December 1, 2011 REIT's senior independent living facilities are qualified health care properties In PLR 201147015, the Service has ruled that certain senior living facilities owned by a real estate investment trust (REIT) are "congregate care facilities," and thus meet the definition of "qualified health care properties" under Section 856(e)(6)(D). Accordingly, the REIT may lease the facilities to its taxable REIT subsidiary (TRS) pursuant to the special rule of Section 856(d)(8)(B). Facts A corporation that elected to be treated as a REIT has acquired properties and, pursuant to the special rule of Section 856(d)(8)(B), intends to lease the properties to a TRS, which in turn, will contract with an eligible independent contractor to operate the properties. In order to qualify for the special rule of Section 856(d)(8)(B), each property must constitute a "qualified health care property" within the meaning of Section 856(e)(6)(D). The properties are senior living communities marketed as independent living facilities providing services for seniors who are able to physically care for themselves. Residents must provide for their own medical needs, but facility management monitors their ability to do so. If management determines that residents can no longer care for themselves, the residents must move out. The facilities offer services not commonly offered by a typical apartment, including housekeeping, social and recreational services, transportation services, and congregate dining. Living quarters contain emergency call systems designed for elderly residents, and most facilities offer in-person status checks. In the event of a medical emergency, facility staff call 911, escort the medical team to the resident, contact the resident's family, and act as first responders. The facilities also keep "Do Not Resuscitate" forms on file for residents. Other services offered at the facilities include emergency call pendants for residents, companions to assist with transportation or shopping off-site, and sharps containers for medical biohazard disposal. Additionally, the independent contractors operating the properties will make voluntary health programs available to residents for an additional fee. These services, provided on-site by an affiliate of the manager, will offer Medicare-certified physical, occupational and speech therapy, medication management, and skilled nursing services by licensed professionals. 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) excludes from the definition of rents from real property 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) allows amounts paid to a REIT by a TRS to qualify as rents from real property 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(d)(9)(A) defines "eligible independent contractor" as an independent contractor actively engaged in the trade or business of operating qualified lodging facilities or qualified health care properties, respectively, for any person who is not a related person with respect to the REIT or the TRS. Section 856(e)(6)(D)(i) defines a qualified health care property as any real property that 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 that extends medical or nursing or ancillary services to patients, and was operated by a Medicare-eligible service provider. The Service noted that the residents at the taxpayer's facilities are physically independent but that the independent contractor at the facilities actively monitors residents' health and provides services to help improve their health and well-being. In addition to monitoring the residents, providing them with emergency call systems, meals, transportation and housekeeping, the independent contractor supervises health-related activities, such as in-home care and oxygen equipment, and even provides optional on-site health care services for residents. Such services are not typically available in apartment buildings and are consistent with congregate care, according to the Service. Accordingly, the Service ruled that the facilities are "congregate care facilities" under Section 856(e)(6)(D), and therefore are "qualified health care properties" under Section 856(e)(6)(D). As such, the amounts paid to each taxpayer by the TRS are not excluded from rents from real property by reason of Section 856(d)(2)(B), as long as the properties are operated by an eligible independent contractor. Implications PLR 201147015 is the first private letter ruling to conclude that a particular senior independent living property constitutes a "congregate care" facility for purposes of Section 856(e)(6)(D), and thus can be leased to a TRS under the special rule of Section 856(d)(8)(B). Neither the Code nor the Regulations defined the term "congregate care facility". Accordingly, this ruling provides insight into the Service's view of the term. This ruling should be contrasted with PLR 200813005 (Tax Alert 2008-498) in which the Service ruled that certain independent living properties did not qualify as health care facilities for purposes of Section 856(l)(3), which prohibits a TRS from directly or indirectly operating or managing a lodging facility or health care facility. PLR 200813005 addressed independent living facilities that did not appear to offer active monitoring of the health of the residents (or other health care-lite services). PLR 200813005 was also issued before Section 856(d)(8)(B) was extended to the leasing of qualified health care properties to taxable REIT subsidiaries ("TRSs") of the REIT. Finally, it should be noted that the Service has previously ruled that certain mixed-use senior living properties constitute "qualified health care properties" based on an analysis of the surrounding facts and circumstances. See PLRs 201125013 (Tax Alert 2011-1113) and 201104023 and 201104033 (Tax Alert 2011-0227). ———————————————
———————————————
| ||||||||||||||||||
| ||||||||||||||||||
