Long-term data center leases must be carefully structured to ensure that data center developers can develop, operate, and maintain their projects without undue interference or legal uncertainty. Data center leases will undergo intense scrutiny from financing parties, technology companies, and their teams of attorneys.
This article – the second in a two-part series – highlights several additional provisions that developers, operators, and counsel should consider when negotiating long-term leases for data center sites. This article also discusses property tax abatements available for data center projects in Texas.
Stay-tuned for an upcoming article on permitting and regulatory considerations for data center development in Texas.
Lease Provisions
- Easements for Access and Utilities
Data centers require robust and reliable access to infrastructure. It is critical that tenants secure easements across adjacent land for ingress, egress, and the installation and maintenance of utilities. These easements must be perpetual or at least co-terminous with the lease term and any extensions, to avoid disruption during construction or operation. If a developer is not leasing all of the landowner’s land, it should include language in the lease to ensure that it will be able to obtain easements across the landowner’s adjacent land if needed.
- Surface Waiver for Mineral Rights
Many jurisdictions allow mineral estate holders to use the surface of land to access subsurface resources like oil and gas. To avoid any risk of disruption, and to ensure that title insurance will be available to cover risks associated with development of oil, gas and other minerals, the lease should include a waiver by the landowner of any right to use the surface for such purposes.
- Landowner Cooperation with Permitting
Securing permits can be a lengthy and complex process. The landowner should be obligated to reasonably cooperate in the tenant’s permitting efforts, including providing signatures, documentation, or access to satisfy regulatory requirements.
- Early Termination Rights for Tenant
Given the lengthy permitting and development timelines, tenants should have the right to terminate the lease without penalty, particularly if project feasibility, permitting, or financing issues arise before operations commence.
- Assured Water Access
Water is increasingly important for cooling systems and other operational needs in modern data centers. The lease should ensure that adequate rights to access and use water—whether via existing infrastructure or new sources—are secured before operations begin.
Property Tax Incentive Agreements
Data center developers and operators are eligible to negotiate two types of property tax incentive agreements in Texas. All local taxing jurisdictions other than school districts are able to enter into property tax abatement agreements with taxpayers under Chapter 312 of the Texas Tax Code. Chapter 312 tax abatement agreements allow for an abatement of an agreed percentage of property taxes for up to ten years.
As an alternative to tax abatement agreements, municipalities (under Chapter 380 of the Texas Local Government Code) and counties (under Chapter 381 of the Texas Local Government Code) are authorized to enter into economic development agreements that provide periodic grants of public funds to data center developers. For data centers, these grants are often calculated as a percentage of property taxes paid by the projects.
Data centers are not eligible for property tax incentive agreements with Texas school districts.
Texas Sales Tax Exemptions
Both owners and operators of data centers may be eligible for valuable sales tax exemptions in Texas. Eligibility is determined in part by the total amount of investment and the level of job creation. If the eligibility criteria are met, the developer or operator must apply to the Texas Comptroller for a designated registration number. Once approved by the Comptroller, most of the data center’s equipment can be purchased with an exemption from the state’s 6.25 percent sales tax. Local sales taxes, if they apply, may still be owed at a rate of up to two percent.
Conclusion
Long-term data center leases are far more complicated and significant than simple commercial real estate leases. For most data centers, a many million, or even billion dollar investment is dependent on the lease. The data center lease is foundational document that impacts project viability, financing, and operational continuity. Data center developers and operators should consult with their Texas tax advisors about available property tax incentives and sales tax exemptions.
Stay tuned for Part III, where we will discuss permitting and regulatory considerations for data center development in Texas.
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David Sewell and Alan Cohen are partners in the Austin, Texas, law firm of Stahl, Sewell, Chavarria, Friend & Cohen LLP, where their practices focuses on energy, real estate, construction and Texas tax law. Mr. Cohen can be contacted at acohen@sbaustinlaw.com or (512) 652-2943. Mr. Sewell can be contacted at dsewell@sbaustinlaw.com or (512) 652-2945.