Executive Summary

Virginia’s 2026 General Assembly session produced significant new legislation reshaping the data center development landscape. Of 61 data center-related bills considered, 15 were sent to Governor Spanberger’s desk and 46 will carry over to 2027. The fate of the state’s marquee data center sales tax exemption remains unresolved. Lawmakers returned to Richmond on April 23 for a special budget session aimed at finalizing the state’s approximately $212 billion two-year spending plan, but the session lasted only a matter of hours before legislators recessed without reaching agreement, a result that laid bare significant rifts among the Democratic majorities. Members departed the Capitol without establishing a firm schedule for resuming negotiations, and the two chambers’ respective budget proposals remain separated by more than $1 billion. At a separate reconvened session on April 22, legislators also declined to adopt a number of the Governor’s proposed amendments to high-profile bills addressing energy policy, marijuana legalization and collective bargaining, further highlighting friction within Virginia’s newly unified Democratic government that could complicate fiscal talks going forward. The constitutional deadline for enacting a budget is June 30, and further negotiations are anticipated. This alert summarizes key legislative outcomes, pending measures and market dynamics that data center developers and operators should factor into their investment decisions.

• Tax Deferral Benefits: Section 1031 allows deferral of capital gains income taxes when exchanging interests in real estate, provided the properties are “like kind” and both held for investment or productive use.
• Real Property Requirement: Since 2017, only interests in real property qualify for 1031 exchanges; personal property does not.
• Handling Proceeds: Careful management of exchange proceeds is crucial to avoid taxable gains, especially concerning "boot" and debt discrepancies.
• Strict Timing Rules: Delayed exchanges must adhere to 45-day identification and 180-day closing deadlines.
• Role of Qualified Intermediaries: To prevent constructive receipt of proceeds, a qualified intermediary must manage the funds.
• Legal Guidance: Recent cases emphasize the importance of meeting deadlines and proper documentation to secure tax deferral benefits.

The Virginia Court of Appeals has reversed a 2024 Arlington Circuit Court ruling that struck down Arlington County’s 2023 “Expanded Housing Option” (EHO) zoning amendment and enjoined the County from issuing permits under it. In a September 5 memorandum order, a three-judge panel held that the circuit court erred when it refused to let developer Wilsons Ventures LLC intervene in the residents’ challenge to the EHO. The panel remanded the case so Wilsons Ventures can be added as a party and participate in further proceedings.

Recent legal and policy developments continue to shape the landscape for “Missing Middle” housing initiatives, impacting developers, municipalities, and communities alike. The original alert reporting on the "Missing Middle" can be found by clicking here. 

On October 25, 2024, Arlington County Court was filled to capacity as Judge Schell delivered his final judgment in the case of Marcia Nordgren v. Arlington County Board. This ruling provided much-needed clarity following the initial oral opinion, which had declared Arlington's Expanded Housing Option ("EHO") zoning and development policy unlawful. 

On September 27, 2024, a Virginia Circuit Court Judge invalidated Arlington's “Missing Middle” zoning policy, which allowed for the by-right construction of up to six dwelling units on properties in districts zoned for single-family residential dwellings. The policy is codified as “Arlington County Zoning Ordinance (ACZO) §10.4 Expanded Housing Option Development” (the “EHO”) and effectively does away with single-family only zoning restrictions. The judge found that the Arlington County Planning Commission violated procedural requirements, failed to consider environmental impacts, and did not account for compliance with state and local tree canopy requirements in its passage of the EHO. As a result of the judge’s ruling, Arlington County cannot issue any more permits under the EHO.
 

Update: Assessing ‘Missing Middle’ Housing Policies: Procedural Pitfalls And Policy Implications In Virginia And Beyond

Assessing ‘Missing Middle’ Housing Policies: Procedural Pitfalls and Policy Implications in Virginia and Beyond