In PLR 201901001, the IRS ruled that amounts received by a real estate investment trust (REIT) for providing the use of fiber optic systems and distributed antenna systems (DAS) to wireless telecommunications carriers constitute qualifying rents from real property for purposes of the 95% and 75% income tests of Section 856(c)(2) and (3). In addition, the IRS ruled that the provision of certain services by a taxable REIT subsidiary (TRS) or an independent contractor (IK) do not give rise to impermissible tenant service income and will not cause any portion of the amounts received by the REIT to fail to qualify as rents from real property under Section 856(d).

Facts

Taxpayer, a REIT, leases systems composed of permanently affixed coaxial and fiber optic cable, and the associated conduit piping (together, the Real Property Assets) to wireless carriers and other telecommunication providers (Tenants). Some of Taxpayer's fiber optic cables are connected to and are associated with DAS installations, as described later, while others form independent networks that are connected to cell towers or utility poles or are buried under the ground. For the networks other than DAS, either a TRS or the Tenant will own and operate all the equipment that receives, amplifies, regenerates, converts, and returns a signal originated by a Tenant, including optical converters, filters, lasers, transponders, amplifiers and regeneration equipment.

Taxpayer also leases to Tenants indoor and outdoor DAS, which are composed of "Real Property Assets," among other assets. A DAS installation is a system for the transmission of telecommunication signals through fiber optic and coaxial cables used by wireless carriers to supplement their antennas mounted on cell towers in certain densely populated areas (e.g., a college campus) and hard-to-reach areas (e.g., an underground transportation system). A DAS installation may be located outdoors where cables are buried in the ground in conduit piping or strung between utility poles, or inside a structure where Real Property Assets are embedded in, or affixed to, walls or ceilings of a building or other structure. A TRS will own and operate all the equipment that receives, amplifies, converts and returns a signal originated by a Tenant, including optical converters, lasers, transponders, amplifiers and regeneration equipment. The Tenants will own the equipment located at the base stations, which will be stored in metal equipment cabinets owned by Taxpayer.

Taxpayer enters into five types of contractual agreements with Tenants, under which Tenants must pay a fixed, recurring amount that may be subject to periodic escalation and, in some cases, an upfront payment:

1. Under a DAS Agreement, the Tenant has the exclusive right to use either a designated number of individual strands within the fiber optic pathway, or a dedicated wavelength within the fiber optic pathway of a DAS installation.
2. Under an Indefeasible Rights of Use Agreement, the Tenant has the exclusive right to use all the wavelengths (or capacity) in one or more specified strands within a fiber optic cable over a specified route for the term of the lease.
3. Under a Capacity Lease, the Tenant has an exclusive right to use a specified subset of all the wavelengths (or capacity) within a strand located in a fiber optic cable over a specified route for the term of the lease.
4. Under a Wave Lease, the Tenant has an exclusive right to use a dedicated wavelength in a strand (which is not specifically identified) within the fiber optic cable over a specified route for the term of the lease.
5. Under a Backhaul Lease, the Tenant has an exclusive right to use all or a dedicated portion of the capacity of an identifiable fiber optic cable over a specifically identified route from a cell tower to a collection point for the term of the lease. Under certain Backhaul Leases, the Tenant does not have an exclusive right to a specifically identified wavelength on a strand within the fiber optic cable; the Tenant has, however, the exclusive right to either (i) all the capacity of a particular number of unidentified strands or (ii) a dedicated portion of the capacity within a strand of a fiber optic pathway.

Law and analysis

In its analysis, the IRS first noted that the Taxpayer represented that the Real Property Assets are real property for purposes of Section 856. Next, the IRS explained that, under each of the five types of agreements, the Tenant has a right to use or to occupy space on the Real Property Assets. Each of the five types of agreements typically involves a term of a certain range of years, and a minimum term applies to all the agreements. Each agreement requires the Tenant to pay a fixed, recurring amount during the term of the agreement. The Tenant must pay for the contracted usage, regardless of the Tenant's actual usage. Accordingly, the IRS concluded that amounts Taxpayer received from Tenants for right to use or to occupy space on the Real Property Assets qualify as "rents from interests in real property" under Section 856(d)(1)(A).

Taxpayer also represented that any service that will be rendered to a Tenant under each of the five types of agreements is a service that is customarily furnished to tenants of Real Property Assets of a similar class to that of Taxpayer in the same geographic area and, except for the provision of electricity, are performed by either a TRS or an IK. The IRS also noted that Taxpayer's performance of certain activities represents permissible fiduciary duties of the Taxpayer's directors in accordance with Regulation Section 1.856-4(b)(5)(ii). Accordingly, the IRS concluded that the furnishing of services to Tenants and Taxpayer's provision of certain activities do not give rise to impermissible tenant service income and will not cause any portion of the rents Taxpayer receives from Tenants for use of Taxpayer's Real Property Assets to fail to qualify as rents from real property under Section 856(d).

Implications

PLR 201901001 is the first private letter ruling addressing a REIT's leasing of fiber optical cable systems (that are not DASs) to wireless telecommunications carriers, and is the third private letter ruling addressing a REIT's leasing of DASs to wireless telecommunications carriers (see PLRs 201741002 (Tax Alert 2017-1801) and 201450017). Technology-driven innovation over the last 20 years has resulted in certain newer forms of arrangements for the use of real property, and it is helpful to see the IRS confirm that those uses of real property may result in "rents from real property" to REITs.

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