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The Service recently released two PLRs (201104023 and 201104033) in which it ruled that certain senior living communities, containing both assisted living units and independent living units, owned by a REIT constitute "qualified health care facilities" within the meaning of Section 856(e)(6)(D)(ii). Accordingly, the REITs could lease the senior living properties to their TRSs under the special rule of Section 856(d)(8)(B).

Facts

Each Taxpayer in the PLRs is a corporation that elected to be treated as a real estate investment trust (REIT). Each Taxpayer owns properties and leases them to its taxable REIT subsidiary (TRS), each of which has hired an eligible independent contractor to operate the properties.

The properties are senior living communities that contain both independent living (IL) and assisted living (AL) units; some also offer Alzheimer's care. The IL and AL units in each property are located on the same campus, generally in one building, and share common area facilities and services. All residents are offered the same events and activities, regardless of the type of unit they occupy. Services include front desk reception, meals, housekeeping, social activities, and fitness activities. Staff members provide diet, mobility, and minor medical assistance. Staff members are available 24 hours a day. Transportation is provided to doctors' offices, banks, and retail stores. AL residents also receive assistance with activities of daily living including, bathing, dressing, grooming, toileting, escorting, medication management, and safety checks. AL units are licensed under state law. A significant number of units on each property are used as AL units. The AL units are licensed under the laws of the state in which the Property is located.

Each resident has a plan of care that dictates the level of assistance required. Residents are periodically evaluated to determine if there is a change in the level of care services needed. Residents may move from an IL unit to an AL unit, if it becomes necessary. Some properties may even be able to change the level of care without the resident physically moving to a different unit.

Analysis

To qualify as a REIT, an entity must derive at least 95% of its gross income from sources listed in Section 856(c)(2) and at least 75% from sources listed in Section 856(c)(3). "Rents from real property" are listed in both sections.

Section 856(d)(2)(B) provides that, with the exception of the special rule of Section 856(d)(8), rents from real property does not include amounts received directly or indirectly from a corporation if the REIT owns 10% or more of the total combined voting power or 10% or more of the total value of the shares of the corporation.

Section 856(d)(8)(B) provides that amounts paid to a REIT by a TRS shall not be excluded from rents from real property by reason of Section 856(d)(2)(B) when a REIT leases a qualified lodging facility or qualified health care property to a TRS, and the facility or property is operated on behalf of the TRS by a person who is an eligible independent contractor.

Section 856(e)(6)(D)(i) defines qualified health care property as any real property which is a health care facility. A "health care facility" is defined in section 856(e)(6)(D)(ii) as a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility (as defined in Section 7872(g)(4)), or other licensed facility which extends medical or nursing or ancillary services to patients, and which was operated by a provider of such services that is eligible for participation in the Medicare program under Title XVII of the Social Security Act with respect to the facility.

Under Section 856(l)(3)(A), a TRS may not directly or indirectly operate or manage a lodging facility or health care facility.

In both PLRs, the Service noted that each property is located in one building or on the same campus, and all of the AL units are licensed by the State in which they are located. The Service also noted that a significant number of units in each of the Properties are currently occupied as AL units, and when a resident requires assistance with activities of daily living, the resident may transition from an IL unit to an AL unit (depending upon availability), and in some cases, the IL unit may be converted to an AL unit.

Accordingly, the Service ruled that the properties are health care facilities under Section 856(e)(6)(D)(ii). As such, the amounts of rent paid to each Taxpayer by its TRS shall not be excluded from rents from real property due to Section 856(d)(2)(B) as long as the property is operated by an eligible independent contractor on behalf of the TRS.

Implications

PLRs 201104023 and 201104033 are the first private letter rulings or guidance of any type that address the characterization of senior living properties that contain both AL and IL units ("mixed-use senior living properties").

The threshold characterization of a mixed-use senior living property has significant consequences to a REIT. While a REIT may master lease a qualified health care property to a TRS under the rules of Section 856(d)(8)(B), a REIT may not generally directly lease space to residents of a qualified health care property because such activity would require that the REIT provide noncustomary health care related services to the residents through a TRS, an activity that a TRS is precluded from conducting. Consequently, it is necessary to determine whether a mixed-use senior living community owned by a REIT is a qualified health care property, unless such property is going to be master leased to an unrelated third-party (an option that may not be available). If a REIT makes an incorrect determination on this matter, it could result in either nonqualifying related party rents or, alternatively, an asset test failure and the receipt of nonqualifying income.

In these PLRs, the Service did not appear to establish bright line tests in making its determination that the mixed-use senior living properties were qualified health care facilities (and thus qualified health care properties). Instead the Service appears to have made its determination based on all of the surrounding facts and circumstances. The following appear to be important facts considered by the Service: a significant number of the units in each property were AL units; each property was operated, managed, and marketed as an integrated property offering different service options and units available; there were shared common area facilities and services among both AL and IL residents; the AL units were licensed by the applicable state; and residents could transition from an IL unit to an AL unit (depending upon availability) as needs change.