March 29, 2024 IRS rules that REIT's income attributable to outdoor industrial storage space and EV charging stations are rents from real property
In a ruling obtained by professionals at EY (PLR 202413004), the IRS ruled that payments received by a real estate investment trust (REIT) for the use of space at outdoor industrial storage facilities and certain services and amenities constitute rents from real property under IRC Section 856(d) for purposes of the REIT gross income tests under IRC Sections 856(c)(2) and (c)(3) (Income Tests). The ruling marks the first time the IRS addressed whether income from electric vehicle charging stations (EV Stations) constitutes rents from real property. Facts Taxpayer, a limited liability company that intends to elect to be taxed as a REIT, plans to acquire and develop outdoor industrial storage facilities (Properties). The Properties will generally be paved, fenced and lit, and may have security cameras. Taxpayer represented that the Properties will consist of real property under Treas. Reg. Section 1.856-10. Storage Agreements Taxpayer will enter into agreements (Storage Agreements) with unrelated third parties (Tenants) for the use of space at the Properties for storing equipment. All Storage Agreements will reserve a specified amount of space for the Tenant, and some Storage Agreements may allocate a specific storage space to a particular Tenant. Where Properties are near each other within a metropolitan area, a Storage Agreement may provide that a Tenant's allocated amount of storage space may be available at any such Property. Storage Agreements will have a specified term and will generally automatically renew at the end of that term. Tenants will pay a fixed fee (Storage Fee) for the right to use their storage space regardless of whether they use it. Taxpayer may increase Storage Fees based on market conditions, such as inflation, upon renewal of a Storage Agreement. Certain services Taxpayer will design the Properties and perform certain customary services provided at similar properties in the same geographic area as the Properties, including inspecting, maintaining and repairing the Properties; checking that no equipment is stored at a Property without a valid Storage Agreement; and providing security. Tenants will generally move their own equipment into and out of their storage spaces. Where it is possible to stack Tenant equipment to maximize storage space, the Tenant will deliver the equipment to a staging area at the Property, and employees of a taxable REIT subsidiary (TRS) or an independent contractor from which Taxpayer derives no income (IK) will move the equipment to the appropriate area inside the Property. Taxpayer represented that this service is customary, will be provided to all Tenants with stackable equipment and will not be a personal service provided to any particular Tenants. A TRS or IK may offer other services (Additional Services) at a Property, such as refueling, washing and maintenance of Tenant trucks and equipment. Tenants will directly contract with and pay the TRS or IK for the Additional Services. Taxpayer represented that it will not receive rent from an IK providing Additional Services, derive any income from the Additional Services or bear any cost of providing the Additional Services. Amenities A Property may include amenities (Amenities), such as EV Stations, shower facilities or weigh stations, which will be available to all Tenants of that Property. The only services provided in connection with the Amenities will be customary utilities, cleaning and basic maintenance. Access to Amenities at some Properties will be available to Tenants at no charge (Included Amenities), and at other Properties, Taxpayer may charge Tenants a separate fee for access. Taxpayer will not treat access fees as qualifying rents from real property for purposes of the Income Tests. Electricity and EV Stations Taxpayer will engage a utility provider that is an IK to provide utility services, such as electricity for (1) lighting the Properties, (2) Tenant use in storage areas to power and charge Tenant equipment, including via EV Stations and (3) parking areas via EV Stations for Tenants (and their guests and customers). EV Station users will be charged for the electricity they draw. Taxpayer will remit the amount collected to the utility provider. Taxpayer will not charge users an access fee to use an EV Station and will not charge a markup on the electricity drawn from EV Stations. Taxpayer will charge higher Storage Fees for storage spaces near electricity sources, including EV Stations. Taxpayer represented that it will install EV Stations only at Properties where EV Stations are customary at similar properties in the relevant geographic area. Taxpayer further represented that the number of EV Stations at a Property will be appropriate for the number of Tenants (and their guests and customers) who are expected to use the Property. While the parking area EV Stations may be accessible by the general public, Taxpayer represented that any such use will be de minimis. Parking Properties may have unattended parking areas that will be appropriate in size for the number of Tenants (and their guests and customers) expected to use storage space at the Property. Tenants will not pay an additional charge for parking, and the only activities performed in connection with the parking areas will be routine maintenance, repair and electricity for lighting and