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In PLR 201310020, the Service ruled that (i) boat slips at a marina constitute qualifying real estate assets within the meaning of Section 856(c)(4), (ii) rental income received from leasing boat slips constitute qualifying rents from real property for purposes of the 75% and 95% REIT income tests and (iii) the activities of the dock master will not cause otherwise qualifying income to be excluded from the definition of "rents from real property."

Facts

Taxpayer, apparently a real estate investment trust (REIT), intends to acquire a long-term leasehold interest in a property comprised of residential rental property units (the Apartments) and a marina containing boat slips and end ties (the Marina). Taxpayer intends to renovate the Marina, adding new boat slip security gates and locker storage boxes as well as updates to the electrical, freshwater, fire suppression and sewage pumpout systems.

The boat slips and Apartments will be rented independently. The boat slips are leased to tenants as a lease of "premises" (namely a lease of a specified "slip"), via standard lease agreements and contain typical real estate terms, and require a minimum duration of X. Taxpayer expects some Marina tenants to be "live aboard" tenants who will reside on their boats. Marina tenants will have access to restrooms, showers and lockers, but will not have access to the clubhouse or other common amenities provided to Apartment tenants. Marina tenants will have access to and be billed for utilities as used, including sewage, electricity and water. The marina will employ a dock master, who will manage the marina, including leasing, collecting rents, enforcing rules, etc. The boat slips are accessed by means of large floating docks held in place by fixed pilings that are attached to the harbor floor. Taxpayer represented that the portion of the boat slip rental income attributable to the floating docks and any other personal property at the Marina does not exceed 15% of the total rental income from the marina lease agreements for the tax year. Additionally, Taxpayer represented that any services rendered in connection with the operation or maintenance of the property are usual or customary services and are not rendered primarily for the convenience of tenants.

Ruling and analysis

Section 856(c) requires a REIT to derive at least (i) 95% of its gross income (excluding gross income from prohibited transactions) from sources listed in Section 856(c)(2), which includes dividends, interest, rents from real property and certain other items, and (ii) 75% of its gross income (excluding gross income from prohibited transactions) from sources listed in Section 856(c)(3), which include rents from real property, interest from mortgage obligations, gains on the sale of real estate assets and certain other real estate sources of income. Section 856(c)(4)(A) requires at least 75% of the value of a REIT's total assets to be represented by real estate, cash and cash items (including receivables), and government securities at the close of each quarter of the REIT's tax year.

Real property (including interests in real property and interests in mortgages on real property) is included in the definition of "real estate assets" under Section 856(c)(5)(B). Section 856(c)(5)(C) defines "Interests in real property" as including fee ownership and co-ownership of land or improvements, leaseholds of land or improvements, options to acquire land or improvements, and options to acquire leaseholds of land or improvements, but does not include mineral, oil, or gas royalty interests.

In Revenue Ruling 71-286, 1971-2 C.B. 263, the Service ruled that air rights over real property, including the necessary easements on the surface for support of structures erected in such air space, are considered "interests in real property" and "real estate assets" under Section 856(c).

The Service explained that the right to use a geographically fixed plot of water (and the seabed underneath it) is directly analogous to air rights addressed in Revenue Ruling 71-246 and, accordingly, ruled that the rights conveyed in a boat slip lease to use water space constitutes a real property interest under Section 856(c). In addition, based in part on Taxpayer's representations that the boat slip rental income attributable to the floating docks and other personal property does not exceed 15% of the total rental income from the Marina lease agreements and that all services provided are usual and customary, the Service ruled that the rental income from the boat sips constitute qualifying "rents from real property," within the meaning of Sections 856(c)(2) and (3), and that the employment of the dock master at the Marina will not cause otherwise qualifying income to be excluded from the definition of "rents from real property."

Implications

PLR 201310020 is the first private letter ruling to comprehensively address the leasing of boat slips by a REIT. It is helpful that the Service analyzed the leasing of boat slips as the leasing of water space (which was ruled to constitute real property), as contrasted with treating the arrangement as the leasing of solely floating docks which generally constitutes personal property for REIT asset and income test purposes. As noted in the ruling, the Taxpayer represented that the value of the floating docks and other personal property fit within the 15% de minimis personal property test of Section 856(d)(1)(C).

In PLR 200052031(Sep. 29, 2000), the Service addressed, less comprehensively, the provision of a boat docks and ramps for no separate charge to the tenants of manufactured housing communities, and operating golf courses and a boat marina as a separate line of business.

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