Marina docks and storage qualified for REIT treatment

Plain-English summary

A taxpayer planning to elect real estate investment trust status indirectly owned marinas with floating docks, dry dock storage, and, at one property, short-stay cabins. The floating docks were permanently secured by pilings or heavy anchored cable systems, served passive access and protection functions, and would be costly or destructive to remove. The IRS ruled that all of the floating docks were real property and therefore real estate assets for the REIT asset tests. Rent for unspecified space in permanent dry dock racks remained rent from real property even though tenants lacked direct facility access and a taxable REIT subsidiary or independent contractor moved the boats. The cabins were lodging facilities, but their limited and separately identifiable presence did not cause the rest of that marina's assets to be treated as lodging facilities.

Ruling snapshot

• Question: How would floating docks, dry storage rack rent, and short-stay cabins be treated under the REIT rules?
• Outcome: approved on all three requested rulings
• Key authorities: IRC §§ 856(c), 856(d), 856(l); Treas. Reg. §§ 1.856-3, 1.856-4, 1.856-10

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201930003                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 856.00-00, 856.02-00,
              856.04-00                                        Person To Contact:
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---------------------                                          Telephone Number:
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---------------------------------------                        Refer Reply To:
----------------------------------                             CC:FIP:B02
                                                               PLR-102542-17
                                                               Date:
                                                               December 19, 2018




LEGEND:

Taxpayer                                              =         -----------------------------------------
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Dear --------------:

      This ruling responds to a letter dated January 17, 2017, and subsequent
correspondence, requesting rulings on behalf of Taxpayer. Specifically, you have
requested the following rulings:

    (1) The floating docks described below at Properties A, B, C, D, and E (collectively,
        the "Properties") are real property for purposes of section 1.856-10(b), and are
        real estate assets for purposes of section 856(c)(4) and (5).

    (2) Amounts received for racking structure space in dry dock storage facilities
        described below will not be considered as other than rents from real property for
        purposes of section 856(d).

    (3) The presence of cabins at Property C will not cause the assets at Property C
        other than the cabins and any areas reserved for cabin guests to be treated as
        lodging facilities within the meaning of section 856(d)(9)(D)(ii).

                                          FACTS

         Taxpayer, an indirect owner of interests in Company, represents that it intends to
file Form 1120-REIT to be taxed as a real estate investment trust ("REIT"). Company, a
partnership for federal tax purposes, owns and leases, or leases and subleases, the
Properties, which are located on inland lakes or coasts. The Properties contain boat
slips, floating docks, storage facilities, boat servicing facilities, and support facilities
such as laundry facilities and restaurants. Property C also contains cabins that are
made available to guests for one-week or shorter stays.

       a. Floating Docks

        The Properties' boat slips are bound by floating docks. The floating docks have a
limited range of vertical movement as necessary for tidal and weather conditions, and
are affixed to the lake bed or sea bottom using either pilings or winches and cables.
Taxpayer represents that the floating docks provide a conduit or route for tenants to
access their boat slips, delineate the area of the slips, and protect the boats from
damage from the elements. Taxpayer further represents that the floating docks serve
no active function within the meaning of section 1.856-10(d)(2)(iii)(A).

        Taxpayer's floating docks are generally attached to poured concrete walkways on
land and, in the case of floating docks located on coasts, are also attached to concrete,
timber, or steel bulkheads that retain contact with the land. The configuration of each
floating dock is determined during the original design of each of the Properties, and the
sections of the dock bounding the boat slips are not interchangeable among the floating
docks. If a floating dock needs to be reconfigured, the sections of the dock bounding
the boat slips are destroyed; Company has never moved or reused these sections. The
floating docks weigh hundreds of thousands to millions of pounds, and cannot be towed
on the water. Taxpayer represents that the floating docks have a useful life expectancy
of greater than a years.

