Ski lift towers qualify as real property for REIT rules

Plain-English summary

A publicly traded real estate investment trust planned to acquire ski resort assets and lease them to operators. It asked whether the concrete foundations, steel towers, tower head assemblies, and walking beams that make up the ski lift towers counted as real property for the REIT asset tests. The structures were custom-built for their locations, anchored deep in concrete, designed to remain permanently, and costly and impractical to relocate. The IRS compared them to transmission towers treated as real estate assets in Rev. Rul. 75-424 and ruled that the ski lift towers were inherently permanent structures. Components of the ski lift system used to operate the business were outside the ruling, and the IRS did not decide whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: Did the ski lift towers qualify as real property for purposes of IRC § 856?
• Outcome: Approved
• Key authorities: IRC § 856(c)(4)(A), (c)(5)(B); Treas. Reg. § 1.856-3; Rev. Rul. 75-424

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201551007 Third Party Communication: None
Release Date: 12/18/2015 Date of Communication: Not Applicable
Index Numbers: 856.00-00, 856.02-00
Person To Contact:
----------------------- ------------------
--------------------------------------- ID No. -----------------
------------------------------ Telephone Number:
--------------------- ---------------------
------------------------ Refer Reply To:
------------- CC:FIP:B03
-------------------------------- PLR-117726-15
Date:
September 18, 2015

LEGEND:

Taxpayer = -----------------------------------------------

Company = ------------------------------------------------------------------------

State = -------------

Date = ----------------------

a = --

b = --

c = ---

Government Agency = --------------------------

Dear ------------------:

 This ruling responds to a letter dated May 20, 2015, submitted on behalf of

Taxpayer. Taxpayer requested a ruling that ski lift towers that will be owned by
Taxpayer qualify as “real property” for purposes of § 856 of the Internal Revenue Code.

                                                 FACTS

PLR-117726-15 2

   Taxpayer was formed on Date, as a State trust and has elected to be treated as

a real estate investment trust (REIT) within the meaning of § 856. Taxpayer is a
publicly traded REIT that owns a portfolio of properties primarily in the destination
entertainment, education, and recreation sectors. Taxpayer is in the process of
acquiring ski resort assets from Company. The ski resort assets at issue will be leased
to operators under triple-net leases, with the operators responsible for the maintenance
and day-to-day operations of the resorts.

   Taxpayer’s typical ski lift conveyer system will consist of the following

components: concrete foundations, towers, tower head assemblies, walking beams,
sheave assemblies, lift chairs or gondolas, cables, machinery, and a building to house
the machinery. For purposes of this ruling, a “Ski Lift Tower” is defined to include only
the foundation, tower, tower head assembly, and walking beam. Taxpayer will own all
of the property constituting a Ski Lift Tower. The function of a Ski Lift Tower is to
support the sheave assemblies and the cables on which the lift chairs or gondolas are
attached.

   A tower designed for a Ski Lift Tower is typically a rolled steel column or tube

anchored to a reinforced concrete foundation using threaded galvanized bolts, lock-
washers, and nuts. The concrete foundation is typically an eight by eight foot pad that
extends more than six feet into the ground. A tower head assembly is made of steel
and is bolted to the top of a tower. The function of a tower head assembly is to support
the walking beam and sheave assemblies. A walking beam is a walkway constructed of
steel and equipped with safety railings. A walking beam is bolted to the tower head
assembly and is used to maintain the sheave assemblies.

    A Ski Lift Tower is designed and constructed to remain permanently in place. It

is rare for any particular component of a Ski Lift Tower to be replaced due to damage
because the damage would likely result from an event that would damage the entire Ski
Lift Tower.

    A Ski Lift Tower is typically custom-designed and engineered for use at a

particular location. A Ski Lift Tower is designed to withstand extreme weather
conditions including high winds and avalanches. The removal of a Ski Lift Tower is both
costly and time consuming. A removal project typically takes a to b weeks and requires
the use of heavy construction equipment such as cranes, and in some cases
helicopters. Except in rare circumstances, it is economically impractical to relocate a
Ski Lift Tower. A Ski Lift Tower is typically sold for scrap metal or discarded once
removed.

