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In PLR 202415001, the IRS ruled that certain age-restricted independent retirement living communities (ILCs) owned by a real estate investment trust (REIT) are not “health care facilities” under IRC Section 856(e)(6)(D)(ii). The IRS also ruled that another ILC registered as a regulated community by a state regulatory body meets the definition of a “congregate care facility” under IRC Section 856(e)(6)(D)(ii) and, thus, constitutes a “qualified health care property” under IRC Section 856(e)(6)(D)(i).

Facts

Taxpayer is a REIT that owns a portfolio of ILCs, hospitals and other health-care related real estate. Taxpayer currently leases certain ILCs to a taxable REIT subsidiary (TRS), which has engaged eligible independent contractors (EIKs) to operate the ILCs (Leased Communities). Taxpayer treats the Leased Communities as qualified health care properties under IRC Section 856(e)(6)(D)(i). Taxpayer owns other ILCs that are managed by a TRS and sub-managed by EIKs (Managed Communities). Taxpayer intends to convert the Leased Communities into Managed Communities, at which point the Leased Communities will no longer provide health care or personal care services.

A resident of an ILC (Resident) enters into an agreement to lease individual living quarters within an ILC in exchange for monthly rent payments. The ILCs generally offer certain amenities, including common area dining, activity rooms, community grounds and handrails in hallways and common bathrooms.

Managed Communities

The following Resident services are provided at the Managed Communities and included in the monthly rent (i.e., are not separately stated):

• Meals (generally three per day)
• Scheduled transportation to and from local destinations and group activities
• Social, cultural, fitness and religious activities
• Personal emergency call pendants
• Basic utilities
• Light housekeeping
• Hard plastic containers for disposal of hypodermic needles and other sharp medical instruments

Taxpayer represented that the Resident services are (1) provided primarily for Residents’ living convenience and social purposes, and (2) customarily furnished or rendered to tenants of age-restricted, non-healthcare independent living facilities in the geographic markets in which the Managed Communities are located.

The Managed Communities are not licensed as hospitals, nursing facilities, assisted living facilities, congregate care facilities, qualified continuing care facilities or similar facilities and do not provide 24-hour onsite assistance to Residents. Furthermore, Residents must provide for their own health and personal care needs or obtain care from third parties other than staff of the Managed Communities (Staff). Staff do not provide any health care services, such as periodic health screenings, medical diagnoses or medical treatment, or personal care services, such as dressing and bathing, and are not licensed health care providers. However, Staff may assist Residents by calling 911 and family in an emergency and may provide first aid and assistance to first responders. Staff may also provide information in the form of pamphlets, brochures and websites to Residents but do not otherwise assist Residents with obtaining health care or medication.

Some Managed Communities also lease space to businesses that are open to the public and provide personal care services, such as beauty salons and in-home health care services (Commercial Tenants). Neither the Commercial Tenants’ leases nor Residents’ leases require those services to be made available to Residents, and the rent paid by the Commercial Tenants is insignificant compared to the total combined rents received from Residents and Commercial Tenants at each Managed Community. Taxpayer made several representations concerning the Managed Communities with Commercial Tenants, including:

• Commercial Tenants are not required to provide their services exclusively to Residents, and Residents remain free to choose any service provider, including providers that are not Commercial Tenants
• Taxpayer does not assure Residents that a Managed Community will have Commercial Tenants that provide in-home health or personal care services and does not encourage Residents to obtain any in-home services or choose any particular service provider
• Commercial Tenants’ leases provide for reasonable fair-market rent and prohibit referral fees, kickbacks or other payments between Taxpayer and the Commercial Tenant
• Taxpayer does not track or receive data regarding (1) the percentage of Residents who use in-home and personal care services at a Managed Community, or (2) the extent to which Residents or the public call or visit Commercial Tenants’ leased space
• The Managed Communities do not (1) coordinate in-home health or personal care services, (2) actively look for Commercial Tenants providing those services, (3) control, manage or supervise Commercial Tenants, (4) market Commercial Tenants’ businesses, or (5) share employees with any Commercial Tenant
• Commercial Tenants must be licensed, maintain their own liability insurance and follow each Managed Community’s code of conduct, which, for example, prohibits Commercial Tenants from soliciting Residents’ business door-to-door or in common areas
• Space leased to Commercial Tenants is equally accessible by Residents and the public

