It is common these days for both residential and commercial rentals to have a parking structure for use by tenants, guests, and the general public. If the entity operating these facilities is owned by a real estate investment trust (REIT), there needs to be sensitivity on how this parking is managed to not run afoul of the REIT income tests. The IRS issued Revenue Ruling 2004-24 (Rev. Rul. 2004-24) that offers some scenarios and guidance on how REITs can comply.
It is important to understand the basic groundwork of the REIT income tests as a primer. There are the 75% and 95% tests that both have “rents from real property” as a key income category, among some other types. “Rents from real property” is defined to include charges for services customarily furnished to tenants in connection with the rentals of real estate. This is a broad category that needs to be considered on a property-by-property basis in each jurisdiction in which they are. In the event the REIT provides services not falling into the customary bucket, it runs the risk of the income being considered impermissible tenant service income (ITSI), which is excluded from rents from real property that can jeopardize the REIT’s income tests.
When Does Income From Parking Qualify as Rent?
Rev. Rul. 2004-24 was issued in March 2004 to provide guidance on when income from parking facilities qualifies as “rents from real property.” Below is a summary of the scenarios outlined:
| Situation | Description of Parking Arrangement | Outcome |
|---|---|---|
| 1. Unattended Parking (Basic) | The REIT provides on-site parking for tenants, guests, etc., of its buildings. The parking lots are appropriate in size for tenant use and have no attendants. The REIT’s activities are limited to maintenance, repairs, lighting, and other fiduciary duties, e.g., paying property taxes and insurance; no other services are provided to parkers. | Qualifies as rent. Providing unattended, self-park facilities is a customary tenant service in many markets and involves only minimal services by the REIT. The IRS ruled that these activities do not produce impermissible tenant service income, so charges for parking remain part of rents from real property. |
| 2. Reserved Parking (Unattended) | Same as Situation 1, except some spaces are reserved for particular tenants. The REIT assigns and marks reserved spots as part of tenant leases. Any ongoing services unique to reserved parking, e.g., monitoring or enforcing the reserved status, are handled by an independent contractor, and the REIT receives no income from that contractor. | Qualifies as rent. The parking is still a customary tenant service (same as Situation 1). Although reserved spaces require extra service (enforcement), the REIT outsourced those tasks to an independent contractor; thus, the REIT itself isn’t providing disqualifying services. The ruling notes Congress’ intent that reserved parking income only counts as rent if an independent contractor performs the services; here that condition is met, so the parking income is good REIT income. |
| 3. Attended & Public Parking | The parking facilities are larger but still “appropriate in size” for the tenant population. Attendants are on duty, and the lots are available to the general public as well as to tenants, e.g., a mixed-use garage. The REIT continues to do only the basic landlord functions (maintenance, lighting, etc.), but it hires an independent company (IC) to operate and manage the parking facility. IC, which qualifies as an independent contractor under the tax rules, employs all attendants and staff, handles all parking operations, and remits parking fee revenues to the REIT, while the REIT pays IC an arm’s-length fee. | Qualifies as rent. Even though the lot serves some public parkers and has attendant services, those services are provided by a third-party contractor, not by the REIT. The arrangement is designed so that the parking is primarily for tenants’ benefit (public use is incidental). Each facility is adjacent to the REIT’s building and sized such that it is expected to be used predominantly by the REIT’s tenants and their visitors. Because the facilities meet the customary service standard and all substantial services (attendant, daily operation) are performed through an independent contractor, the income does not count as impermissible service income. In the IRS’ view, this scenario satisfies the requirements of Section 856(d), even though public parkers are allowed, thanks to the third-party management and tenant-focused use. |
How Forvis Mazars Can Help
While Rev. Rul. 2004-24 is not all-encompassing, it does provide a valuable framework for REITs on how to structure parking facilities to continue generating qualifying income for REIT tests. There have been a number of private letter rulings as well that detail more specific situations. If you need assistance with measures to help protect your REIT status or you have any questions, please reach out to a Real Estate professional at Forvis Mazars. We work with private, public, and mortgage REITs to provide holistic, tailored services to help you prepare for what’s next.