In PLR 202013006, the IRS ruled that a real estate investment trust's share of public parking revenues derived from the real estate investment trust's office building parking garage and a physically connected parking garage owned by a third-party constitutes rents from real property for purposes of IRC Section 856(d), and thus qualifying income for purposes of the 95% and 75% income tests of IRC Section 856(c)(2) and (3).

Facts

Taxpayer, a real estate investment trust (REIT), and Company A, a REIT, are developing a mixed-use development project consisting of Parcel 1 and Parcel 2.

Taxpayer and LLC are developing Parcel 1 into a property that will consist of an office condominium unit owned by Taxpayer and a retail condominium unit owned by LLC. The property will also contain an underground parking garage, which will be part of the office condominium unit owned by Taxpayer or otherwise reserved for Taxpayer's use. Taxpayer will make the parking garage available to its tenants (which includes the tenants' guests, customers and subtenants), as well as to the general public. Taxpayer will be required under the condominium documents to leave a certain number of parking spaces available for daily public parking, which may include tenants and customers of LLC. The parking garage is "appropriate in size" for the expected number of tenants and is expected to be used predominantly by those persons.

Parcel 2 is located across the street from Parcel 1 and contains recently constructed towers consisting of a retail condominium unit owned by Company A (through a partnership) and a residential condominium unit owned by an unrelated third party. Company A's retail condominium unit and the third-party's condominium each include separate portions of a parking garage (with separate gated entrances) located on Parcel 2. Company A's portion of the parking garage is available for use by Company A's tenants (which includes the tenants' guests, customers and subtenants), as well as the general public. Taxpayer represents that Company A's portion of the garage is "appropriate in size" for the expected number of tenants of the retail condominium unit and is expected to be used predominantly by such persons.

The two parking garages will be physically connected underground in accordance with applicable building permits for the project, and Taxpayer and Company A will grant each other reciprocal easements for ingress, egress, transit, and parking. Each parking garage is expected to be used predominantly for parking by tenants of the parking garage owner, but cars could enter one parking garage and park in the other parking garage. Taxpayer and Company A will engage an independent contractor (IK) to manage and operate the parking garages under a single management contract , and will share parking revenues received from the public (Public Parking Revenues) under a formula that generally will be based on the square footage of each parking garage used for parking, and also adjusted for reserved spaces. Taxpayer and Company A will each retain parking revenues received from their respective tenants for providing reserved parking spaces. Taxpayer and Company A will share operating expenses of the garages under a similar formula.

PLR 202013007, a companion ruling to PLR 202013006, appears to address the same facts for Company A, which as noted previously, is also a REIT.

Law and analysis

Revenue Ruling 2004-24 addresses three situations in which a REIT's income from making parking spaces available in a parking facility located at the REIT's rental property qualifies as income from the provision of customary services, and thus qualifying rents from real property under IRC Section 856(d).

In Situation 3 of Revenue Ruling 2004-24, the IRS concluded that income received by a REIT from the provision of parking facilities to the tenants of its rental property and to the general public constitutes rents from real property when (i) the parking facility is located in or adjacent to the rental property; (ii) the parking facility is appropriate in size for the number of tenants and their guests, customers, and subtenants who are expected to use the facility, and is made available for those parties, as well as the general public; (iii) the parking garage is operated by an IK from whom the REIT receives no income; and (iv) all services provided by the IK (and the REIT) are customary under the applicable services tests.

In PLR 202013006, the IRS indicated that the parking garages are similar to the parking facility addressed in Situation 3 of Revenue Ruling 2004-24, except that the parking garages are connected and the public parking revenues received by Taxpayer may not be the exact amounts attributable to cars parked in Taxpayer's garage. The IRS concluded, however, that the Taxpayer's garages were sufficiently similar to those in Scenario 3 that the parking income qualified for the same treatment. In reaching this conclusion, the IRS noted Taxpayer's representations that: (i) the project's permits required the garages to be connected; (ii) "each parking garage will be used for parking predominantly by tenants (and their customers and guests) of the REIT owning such parking garage"; and (iii) the Public Parking Revenues and expenses "will be shared so as to replicate as closely as possible the revenue and expenses that each REIT would have if the parking garages were operated separately."

In addition, the IRS noted that all services provided at the parking garages will be of a type that are customarily provided in connection with the rental of space in parking garages in the geographic market in which the parcels are located. Accordingly, the IRS ruled that Taxpayer's share of the Public Parking Revenues will qualify as rents from real property for purposes of IRC Section 856(d).

Implications

PLR 202013006 is the first private letter ruling to address a "shared parking garages" scenario. It is helpful to see the IRS clarify that the receipt of parking revenue from general public parking in this situation is treated as qualifying rents from real property, and thus qualifying income for purposes of the 95% and 75% REIT income tests. Presumably, neither Taxpayer nor the IRS had concerns that the parking revenue from tenant parking would be treated as other than qualifying income, as evidenced by the matter not being addressed in the ruling conclusion or in a caveat.

Of additional interest, PLR 202013006 appears to be the first private letter to address a situation in which a REIT's parking facility contains electric vehicle charging stations. Specifically, the ruling describes that the IK operating the parking garage will be involved in connecting and disconnecting electric vehicles from charging stations or moving electric vehicles to and from charging stations to maximize the use of charging stations (for which no separate fee is charged).

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