Private Power as a New Real Estate Asset Class for Closed-End Funds
For real estate investors looking to deploy capital into the data center space, power availability is now both the greatest constraint on asset value and a rapidly emerging opportunity. A closed-end fund structure with a build-to-core strategy may be well-suited to capitalize in this market.
The rapid growth in artificial intelligence (“AI”) over the past few years has fundamentally changed the landscape of real estate investment—most notably through data centers, the physical infrastructure that powers AI. By 2030, data center demand is predicted to triple, representing trillions of dollars in total investment. This increased demand is redefining global investment strategies, as reflected in global data center investments exceeding $580 billion in 2025. This marked a 27% increase from 2024, outperforming the year-over-year growth in multifamily housing investments (9.1%) and the commercial real estate market as a whole (14.4%).
The Power Availability Bottleneck
Given the widespread interest in data center investment, the greatest problem data centers currently face is not a lack of capital, but rather a lack of power availability. The existing power grid is overloaded by household consumption, electric vehicles, and existing industrial and data center uses. Data center power usage is projected to increase to 219 GW over the next five years, which is enough to power more than 180 million US homes, and far more than the existing grid can accommodate. Only 12 GW of data center capacity is expected to become available in the United States in 2026, and only about one-third of that capacity is currently under active construction. Close to half of data center builds in 2026 are projected to be delayed or cancelled due to insufficient power grid infrastructure.
BTM Power as a Real Estate Asset Class
This bottleneck represents an opportunity for closed-end real estate funds. The constriction in power availability has led investors to increasingly invest in “behind-the-meter” (“BTM”) power solutions. BTM power allows the consumer to control their energy use, rather than depending on a utility provider to generate energy for them. BTM systems allow users to generate and store excess energy as they please, maintain operations during public grid outages, and adapt flexibly to changes in demand.
Because BTM power investments share characteristics with traditional infrastructure such as having significant capital requirements and having a long, useful life span, they have predominantly been pursued through open-end fund structures. But the assumption that BTM assets require a perpetual vehicle like an open-end fund is overstated. Closed-end funds, being one of several vehicles for investors to put capital to work, can play a key role in developing build-to-core infrastructure opportunities—strategies where a fund acquires land, constructs the asset, and stabilizes operations before selling to a core infrastructure buyer. Properly diligenced and structured private BTM assets fit the build-to-core profile. The acquisition, entitlement, construction, and stabilization period represents a distinct value creation phase that can be captured and monetized through recapitalization or sale.
For closed-end funds pursuing this strategy, the legal landscape presents several distinct considerations, a few of which we consider here.
Ground Lease Structure and REIT Qualification
A strategy of many closed-end funds is to stabilize their project and then sell it to an open-end core fund. Due to many open-end funds being structured as a real estate investment trust (“REIT”), closed-end fund sponsors should structure their BTM asset as marketable to an open-end REIT fund from day one. One of the primary considerations for whether a particular asset should be acquired by an open-end REIT fund is whether the asset will primarily generate “good” REIT income. One solution that is well-recognized as a marketable and financeable real estate asset that is attractive to open-end funds is a ground lease, meaning a lease where the landowner (i.e., the fund) grants a long-term lease to an operator who would own and operate the BTM generation facility.
The critical question for determining whether ground lease rent from land underlying a BTM facility constitutes “good” REIT income is whether the ground lease rent constitute “rents from real property,” qualifying for favorable tax treatment for REIT purposes. Under IRC Section 856(c)(2) and (3), rents from real property generally qualify as “good” REIT income so long as the rent does not depend on the tenant’s income or profits from the land. Assuming that the ground lease is structured properly, a closed-end fund could create an asset that is marketable to an open-end REIT fund.
Entitlements and Related Fund Lifespan Risk
A closed-end fund’s finite term makes entitlement risk particularly acute. When a closed-end fund acquires land without a clear, near-term path toward receiving the necessary municipal and regulatory approvals, it risks expending a sizable portion of its fund lifespan trying to obtain those approvals. Due diligence initiatives must therefore focus on ensuring there are realistic and timely paths to authorization of BTM facilities. For example, a closed-end fund should avoid acquiring sites where entitlement uncertainty could consume several years of the fund’s investment period before groundbreaking, as this could materially compress the fund’s build-to-core window.
Clear guidelines for permitting large-scale BTM power sources like gas turbines, fuel cells, small modular nuclear reactors, and battery energy storage systems (BESS) are still being developed.
Restrictive Covenants as a Threshold Diligence Item
Closed-end funds are particularly susceptible to issues arising from pre-existing restrictive covenants, as concerns that a restrictive covenant may impact the marketability or financeability of real property can cause a substantial drag on the fund’s ability to exit the investment. Title review for any prospective site should include a thorough investigation of restrictive covenants that could limit power plant development. Many parcels in agricultural areas, industrial parks or mixed-use planning developments carry deed restrictions, declarations of covenants, or reciprocal easement agreements that may limit permissible uses to specified activities. Because BTM power generation is a relatively novel use, existing restrictive covenants may not explicitly consider the installation of BTM power sources like gas turbines, fuel cells, or small modular nuclear reactors—creating ambiguity that could invite challenges from neighboring property owners. While open-end funds may be willing to take more risk concerning ambiguous restrictive covenants, the potential of an open-end fund agreeing to buy the asset may not outweigh the potential closed-end fund lifespan risks addressed above.
The Path Forward
There is no fundamental reason that BTM power assets should be limited to open-end funds. The legal and structural tools to accommodate these investments within a closed-end fund framework exist today, and the market conditions creating demand for BTM power show no signs of slowing down. For closed-end fund sponsors willing to navigate the diligence matters required, BTM power assets represent a significant opportunity to access an emerging asset class at a time when the supply-demand imbalance for power strongly favors early movers.
Carson Leighty contributed to this Legal Update.
