The IRS continues to provide a broad interpretation of what constitutes qualified rents and services for purposes of the 75% gross income test. For the first time, the IRS ruled that a real estate investment trust (REIT) can mark up electric vehicle (EV) services and still be treated as having qualified rents under certain conditions. As REITs continue to enter into new property types, it will be important to understand what services and leases the IRS approves in their rulings.
In a recent private letter ruling (PLR), the IRS ruled that (1) total rents received from unrelated third parties under storage agreements—including fees for space rental, services provided in connection with that space (such as electricity drawn from EV stations), and charges for included amenities—are treated as “rents from real property” for purposes of the Income Tests defined under Section 856(d), and that (2) none of the services and amenities covered under the ruling (including access fees for access-fee amenities) will generate impermissible tenant service income (ITSI) under §856(d)(7), and (3) any rent payments received by the taxpayer under a lease of space at the properties to its taxable REIT subsidiary (TRS) also constitute rents from real property.
What to Know About the PLR
Understanding the structure and various services, amenities, and leases in the PLR is critical for grasping the ruling. The PLR applies to a taxpayer who was a state limited liability company (LLC) and had elected to be taxed as a REIT. The taxpayer and its subsidiary made a joint election to treat the subsidiary as a TRS of the taxpayer. As a TRS, the subsidiary is a separate corporation owned by the REIT and is subject to regular corporate income tax rates. This structure allows the REIT to conduct activities through the TRS that would otherwise disqualify it from its special tax treatment.
The taxpayer aimed to acquire, either directly or indirectly through disregarded entities or entities classified as partnerships, interests in properties located throughout the country. These properties would provide outdoor storage for equipment.
Ruling Requested on Outdoor Storage Properties
Payments the taxpayer receives from unrelated parties for use of specific real property are considered rents from real property under §856(d) for the Income Tests in §§856(c)(2) and (c)(3) of the Internal Revenue Code (IRC).
The amenities and services described do not generate ITSI per §856(d)(7), and do not disqualify those payments from being treated as rents from real property.
Payments the taxpayer receives for providing the specified services and included amenities also qualify as rents from real property for purposes of the Income Tests.
Ruling Requested on TRS Leases
Amounts received by the taxpayer from leasing certain assets and areas to its TRS qualify as rents from real property under §856(d) for the Income Tests.
Storage Agreements
The taxpayer enters into leases with unrelated third-party individuals or business tenants for the use of a specified space at a property for equipment storage (storage agreements). The properties primarily provide outdoor industrial storage, with some indoor industrial space also available. The indoor area consists of designated sections within a large warehouse-type building, featuring multiple numbered docking bays on the inbound side. The taxpayer represented that the properties were real property under Regulation §1.856-10.
When the taxpayer leases indoor industrial space, the tenant receives exclusive rights to a specific area, which may be associated with particular bays, for an undisclosed minimum term, with many leases extending for several months or years. Equipment in these indoor spaces belongs to and is operated solely by the tenant, who also manages their own cargo.
For outdoor storage, storage agreements may designate specifically identified areas, and all agreements will specify the amount of space allocated to each tenant. The taxpayer is responsible for ensuring that the designated space always remains reserved and accessible to the tenant at the agreed-upon property or properties.
Storage agreements have an undisclosed minimum term and typically renew automatically on a month-to-month basis. Under these agreements, the taxpayer represents that tenants will pay a fixed dollar amount storage fee for the use of the designated space, which also covers security, lighting, electricity (excluding electricity from EV stations), moving stacked equipment, parking, and additional amenities.
Tenants must pay the storage fee regardless of actual usage. Adjustments to the storage fee may occur upon renewal if market conditions warrant changes, e.g., inflation or increased rental value. These adjustments only apply during renewal of a storage agreement.
The taxpayer indicates that the storage fee is not based on any party’s income or profits, as specified in §856(d)(2)(A), which states that any amount received (directly or indirectly) with respect to real or personal property is excluded from rents from real property if its determination depends on the whole or part of the income or profits derived by any person from that property. However, amounts based on a fixed percentage or percentages of receipts or sales are not excluded and remain qualifying rents from real property.
For each storage agreement, rent from leased personal property will not exceed 15% of total annual rent paid by the tenant for both real and personal property.
The IRS determined that the portion of the storage fee for reserving space at a property qualifies as rents from interest in real property under §856(d)(1)(A).
Services & Amenities
The taxpayer is responsible for the design, inspection, maintenance, and repair of the properties. The taxpayer will make sure that equipment is not stored on any property without a valid storage agreement. The taxpayer represented that the inspection, maintenance, and repair of the properties are customary services provided at similar properties in the geographic area, rather than services for individual tenants.
The properties may include unattended parking areas adjacent to or near the storage spaces. The taxpayer represented that parking areas would be appropriately sized for anticipated tenants, their guests, customers, and subtenants, and that no additional fee would be charged for parking use. Parking areas are unstaffed, and neither the taxpayer nor any other entity will undertake activities related to these areas beyond routine maintenance, repairs, and providing electricity for lighting.
