In a private letter ruling (PLR 201944011), the IRS ruled that rental income received by a real estate investment trust (REIT) from boat slips and storage spaces at the REIT's marina qualifies as rents from real property under IRC Section 856(d). The IRS also ruled that income from services provided at the marina is not impermissible tenant service income, so it would not prevent the rental income from qualifying as rents from real property.

Facts

Taxpayer is a REIT that indirectly owns, through partnerships, a property consisting of a ground lease, an apartment building, and a marina. Taxpayer leases, as lessee, the land and adjacent water space under a long-term ground lease from County.

Taxpayer demolished the existing apartment building and built a new one and redeveloped the marina to contain boat slips. The marina will include floating piers, with individual boat slips along each pier consisting of a space on the water to moor a boat, marked by floating fingers attached to the piers or by an end tie at the end of each pier. The piers will be held in place by pylons. Taxpayer represents that the pylons are real property, as they are inherently permanent structures. In addition, Taxpayer represents that the boat slips are water space superjacent to land, and therefore land under Treas. Reg. Section 1.856-10(c). Taxpayer intends to treat dock carts, ice machines, bike racks, piers, and the fingers as personal property.

The marina will have restrooms and showers (shower facilities) in a permanently affixed building on the shore and be available to marina tenants for no additional fee. These facilities will be unattended and have no towel service.

Boat slips will be leased to tenants (most of whom will not live in Taxpayer's apartment building) under a wharfage contract, under which a tenant will be assigned a specific slip for mooring a specific boat. The wharfage contracts will be on a month-to-month basis, with a minimum term of one month. The rental charges (slip fees) will be a fixed monthly amount based on the length of the slip. The tenants must pay a one-month deposit and maintain liability and property insurance for the moored boat. The wharfage contract cannot be assigned or sublet. Taxpayer represents that the fair market value of the personal property leased in connection with the boat slip will be 15% or less of the fair market value of the combined real and personal property.

The marina will also rent out storage areas on monthly terms. The storage consists of individual spaces in cages in locked rooms in a permanently affixed building on the shore. No services will be provided in connection with the storage areas. As with the boat slip rental, Taxpayer represents that the fair market value of the personal property leased in connection with the storage space will be 15% or less of the fair market value of the combined real and personal property.

Taxpayer will provide, without charge, self-service utilities hookups at each boat slip. The charges for the utilities will be included in the monthly slip fee or billed directly to the tenant by the utility company. The utility services will be available to all tenants and Taxpayer represents that they do not constitute personal services given to any particular tenant.

Taxpayer will contract with service providers for a dock master, porters, a courtesy officer, and a vessel recovery specialist. The dock master manages all aspects of the marina, such as leasing and collecting rents. The porters perform routine maintenance for the marina, including the restrooms and showers. All service providers will be either independent contractors from whom Taxpayer derives no income or a taxable REIT subsidiary of Taxpayer.

Law and analysis

Rental income from boat slips and storage spaces

Under IRC Section 856(d)(1), rents from real property include:

• Rents from interests in real property
• Charges for services customarily furnished or rendered in connection with the rental of real property, whether or not those charges are separately stated
• Rent from personal property leased under, or connected with, a real property lease, but only if the rent from the personal property for the tax year does not exceed 15% of the total rent for the tax year attributable to both the real and personal property leased

Treas. Reg. Section 1.856-4(a) defines "rents from real property" generally as the gross amounts received for the use of, or the right to use, real property of the REIT. Treas. Reg. Section 1.856-10(b) defines real property as land and improvements to land. Under Treas. Reg. Section 1.856-10(c), land includes water and air space superjacent to land. Treas. Reg. Section 1.856-10(d)(1) and (2) defines improvements to land as inherently permanent structures and their structural components, while the term "inherently permanent structure" means any permanently affixed building or other permanently affixed structure.

For purposes of IRC Section 856(c)(2) and (3), Treas. Reg. Section 1.856-4(b)(1) treats rents from real property as charges for services customarily furnished in connection with the rental of real property. Services furnished to tenants of a particular building will be considered customary if, in the geographic market in which the building is located, the service is customarily provided to tenants in buildings of a similar class.

The IRS concluded that the income received by Taxpayer for the use of the boat slips and storage spaces would constitute rents from real property.

In support of its conclusion, the IRS noted:

• The rents received for the rights to use the boat slips and the storage spaces were rights to use and occupy the space above the seabed or in buildings permanently affixed to the shore.
• Taxpayer represented that the fair market value of the personal property leased in connection with the boat slip and storage space leases was no more than 15% of the combined valued of the real and personal property leased.
• All the services performed at the marina were usual and customary for marinas in the applicable geographic market.

Income from services provided at the marina

IRC Section 856(d)(2)(C) excludes any impermissible tenant service income from the definition of rents from real property. IRC Section 856(d)(7)(A) defines impermissible tenant service income as any amount received or accrued directly or indirectly by the REIT for services furnished by the REIT to the tenants of the property, or for managing or operating that property. IRC Section 856(d)(7)(C)(i) does not treat services, management, or operation provided through an independent contractor from whom the REIT does not derive or receive any income, or through the taxable REIT subsidiary, as furnished, rendered, or provided by the REIT. IRC Section 856(d)(7)(C)(ii) does not treat any amount that would be excluded from unrelated business taxable income (UBTI) under IRC Section 512(b)(3), if received by an exempt organization under IRC Section 511(a)(2), as impermissible tenant service income.

The IRS concluded that the income from the services provided at the marina was not impermissible service income, so the rents from the marina tenants qualify as rents from real property.

In support of its conclusion, the IRS ruled that:

• Income attributable to providing shower facilities to all tenants is not income from the provision of a service, regardless of whether services may be provided in the shower facilities, and therefore is not impermissible tenant service income.
• Taxpayer represented that all the services performed at the marina are usual and customary for marinas in the same geographic area.
• Utilities are available to all boat slip tenants and are not personal services given to any particular tenant.
• Taxpayer represents that all other services that will be provided at Marina will be provided through either an independent contractor or a taxable REIT subsidiary.
• The income from the provision of utilities is, for purposes of determining whether the income is qualifying income for REIT qualification purposes, income that would be excluded from UBTI if received by an exempt organization.

Implications

PLR 201944011 is the third private letter ruling addressing a REIT's ownership of a marina.

In PLR 201944011, as in PLR 201310020 (Tax Alert 2013-0510), the IRS ruled that rents received from leasing "boat slips" (i.e., identified water space to moor a boat or other watercraft) constituted qualifying rents from real property. In these two rulings, the floating docks/piers were represented to constitute personal property, so the REITs needed to be mindful that the fair market value of the floating docks/piers and other personal property leased under, or in connection with, the leases of the boat slips did not represent more than 15% of the fair market value of both the real and personal property leased.

In PLR 201930003 (Tax Alert 2019-1751), the IRS ruled that certain floating docks constituted real property where: (i) the floating docks were attached to poured concrete walkways on land or, in coastal marinas, attached to timber or steel bulkheads that retained contact with the land; and (ii) such floating docks were held in place by either pilings or winches and cables that were permanently anchored to the seabed.

In PLR 201944011, the IRS determined that the provision of shower facilities by the REIT was not viewed as the provision of a "service," although the IRS noted that any service provided in or with respect to the shower facilities (such as towel service) must be analyzed as a service under the REIT rules. In PLR 201812009 (Tax Alert 2018-0737), the IRS also concluded that the provision of physical facilities/amenities at an apartment complex are not generally considered services themselves.

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