Marina slip and storage rents qualified as REIT rents from real property

Plain-English summary

A real estate investment trust planned to lease boat slips and shore-based storage spaces at a redeveloped marina. The IRS treated the boat slips as water space above land and the storage spaces as space in permanently affixed buildings, so rent from both qualified as rent from real property under section 856(d). Personal property provided with each lease was represented to be worth no more than 15 percent of the combined property value. Utilities and other marina services were customary, available to tenants generally, or furnished through an independent contractor or taxable REIT subsidiary. The IRS therefore ruled that the service income was not impermissible tenant service income and would not disqualify the marina rents.

Ruling snapshot

• Question: Do marina slip and storage rents qualify as rents from real property, and do the related services create impermissible tenant service income?
• Outcome: approved, based on the represented property values, customary services, and use of independent contractors or a taxable REIT subsidiary
• Key authorities: IRC §§ 856(c), 856(d), 512(b)(3); Treas. Reg. §§ 1.856-4, 1.856-10, 1.512(b)-1(c)(5)

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201944011                                                Third Party Communication: None
Release Date: 11/1/2019                                          Date of Communication: Not Applicable
Index Number: 856.04-00
                                                                 Person To Contact:
------------------------                                         -------------------------- ID No. -----------------
------------------------------------------------------           -----------------------------------------------------
-----------------------------------                              Telephone Number:
----------------------------------                               ---------------------
------------------------------------------------                 Refer Reply To:
----------------------------                                     CC:FIP:B01
                                                                 PLR-136969-14
                                                                 Date:
                                                                 August 06, 2019


Legend:

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

State A           =        -------------

Area A            =        -----------------------------------

County A          =        ------------------------------

Date 1            =        --------------------------

a                 =        -----

b                 =        -----

c                 =        ---

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

        This responds to a letter dated September 30, 2014, and subsequent
correspondence, submitted on behalf of Taxpayer. Taxpayer requests rulings that
(1) the rental income from the boat slips and storage spaces at Marina (as defined
below) constitutes rents from real property within the meaning of section 856(d)(1) of
the Internal Revenue Code (“Code”), and (2) the income from the services provided at
Marina is not impermissible tenant service income and, therefore, will not cause any
portion of the rents received by Taxpayer from tenants of the Marina to fail to qualify as
rents from real property under section 856(d).

PLR-136969-14                                 2

                                          FACTS

         Taxpayer is a State A limited liability company that has elected to be treated as a
real estate investment trust (“REIT”) for federal income tax purposes beginning with its
initial taxable year ended Date 1. Taxpayer owns, through various wholly owned
subsidiary entities and partnership joint ventures, a portfolio of real estate assets
consisting of office, retail, hotel, industrial, and apartment properties. Taxpayer
indirectly owns substantially all of the interests in a limited liability company that is
classified as a partnership for federal income tax purposes (“Partnership”), which, in
turn, owns a single member, limited liability company that is classified as a disregarded
entity for federal income tax purposes (“DE”), which, in turn, owns an interest in a
property consisting of a ground lease, an apartment building, and a marina in Area A.

       Taxpayer, acting through Partnership and DE, leases the land and adjacent
water space of the property in Area A from County A under a long-term ground lease.
The ground lease makes no distinction between parcels of water space and parcels of
dry land.

       With respect to the property, Taxpayer, acting through Partnership and DE, has
demolished the existing apartment building, substantially developed a new
approximately a-unit apartment community (“Apartments"), and redeveloped the marina
to contain approximately b boat slips (as redeveloped, "Marina"). Apartments and
Marina will be held for lease to tenants and for long-term investment by Taxpayer,
through Partnership and DE.

      By law, Marina is required to make boat slips available for lease to the public,
without discriminating in favor of residents of Apartments. Taxpayer expects that the
overwhelming majority of tenants at Marina will not reside in Apartments.

