In short
A private AI infrastructure fund pools investor capital to own and develop AI data centers and the power assets that feed them. Most such funds use a private placement exemption from the Investment Company Act of 1940, commonly either the 3(c)(1) exemption for up to 100 beneficial owners or the 3(c)(7) exemption for qualified purchasers. 15 U.S.C. §§ 80a-3(c)(1), 3(c)(7). Many also organize as a real estate investment trust (REIT) if the underlying AI data center rents qualify, because a REIT can pass income to investors without a corporate level tax. 26 U.S.C. § 856, 26 U.S.C. § 857. Funds that accept foreign capital face national security review by CFIUS, because a U.S. business that owns or operates an AI data center collocated at a submarine cable landing point, landing station, or termination station performs a function with respect to covered investment critical infrastructure and may qualify as a TID U.S. business. 31 C.F.R. § 800.212, Appendix A to 31 C.F.R. Part 800. Private equity poured $45.70 billion into U.S. AI data centers in 2025, and the industry may need $5.2 trillion globally by the end of the decade. S&P Global Market Intelligence, McKinsey & Company, cited by Quinn Emanuel
Why AI infrastructure funds are being formed now
The demand for AI data centers is record breaking. Global AI data center capacity could nearly triple from 82 gigawatts in 2025 to 220 GW by 2030. RBC and McKinsey, cited by Blue Owl. In the U.S., vacancy fell to about 1.3 percent by the end of 2025, and rents more than doubled in four years. CoStar News. Private equity invested $45.70 billion in U.S. data centers in 2025, the highest in at least five years, making up 72 percent of the $63.35 billion total U.S. data center investment. S&P Global Market Intelligence
Big technology companies are spending heavily but cannot fund everything on their balance sheets. The four largest spent $381 billion in capital expenditures in 2025 and could spend about $700 billion in 2026. CNBC, cited by Quinn Emanuel. More than $120 billion in AI data center spending moved off balance sheet through special purpose vehicles in under two years. Tax alert. This gap creates a need for private fund capital. The White House has also directed federal agencies to accelerate permitting for AI data centers. Executive Order 14318
What legal structure does a private AI infrastructure fund use
Most AI infrastructure funds are private investment funds exempt from SEC registration under the Investment Company Act of 1940. They choose between two main exemptions.
The 3(c)(1) and 3(c)(7) exemptions
The Investment Company Act requires most pooled investment vehicles to register with the SEC, but private funds can avoid registration by limiting their investor base.
The 3(c)(1) exemption allows a fund to have no more than 100 beneficial owners. The fund must not make a public offering of its securities. There is no limit on the fund’s total size. 15 U.S.C. § 80a-3(c)(1)
The 3(c)(7) exemption allows a fund to have up to 2,000 beneficial owners, but every owner must be a qualified purchaser. An individual qualified purchaser must own at least $5 million in investments. A person acting for its own account or the accounts of other qualified purchasers must own and invest on a discretionary basis at least $25 million in investments. 15 U.S.C. § 80a-3(c)(7), 15 U.S.C. § 80a-2(a)(51)(A), Carta
An AI infrastructure fund that holds real property (land, buildings, and structural components of an AI data center) might also qualify for the 3(c)(5) exemption. That exemption applies to a fund primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. 15 U.S.C. § 80a-3(c)(5)
| Feature | 3(c)(1) Fund | 3(c)(7) Fund |
|---|---|---|
| Investor limit | 100 beneficial owners | 2,000 beneficial owners |
| Investor qualification | Accredited investor | Qualified purchaser (individual $5M, institution $25M) |
| AUM cap | None | None |
| Typical use | Smaller, early step funds | Large institutional scale funds |
Master feeder and parallel structures
Many AI infrastructure funds use a master feeder structure. One or more feeder funds collect capital from different groups of investors and feed it into a single master fund that directly owns the data center assets. This lets the sponsor separate U.S. taxable investors from tax exempt or foreign investors.