EV Stations. TRS lease Taxpayer will lease any space necessary to perform Additional Services at a Property, as well as a specified amount of storage space, to its TRS (TRS Lease). The TRS will sublease portions of the storage space to third parties, some of which will sublease from the TRS on a shorter-term basis. Taxpayer represented that TRS payments for the use of space at a Property will be substantially comparable to Storage Fees paid by Tenants for comparable space; if no comparable space is leased to a Tenant, TRS payments will be substantially comparable to payments for similar space leased to unrelated parties in the same geographic area. Law and analysis IRC Section 856(c)(2) requires a REIT to derive at least 95% of its gross income from specified sources of passive income, including rents from real property. IRC Section 856(c)(3) requires a REIT to derive at least 75% of its gross income from specified sources of real estate source income, including rents from real property. Treas. Reg. Section 1.856-4(a) defines the term "rents from real property" generally as the gross amounts received for the use of, or the right to use, the REIT's real property. Under IRC Section 856(d)(1), the term "rents from real property" includes: "(A) rents from interests in real property, (B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and (C) rent attributable to personal property leased under, or in connection with, a lease of real property, but only if the rent attributable to 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 under, or in connection with, such lease." A service 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 (Treas. Reg. Section 1.856-4(b)(1)). Under IRC Section 856(d)(2)(C), the definition of "rents from real property" does not include ITSI (defined by IRC Section 856(d)(7)(A) as any amount received or accrued by the REIT for services furnished or rendered to tenants or for managing or operating the property). ITSI does not include (1) payments received for services, management or operations provided through an IK or TRS, and (2) any payment that would be excluded from unrelated business taxable income under IRC Section 512(b)(3) if received by an organization described in IRC Section 511(a)(2) (IRC Section 856(d)(7)(C)). Further, Section 856(d)(7)(B) provides that if the amount of ITSI "with respect to a property for any taxable year exceeds 1% of all amounts received or accrued during such taxable year directly or indirectly by the REIT with respect to such property, the ITSI of the REIT will include all of the amounts received or accrued with respect to the property." Storage Fees are rents from real property Taxpayer represented that (1) Storage Fees will not depend on the income or profits of any person, (2) rent attributable to leased personal property under each Storage Agreement will not exceed 15% of the total rent for the tax year for both the real and personal property leased under such Storage Agreement, and (3) ITSI will not exceed 1% of all amounts received or accrued from a Property during a tax year under IRC Section 856(d)(7)(B). Given these representations and the terms of the Storage Agreements, the IRS concluded that Storage Fees received for the use of space at the Properties are rents from real property under IRC Section 856(d) for purposes of the Income Tests. In so concluding, the IRS noted that Tenants reserving an amount of space that is not "specifically identified" at a Property or specified Properties would not alter the conclusion. Certain services income are rents from real property The IRS stated that the portion of Storage Fees attributable to Taxpayer's routine inspection, maintenance, repair and security of the Properties, services that Taxpayer represented are customarily provided to tenants of similar properties in the same geographic area, would be excluded from unrelated business taxable income (UBTI) if received by an organization described in IRC Section 511(a)(2). In addition, Taxpayer represented that the service of stacking Tenant equipment to maximize storage space is customarily provided to tenants of similar properties in the same geographic area and will be performed by a TRS or IK. Accordingly, the income from all such services, as well as Taxpayer's fiduciary duty of designing the Properties, will not be treated as ITSI and will constitute rents from real property under IRC Section 856(d) for purposes of the Income Tests. Based on Taxpayer's description of a TRS or IK directly providing and billing Additional Services to Tenants and Taxpayer's representations that it will not receive rent from an IK providing Additional Services, derive any income from the Additional Services or bear any cost of providing the Additional Services, the IRS concluded that the availability of the Additional Services will not result in ITSI. Income from Included Amenities is rents from real property The IRS concluded that income from making Included Amenities available to Tenants is not income from providing a service and therefore will not be treated as ITSI; as such, it will constitute rents from real property under IRC Section 856(d) for purposes of the Income Tests. In addition, rent attributable to the services provided in connection with the Included Amenities (i.e., utilities, cleaning and maintenance) would be excluded from UBTI if received by an organization described in IRC Section 511(a)(2) and therefore will not be treated as ITSI; as