Property

Taxpayer owns another ILC that is registered as a regulated community by a state regulatory body (Property). Property provides health care services in addition to many of the Resident services provided at the Managed Communities. Property’s regulatory classification requires it to perform initial and annual health screenings of Residents. In addition, the state regulatory body requires Property to have a written agreement with at least one licensed provider of home health care services, which are accessible and available at Property. When Residents choose to use such services, Property management arranges them.

Law

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. The term "rents from real property" includes (1) rents received from the lease of interests in real property to tenants, (2) charges for services customarily rendered to tenants, and (3) rents from the lease of certain de minimis personal property (IRC Section 856(d)(1)). IRC Section 856(d)(2)(B) provides in part that the term “rents from real property” does not include amounts received directly or indirectly by a REIT from a corporation owned 10% or more (by vote or value) by the REIT.

Under IRC Section 856(d)(8)(B), payments by a TRS to a REIT are not excluded from rents from real property by reason of IRC Section 856(d)(2)(B) when a REIT leases qualified health care property to a TRS, and an EIK operates the property on behalf of the TRS.

IRC Section 856(l)(1) defines TRS to mean, with respect to a REIT, a corporation (other than a REIT) if (1) the REIT directly or indirectly owns stock in the corporation and (2) the REIT and corporation jointly elect to treat the corporation as a TRS of the REIT.

IRC Section 856(l)(3)(A) does not consider any corporation that directly or indirectly operates or manages a health care facility (as defined in IRC Section 856(e)(6)(D)(ii)) to be a TRS.

IRC Section 856(e)(6)(D)(i) defines a “qualified health care property” as “any real property (including interests therein), and any personal property incident to such real property, which (i) is a health care facility or (ii) is necessary or incidental to the use of a health care facility.”

IRC Section 856(e)(6)(D)(ii) defines a "health care facility" to include a "hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility (as defined in [IRC S]ection 7872(g)(4)), or other licensed facility which extends medical or nursing or ancillary services to patients and which, immediately before the termination, expiration, default, or breach of the lease of or mortgage secured by such facility, was operated by a provider of such services which was eligible for participation in the Medicare program under Title XVII of the Social Security Act with respect to such facility."

IRS ruling and analysis

The IRS ruled that the Managed Communities (including the Leased Communities once converted to Managed Communities) are not health care facilities under IRC Section 856(e)(6)(D)(ii); as a result, the TRS’s direct or indirect operation or management of the Managed Communities will not prevent the TRS from being treated as the Taxpayer’s TRS under IRC Section 856(l)(3)(A).

While the Managed Communities offer some services offered in congregate care facilities, the IRS noted that the amenities and services provided at the Managed Communities focus on the Residents' convenience and social lives. The absence of medical personnel, health screenings and medical monitoring, along with affirmative requirements that Residents be responsible for their own health care needs, further support the view that the Managed Communities do not have a health care focus.

Furthermore, the mere presence of Commercial Tenants within the Managed Communities, some of which may offer in-home health and personal care services to Residents, will not cause the Managed Communities to be viewed as furnishing services that emphasize the health care of Residents. The Managed Communities do not coordinate, exercise control over, or otherwise support or direct the Commercial Tenants. Additionally, Taxpayer does not seek out in-home health and personal care service businesses as Commercial Tenants, the rent paid by the Commercial Tenants is insignificant compared to the total combined rents received from Residents and Commercial Tenants at each Managed Community, and no other payments are exchanged between Commercial Tenants and Taxpayer.