    Each Ski Lift Tower was constructed on a site that was expected to be controlled

by the owner for a period in excess of c years from the date of the initial erection of the
Ski Lift Tower. Taxpayer does not intend or expect to remove and, in most cases, is not
PLR-117726-15 3

permitted to remove, a Ski Lift Tower following the expiration of ground leases or
Government Agency occupancy permits.

                              LAW AND ANALYSIS

   Section 856(c)(4)(A) of the Code provides that at the close of each quarter of its

taxable year, at least 75 percent of the value of a REIT's total assets must be
represented by real estate assets, cash and cash items (including receivables), and
Government securities.

   Section 856(c)(5)(B) provides that the term "real estate assets" means real

property (including interests in real property and interests in mortgages on real property)
and shares (or transferable certificates of beneficial interest) in other REITs that meet
the requirements of § 856 through § 859.

   Section 1.856-3(b) of the Income Tax Regulations provides, in part, that the term

“real estate assets” means real property. Section 1.856-3(d) provides that the term "real
property" means land or improvements thereon, such as buildings or other inherently
permanent structures thereon (including items which are structural components of such
buildings or structures). In addition, the term "real property" includes interests in real
property. Local law definitions will not be controlling for purposes of determining the
meaning of "real property" for purposes of § 856 and the regulations thereunder. The
term “real property” includes, for example, the wiring in a building, plumbing systems,
central heating or central air-conditioning machinery, pipes or ducts, elevators or
escalators installed in a building, or other items which are structural components of a
building or other permanent structure. The term does not include assets accessory to
the operation of a business, such as machinery, printing press, transportation
equipment which is not a structural component of the building, office equipment,
refrigerators, individual air-conditioning units, grocery counters, furnishings of a motel,
hotel, or office building, even though such items may be termed fixtures under local law.

   Rev. Rul. 75-424, 1975-2 C.B. 269, considers whether certain assets used in

connection with the transmission and reception of microwave signals qualify as “real
property” for purposes of § 856. The ruling concludes that the building, the heating and
air conditioning system, the transmitting and receiving towers, and the chain link fencing
are "real estate assets" within the meaning of § 856(c)(5)(B). The antennae,
waveguides, transmitting, receiving, multiplex equipment, and prewired modular racks
are "assets accessory to the operation of a business" and therefore not "real estate
assets" within the meaning of § 856(c)(5)(B).

  A Ski Lift Tower is a large steel structure that is anchored to a reinforced

concrete foundation using heavy duty hardware. A Ski Lift Tower is designed and
PLR-117726-15 4

constructed to remain permanently in place. A Ski Lift Tower cannot be readily moved
and is most often sold for scrap metal or discarded once removed. Taxpayer’s Ski Lift
Towers will remain in place following the expiration of Taxpayer’s ground lease or
occupancy permit. Removing a Ski Lift Tower requires significant time and expense.
The permanency and other characteristics of a Ski Lift Tower are similar to those of the
transmitting and receiving towers that were held to be “real estate assets” in Rev. Rul.
75-424.

   Similar to the transmitting and receiving towers in Rev. Rul. 75-424, each Ski Lift

Tower supports or is directly or indirectly connected to components of the ski lift
conveyer system (i.e., sheave assemblies, lift chairs or gondolas, cables, and
machinery) that are assets accessory to the operation of a business that would not
qualify as real estate assets under § 856. However, the fact that the Ski Lift Towers
support or are directly or indirectly connected to these assets does not prevent the Ski
Lift Towers themselves from qualifying as real estate assets.

                                   CONCLUSION

   Based on the information submitted and representations made by Taxpayer, we

rule that Taxpayer’s Ski Lift Towers are inherently permanent structures that qualify as
“real property” for purposes of § 856.

   This ruling's application is limited to the facts, representations, Code sections,

and regulations cited herein. Except as expressly provided herein, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter. In particular, no opinion is expressed
concerning whether Taxpayer otherwise qualifies as a REIT under subchapter M, part II
of Chapter 1 of the Code.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                               Sincerely,
                                               __________________________
                                               K. Scott Brown
                                               Branch Chief, Branch 3
                                               Office of Associate Chief Counsel
                                               (Financial Institutions & Products)