A parallel 3(c)(1)/3(c)(7) structure is also common. A 3(c)(7) feeder holds capital from qualified purchasers, and a 3(c)(1) feeder holds capital from accredited investors. Both feeders co-invest in the same portfolio pro rata. The 3(c)(7) statute expressly permits co investment without integration risk.
Regulation D offering rules
To sell interests in the fund, sponsors rely on a private placement under Regulation D. Two main paths exist.
Rule 506(b) allows the fund to raise unlimited capital from an unlimited number of accredited investors and up to 35 non accredited sophisticated investors. The fund cannot use general solicitation or advertising. Under Rule 506(b), an issuer may rely on an investor’s written representation of accredited status, without the verification steps required by Rule 506(c). 17 C.F.R. § 230.506
Rule 506(c) permits general solicitation and advertising, but every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify that status. 17 C.F.R. § 230.506(c)
Within 15 days of the first sale, the fund must file a Form D with the SEC. SEC
If the fund’s investment adviser manages over $150 million in regulatory assets under management, it must file Form PF, reporting details on AUM, strategy, leverage, and risk. Most institutional scale 3(c)(7) AI data center funds trigger this filing. Valuation Research
How do tax rules shape the fund’s returns
The largest tax decision for an AI infrastructure fund is whether to organize as a REIT. The Opportunity Zone program and bonus depreciation also affect after tax returns.
REIT status for AI data centers
A real estate investment trust can avoid corporate income tax on income it distributes to shareholders. To qualify, a REIT must meet strict tests.
At least 75 percent of its gross income must come from real estate related sources, such as rents from real property. At least 95 percent must come from passive sources like rents, dividends, and interest. 26 U.S.C. § 856(c)(2)
At the end of each quarter, at least 75 percent of the REIT’s total asset value must be real estate assets, cash and cash items (including receivables), and government securities. 26 U.S.C. § 856(c)(4)(A)
The IRS has ruled in multiple private letter rulings that AI data center buildings and their structural components (electrical distribution, HVAC, security, fire protection, and telecommunications infrastructure) qualify as real property for the asset and income tests. Routine services like providing utilities, humidity control, security, and common area maintenance do not create impermissible tenant service income as long as the services are customary. IRS PLR 201314002, IRS PLR 201034010, cited by The Tax Adviser. Treasury regulations also give an example that treats a customized electrical system and telecommunications infrastructure as real property. Treas. Reg. § 1.856-10(g), Example 6
A critical risk is the 1 percent rule. If a REIT provides noncustomary services to a tenant and the income from those services exceeds 1 percent of all amounts received from that property, all rent from that property is disqualified. The amount treated as received for the impermissible service cannot be less than 150 percent of the REIT’s direct cost. IRC § 856(d)(7). To avoid this, the REIT must perform services through a taxable REIT subsidiary (TRS) or an independent contractor.