       Properties A, D, and E

        The piling method of affixation is present at Property A, Property D, and Property
E. Taxpayer represents that the pilings are inherently permanent structures for
purposes of section 1.856-10(d)(2). The floating docks are permanently affixed to the
pilings by steel pile guides that affix the docks to the pilings in a manner that allows the
docks to float on the top of the water’s surface as the tide ebbs and flows but keeps the
docks affixed to the pilings. The steel pile guides contain rollers that surround and
always touch the pilings and at no time is there space between the rollers and the
pilings. The steel pile guides are permanently connected to the docks with at least b
mechanical fasteners (steel or aluminum bolts or brackets) per piling. The floating
docks are built around or surrounded by the pilings, and are not designed to be
removed from the pilings. Between b and c pilings bound each boat slip. Company

generally employs the piling method of affixation if the water level is expected to
fluctuate between d and e feet.

       Taxpayer represents that the floating docks affixed to pilings are designed to
remain in place indefinitely. Company has never moved a floating dock, and does not
intend to ever do so. Removing a floating dock from its pilings would require total
deconstruction of the floating dock, and would require cutting the pilings down to the
surface level of the water thereby destroying the pilings as well.

        In rare and extraordinary circumstances, a governmental body may close a
marina (for example, due to a violation of the lease or willful neglect of the premises). In
that case, all buildings would be completely demolished and removed, and the land
restored to its natural condition. Taxpayer represents that this has never happened with
respect to a marina owned by Company, and Company does not expect this to ever
occur. Taxpayer further represents that, with respect to the floating docks affixed using
the piling method, no other circumstances suggest that the expected period of affixation
is not indefinite. Taxpayer further represents that removing the floating dock from its
pilings would be extremely time-consuming and expensive, exceeding the cost of new
construction.

       Properties B and C

       The winch and cable method of affixation is present at Property B and Property
C. Under the winch and cable method of affixation, the floating docks are attached to
the seabed by a system of wire rope cables, concrete anchors, and winches. The
cables are between f and g inches in diameter and attach the winches on the docks to
the anchors on the seabed or lake bottom. The cables are the same type used to
support suspension bridges, and are attached to the winches and concrete anchors in
the same manner as cables are attached to suspension bridges. The anchors weigh in
excess of h pounds and are embedded in the seabed or lake bottom. Galvanized
anchor bolts affix the winches to winch stands that are affixed to the floating docks
using industrial steel mounting bolts. The winch and cable method allows the floating
dock to move when water levels fluctuate and when affected by natural occurrences
such as tides, although the concrete anchors never move as they are permanently
affixed to a specific point in the seabed or lake bottom. The winch and cable method
generally is used when the water level is expected to fluctuate by e feet or more.

       Taxpayer represents that the floating docks affixed using the winch and cable
method are designed to remain in place indefinitely. The docks are constructed in a
particular manner based on the area in which they are located in order to withstand
particular wind, current, and wave conditions of the area, and would not be removed
and reused in another location. Similarly, the winches and winch stands are designed
and constructed to be used in a particular location on a dock due to prevailing

conditions unique to the area, such as wind and tides, and are not removed unless they
are damaged or have reached the end of their useful lives.

        In rare and extraordinary circumstances, a governmental body may close a
marina (for example, due to a violation of the lease or willful neglect of the premises). In
that case, all buildings would be completely demolished and removed, and the land
restored to its natural condition. Taxpayer represents that this has never happened with
respect to a marina owned by Company, and Company does not expect this to ever
occur. Taxpayer further represents that, with respect to the floating docks affixed using
the winch and cable method, no other circumstances suggest that the expected period
of affixation is not indefinite.

        Removing a dock affixed by the winch and cable method generally requires
between i and j months, depending on the size of the dock, and costs generally
between k and l percent of the cost to construct a new dock of similar size. Cutting the
cables from the winches requires the use of specialized industrial tools and the
employment of certified divers to remove bolts and to connect the crane/lifting cables to
trussing frames. The anchors, embedded into the seabed or lake bottom upon
installation, tend to burrow deeper into the sea bed or lake bottom over time,
exponentially increasing the force required to dislodge them. The weight of the anchors
typically exceeds the lifting capacity of available barge or crane equipment; as a result,
the anchors and cables are generally abandoned in place rather than removed from the
seabed. The weight of the winch system typically requires removal by crane. The
removal of a winch and winch stand damages the dock to which it is attached, and
renders it unsafe for use. Removal of the floating docks themselves would require
Taxpayer to demolish the docks, send certain scrap materials to a recycling center, and
haul the remainder to a landfill.