        Marina includes c floating piers that extend from the seawall into the water, with
individual boat slips arrayed alongside each pier. Each individual boat slip is a space
on the water to moor a watercraft. The boat slips will be demarcated either by floating
"fingers" attached to the piers or by an end tie at the end of each pier. The piers will be
kept in place by pylons. Taxpayer will make dock carts available for Marina tenants to
move items around the piers, and from their cars to the piers and their boats; the dock
carts will be self-service items, and Taxpayer will not charge for their use. Marina will
also have ice machines and bike racks available for use by tenants. Taxpayer intends
to treat the dock carts, ice machines, bike racks, piers, and fingers (but not the pylons
and boat slips) as personal property for purposes of the REIT gross income and asset
tests of section 856(c)(2) and (3) and section 856(c)(4), respectively. Taxpayer
represents that the pylons are inherently permanent structures within the meaning of
section 1.856-10(d)(2) of the Income Tax Regulations and, thus, real property.
Additionally, the boat slips are water space superjacent to land and, thus, land within
the meaning of section 1.856-10(c).

PLR-136969-14                                  3


        Marina will include restrooms and showers (together, the “Shower Facilities”).
The Shower Facilities will be located in a permanently affixed building on the shore and
will be available to all Marina tenants without an additional fee. The Shower Facilities
will be unattended and will not provide towel service.

       Each boat slip will be leased to a tenant pursuant to a wharfage contract
(“Wharfage Contract”). Marina will also have storage in slips on the water for a limited
number of dinghies and jet skis, and will lease such a slip to a tenant pursuant to a
Wharfage Contract. Under the terms of a Wharfage Contract, a tenant will be assigned
a specific slip for the purpose of mooring a specifically identified boat. Taxpayer will
have the right to reassign a tenant to another slip, either permanently or as needed in
the case of emergency or operational necessity.

       Wharfage Contracts are entered into on a month-to-month basis, with the
minimum term of a Wharfage Contract being one month. Taxpayer will have the right to
temporarily assign another boat to a tenant's slip during periods when the tenant's boat
is absent. During such periods, the tenant will remain obligated to pay slip fees (as
described below). The Wharfage Contract authorizes certain persons to board a
tenant's boat to relocate it in the case of emergency or operational necessity.

        The rental charge, or slip fee, under a Wharfage Contract will be a fixed monthly
amount based on the length of the slip. The tenant will also pay a security deposit,
generally equal to one month's slip fee. The tenant will be required to maintain liability
and property insurance for the boat moored in the slip. A Wharfage Contract cannot be
assigned or sublet. Although a tenant must register the specific boat to be moored in
the slip it is renting, the tenant may change the registration to that of a different boat that
then may be moored in the slip without entering into a new Wharfage Contract.
Taxpayer represents that the fair market value of the personal property that will be
leased under, or in connection with, a lease of a boat slip will represent no more than 15
percent of the fair market value of both the real and personal property leased under, or
in connection with, such lease.

       Marina will also have limited areas for storage that is not on the water. These
areas are leased under storage contracts described below (“Storage Contracts”).
Storage will include individual spaces within cages that are in locked rooms in a
permanently affixed building on the shore. The term of a Storage Contract will be
monthly for a fixed amount. No services will be provided in connection with these
areas. Taxpayer represents that the fair market value of the personal property that will
be leased under, or in connection with, a lease of a storage space will represent no
more than 15 percent of the fair market value of both the real and personal property
leased under, or in connection with, such lease.

PLR-136969-14                                   4

         Taxpayer will provide utilities to tenants of Marina through utility hookups at each
boat slip. Each boat slip at Marina will have self-service utility hookups to connect a
boat to sewage facilities, electricity, cable TV/phone/internet, and water. Taxpayer will
not impose a separate charge for tenants to use the utility hookups. Charges for the
utilities will either be included in the monthly slip fee or billed directly to the tenant by the
utility company.

        Taxpayer will contract with service providers to provide a dock master, porters, a
courtesy officer, and a vessel recovery specialist at Marina. The dock master will
manage all aspects of Marina, such as leasing, collecting rents, enforcing rules, serving
late rent notices, filing unlawful detainer actions, advertising, maintaining income
receipts and other documentation, and managing tenant relationships. The porters will
perform routine maintenance and janitorial activities for Marina, including the Shower
Facilities, and also will ensure that utility hookups at the boat slips are properly
connected by the tenants. The courtesy officer will regularly patrol Marina. The vessel
recovery specialist will provide salvage services at Marina. Taxpayer represents that
each service provider will be either an independent contractor within the meaning of
section 856(d)(3) from whom Taxpayer will not derive or receive any income (“IK”) or a
taxable REIT subsidiary of Taxpayer within the meaning of section 856(l) (“TRS”).

