Texas’ decision to restrict the acquisition of real property (which includes leases of one year or more) from designated adversarial nations such as China, Russia, and Iran poses several areas of compliance risk for data center developers in the state. Proposed rules from the Texas Attorney General introduce added complexity in data center transactions.

Public polling reflects growing skepticism toward data centers among Texans. This political momentum is unlikely to make Texas regulators and enforcement authorities more receptive to foreign data center investments, and Senate Bill 17 (now Section 5.251 of the Texas Property Code) probably will be interpreted and enforced with greater strictness.

As data center and digital infrastructure development continues to boom, we have identified four areas of data center activity that may run afoul of the new statute:

Acquisitions involving a membership interest purchase agreement, or MIPAMaster services agreements that look like leasehold interestsSyndicated loans involving foreign-linked lenders or borrowersGPUs-as-a-service agreementsMIPA Structures

MIPAs are becoming a common way to acquire data center projects and digital infrastructure assets. Under a typical MIPA structure, the purchaser acquires membership interests of a data center owner rather than conveying title to the underlying real property where the data center will operate. This is usually done to avoid restarting regulatory approvals that the seller already obtained.

At the close of a MIPA transaction, no deed is signed, and the original special purpose entity that owns the project assets remains the same but the controlling entity changes. However, the proposed rules broadly define “control” and “purchase or otherwise acquire.” Any changes in control of entities that own Texas real property may fall under the attorney general’s purview, and tranactions structured as an equity transaction may not avoid scrutiny.

The main question is whether a covered foreign person is obtaining a controlling interest in an entity that owns real property in Texas. The proposed rules signal that the analysis may focus on the substantive ownership and governance consequences of a transaction, rather than solely on whether title to property has changed hands.

This matters because transactions structured as stock purchases, minority investments, redemptions, or governance-rights arrangements could fall within the rules even if the real property owner on record does not change.

Parties in these corporate-type transactions are unlikely to perform an SB 17 analysis because they may not consider their transaction as a real estate acquisition. Parties therefore may need to evaluate ownership percentages, control rights, investor identity, and indirect acquisition structures early in the transaction process.

Leasehold-Like Interests

The proposed rules broadly define “interest in real property” to encompass traditional ownership interests as well as use-based rights such as licenses, when those agreements rise to the functional equivalent of a lease. Attempts at working around lease restrictions by using service contracts or licenses with a stated term of less than one year would therefore be prohibited.

For example, a master services agreement for a data center or co-location services may be viewed as conferring leasehold-like rights to occupy or control space, regardless of the parties’ characterization. Rather than focusing solely on how parties label an agreement, the proposed rules look to the practical rights being granted.

As a result, agreements characterized as data center service contracts, licenses, or colocation arrangements could be treated as leases if they provide long-term rights to occupy or control space, expanding the range of transactions that may require SB 17 analysis.

Syndicated Loans

SB 17 also extends to lenders as facilitating entities. The financing arrangements for data center projects are complex, and loans often involve a lender syndicate to raise enough capital.

A potential risk here is whether the lender group includes any foreign capital from a prohibited source because the lender could be deemed to be “acquiring an interest in real property” and could encounter hurdles if taking title following a foreclosure.

This is important because restrictions affecting a lender’s ability to acquire or enforce real property rights could create uncertainty around foreclosure remedies and debt recoveries. Compliance tasks for syndicated loans may not include SB 17 analysis because the lender may not realize that under Texas law it could be “acquiring an interest in real property.”

Consequently, parties may need to scrutinize the identity and ownership of financing sources earlier in the transaction process to avoid unexpected compliance issues later.

GPU Agreements

GPUs as-a-service (GPUaaS) agreements are commonly involved in data centers. Graphics processing units, which are expensive and hard to source, provide the backbone for AI applications and do the complex calculations needed for AI.

The customer virtually rents the use of GPUs that are housed within a data center. The counterparty, typically the data center operator, is then responsible for providing the physical infrastructure necessary to keep those GPUs running in optimal conditions. Sometimes the customer may bring its own GPUs to the site while outsourcing operational management. Other times, the customer may hold reserved capacity or a dedicated cluster of GPUs within the facility.

Both types of arrangements could now be at risk. The more a GPUaaS contract resembles a lease, the greater the risk that it could be characterized as a “leasehold interest in improvements” exceeding one year. A foreign customer may believe it is merely purchasing cloud-computing services rather than entering into a real estate transaction. Yet, both the data center owner and the customer could expose themselves to penalties.

Compounding this risk, a GPUaaS contract that violates SB-17 would be void and unenforceable, creating financing challenges for lenders that expected the customer under contract would continue making payments.

Looking Ahead

Rather than creating bright-line rules that could be easily worked around, the proposed rules preserve discretion to challenge arrangements that function like prohibited property interests, even if they are drafted to appear otherwise.

Practitioners should assume that regulators may scrutinize the economic reality of a transaction rather than its drafting. As a result, clients should review not only acquisition agreements and leases, but also joint ventures, financing arrangements, colocation agreements, GPUaaS contracts, licenses, and governance provisions that could be viewed as creating indirect real property interests.

This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Amelia Zhang is a partner with Norton Rose Fulbright in Houston focused on the energy, technology, data, AI, and banking industries and counseling clients on China- and Asia-related issues.

Ammad Waheed is a Norton Rose Fulbright partner and Houston real estate group leader focused on commercial real estate, data center, AI infrastructure, and corporate transactions.

Kevin Chen is a Norton Rose Fulbright associate who advises on mergers and acquisitions, capital markets, corporate and securities matters, among other areas.

Vanisha Weatherspoon contributed to this article.

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