       b. Dry Dock Storage Facilities

        The Properties contain dry dock storage facilities, which Taxpayer represents are
inherently permanent structures for purposes of section 1.856-10(d)(2). The dry dock
storage facilities contain steel racking structures arranged into vertical bays measuring
several feet high to accommodate several tiers of boats. Company leases space in the
racking structures to tenants for terms of at least m. The dry dock storage leases do not
allow the tenant to enter the facilities, nor do they allocate to the tenant a specifically
identified spot in a racking structure, but they do guarantee the tenant a specified
amount of storage space in a dry dock storage facility for the dry dock storage of the
tenant’s boat. Taxpayer represents that a taxable REIT subsidiary (“TRS”) of Taxpayer
or an independent contractor from whom Taxpayer derives no income will move the
tenants’ boats into and out of the dry dock storage facilities. Taxpayer further
represents that this is a service customarily performed at dry dock storage facilities in
each of the geographic areas in which Company’s marinas are located. No other

services will be provided in connection with the storage fee for leasing space in the dry
dock storage facilities.

       Tenants of Company's dry dock storage facilities may request services such as
boat maintenance or repairs prior to storage ("Dry Dock Services"). The storage fees
for leasing space in the dry dock storage facilities will not include fees for these
requested services, and Taxpayer represents that the Dry Dock Services will be
performed by a TRS of Taxpayer or by an independent contractor from whom Taxpayer
derives no income.

       c. Cabins

       Property C contains n cabins used by guests for stays of less than one week.
Company provides cabin guests with linens and basic toiletries at the beginning of their
stay, and cleans the cabin when the guests vacate the premises. The cabin guests are
generally not the same parties that lease boat slips or dry dock storage space from
Company. The income generated by the cabins represents less than between o and p
percent of Company's revenues. Taxpayer intends to have a TRS own the cabins and
any areas reserved for cabin guests, and to have Company manage the cabins.
Taxpayer represents that the income it receives attributable to the cabins will be treated
as non-qualifying income for purposes of section 856(c)(2) and (3).

                                 LAW AND ANALYSIS

Ruling 1:

       Section 856(c)(4)(A) of the Code provides that, at the close of each quarter of its
tax year, at least 75 percent of the value of a REIT’s total assets must be represented
by real estate assets, cash, cash items (including receivables), and Government
securities.

       Section 856(c)(5)(B) defines the term “real estate assets,” in part, to mean real
property (including interests in real property). Section 1.856-3(b)(1) of the regulations
provides that the term “real estate assets” means real property, interests in mortgages
on real property (including interests in mortgages on leaseholds of land or other
improvements thereon), and shares in other qualified REITs.

        Section 1.856-10(b) provides that the term “real property” means land and
improvements to land. Local law definitions are not controlling for purposes of
determining the meaning of the term real property. Section 1.856-10(d)(1) provides that
the term “improvements to land” generally means inherently permanent structures and
their structural components. Section 1.856-10(d)(2)(i) provides that the term “inherently
permanent structure” means any permanently affixed building or other permanently
affixed structure. Affixation may be to land or to another inherently permanent structure,

and may be by weight alone. If the affixation is reasonably expected to last indefinitely
based on all the facts and circumstances, the affixation is considered permanent. A
distinct asset that serves an active function, such as an item of machinery or equipment,
is not a building or other inherently permanent structure.

        Section 1.856-10(d)(2)(iii)(A) provides that, in general, other inherently
permanent structures serve a passive function, such as to contain, support, shelter,
cover, protect, or provide a conduit or a route, and do not serve an active function, such
as to manufacture, create, produce, convert, or transport. Section 1.856-10(d)(2)(iii)(B)
provides a list of distinct assets that may qualify as other inherently permanent
structures if they are permanently affixed. Stationary wharves and docks are included
in the list of inherently permanent structures found in section 1.856-10(d)(2)(iii)(B).

