December 19, 2012 REIT's mixed-use senior living communities are qualified health care properties In PLR 201250019, the Service has ruled that certain senior living communities, containing both assisted living units and independent living units, owned by a real estate investment trust (REIT) are health care facilities and, thus, meet the definition of "qualified health care properties" under Section 856(e)(6)(D). Accordingly, the REIT may lease the communities to its taxable REIT subsidiary (TRS) pursuant to the special rule of Section 856(d)(8)(B). Facts Taxpayer, a corporation that elected to be treated as a REIT, owns senior living communities that are currently leased to a single tenant. Pursuant to the special rule of Section 856(d)(8)(B), Taxpayer desires to lease the properties to a newly formed 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). X of the senior living communities are comprised of both independent living (IL) and assisted living (AL) residents (Mixed-Use Communities) and Y of the senior living communities are comprised of AL only dealing with memory care (MC) patients. Each Mixed-Use Community is and will continue to be operated and marketed as one integrated community with different service options and units available for AL and IL residents. MC is a subset of assisted living with additional specialized care provided and licenses issued in each state pursuant to the assisted living licensing statutes. IL and AL residents usually share common area facilities, except that in larger facilities there are additional secondary reception areas in the AL and MC areas. Except for specialized events for MC residents, the same events and activities are offered for all residents regardless of the type of unit in which they reside. Each Mixed-Use Community is operated and marketed as one integrated community with different service options and units available. All residents are provided with core services, all of which are included in the monthly service fee. Additionally, AL residents receive assistance with activities of daily living. The AL units in each of the Facilities are licensed under the laws of the applicable state agencies in which the property is located. A service plan, as required by law, is developed upon admission and is regularly updated, including when there is a significant change in the resident's condition. Taxpayer represents that transitioning a resident from IL to AL within a Mixed-Use Community is generally a simple process with no move necessary. There are a significant number of AL residents in each Mixed-Use Community, and a significant portion of the gross income is from the AL residents, although occupancy can fluctuate due to various factors. 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) grants a special exception to the "related party rents" rule of Section 856(d)(2)(B) and 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 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 AL and IL residents are located in the same building or on the same real estate parcel; all of the AL units are licensed by the State in which they are located (to the extent licensing is required); 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 a significant number of units in each of the Mixed-Use Communities will be occupied as AL units. Accordingly, the Service ruled that the Mixed-Use Communities (as well as the MC communities) are health care facilities under Section 856(e)(6)(D)(ii). Implications PLR 201250019 is the fourth private letter ruling in which the Service has ruled that certain mixed-use senior living properties constitute "health care facilities" based on an analysis of the surrounding facts and circumstances. As in the prior rulings, the Service does not appear to have established "bright line" tests for making such determinations. See PLRs 201104023 and 201104033 (Tax Alert 2011-0227) and 201125013 (Tax Alert 2011-1113). Also see PLR 201147015 (Tax Alert 2011-2003), in which the Service ruled that certain senior independent living communities offering health care-lite services are "congregate care facilities" and, thus, meet the definition of "qualified health care properties" under Section 856(e)(6)(D). ———————————————
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