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In PLR 201429017, the Service ruled that certain senior living communities owned by a real estate investment trust (REIT) that have a significant health care-related focus and the goal of offering a medical services intensive environment for senior citizens who are generally physically able to care for themselves constitute "congregate care facilities" within the meaning of Section 856(e)(6)(D). As such, they are "qualified health care properties" and, the senior living communities could be leased to a taxable REIT subsidiary (TRS) under the special rule of Section 856(d)(8)(B).

Facts

Taxpayer is a publicly traded REIT that is in the business of owning and leasing healthcare-related real estate. Taxpayer acquired certain senior living facilities through a partnership. The senior living facilities are leased to another partnership in which a TRS of Taxpayer is a partner, and are managed by an eligible independent contractor. The structure is intended to conform to the ownership structure permitted by Section 856(d)(8)(B).

The senior living facilities are unlicensed age-restricted residential communities that provide living quarters and significant congregate care services for tenants. The congregate care and wellness-related services are not commonly offered by typical multi-family residential rental properties. The facilities offer full-service community meals, housekeeping services, scheduled transportation services, 24-hour staff, daily social programs, events and outings, general maintenance service for units, paid utilities, on-site beauty salon & store, fitness center, 24-hour emergency response system, personal emergency pendants, maintenance of current "do not resuscitate" forms for residents upon request, sharps containers, healthcare screenings, meetings with a clinical director and an on-site director that promotes resident health. For an additional fee, the facilities offer outpatient therapy services, hospice services, home healthcare services and companion services.

The facilities also offer a resident transfer program should a resident need to move to a different facility with a higher level of care.

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). Both sections include "rents from real property."

Section 856(d)(2)(B) provides that, with the exception of the special rule of Section 856(d)(8), "rents from real property do 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 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," 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 is 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.

The IRS explained that the senior living facilities offer services that have a significant health care-related focus, with the goal of offering a medical services-intensive environment for senior citizens who are generally physically able to care for themselves, and that the facilities offered healthcare-related services and alternatives for residents that are not available in a typical multi-family residential rental property.

Accordingly, the Service ruled that the senior living communities are "congregate care facilities" within the meaning of Section 856(e)(6)(D) and, therefore, are "qualified health care properties" under Section 856(e)(6)(D). As such, the amounts of rent paid to the Taxpayer by its TRS shall not be excluded from rents from real property under Section 856(d)(2)(B) as long as the senior living communities are operated by an eligible independent contractor on behalf of the TRS.

Implications

PLR 201429017 is the second private letter ruling to conclude that senior independent living communities constitute "congregate care facilities" 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 IRS's view of the term. See PLR 201147015 (Tax Alert 2011-2003).

This ruling should be contrasted with PLR 200813005 (Tax Alert 2008-0498) in which the IRS 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 a TRS of the REIT.

The Service has previously ruled that certain "mixed-use" senior living properties (containing both assisted living units and independent living units) constitute "qualified health care properties" based on an analysis of the surrounding facts and circumstances. See PLRs 201125013 (Tax Alert 2011-1113), PLRs 201104023 and 201104033 (Tax Alert 2011-0227) and PLR 201250019 (Tax Alert 2012-2093).

Finally, the senior living communities in PLR 201429017 appear to have been leased to a partnership in which the TRS was a partner, as contrasted with a direct lease to the TRS. While Section 856(d)(8)(B) does not directly address leasing to a TRS-partner, the IRS concluded in Revenue Procedure 2003-66 that a REIT can satisfy the related-party rent exception of Section 856(d)(8)(A) (relating to leasing up to 10% of the space in a non-hotel/health care property to a TRS) when the space is leased to a partnership in which the TRS is a partner. It also appears that the Service approved a lease to a TRS-partnership for purposes of Section 856(d)(8)(B) in PLR 201104023 and companion PLRs 201225008 and 201225009 (Tax Alert 2012-1138).

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