One of the hottest buzz words in the commercial real estate industry today is DATA CENTERS. Serving a critical role in digital infrastructure, data centers comprise one of the fastest growing asset classes in the market. Much of the demand is brought on by remote work, cloud adoption, and artificial intelligence (AI) driving an unprecedented need for computing power and data storage.
The U.S., offering scale and a relatively reliable regulatory framework, represents roughly half of the global data center market. However, returns on data center investments ultimately depend on disciplined execution. Any missteps in compliance, tax structuring or site selection can materially erode the value of the investment.
Below are nine things fund managers should know about data centers, the tax ramifications of investing in them and other considerations to talk through with your advisory team.
A data center is a specialized facility that houses servers, storage systems and networking equipment used to store, process and distribute large amounts of digital data. These facilities provide the power, cooling, security and connectivity needed to keep applications, websites and business systems running continuously. Many major technology companies operate large global networks of data centers that power cloud computing, online services and much of the modern internet.
Data center investments often trigger heightened regulatory scrutiny because many facilities qualify as Technology, Infrastructure, or Data (TID) U.S. businesses. This classification can bring transactions within the jurisdiction of CFIUS or the Committee on Foreign Investment in the United States, and may also require oversight from the Department of Justice and the Department of Commerce, particularly for AI related or government linked investments.
Beyond ownership, export controls, sanctions and deemed export rules affect who can access technology, how personnel are staffed, and which vendors and equipment can be used.
Data centers are extremely resource intensive, requiring large sites, significant water access and massive electricity supply, which is placing significant pressure on local power grids. As development accelerates alongside energy mandates and sustainability requirements, power availability — not land or capital — has become the primary site‑selection constraint, shaping where new data center projects can realistically move forward. As a result, many states impose restrictions on the development of data centers. However, states such as Pennsylvania are offering a boost to data center developers by providing the resources they need.
It is critical to consider early federal tax structuring, especially if you have foreign investors. This would help optimize funding, cash repatriation and exit strategy outcomes. Public investors may benefit from tax treaty protections that may reduce withholding on future distributions, while private investors can often use U.S. REIT structures to achieve more tax efficient exits and enhanced after tax returns, particularly for sovereign wealth funds and pension fund investors.
Data center REITs focus on owning, developing and leasing highly engineered real estate specifically designed to support servers and networking equipment that power today’s digital economy. These facilities typically allow tenants flexibility to choose their own network and connectivity providers while benefiting from secure infrastructure. From an investment perspective, the REIT structure is often attractive because it can potentially provide access to long duration, stable cash flows, while also offering the advantages of tax efficient real estate ownership.
Data center REITs sit at the intersection of real estate and operations, which makes tax and structural planning especially important. While they generate rental income like traditional REITs, the operational intensity of data centers means careful attention is required to ensure the REIT remains focused on real estate rather than an operating business.
From an asset test perspective, at least 75% of assets must qualify as real estate, cash or government securities and be tested quarterly. IRS guidance recognizes that core infrastructure, such as electrical distribution and redundancy systems, may qualify as real property when they serve a utility like building function. However, risk areas remain, including pre installation equipment, on site power generation, and tenant prepaid or non recurring charges, all of which require careful classification to preserve REIT compliance.
In terms of income testing, REIT compliance is anchored by two core gross income tests:
Within that framework, “rents from real property” generally include base rent, charges for customary services and limited rent attributable to personal property leased alongside real estate.
For data center REITs, the key income test risks tend to arise during the development phase, particularly in the treatment of electricity revenues and in deciding which services must be provided outside the REIT. That’s where Impermissible Tenant Service Income, or ITSI, becomes critical. If noncustomary service income exceeds just 1% of a property’s income, all rent from that property can lose qualifying status. To manage this risk, REITs rely on taxable REIT subsidiaries, independent contractors and disciplined service design to preserve compliance while remaining operationally competitive.
Data center REITs often use joint ventures to develop and operate large scale facilities. For income test purposes, the IRS allows REITs to exclude their proportionate share of certain joint venture “prime rents,” avoiding double counting. This framework enables REITs to scale efficiently while maintaining compliance with the 75% and 95% gross income tests.
The U.S. tax landscape is highly fragmented across states, creating both complexity and meaningful upside for foreign data center investors. State and local tax incentives are not afterthoughts; they are core value drivers that directly influence site selection, project economics and other factors. In particular, property and sales tax abatements on critical infrastructure such as cooling systems, transformers, switchgear and power shells can materially affect procurement timing, cash flow and overall investor rate of return. Importantly, incentive availability shifts quickly by jurisdiction: states with surplus power are actively supporting data center development, while others are pulling back incentives in the midst of community opposition and resource constraints, making early, location specific planning essential.
Vacancy in the data center market has tightened dramatically — falling from about 1.9% at the end of 2024 to roughly 1% in 2025, according to a recent facilities.net article — highlighting just how constrained supply has become. At the same time, demand is expected to double by 2030, driven primarily by AI workloads. Meeting that demand will require significant new development, expanded power generation and innovative infrastructure solutions to overcome current capacity constraints — likely giving this asset class much momentum for the foreseeable future. REIT structures offer a powerful mechanism to align long term real estate investment with technology demand. Talk with your tax advisers to discuss this opportunity.
Contact Asha Shettigar, Pargat Singh or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.