       Section 1.856-10(d)(2)(iv) provides facts and circumstances that must be
considered in determining if a distinct asset that serves a passive function and is not
otherwise listed in section 1.856-10(d)(2)(ii)(B) or (iii)(B) is an inherently permanent
structure. The factors that must be taken into account include:

   (A) The manner in which the distinct asset is affixed to real property;

   (B) Whether the distinct asset is designed to be removed or to remain in place
       indefinitely;

   (C) The damage that removal of the distinct asset would cause to the item itself or to
       the real property to which it is affixed;

   (D) Any circumstances that suggest the expected period of affixation is not indefinite
       (for example, a lease that requires or permits removal of the distinct asset upon
       the expiration of the lease);

   (E) The time and expense required to move the distinct asset.

       Because only stationary wharves and docks are included in the list of inherently
permanent structures under section 1.856-10(d)(2)(iii)(B), floating docks that do not
serve an active function must be analyzed based on all the facts and circumstances
pursuant to section 1.856-10(d)(2)(iv) to determine if they are inherently permanent
structures.

       Properties A, D, and E

       Taxpayer represents that the pilings at Property A, Property D, and Property E
are inherently permanent structures for purposes of section 1.856-10(d)(2)(i). With
regard to the floating docks affixed to pilings at these properties, Taxpayer represents
that (A) the floating docks are affixed to the pilings by steel pile guides containing rollers

that always touch the pilings, and that the pile guides are permanently connected to the
docks with at least b steel or aluminum bolts or brackets; (B) the floating docks are
designed to remain in place indefinitely; (C) removal of the floating docks from the
pilings would require total deconstruction of the floating docks as well as the destruction
of the pilings; (D) no circumstances suggest that the expected period of affixation is not
indefinite; and (E) moving a floating dock would be time-consuming and more expensive
than building a new one. Taxpayer represents that the floating docks provide a conduit
or route to tenants' boat slips, delineate the area of the slips, and protect the boats from
damage from the elements. Taxpayer further represents that the floating docks serve
no active function within the meaning of section 1.856-10(d)(2)(iii)(A).

       Based on the information submitted and representations made, we conclude that
the floating docks at Property A, Property D, and Property E affixed using the piling
method are inherently permanent structures that are permanently affixed to other
inherently permanent structures for purposes of section 1.856-2(d)(2)(i). Accordingly,
the floating docks at Property A, Property D, and Property E are real property within the
meaning of section 1.856-10(b) and, therefore, are real estate assets for purposes of
section 856(c)(4) and (5).

       Properties B and C

       With regard to the floating docks affixed to the seabed by winch and cable at
Property B and Property C, Taxpayer represents that (A) the floating docks are
permanently attached to concrete anchors weighing in excess of h pounds that are
embedded in the seabed or lake bottom; (B) the floating docks are designed and
intended to remain in place indefinitely; (C) removal of the floating docks would require
their demolition and the abandonment of the anchors in the seabed or lake bottom; (D)
no circumstances suggest that the expected period of affixation is not indefinite; and (E)
removing the floating docks requires specialized industrial tools and certified divers,
bears a cost of between k and l percent of new construction, and would take between i
and j months. Taxpayer further represents that the floating docks provide a conduit or
route to tenants' boat slips, delineate the area of the slips, and protect the boats from
damage from the elements. Additionally, Taxpayer represents that the floating docks
serve no active function within the meaning of section 1.856-10(d)(2)(iii)(A).

       Based on the information submitted and representations made, we conclude that
the floating docks at Property B and Property C affixed by the winch and cable method
are inherently permanent structures that are permanently affixed to the ground for
purposes of section 1.856-2(d)(2)(i). Accordingly, the floating docks at Property B and
Property C are real property within the meaning of section 1.856-10(b) and, therefore,
are real estate assets for purposes of section 856(c)(4) and (5).

Ruling 2:

      Section 856(c)(2) provides that at least 95 percent of a REIT's gross income
must be derived from, among other sources, rents from real property.

      Section 856(c)(3) provides that at least 75 percent of a REIT's gross income
must be derived from, among other sources, rents from real property.

        Section 856(d)(2)(1)(A) provides that the term rents from real property includes
rents from interests in real property.

       Section 1.856-3(c) provides that the term "interests in real property" includes fee
ownership or co-ownership of land or improvements thereon, leasehold interests in the
same, and timeshare interests that represent an undivided fractional fee or leasehold
interest and entitle the holders to the use and enjoyment of the property for a specified
period of time each year.

