal and regulatory hurdles slowing development?
Q. This varies by state. In California, one barrier is the California Energy Commission’s regulatory process for thermal power plants. This process extends to the diesel or natural gas back-up generators used for most California data centers.
The CEC’s process for diesel generators of 100 megawatts or less, called the Small Power Plant Exemption, is simpler and faster than the process for diesel generators of more than 100 MW, known as the Application for Certification. In either case, the CEC must undertake a review of both the power plant and the data center pursuant to the California Environmental Quality Act, or CEQA.
Another obstacle in California is the separate regulatory process for grid upgrades and interconnections required to power data centers. The California Public Utilities Commission has authority over the construction of the infrastructure, with these improvements also subject to CEQA, the CPUC or the local jurisdiction. Coordination between these agencies can be an additional hurdle.
A. What about community pushback?
Q. Yes, that’s another barrier. If a community opposes data center development, local decision-makers may feel pressure to enact new zoning regulations that heavily restrict or prohibit it. We saw this play out recently in the City of Monterey Park, where the city council first imposed a zoning moratorium and unanimously voted to place a measure on the June 2, 2026, ballot. If the voters approve it, the measure will ban all data centers citywide.
Strategies to address pushback vary by jurisdiction, the size and scale of the proposed data center, the nature of the site, the proposed on-site power generation, and the proximity of sensitive land uses.
There can be a lot of misinformation and confusion around environmental impacts and operating characteristics, so every developer should clearly communicate how their data center project will benefit the local jurisdiction, emphasizing positive project design and sustainability features.
A. Speaking of sustainability, what about water usage and other environmental issues?
Q. Water consumption remains a key issue, and not just in the West. At the end of April, the U.S. Drought Monitor reported that many areas of the United States were experiencing drought.
It’s no secret that water consumption for data centers is tied to the cooling equipment used. Data centers with evaporative cooling systems require continuous water use, more than hybrid or non-evaporative, or “closed loop,” cooling systems, where the water is reused. The type of cooling system a data center uses depends on site-specific factors, and in some areas, a data center may have two systems in place, with seasonal variations.
Environmental issues are typically handled at the state level. In California, sustainability is built into the regulatory ecosystem, so data centers have to comply with many general requirements that drive sustainability. Additionally, many hyperscalers have corporate sustainability mandates that are driving more environmentally friendly data center solutions.
The post The Legal Side of Data Center Development: Q&A with Cox & Castle’s Margo Bradish and Arielle Harris appeared first on Connect CRE.