such, it will constitute rents from real property under IRC Section 856(d) for purposes of the Income Tests. Income from electricity and EV Stations is rents from real property With respect to providing electricity through an IK to light the Properties and power and charge Tenant equipment, Taxpayer represented that the provision of electricity and light is a utility service customarily provided to tenants of similar properties in the same geographic area. The IRS stated that the service provided by an EV Station is electricity and reasoned that charging for electricity drawn by Tenants (and their guests and customers) is analogous to submetering utilities, which is a customary service under Treas. Reg. Section 1.856-4(b)(1). Thus, the IRS concluded that any income from Taxpayer's provision of electricity, including via EV Stations, will not be treated as ITSI. The IRS further concluded that payments Taxpayer receives for the service of providing electricity (including via EV stations) and for providing EV charging stations (as an Included Amenity) will constitute rents from real property under IRC Section 856(d) for purposes of the Income Tests. Parking income is rents from real property In Revenue Ruling 2004-24, the IRS addressed three situations in which a REIT's income from making parking spaces available in a parking facility located at the REIT's rental property qualified as income from providing customary services, and thus qualifying rents from real property under IRC Section 856(d). In Situation 1 of Revenue Ruling 2004-24, the IRS stated that income received by a REIT from providing unattended parking facilities to its rental property's tenants and their guests, customers and subtenants constituted rents from real property when (1) the parking facility was located in or adjacent to the rental property; (2) the parking facility was appropriate in size for the number of tenants and their guests, customers and subtenants who were expected to use the facility; (3) the parking facility did not have parking attendants; and (4) the REIT's activities performed in connection with the parking facilities were limited to maintenance, repairs, lighting and fiduciary functions, such as dealing with taxes and insurance. Based on Taxpayer's representations regarding parking areas at the Properties and their similarities to Situation 1 of Revenue Ruling 2004-24, the IRS concluded that amounts received by Taxpayer attributable to parking will qualify as rents from real property under IRC Section 856(d). TRS lease income is rents from real property Under IRC Section 856(d)(8)(A), payments to a REIT by its TRS for the use of space at a property are not excluded from rents from real property as related-party rent if:
Based on Taxpayer's representations regarding the TRS Lease, and provided that at least 90% of Property's leased space a is leased to persons other than TRSs or other related parties, the IRS concluded that payments received by Taxpayer under the TRS Lease will be treated as qualifying rents from real property under the limited TRS rental exception. Implications PLR 202413004 is notable in that Taxpayer will be leasing outdoor space at paved and fenced parking/storage lots for Tenants' equipment, including trucks and equipment that Tenants may be able to move into and out of the space without assistance. The ruling's conclusion is similar to that in PLR 202237004, in which the IRS concluded that payments received by a REIT for the use of space in outdoor dry dock storage facilities, including facilities at which tenants moved boats on tenant-owned trailers into and out of the storage area, would not be treated as other than rents from real property under IRC Section 856(d) (see Tax Alert 2022-1413). In addition, PLR 202413004 concludes that where a tenant has leased a certain amount of storage capacity, the REIT may provide the reserved amount of space at one of a number of geographically proximate properties. This arrangement appears to give Taxpayer flexibility in determining which Property a Tenant may use at different times, if Taxpayer has at all times reserved the specified amount of space for the Tenant at one of the applicable Properties. PLR 202413004 is also the first ruling to address income from EV Stations for purposes of the Income Tests. The IRS reasoned not only that income from making the EV Stations available to Tenants at no additional charge is not income from providing a service and therefore not ITSI, but also that the service of providing electricity to tenants via EV Stations is akin to the submetering of utilities, which is a customary service that a REIT may provide directly to its tenants. Accordingly, amounts received by Taxpayer for making EV Stations available and providing electricity via EV Stations to Tenants and their guests and customers constitute rents from real property for purposes of the Income Tests. REITs that receive payments for the use of EV Stations at their rental properties should consult with their tax advisors and may consider seeking their own rulings on these issues. While the REIT in PLR 202413004 did not intend to charge EV Station access fees or a markup on electricity drawn from EV Stations, and expected public use of the EV Stations to be de minimis, it will be interesting to see if (and how) the IRS addresses variations on this fact pattern in any subsequent rulings involving EV Stations.
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