The taxpayer contracted with an independent utility provider to supply tenants with utilities, including electricity for lighting properties and powering equipment via EV stations. To enable access to EV stations, the taxpayer may lease space to a third party who installs and maintains the stations, owns them while engaging third parties for maintenance, or owns and maintains them directly. These stations are designed for tenant equipment and are located inside secured property perimeters, making them inaccessible to the public.
The taxpayer states that electricity in storage areas, including through EV stations, will power tenant equipment; higher storage fees may apply for units with enhanced electrical access. Tenants will be charged for electricity from EV stations, potentially with a markup that covers installation and ongoing costs. The taxpayer will only install EV stations where they are customary for similar local properties.
Security measures, such as cameras, guards, and controlled gate access, may be provided at the properties. Employees may also verify compliance with lease terms regarding stored items. The taxpayer represented that the security services are customary in the market and will be provided uniformly to all tenants.
The taxpayer stated that some properties will offer amenities like portable restrooms, showers, and weigh stations (amenities) to all tenants. At some locations, these amenities are free (included amenities), while others may require a separate fee (access-fee amenities), which is distinct from the storage fee. For access-fee amenities, cleaning and maintenance will be handled by a TRS or independent contractor.
The taxpayer represents that only utilities, cleaning, and basic maintenance for the included amenities will be included as part of the storage fee, which applies to all tenants and does not count as personal services. These amenities are customary for similar properties in the region. Access fees paid by tenants will be treated as other than rents from real property under §856(d), but not ITSI, since the REIT will not be providing services.
The taxpayer represented that for any taxable year, ITSI will not be greater than 1% of all amounts received or accrued by the taxpayer, directly or indirectly, with respect to a property as defined in §856(d)(7)(B).
Based on the taxpayer’s representations, the IRS ruled that income from routine inspection, maintenance, repair, and security services is excluded from unrelated business taxable income under §512(b)(3) if received by qualifying organizations pursuant to §511(a)(2). Under §856(d)(7)(C)(ii), income from these services and property design is not considered ITSI.
Furthermore, regarding EV stations specifically, the IRS ruled that any income from the taxpayer’s provision of electricity to tenants utilizing EV stations will not be considered ITSI as the taxpayer will not receive a profit from such services.
TRS Lease
The taxpayer plans to lease storage space and certain assets at its properties to its TRS under the limited rental exception of §856(d)(8)(A). The TRS will sublease this space to third parties for short-term use. The taxpayer represents that at least 90% of each property’s leased space will be rented to unrelated parties, and rent charged to the TRS will be comparable to that paid by other tenants or similar space in the area. In addition, any rent from personal property included in the lease will not exceed 15% of the total annual rent paid by the TRS.
Based on the taxpayer’s representations, the IRS ruled that provided at least 90% of the leased space is leased to parties other than TRS or related parties under §856(d)(2)(B), rents received by the taxpayer from a TRS for the leasing of space at a property will be treated as rents from real property under §856(d).
Key Takeaways
PLR 202530005 follows the path of a number of prior PLRs, and as such, it reinforces the idea that the conclusions therein represent the IRS’ position on these issues:
- Storage Fees. The IRS’ conclusion follows their rulings in PLR 202510011 and PLR 202346008, that a lease for either specified space or a specified amount of space constitutes rents from real property so long as the taxpayer is obligated at all times to ensure that the amount of space specified in the storage agreement is reserved for and available to the relevant tenant (no double booking of space). The ruling reiterates that the lease must be for a minimum term (in the past, PLRs had been 28 to 30 days). The IRS’ ruling that qualified rents can consist of non-specific spaces will allow REITs more flexibility in generating qualified income.
- EV Stations. The IRS’ conclusion that providing electricity to the EV station would not be treated as ITSI follows PLR 202413004 and Revenue Ruling 2004-24. The one added feature is that the IRS allowed a markup on the electricity based on the taxpayer’s representation that the markup only covered additional costs of providing the electricity.
- The amounts received for services at amenities, including electric vehicle charging stations (EV stations) and other services, did not give rise to ITSI and such amounts qualified as rents from real property (same ruling in PLR 202530005).
- The amounts received by the taxpayer from unrelated third parties under leases, licenses, or other similar agreements (including the use of non-designated space at certain outdoor industrial storage facilities) qualified as rents from real property (same ruling in PLR 202530005).
- The amounts received by the taxpayer under a lease of certain assets and areas to its TRS also qualified as rents from real property (same ruling in PLR 202530005).
Final Thoughts
This is an important ruling for REITs that have EV stations, marked-up services, and non-specific space leases. If you have questions about any of the issues discussed in this tax alert or are considering a REIT election, please reach out to a REIT tax professional at Forvis Mazars.