Colocation data centers in Opportunity Zones

A colocation data center is a multi-tenant facility where the operator provides space, power, cooling, physical security and network connections, and customers bring and own their IT equipment. Retail colocation sells by the rack, cage or kilowatt on shorter contracts. Wholesale colocation leases whole data halls or megawatts to fewer, larger customers. These categories reflect common industry usage rather than legal definitions.

Public filings give a sense of the economics. Equinix's 10-K for fiscal 2025 says its recurring revenue comes from colocation, interconnection and managed infrastructure, is billed monthly under contracts that typically run one to five years with automatic one-year renewals, and has made up more than 90% of total revenue for the past three years.¹ Digital Realty reported that its lease terms are generally longer than standard commercial leases, with an average remaining term of about five years across its portfolio at the end of 2023.²

Demand is strong. CBRE measured North American primary-market vacancy at a record 1.4% in the first half of 2026.⁸ For the Opportunity Zone framework that applies to every data center type, see Data centers in Opportunity Zones: the complete guide.

Because the operator delivers services every day, rather than handing the building to a tenant. A Qualified Opportunity Zone Business (QOZB) must be engaged in the active conduct of a trade or business, and Treas. Reg. §1.1400Z2(d)-1(d)(5)(ii)(B) says merely entering into a triple-net lease of owned real property is not enough.⁴

The regulations' own examples point the same way. A landlord leasing an entire building to one tenant on triple-net terms is not active, but a landlord whose on-site employees actively manage and operate the building's non-triple-net space is active.⁵ Commentators note that the rules look at whether the owner meaningfully participates in management and operations.⁶ A colocation operator that runs the power plant, cooling, security, cross-connects and remote hands has the stronger set of facts. That is a practical reading of the examples, not a separate safe harbor.

The QOZB owns the building and infrastructure, and the customers own their computers. At least 70% of the tangible property the QOZB owns or leases must be Qualified Opportunity Zone business property, generally meaning property purchased from an unrelated party, first placed in service in the zone by the QOZB or substantially improved, and used in the zone for substantially all of the holding period.^3,15

That split helps. JLL forecasts an average global shell-and-core cost of $11.3 million per MW in 2026 and says tenant AI fit-out can cost up to about $25 million per MW.⁷ In a colocation model the expensive, short-lived server fit-out is the customer's, so the QOZB's asset base is dominated by long-lived property that can carry 10-year appreciation. The interplay with server refresh cycles is covered in Servers, equipment and the Opportunity Zone rules.

Intangibles matter too. At least 40% of the QOZB's intangible property, such as operations software, customer contracts and brand, must be used in the active conduct of the zone business.¹⁶ Cash beyond the working capital safe harbor counts as nonqualified financial property, which must stay under 5% of the QOZB's average property basis.

Usually through the services or property safe harbors, because the facility, its staff and its customers' equipment are all in the zone. At least 50% of the QOZB's gross income must come from the active conduct of business in the zone. The regulations offer four ways to show it: by hours of services performed in the zone, by amounts paid for services performed in the zone, by showing that the zone's tangible property and management functions are each necessary to generate at least 50% of income, or on facts and circumstances.¹⁵

A single-site colocation QOZB with on-site critical facilities staff will typically meet more than one of those tests. A multi-site operator with a central network operations center outside any zone should measure the hours and payments test carefully, a point covered in QOZB gross income, intangibles and financial property tests.

They add re-leasing risk and capital needs, but they do not change the tax rules. With contracts of one to five years¹, a 10-year hold will usually see at least one full turnover of the customer base, and customer needs will change over that time.

Density is the clearest example. A general-purpose CPU rack supports up to about 12 kW, an air-cooled H100 rack about 40 kW, and an NVIDIA GB200 NVL72 rack about 120 kW with liquid cooling.⁹ A facility built for air-cooled racks may need new power distribution and liquid cooling mid-hold to stay competitive. Those upgrades are new qualifying property if purchased from unrelated parties and placed in service in the zone, but they need capital, and the working capital safe harbor applies to plans for acquiring, building or improving property, so upgrades should be planned in writing.

Efficiency also affects margins. Uptime Institute's 2025 survey reports a weighted average PUE a little above 1.5, essentially flat for about six years.¹⁰ Operating cost and density will drive the facility's value at exit, which is what the 10-year exclusion shelters.

The benefit comes from deferral, the 10% step-up and above all the exclusion of appreciation after 10 years. The illustrative comparison below follows one investor with a $5 million long-term capital gain realized in early 2027.

The gap comes mainly from tax-free appreciation and from investing the full pre-tax gain. Actual returns depend on the project. More scenarios are in Opportunity Zone tax savings: a worked example.¹²

Either by selling the fund interest or by having the fund or QOZB sell the facility. After at least 10 years, an investor who sells a QOF interest can elect to step its basis up to fair market value, so the appreciation is excluded from federal income tax, with the basis fixed at fair market value on the 30th anniversary for later sales.³

The regulations also let investors in partnership or S corporation funds elect to exclude gain from the fund's or a lower-tier QOZB's sale of assets after the 10-year mark, including depreciation recapture, with inventory the main exception.¹¹ That matters for colocation, where accelerated depreciation on electrical and mechanical systems can create large recapture. Options are compared in Opportunity Zone exit strategies after 10 years.

State taxes can differ. Thirty-eight states offer dedicated data center tax incentives, according to NCSL¹³, and 36 exempt data center building materials and IT equipment from sales and use tax, according to Good Jobs First.¹⁴ Those state benefits often go to the equipment buyer, which in colocation is frequently the customer, and some states do not follow the federal Opportunity Zone rules. Confirm the state position with your tax adviser.