Connected parking-garage revenue qualifies as REIT rent

Plain-English summary

Two REIT-owned parking garages in a mixed-use project had to be physically connected and jointly operated, making it impractical to identify which garage held each public customer’s car. The REITs used one qualifying independent contractor and allocated public parking revenue and expenses with a formula designed to approximate separate operation. Because each garage was appropriately sized, predominantly served its owner’s tenants and their guests or customers, and provided only customary services through the contractor, the IRS ruled that the taxpayer’s share of parking revenue qualified as rents from real property under section 856(d).

Ruling snapshot

• Question: Does a REIT’s formula-allocated share of revenue from jointly operated, interconnected parking garages qualify as rents from real property?
• Outcome: approved
• Key authorities: IRC § 856(c), (d); Treas. Reg. § 1.856-4(b); Rev. Rul. 2004-24

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202013006 Third Party Communication: None
Release Date: 3/27/2020 Date of Communication: Not Applicable
Index Number: 856.04-00
Person To Contact:
-------------------------- ----------------, ID No. ------------
--------------------------- Telephone Number:
------------------------------------ --------------------
----------------------------------------- Refer Reply To:
---------------------------------------- CC:FIP:B02
PLR-114655-19
Date:
December 20, 2019

Legend:

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

REIT A = ------------------------------------------

Area = ---------------------
City = -------------------------------
LLC = ------------------------------------
Partnership = ---------------------------------------

x = -----------
y = ---
z = ------

Dear --------------------

  This responds to a letter dated May 2, 2019, requesting rulings on behalf of

Taxpayer. Taxpayer requests rulings with respect to the qualification of certain items of
income under section 856 of the Internal Revenue Code (“Code”) in connection with the
parking garages described below.

                                                 FACTS

     Taxpayer and REIT A (together, “Companies”) have each elected to be taxed as

a real estate investment trust (“REIT”) under sections 856 through 859. Companies are
engaged in owning and developing certain parcels of real estate (described below) for
rent that are located near Area in City. This development activity is part of a mixed-use
development project spanning --------------------------- and required to include ----------------
--------------------------------------------------------------------------------------------------------.
PLR-114655-19 2

   The Parcels

    Taxpayer and LLC, a REIT, plan to develop an unimproved parcel in Area that is

permitted to have nearly x square feet of gross floor area containing retail and office
space along with a subsurface parking garage (“Parcel 1”). Taxpayer represents that,
under local law, Parcel 1 currently may not be subject to a condominium regime
because it is unimproved. As soon as it is permissible under local law, Parcel 1 will be
submitted to a condominium regime with two units: a unit containing at least y floors of
office space (the “Parcel 1 Office Unit”), title to which will be legally conveyed to a
disregarded entity of Taxpayer, and a unit containing the ground floor retail space (the
“Parcel 1 Retail Unit”), title to which will be legally conveyed to a disregarded entity of
LLC.

   Across the street from Parcel 1 is a parcel that contains newly constructed

towers containing residential and retail space and a subsurface, three-level parking
garage (“Parcel 2” and, together with Parcel 1, the “Parcels”). Parcel 2 is currently
subject to a condominium regime with two units: a unit containing the retail space and
related amenities (the “Parcel 2 Retail Unit”) and a unit containing the residential space
and related amenities (the “Parcel 2 Residential Unit”). The Parcel 2 Retail Unit is
indirectly owned by REIT A through a z% interest in Partnership. The Parcel 2
Residential Unit is owned by an unrelated third party.

   Parking Garages

   Parcel 1 Office Garage

   Parcel 1 will contain an underground parking garage (the “Parcel 1 Office

Garage”). The condominium documents will provide that the Parcel 1 Office Garage will
either be (i) part of the condominium unit compromising the Parcel 1 Office Unit (owned
by Taxpayer), or (ii) a “limited use” condominium common area separate from the
Parcel 1 Office Unit but reserved for its use. In either event, the Parcel 1 Office Unit will
make the Parcel 1 Office Garage available to its tenants and their guests, customers, or
subtenants, as well as to the general public. Taxpayer will maintain, repair, and light the
Parcel 1 Office Garage. Taxpayer will also assign and mark the reserved spaces in
connection with leasing space in the Parcel 1 Office Unit to the tenants. In addition, as
needed to manage the REIT itself, Taxpayer will perform fiduciary functions, such as
dealing with taxes and insurance, as permitted by § 1.856-4(b)(5)(ii) of the Income Tax
Regulations.

   The condominium documents will provide that the Parcel 1 Office Unit leave a

certain number of parking spaces available for daily public parking. Because parking is
available to the public, some of the tenants, invitees, guests, customers and subtenants
of LLC (owner of Parcel 1 Retail Unit) will use the Parcel 1 Office Garage. Taxpayer
represents that the Parcel 1 Retail Unit does not desire or require dedicated parking as
long as some amount of public parking is available nearby, and there are already
PLR-114655-19 3

several public parking garages nearby. Certain tenants of the Parcel 1 Office Unit may,
pursuant to their leases, be granted the right to use a specified number of spaces in the
Parcel 1 Office Garage. Such spaces could be reserved for the exclusive use of the
foregoing tenants or, alternatively, the tenants may be issued garage access cards that
can be used to access the garage and park at unreserved spots.

    Taxpayer represents that all income and expenses of the Parcel 1 Office Garage

will inure to the benefit of, and will be borne solely by, the Parcel 1 Office Unit.
Taxpayer represents that the number of spaces in the entirety of the Parcel 1 Office
Garage, including the number of spaces set aside for public parking, is appropriate in
size for the expected number of tenants and their respective guests, customers and
subtenants of the Parcel 1 Office Unit. The Parcel 1 Office Garage is expected to be
used predominantly by the Parcel 1 Office Unit’s tenants, guests, subtenants, and
customers and will be built for this purpose.