On site power generation raises harder questions. Solar photovoltaic assets have clearer authority to count as good REIT assets. Nuclear and gas fired generation on site lack clear guidance and present complex issues. Tax analysis
For a newly formed REIT, a 2024 IRS private letter ruling confirmed that a REIT with zero assets and zero gross income can still satisfy the 75 percent and 95 percent income tests (because 75 percent of $0 equals $0). This resolved a startup uncertainty. IRS PLR 202440007
REITs also attract foreign investors. Because corporate level tax is avoided, foreign investors do not have U.S. return filing obligations for REIT dividends. Dividends from a REIT are generally not unrelated business taxable income. The Foreign Investment in Real Property Tax Act (FIRPTA) can apply to sales of REIT shares, but exceptions exist for domestically controlled REITs and qualified foreign pension funds. Law firm commentary
Opportunity Zones
The Opportunity Zone program, made permanent by the One Big Beautiful Bill Act (P.L. 119-21) in 2025, lets investors defer and reduce capital gains by investing in a Qualified Opportunity Fund. The fund must invest at least 90 percent of its assets in qualified opportunity zone property. 26 U.S.C. § 1400Z-2
A new category, the Qualified Rural Opportunity Fund (QROF), offers richer benefits for rural zones. A QROF must invest at least 90 percent of assets in qualified opportunity zone property located in entirely rural zones (any area other than a city or town with more than 50,000 inhabitants and other than an urbanized area contiguous to such a city or town). IRC § 1400Z-2(b)(2)(C). The IRS identified 3,309 rural zones out of 8,764 total Qualified Opportunity Zones. IRS Notice 2025-50, IRS Opportunity Zones
Standard opportunity fund investors who hold for five years receive a 10 percent basis step up on the deferred gain. QROF investors receive a 30 percent step up after five years. The substantial improvement threshold for rural zones is reduced from 100 percent to 50 percent of the adjusted basis of the property, within a 30 month period. 26 U.S.C. § 1400Z-2(d)(2)(D)(ii)
| Benefit | Standard QOF | QROF (Rural) |
|---|---|---|
| 5 year basis step up | 10% | 30% |
| Substantial improvement requirement | 100% of basis | 50% of basis |
| Zone type | Any QOZ | Entirely rural QOZ (3,309 zones) |
New QOZ designations take effect January 1, 2027, and many QROF benefits begin then. OBBBA
Bonus depreciation
The OBBBA expanded 100 percent additional first year depreciation for qualified property. For capital intensive AI data center buildouts, this allows funds to deduct the full cost of qualifying equipment and improvements immediately, reducing taxable income. IRS Notice 2026-11, 26 U.S.C. § 168(k)
Proposed water reuse tax credit
A bipartisan bill introduced in April 2025, the Advancing Water Reuse Act (H.R. 2940), would create a new Internal Revenue Code section 48F providing a 30 percent credit for qualified water reuse investments in AI data centers. The bill has more than 20 cosponsors but is not yet law. Forbes/Tax Notes, H.R. 2940
What regulatory hurdles apply to foreign investors
CFIUS review
Any foreign investment that results in control of any U.S. business can be reviewed by the Committee on Foreign Investment in the United States (CFIUS), and certain non controlling investments in a U.S. business that involves technology, infrastructure, or data (a TID U.S. business) are also covered. Appendix A to part 800 specifically lists AI data centers collocated at submarine cable landing points as covered investment critical infrastructure. 50 U.S.C. § 4565, 31 C.F.R. § 800.248, 31 C.F.R. Part 800, Appendix A
In 2024, CFIUS reviewed 209 formal notices, investigated about 56 percent, adopted mitigation measures in 25 transactions, and examined thousands of non notified deals, opening 76 formal inquiries. CFIUS 2024 Annual Report. By year end, 242 active mitigation agreements and conditions were in place. CFIUS 2024 Annual Report
Certain transactions require mandatory filing, such as those involving foreign government interests or critical technologies. The February 2025 America First Investment Policy called for an expedited fast track CFIUS process for allied investors, while heightening scrutiny of foreign adversary investments in technology, critical infrastructure, and other strategic sectors, especially artificial intelligence. White House memo, Law firm analysis
For foreign investors seeking to avoid review, a fund must carefully structure voting and governance rights to avoid control. A common technique is to stay below 10 percent passive investment, but even passive investments may be reviewed if they involve critical technologies.
Power and interconnection regulation
AI data centers consume enormous amounts of electricity. Many projects colocate with power plants to secure cheap, reliable power. This raises issues under the Federal Power Act and FERC jurisdiction.