       Section 1.856-4(a) provides, in relevant part, that the term "rents from real
property" means, generally, the gross amounts received for the use of, or right to use,
real property of the REIT.

         Taxpayer represents that its dry dock storage facilities are inherently permanent
structures for purposes of section 1.856-10, and that it leases racking structure space in
the facilities for terms of at least m. Additionally, Taxpayer represents that while dry
dock storage leases do not allocate to the tenant a specifically identified spot in the
racking structure, they do guarantee the tenant a specified amount of storage space in a
dry dock storage facility for the dry dock storage of the tenant’s boat. Taxpayer further
represents that the service of moving boats into and out of the dry dock storage facilities
is the only service provided in connection with amounts received for the use of racking
structure space in the dry dock storage facilities, is customarily provided to tenants of
similar dry dock storage facilities in the geographic area, and is being provided by a
TRS of the Taxpayer or an independent contractor from whom Taxpayer derives no
income. Based on the information submitted and representations made, we conclude
that the amounts received for the use of racking structure space in dry dock storage
facilities will not be considered as other than rents from real property for purposes of
section 856(d) by reason of the storage leases' failure to convey to tenants a right of
entry or a right to use specifically enumerated space within the dry dock storage
facilities.

Ruling 3:

              Section 856(l)(1) defines a TRS as a corporation that is directly or
indirectly owned in whole or in part by a REIT, and that makes a joint election with the
REIT to treat the corporation as a TRS of the REIT.

        Section 856(l)(3) provides that the term TRS shall not include any corporation
that directly or indirectly manages a lodging facility.

       Section 856(d)(9)(D)(ii) provides that the term "lodging facility" means a hotel,
motel, or other establishment more than one-half of the dwelling units in which are used
on a transient basis.

         The Properties contain separately identifiable items of property that are rented
and used independently of each other, such as floating docks, dry dock facilities, and
restaurants. The characterization of a separately identifiable item of property that is
rented and used independently of the greater property on which the item of property is
physically located should not dictate the characterization of the greater property – for
example, the presence of a restaurant on a marina property should not automatically
render the entire marina property a restaurant. Company provides linens, basic
toiletries, and cleaning services to the cabin guests, who stay for short periods of time.
Additionally, Taxpayer represents that the cabin guests are generally not tenants of the
marina boat slips or dry dock storage facilities, and that income from the cabins
comprises less than o to p percent of Company's revenues.

         The cabins at Property C are dwelling units used on a transient basis; together
with any areas reserved for cabin guests, they are an establishment that is a lodging
facility for purposes of section 856(d)(9)(D)(ii). However, based on the information
submitted and representations made, including the fact that the income from the cabins
comprises less than o to p percent of Company’s revenues, the presence of the cabins
at Property C will not cause the assets at Property C other than the cabins and any
areas reserved for cabin guests to be treated as lodging facilities for these purposes.

                                     CONCLUSIONS

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

   (1) The floating docks described above at Properties A, B, C, D, and E are real
       property for purposes of section 1.856-10(b) and, therefore, are real estate
       assets for purposes of section 856(c)(4) and (5).

   (2) Amounts received for racking structure space in dry dock storage facilities
       described above will not be considered as other than rents from real property for
       purposes of section 856(d).

   (3) The presence of cabins at Property C will not cause the assets at Property C
       other than the cabins and any areas reserved for cabin guests to be treated as
       lodging facilities within the meaning of section 856(d)(9)(D)(ii).

       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 any asset described herein constitutes real property for purposes of
any section of the Code other than section 856. Additionally, except as expressly
provided herein, no opinion is expressed or implied concerning whether any income is
qualifying income for purposes of section 856(c)(2) and (3). Furthermore, no opinion is
expressed concerning any services performed by Taxpayer, Company, any TRS, or any
other party. Finally, no opinion is expressed 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 representatives.

                                                 Sincerely,



                                                 Andrea Hoffenson______________
                                                 Andrea Hoffenson
                                                 Branch Chief, Branch 2
                                                 Office of Associate Chief Counsel
                                                 (Financial Institutions & Products)
Enclosure:
Copy of this for section 6110 purposes