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In PLR 201509019, the IRS ruled that certain senior independent living communities owned by a real estate investment trust (REIT) that offer services to monitor and to help improve the health and well-being of the residents, as well as supportive services offered by a typical congregate care facility, constitute "congregate care facilities" within the meaning of Section 856(e)(6)(D). As such, they are "qualified health care properties" that can be leased to a taxable REIT subsidiary (TRS) under the special rule of Section 856(d)(8)(B).

Facts

Taxpayer is a publicly traded corporation that elected to be taxed as a REIT. Taxpayer owns a geographically diverse portfolio of senior housing and health care properties, including age-restricted residential communities that provide living quarters and significant congregate care services for residents (Communities). The Communities are currently marketed as age-restricted independent living communities. Upon receipt of a favorable ruling, Taxpayer will lease the Communities to existing TRSs which, in turn, will contract with an eligible independent contractor (EIK) to operate the Communities under the special rule of Section 856(d)(8)(B).

Through an EIK, the Communities will provide residents with assistance in obtaining certain congregate care and wellness related services that are generally not offered by typical multi-family residential rental properties. Services available to the residents of the Communities include: Community Services, Wellness Services, and Healthcare Related Services.

Community Services include daily meals in a shared and central location, housekeeping and linen services, transportation services, social and recreational activities designed to improve a resident's well-being, 24-hour security, and handrails, bathroom rails and other improvements to facilitate mobility.

Wellness Services include dietary assistance, personal emergency call pendants, assistance with emergency response and monitoring residents for their safety and well-being.

Healthcare Related Services include assistance in obtaining third-party healthcare services such as on-site rehabilitation clinics for physical, speech and occupational therapy, assisting residents in obtaining on-site skilled nursing services administered by licensed professionals, and assistance in obtaining medication management services.

Law and 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 determined that the services provided to residents of the Communities are specifically targeted to monitor and to help improve the health and well-being of its residents, as well as to provide the type of supportive serves offered by a typical congregate are facility. In addition, the Community Services, Wellness Services and Healthcare Related Services provided are not commonly offered by typical multi-family residential properties located in the relevant geographic markets. Accordingly, the IRS ruled that the Communities are congregate care facilities within the meaning of Section 856(e)(6)(D)(ii) and, therefore, constitute "qualified health care properties" within the meaning of Section 856(e)(6)(D)(i). Additionally, rents received by Taxpayer from leasing the Communities to a TRS shall not be excluded from the definition of "rents from real property" by operation of Section 856(d)(2)(B), provided the Communities are operated and managed by an EIK.

Implications

PLR 201509019 is the third private letter ruling to conclude that certain 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 define the term "congregate care facility," nor is this term in customary use today. Accordingly, this ruling provides insight into the IRS's view of the term. See PLRs PLR 201429017 and 201147015.

This ruling should be contrasted with PLR 200813005 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, PLRs 201104023 and 201104033 and PLR 201250019.

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