      Taxpayer represents that all of the services performed at Marina will be usual
and customary for marinas in the geographic market where Marina will be located.
Taxpayer further represents that any persons performing services at Marina not
previously described herein will be employees of an IK or TRS. Additionally, Taxpayer
represents that the utility services rendered by Taxpayer at Marina are available to all
tenants and do not constitute personal services rendered to any particular tenant.

                                    LAW AND ANALYSIS

      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)(1) provides that rents from real property include (subject to
exclusions provided in section 856(d)(2)): (A) rents from interests in real property; (B)
charges for services customarily furnished or rendered in connection with the rental of
real property, whether or not such charges are separately stated; and (C) rent
attributable to personal property leased under, or in connection with, a lease of real
property, but only if the rent attributable to the personal property for the taxable year
does not exceed 15 percent of the total rent for the taxable year attributable to both the
real and personal property leased under, or in connection with, such lease.

PLR-136969-14                                  5

       Section 1.856-4(a) defines the term “rents from real property” generally as the
gross amounts received for the use of, or the right to use, real property of the REIT.
Section 1.856-10(b) provides, in part, that the term real property means land and
improvements to land. Section 1.856-10(c) provides that land includes, among other
things, water and air space superjacent to land. Section 1.856-10(d)(1) provides that
the term improvements to land means inherently permanent structures and their
structural components, and section 1.856-10(d)(2) provides, in part, that the term
inherently permanent structure means any permanently affixed building or other
permanently affixed structure. Section 1.856-10(g) provides examples that demonstrate
the rules of section 1.856-10. Example 2, which illustrates the definition of land as
provided in section 1.856-10(c), provides, as follows:

              Water space superjacent to land. REIT B leases a marina from a
       governmental entity. The marina is comprised of U-shaped boat slips and
       end ties. The U-shaped boat slips are spaces on the water that are
       surrounded by a dock on three sides. The end ties are spaces on the
       water at the end of a slip or on a long, straight dock. REIT B rents the
       boat slips and end ties to boat owners. The boat slips and end ties are
       water space superjacent to land that is land within the meaning of
       paragraph (c) of this section and, therefore, are real property.

       Section 1.856-4(b)(1) provides that, for purposes of section 856(c)(2) and (3), the
term rents from real property includes charges for services customarily furnished or
rendered in connection with the rental of real property, whether or not the charges are
separately stated. Services furnished to tenants of a particular building will be
considered customary if, in the geographic market in which the building is located,
tenants in buildings of a similar class are customarily provided with the service. In
particular geographic areas where it is customary to furnish electricity or other utilities to
tenants in buildings of a particular class, the submetering of those utilities to tenants in
the buildings will be considered a customary service.

       Section 856(d)(2)(C) provides that any impermissible tenant service income is
excluded from the definition of rents from real property. Section 856(d)(7)(A) defines
impermissible tenant service income to mean, with respect to any real or personal
property, any amount received or accrued directly or indirectly by the REIT for services
furnished or rendered by the REIT to the tenants of such property, or for managing or
operating such property.

       Section 856(d)(7)(C) provides certain exclusions from impermissible tenant
service income. Section 856(d)(7)(C)(i) provides that for purposes of section
856(d)(7)(A), services furnished or rendered, or management or operation provided,
through an independent contractor from whom the REIT does not derive or receive any
income or through a TRS of such REIT shall not be treated as furnished, rendered, or
provided by the REIT. Section 856(d)(7)(C)(ii) provides that any amount which would

PLR-136969-14                                6

be excluded from unrelated business taxable income under section 512(b)(3) if received
by an organization described in section 511(a)(2) is not impermissible tenant service
income.

        Section 512(b)(3) provides, in part, that there shall be excluded from the
computation of unrelated business taxable income all rents from real property and all
rents from personal property leased with such real property, if the rents attributable to
such personal property are an incidental amount of the total rents received or accrued
under the lease, determined at the time the personal property is placed in service.