In December 2025, FERC issued a unanimous order directing PJM Interconnection (the grid operator serving several key data center markets) to create new transmission service options and reform behind the meter generation rules. This was meant to enable AI data center colocation while protecting existing utility customers from cost shifts. FERC Order, Docket Nos. EL25-49-000 et al. (Dec. 18, 2025)
Earlier, FERC rejected a proposed colocation of an AI data center with the Susquehanna nuclear plant because PJM had not met its burden of proof to demonstrate that the proposed non conforming provisions in the amended interconnection agreement were necessary. FERC Order, 189 FERC ¶ 61,078
In October 2025, the Secretary of Energy directed FERC to initiate rulemaking to standardize interconnection of loads larger than 20 megawatts, aiming to speed up interconnection of large loads, including AI data centers. DOE § 403(a) letter. FERC’s final action on large load interconnection reform was due by April 30, 2026 under the DOE’s Section 403 directive, but on April 16, 2026, FERC announced it will instead act by the end of June 2026. FERC news release, Law firm analysis, Client alert
Any AI infrastructure fund that invests in generation or directly contracts for power must track FERC orders closely. The regulatory environment is evolving fast.
How have major deals been structured
Real transactions illustrate how funds combine legal structures, tax strategies, and regulatory navigation.
Stargate Project. A joint venture of OpenAI, SoftBank, Oracle, and MGX, announced in January 2025. It plans to invest $500 billion over four years for 10 GW of AI data center capacity. SoftBank and OpenAI each committed $19 billion (40 percent stakes), Oracle and MGX each $7 billion. The rest comes from limited partners and debt. The entity is Stargate LLC, a Delaware limited liability company. IBM, Wikipedia
Global AI Infrastructure Investment Partnership (GAIIP). BlackRock, Microsoft, Global Infrastructure Partners, and MGX launched GAIIP in September 2024 to raise $80 to $100 billion, starting with $30 billion in private equity. NVIDIA is a technical advisor. The partnership will build energy plants and AI data centers. Data Center Frontier
Blackstone Digital Infrastructure Trust (BXDC). Filed SEC registration for an IPO in April 2026, targeting about $2 billion. It focuses on stabilized AI data centers leased to investment grade hyperscalers under 10 to 20 year leases with 2 to 3 percent annual rent escalators. It is structured as a REIT, illustrating the REIT path for mature portfolios. CoStar News
Blackstone QTS Data Centers. Blackstone acquired QTS Realty Trust for about $10 billion in 2021. QTS now has an estimated $25 billion committed development pipeline and an $80 billion future potential development pipeline. BREIT.com
These examples show that funds use a mix of traditional private fund structures, REITs, and special purpose vehicles to layer capital and manage risk.
What are the key risks for an AI infrastructure fund
Even with strong demand, several risks matter.
REIT noncompliance. The 1 percent impermissible tenant service income rule can disqualify millions of dollars in rent from a single property if not managed carefully. The tax treatment of on site gas and nuclear generation for REITs remains uncertain. Forbes/Tax Notes
Regulatory shifts. FERC rules on colocation are still being developed. The December 2025 FERC order required PJM to file compliance within 30 to 60 days. Law firm analysis PJM filed its compliance submissions in January and February 2026, and on April 16, 2026 FERC partially accepted the filing while directing further compliance, though the paper hearing on final rates and terms remains ongoing. Law firm analysis, Law firm analysis, Law firm analysis DOE’s push for interconnection standardization may further alter the playing field.
Technology and obsolescence. Rapid AI evolution could make some AI data center designs obsolete, although the current shortage suggests continued demand.
Geopolitical. CFIUS scrutiny can delay or block foreign capital from certain countries, affecting fund raising.
Market concentration. A handful of hyperscaler tenants dominate the market. A fund’s fortune can turn on the credit of one or two large customers.
Despite these risks, the scale of the AI buildout continues to draw massive capital inflows.
Key takeaways
- Most AI infrastructure funds adopt a 3(c)(7) structure for large institutional investor pools or a 3(c)(1) structure for smaller funds. Parallel and master feeder structures let sponsors accommodate different investor types.
- REIT status can eliminate corporate level tax, but only if data center rents and assets qualify and service income remains below the 1 percent threshold. Use a taxable REIT subsidiary for noncustomary services.
