Legal and regulatory issues are becoming a defining factor in how and where new data centers are built, even as the asset class draws heightened attention for its economic potential. In a recent discussion with Connect CRE, Cox, Castle & Nicholson partners Margo Bradish and Arielle Harris outlined how tax, zoning, environmental and infrastructure rules are shaping the development landscape, with California serving as a prominent example.
From a land-use standpoint, Harris noted that data centers can resemble modern industrial infrastructure, sharing characteristics with research and development and other industrial facilities. Many California municipalities therefore evaluate them under the “most similar” existing use category, such as office, R&D or industrial, rather than as a standalone use. In practice, the size and scale of a proposed facility often drive the zoning conversation and determine whether a project can be accommodated within existing districts.
One key differentiator from traditional industrial assets is the scale of tax revenues that data centers can deliver to local jurisdictions. Beyond property taxes, facilities may contribute utility users taxes, business license taxes and discretionary general fund revenues that cities can direct toward broader community priorities. At the same time, during operations, data centers typically generate far fewer passenger and truck trips than other industrial uses, which can influence traffic and environmental assessments.
Bradish highlighted that in California, the state-level energy regulatory framework is a major gating item. The California Energy Commission oversees thermal power plants, including the diesel or natural gas backup generators that most data centers rely on. Projects using up to 100 megawatts of diesel generation may qualify under the Small Power Plant Exemption, a relatively streamlined process, while larger installations must proceed through the more complex Application for Certification. In both cases, the CEC must evaluate not only the generators but also the data center itself under the California Environmental Quality Act.
Separately, required grid upgrades and interconnections fall under the jurisdiction of the California Public Utilities Commission, with those improvements also subject to environmental review by either the CPUC or the local government. Coordinating among agencies and processes adds time and uncertainty, even before local politics are considered.
Community resistance is emerging as another meaningful constraint. Harris pointed to the City of Monterey Park, where the city council first enacted a zoning moratorium on data centers and then voted unanimously to send a June 2, 2026, ballot measure to voters that, if approved, would ban data centers citywide. Local pushback can prompt new zoning limits or outright prohibitions, particularly where questions arise around environmental impacts, on-site power and proximity to sensitive uses.
Developers are responding with jurisdiction-specific engagement strategies and clearer communication around benefits, operating characteristics and sustainability features. Water use remains a focal issue, as data center cooling systems can significantly affect local resources. Evaporative cooling requires continuous water consumption, while hybrid and closed-loop systems allow water reuse and can reduce demand. The choice of system is site dependent and, in some cases, facilities may employ multiple approaches with seasonal adjustments.
Environmental regulation of these issues is typically handled at the state level. In California, sustainability is embedded in the regulatory environment, requiring data centers to meet broad standards that implicitly push designs toward more efficient and environmentally responsible solutions. Many hyperscale operators also bring corporate sustainability mandates to their projects, further reinforcing the drive toward lower-impact power and cooling strategies.
