The Chicagoland area is the third largest real estate market for data centers. However, most local ordinances lack zoning regulation for such use

Shapiro Associates • Jan 18, 2018

  By: Justin A. Silva, Shapiro & Associates Law January 18, 2018 To my surprise, […] The post The Chicagoland area is the third largest real estate market for data centers. However, most local ordinances lack zoning regulation for such use appeared first on Shapiro & Associates.

 

By: Justin A. Silva, Shapiro & Associates Law
January 18, 2018
To my surprise, cloud-computing is a bit of a misnomer, as it requires a lot of land. Specifically, land used for data centers – large rooms filled with rows upon rows of servers and computer components. Data centers are the backbone for this type of data transmittal. The digital economy, growth in mobile devices and applications, increased availability and reliance on the internet of things (IoT) has all translated into tremendous growth and demand for data centers. The current expansion for data center space in the last few years is of no real great surprise. However, what is surprising is the hockey stick like demand curve we are likely to see in the next 5-10 years for data center space and/or development, with Chicago and its surrounding suburbs already becoming the third-largest market in the country. According to CBRE’s research division for 2017, “the extremely limited amount of available existing supply in the Chicago Wholesale data center market continues to influence market dynamics.” As a result, data centers are being developed in the surrounding suburbs, most notably and recently in Aurora and Elk Grove Village, both of which are providing cloud-computing services to companies such as Amazon, Microsoft, and Google.

I recently attended the Data Center Investment Conference and Expo, (DICE) Midwest this past fall. My path to DICE oddly began while researching Tesla’s Model 3 and its autonomous vehicle (AV) technology to replace my tired 12-year-old car. While conducting the usual Google search on the Model 3, I came across an article by Patrick Nelson of Network World entitled  Just One Autonomous Car Will Use 4,000 GB of Data/Day. [1]  As further provided in the article, Nelson quotes Intel’s CEO Brian Krzanich, who estimates AVs will generate and consume roughly 40 terabytes of data for every eight hours of driving. Stated differently, the averagely driven car will churn out 4,000 GB of data per day, he says. And that’s just for one hour of driving a day. To put this in perspective, an average person’s video, chat and other internet use, is about 650 MB per day.  Inevitably, one has to wonder how this transfer of data takes place, and from a real estate attorney’s perspective, where does it take place?

Intrigued by new land uses and real estate development trends is what led me to DICE. Below are some of the key takeaways for developers to consider if looking to capitalize on this asset class:

 

  • Not all data centers are used exclusively for transmitting data, such as for the operation of AVs. Rather, many of the facilities are used to house computer storage system, often times for backup power supply and redundant data communications connections. In more simple terms, most data centers are used as backup systems in the event that another server or data center fails.
  • When evaluating data center locations, there are a number of industry-specific factors to consider. For example, what are your client’s needs? If they are a healthcare provider, tech company, financial institution, or other large data user, do they need dedicated space that can accommodate the privacy requirements mandated by their business or industry? In order words, they share data center space with others or do federal or state guidelines require otherwise. Also, how much power do they need to run their equipment? Many tenants can get by with retail co-located space managed by others (e.g., space for servers in a cage in a data center) as opposed to dedicated leased premises with numerous servers and other equipment (wholesale space). Be forewarned, the cost of data center space far exceeds that of office or industrial space and is generally based on power capacity made available to a tenant rather than square footage.  Some data center developers will not even consider a potential site if there are not at least two individual substations in the immediate vicinity of the property. As further stated, the most important factors to consider are available fiber (cables to provide the enormous amounts of electricity) to the property and the price of energy in the area.
  • Data centers use huge amounts of power, both for cooling and electrical redundancy purposes. One should determine the reliability of that power (e.g., whether it complies with industry specifications such as the ITIC (CBEMA) Curve, and whether there at least two feeds of power to the data center from separate electric substations.
  • Data centers involve significant capital investment. In addition to mortgages and traditional financing options, financing is available from publicly traded real estate companies as well as institutional investors and end-users themselves.
  • Data centers are rated from Tier I (most basic) through Tier IV (most redundant and reliable) and are based on numerous factors including redundancy of the power, cooling, and broadband availability. The equipment needed to make a center more fault tolerant (e.g., additional cooling systems, more than one generator for each circuit, redundant UPS systems, etc.) is more expensive, and the cost for higher-rated data centers is concomitantly greater than that in a lower rated center.
  • Temperature matters greatly with data centers. A large consumer of power in a data center is the specialized cooling equipment needed to protect the servers and other electronic equipment that require specific operating ranges for both temperature and humidity.
  • Another area to consider is the scalability of the center to meet future requirements. If you can project increased needs over time, determine if there is enough power capacity at the data center to meet your requirements and whether you can reserve your anticipated power requirements through an option, right of first refusal or right of first offer. If you are a user with larger requirements, you should determine whether to develop the space on your own, have the space or data center built for you on a build-to-suit basis, or enter into a lease with a landlord for pre-built space that you will improve.
  • Another factor to consider is one’s security requirements (the level of security, both on an IT and physical basis can be key to keeping the tenant’s equipment or client secrets confidential).As an example, if the data center contains patient records or information,thecenterand its security protections must be HIPAA compliant. Other industries have their own security issues (e.g., cable companies not wanting someone to disseminate media not approved by the company or the stations it is carrying or violating FCC or broadcast rules).
  • Public/private partnership benefits should be considered in evaluating expensive of space. There are many state or local programs that can assist landlords and tenants in data center transactions. Examples include real estate tax relief and sales tax benefits for the cost of equipment, and landlord or tenant improvements through industrial development agencies, TIF financing, and other benefits that may be available. In some states, there are utility incentives available to building owners that can help ameliorate the costs of what can be the second most expensive part of the ongoing cost of space in a data center.
  • Since the incentives vary widely between the states, one should carefully compare the benefits and requirements of each location before committing a project to a state.

 

As with any new type of land use, communities can be willing and helpful partners with data center developers. However, in most instances, local governments have little experience with data centers and their zoning codes present hurdles and challenges. To avoid unnecessary and costly pitfalls when developing data centers, early consultation with professionals who appreciate the unique needs of data centers, coupled with due diligence and zoning proficiency, is key to successful development.
[1]  https://www.networkworld.com/article/3147892/internet/one-autonomous-car-will-use-4000-gb-of-dataday.html

 

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