- Opportunity Zone funds, especially the new rural QROFs, can offer accelerated basis step ups and capital gain deferral. Over 3,300 rural zones are available.
- Any foreign investor in the fund will likely trigger CFIUS review because AI data centers are TID U.S. businesses. Plan for mitigation requirements or structure to avoid control.
- FERC’s evolving rules on colocation and interconnection require close monitoring for funds that own or contract with power generation.
- Build in flexibility. The regulatory and tax environment is changing. The REIT rules for on site power are not fully settled, and the bonus depreciation windfall may only be temporary.
Frequently asked questions
Q:What is the difference between a 3(c)(1) and a 3(c)(7) fund?
A:A 3(c)(1) fund may have up to 100 beneficial owners. A 3(c)(7) fund must be owned exclusively by qualified purchasers (individuals with $5 million in investments or institutions with $25 million). Both are exempt from SEC registration as investment companies. 15 U.S.C. §§ 80a-3(c)(1), (c)(7)
Q:Can a fund hold AI data centers and qualify as a REIT?
A:Yes. The IRS has ruled that data center buildings and their structural components are real property for REIT purposes. Routine services like power and cooling do not create a problem if they are customary. A key risk is the 1 percent impermissible service income rule. IRS PLR 201314002
Q:What is a Qualified Rural Opportunity Fund?
A:A QROF is a Qualified Opportunity Fund that invests at least 90 percent of its assets in entirely rural opportunity zones. It offers a 30 percent basis step up after five years and a reduced substantial improvement threshold of 50 percent. The 50% substantial improvement threshold took effect July 4, 2025. IRC § 1400Z-2, IRS Notice 2025-50
Q:When must the fund file Form D?
A:Within 15 days after the first sale of securities in a Regulation D offering. SEC
Q:How does CFIUS affect foreign investment in an AI infrastructure fund?
A:CFIUS can review any transaction that gives a foreign person control of a U.S. business with sensitive technology, infrastructure, or data. AI data centers are squarely within scope. Certain transactions require mandatory filing. Review can lead to mitigation agreements or even presidential prohibition. 50 U.S.C. § 4565
Q:Does a fund that invests in colocated power plants need to deal with FERC?
A:Yes. The Federal Energy Regulatory Commission regulates wholesale power sales and transmission. Colocation arrangements with large AI data centers are under active FERC rulemaking. The December 2025 order on PJM created new service options. FERC Order, Docket Nos. EL25-49-000 et al.
Q:What is the current scale of private equity investment in AI data centers?
A:Private equity invested $45.70 billion in U.S. data centers in 2025, up sharply from prior years. U.S. vacancy is around 1.3 percent, and rents have more than doubled in four years. CoStar News
Q:Can a newly formed REIT qualify for the income tests if it has no income?
A:Yes. A 2024 IRS private letter ruling stated that a REIT with zero assets and zero income can still meet the 75 percent and 95 percent income tests because 95 percent of $0 equals $0 and 75 percent of $0 equals $0. IRS PLR 202440007
Q:What is the benefit of 100 percent bonus depreciation?
A:Under current law, funds can immediately deduct the full cost of qualifying AI data center equipment and certain improvements in the first year, significantly reducing taxable income in the early years of a project. IRC § 168(k)
Q:Is the proposed water reuse tax credit available now?
A:No. The Advancing Water Reuse Act (H.R. 2940) was introduced in April 2025 to create a 30 percent credit for water reuse investments in data centers, but it has not been enacted. Forbes/Tax Notes, H.R. 2940
Q:Are there special tax benefits for foreign investors in a U.S. AI data center REIT?
A:Yes. REIT dividends are generally not subject to U.S. trade or business tax for foreign investors and are not unrelated business taxable income. Sales of shares may be exempt from FIRPTA for domestically controlled REITs or qualified foreign pension funds. Law firm commentary
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.