       Section 1.512(b)-1(c)(5) provides that payments for the use or occupancy of
rooms and other space where services are also rendered to the occupant, such as for
the use or occupancy of rooms or other quarters in hotels, boarding houses, or
apartment houses furnishing hotel services, or in tourist camps or tourist homes, motor
courts or motels, or for the use or occupancy of space in parking lots, warehouses, or
storage garages, do not constitute rent from real property. Generally, services are
considered rendered to the occupant if they are primarily for his convenience and are
other than those usually or customarily rendered in connection with the rental of rooms
or other space for occupancy only. The supplying of maid service, for example,
constitutes such service; whereas the furnishing of heat and light, the cleaning of public
entrances, exits, stairways, and lobbies, and the collection of trash are not considered
as services rendered to the occupant.

Ruling Request 1

          The rights to use a boat slip to moor a boat under a Wharfage Contract and to
use a storage space under a Storage Contract are rights to use and occupy the space
above the seabed or in buildings permanently affixed to the shore. Taxpayer represents
that the fair market value of the personal property that will be leased under, or in
connection with, a lease of a boat slip or storage space will represent no more than 15
percent of the fair market value of both the real and personal property leased under, or
in connection with, such lease. Taxpayer further represents that all of the services
performed at Marina will be usual and customary for marinas in the geographic market
where Marina will be located.

         Therefore, the income received by Taxpayer from its tenants for the use of the
boat slips and storage spaces constitute rents from real property within the meaning of
section 856(d)(1).

Ruling Request 2

       In determining whether a taxpayer has income that is impermissible tenant
service income, only the income that is attributable to a provision of a service is
analyzed. Although services may be provided in the Shower Facilities, the Shower

PLR-136969-14                                7

Facilities themselves are not services. Income that is attributable to making available to
all tenants at no additional cost a space such as the Shower Facilities is not income
from the provision of a service and is therefore not impermissible tenant service
income. Any services that are provided in or with respect to the Shower Facilities are
analyzed as any other service provided to tenants.

        Taxpayer has represented that all of the services that will be performed at Marina
will be usual and customary for marinas in the geographic area where Marina will be
located. Taxpayer further represents that the provision of utilities to tenants of boat
slips at Marina are available to all boat slip tenants and do not constitute personal
services rendered to any particular tenant.

       The income from the provision of utilities is, for purposes of determining whether
the income is qualifying income for REIT qualification purposes, income that would be
excluded from unrelated business taxable income under section 512(b)(3) if received by
an organization described in section 511(a)(2). Taxpayer represents that all other
services that will be provided at Marina will be provided through either an IK or a TRS.

       Accordingly, income from the services that will be provided at Marina is not
impermissible tenant service income and, therefore, will not cause any portion of the
rents received by Taxpayer from the tenants of Marina to fail to qualify as rents from
real property under section 856(d).

                                     CONCLUSION

         Based on the facts submitted and representations made, we rule that (1) the
rental income from the boat slips and storage spaces at Marina constitutes rents from
real property within the meaning of section 856(d)(1), and (2) the income from the
services provided at Marina is not impermissible tenant service income and, therefore,
will not cause any portion of the rents received by Taxpayer from the tenants of Marina
to fail to qualify as rents from real property under section 856(d).

       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. Specifically, no opinion is expressed or implied on whether
Taxpayer otherwise qualifies as a REIT under subchapter M, part II of Chapter 1 of the
Code.

       Furthermore, the ruling herein related to whether income from services that will
be performed by Taxpayer at Marina is impermissible tenant service income is
specifically limited to whether the income is qualifying income for REIT qualification
purposes. The definition of rents from real property under section 856(d) differs in
scope and structure from the definition of rents from real property under section
512(b)(3), which applies to exempt organizations described in section

PLR-136969-14                                  8

511(a)(2). Therefore, an exempt organization providing the same services may have
unrelated business taxable income because the income may not be excluded under
section 512(b)(3) as rents from real property.

      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,


                                       ______________________________
                                       Robert A. Martin
                                       Senior Technician Reviewer, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)


Enclosure:
      A copy of this letter for section 6110 purposes