In PLR 201647005, the IRS ruled that certain senior housing communities, containing both assisted living units and independent living units, owned by a real estate investment trust (REIT) were health care facilities, thereby meeting 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) under the special rule of Section 856(d)(8)(B).

Facts

Taxpayer is a REIT that acquired two mixed-use senior housing communities, Property One and Property Two (the Communities). Taxpayer intends to hold the Communities in a partnership and lease them to a TRS. The TRS will enter into an arm's-length management contract with an eligible independent contractor to operate and manage the Communities.

The Communities are "age-in-place" senior living communities that contain both independent living (IL) and assisted living (AL) units. "Age in place" is an industry term used to describe a resident's natural progression across the spectrum of services that the facility offers, starting with IL and ending with AL, as the need arises. Property One consists of three buildings connected by enclosed corridors that are operated as one integrated community. Two of the buildings contain IL units and one contains both IL and AL units. Residents may utilize the amenities at each of the buildings and there is substantial integration of the IL and AL services so that residents can move seamlessly between service offerings as health needs warrant.

Property Two consists of a single building containing both IL and AL units on different floors. Property Two also operates as one integrated community offering different levels of care. This structure allows residents to have access to increased services as their conditions warrant without the need to move into a different facility.

The Communities offer services that are not commonly offered by a typical apartment building. Services available to all residents of both Communities generally include daily meals in a community dining room, social and recreational activities, routine pharmacy deliveries, vaccinations, blood pressure checks, fitness classes, and transportation to medical appointments. Both Communities have a daily check-in system with a follow-up for residents who do not check in by the designated time and units in both Communities are equipped with an emergency call system. If a resident is believed to be in need of medical attention, staff at both Communities will contact emergency 911 services and will assist as necessary with the emergency. In both Communities, the AL units are licensed by the state in which they are located. Additionally, AL residents receive assistance with activities of daily living (ADLs), including bathing, dressing, grooming, toileting, and eating, provided as the resident's condition requires.

Property One also offers a wellness center where IL residents can pay an additional fee for access to assistance with ADLs as their needs require. Property Two offers onsite rehabilitation therapy provided by licensed therapists as well as in-home supportive services. Each Community has several common areas where AL and IL residents can congregate and socialize, such as dining areas, hobby rooms and libraries. The same staff members provide services to all residents in regard to housekeeping, food service, maintenance and community life.

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 that is a health care facility. Section 856(e)(6)(D)(ii) defines a "health care facility 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 … 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 such facility."

In the analysis section of PLR 201647005, the IRS noted that each Community is located in one building or on the same campus, and all of the AL units are licensed by the state in which they are located. When a resident eventually requires assistance with ADLs, the resident may transition from an IL unit to an AL unit (depending upon availability). The IL residents are more physically independent, but the Properties offer services to help maintain and improve the health and well-being of all of their residents including: daily check-ins, the provision of emergency call systems, congregate meals, wellness programs, transportation, and housekeeping. Both properties offer wellness-related services that support the overall well-being of the IL residents, including routine pharmacy deliveries, vaccinations, blood pressure checks and transportation to medical appointments. Additionally, the Properties provide optional health care services on-site for residents. These healthcare services are not typically available in general apartment buildings and are offered for residents in a manner that provides for congregate care.

In conclusion, the IRS ruled that the Communities are health 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).

Implications

PLR 201647005 is the fifth private letter ruling in which the IRS has ruled that certain mixed-use senior living/housing communities (e.g., communities containing both AL and IL units) constitute "qualified health care facilities" based on an analysis of the surrounding facts and circumstances. As in the prior rulings, the IRS does not appear to have established "bright line" tests for making these determinations. See PLRs 201104023 and 201104033 (Tax Alert 2011-227), 201125013 (Tax Alert 2011-1113), and 201250019 (Tax Alert 2012-2093).

The IRS has previously ruled that certain REIT-owned senior independent living/housing communities (e.g., communities containing solely IL units) offering 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, constituted "congregate care facilities" within the meaning of Section 856(e)(6)(D) and, thus, qualified health care properties. See PLRs 201147015 (Tax Alert 2011-2003), 201429017 (Tax Alert 2014-1367), and 201509019 (Tax Alert 2015-480).

Of note, the current IRS Business Plan contains a project relating to "Guidance defining congregate care for purposes of the definition of a REIT health care facility under Section 856(e)(6)(D)(ii) and (l)(4)(B)."

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