The IRS concluded that the Managed Communities are not “congregate care facilities” or any other type of health care facility described in IRC Section 856(e)(6)(D)(ii). Conversely, the IRS ruled that the Property meets the definition of a “congregate care facility” under IRC Section 856(e)(6)(D)(ii) and, thus, constitutes a “qualified health care property” under IRC Section 856(e)(6)(D)(i). While Property provides many of the same Resident services as the Managed Communities, the IRS reasoned that the Property has “an emphasis on the health and wellbeing of its Residents,” as evidenced by its compliance with state health care regulations, procurement of health care services for Residents and provision of such services through a licensed health care provider.

Implications

PLR 202415001 is the seventh private letter ruling in which the IRS has ruled, based on the surrounding facts and circumstances, that certain independent retirement living facilities (i.e., the Managed Communities) are not "health care facilities" for purposes of IRC Section 856(e)(6)(D)(ii).

As in previous rulings, the IRS considered whether the Managed Communities and the Property are "congregate care facilities," a term that is not defined in the Internal Revenue Code or the Treasury regulations, and determined that the Managed Communities are not congregate care facilities because the Resident services “are provided for convenience and to enhance the social lives of the Residents” and not for “a health benefit.” Furthermore, as in PLRs 202317017 and 202317018 (Tax Alert 2023-0799), the mere presence of Commercial Tenants that provide in-home health and personal care services does not cause the Managed Communities to be considered health care facilities, provided an appropriate arm's-length relationship exists between the Commercial Tenant and the Managed Community (e.g., the Commercial Tenant is accessible by the general public, and the Managed Community does not coordinate or exercise control over the Commercial Tenant). See also PLRs 202226002 (age-restricted independent living communities “are not focused on the health and well-being of the residents”) (Tax Alert 2022-1045), 202020007 (services provided at independent living facilities “are not focused on the health and well-being of the Residents”) (Tax Alert 2020-1374), 201828008 (independent living facility “does not focus on the health and well-being of its residents”) (Tax Alert 2018-1566), and 200813005 (independent living facilities are “not licensed facilities and will not provide any medical, nursing or ADL services to tenants”).

In contrast to the Managed Communities, the IRS concluded that the Property is a “congregate care facility” and, thus, a "health care facility" for purposes of IRC Section 856(e)(6)(D)(ii) because it emphasized “the health and wellbeing” of its Residents as demonstrated by its focus on health care and compliance with state health care regulations. The IRS reached a similar conclusion in four other private letter rulings. See PLRs 201828008 (independent living facilities are operated with an “emphasis on health and wellness of seniors”) (Tax Alert 2018-1566), 201509019 (senior independent living facilities provide services “specially targeted to monitor and help improve the health and well-being of its residents”) (Tax Alert 2015-0480), 201429017 (senior living facilities offer services that have a “significant health care related focus”) (Tax Alert 2014-1367) and 201147015 (age-restricted independent living community actively monitors the residents' health and provides services to help improve the health and wellbeing of its elderly residents”) (Tax Alert 2011-2003).

REITs investing in senior independent living facilities will need to determine whether a facility is or is not a "congregate care facility." Of particular importance in making this determination is whether there is an emphasis on health and wellbeing of the residents, as opposed to providing solely social and lifestyle amenities. If the facility is a congregate care facility, the REIT may not engage its TRS to provide operation or management services at the facility. The REIT, however, can consider leasing the facility to a TRS under the related-party rent exception of IRC Section 856(d)(8)(B) if the TRS engages an EIK to operate and manage the facility on behalf of the TRS. Where a senior independent living facility is not a congregate care facility, a TRS may be engaged to operate or manage the facility and, as in PLR 202415001, subcontract its obligations to a third-party independent contractor (see also PLR 202226002 in which the TRS subcontracted to a third party that was not an independent contractor).

While the IRS to date has not provided a bright-line test for determining whether a particular senior independent living community is a health care facility for purposes of IRC Section 856(e)(6)(D)(ii), PLR 202415001 provides additional insight into the IRS's holistic approach when considering whether a senior independent living community falls outside of the definition of a "congregate care facility."