  Parcel 2 Retail Garage

    Parcel 2 includes a ------------------------------ parking garage. The Parcel 2

Residential Unit includes certain areas at the lower levels of the parking garage (the
“Residential Parking Garage”). The Parcel 2 Retail Unit includes the remainder of the
parking garage (the “Parcel 2 Retail Garage” and, together with the Parcel 1 Office
Garage, the “Parking Garages” and each a “Parking Garage”). The Residential Parking
Garage has a gated entry separating it from the rest of the parking garage in which it is
situated and an easement for ingress and egress through the Parcel 2 Retail Parking
Garage. During construction, the owner of the Parcel 2 Retail Unit and the Parcel 2
Residential Unit each decided independently on the size of their respective parking
garages and whether such garage would be open to the public in light the intended use
of their respective components and the available supply of public parking in a dense
urban area with several public parking garages nearby. This letter contains no rulings
concerning the Residential Parking Garage.

    REIT A will maintain, repair, and light the Parcel 2 Retail Garage. REIT A will

also assign and mark the reserved spaces in connection with leasing space in the
Parcel 2 Retail Unit to the tenants. In addition, as needed to manage the REIT itself,
REIT A will perform fiduciary functions, such as dealing with taxes and insurance, as
permitted by § 1.856-4(b)(5)(ii). Certain tenants of the Parcel 2 Retail Unit may,
pursuant to their leases, be granted the right to use a specified number of spaces in the
Parcel 2 Retail Garage (through reserved spaces or access cards). The Parcel 2 Retail
Garage will also be available for use by the general public. Taxpayer represents that
the number of spaces in the entirety of the Parcel 2 Retail Parking Garage is
appropriate in size for the tenants, guests, subtenants, and customers of the Parcel 2
Retail Unit. The Parcel 2 Retail Parking Garage is expected to be used predominantly
by the Parcel 2 Retail Unit’s tenants, guests, subtenants, and customers and was built
for this purpose.
PLR-114655-19 4

  Garage Connection

   The land-use and environmental permits for the entire mixed-use development

project require the Parking Garages to be physically interconnected underground. Once
physically interconnected, cars will be able to enter and exit either Parking Garage from
the other Parking Garage without using the surrounding streets. To facilitate the
connection, Taxpayer and REIT A will each grant the other a reciprocal easement for
ingress, egress, transit and, as described herein, parking.

   Once connected, it is anticipated that each Parking Garage will nonetheless be

predominantly used for parking by tenants (and their customers and guests) of the REIT
owning such Parking Garage. However, because there will be free access from each
Parking Garage to the other, it will be possible for cars entering through the entrance to
one of the Parking Garages to park in the other Parking Garage. Thus, it will be
impractical to determine in which Parking Garage any individual car has been parked.

   Because a car entering one Parking Garage can be parked in either Parking

Garage, Taxpayer and REIT A have determined that the Parking Garages must be
operated essentially as if they were one parking garage, and they intend to engage one
independent contractor (the “Independent Contractor”) for the Parking Garages.
Taxpayer represents the Independent Contractor will be an independent contractor, as
defined in section 856(d)(3), from whom neither Taxpayer nor REIT A derives or
receives any income within the meaning of section 856(d)(7)(C)(i) and section 1.856-
4(b)(5)(i) of the Income Tax Regulations.

    The Independent Contractor will manage and operate the Parking Garages under

a single management contract (the “Management Contract”) with both Taxpayer and
REIT A. Both Parking Garages will have parking attendants, as described in greater
detail below. The Independent Contractor will employ all of the individuals (including
attendants) who manage and operate the Parking Garages. The Independent
Contractor will be directly responsible for providing all salary, wages, benefits,
administration, and supervision of its employees. The Independent Contractor will
receive arm’s-length compensation. Any recurring functions unique to the reserved
spaces (such as enforcement) will be provided by the Independent Contractor.

  The Independent Contractor will provide security within the garage; collect the

parking fees from those using the Parking Garages; maintain and monitor the reserved
spaces; maintain the parking equipment; maintain and monitor the Parking Garages for
needed repairs and maintenance; and, subject to an approved budget or the owners’
approval, supervise such repairs and maintenance.

   In addition, the Independent Contractor may park cars, but only in order to

maximize capacity of the Parking Garages or for reasons of safety or security. The
Independent Contractor may also connect or disconnect electric vehicles from charging
stations or move electric vehicles close to or away from charging stations in order to
PLR-114655-19 5

maximize the use of charging stations. No separate fee will be charged to move or park
a car or to connect or disconnect an electric vehicle from a charging station.
Occasionally, as a courtesy or when necessary, an attendant may provide minor,
incidental, or emergency service, such as charging a battery or changing a flat tire.

   Taxpayer represents that, if the Independent Contractor charges for any

incidental services, neither Taxpayer nor REIT A will receive any portion of the income
derived from, or bear any of the expenses incurred in, the provision of such services.
Taxpayer represents that no other services will be provided at the Parking Garages.

  Parking Revenues

   Because of the joint operation, Taxpayer and REIT A will need to share public

parking revenues (the “Parking Revenues”) and expenses of the Parking Garages.
Taxpayer and REIT A intend to share these items in a manner that replicates as closely
as possible the revenue and expenses that each REIT would have if the Parking
Garages were operated separately rather than jointly. The Parking Revenues will be
apportioned pursuant to a formula that generally will be based on the square footage of
each Parking Garage, adjusted for areas not used for parking spaces (e.g., areas used
for mechanical equipment, storage, utilities) and also adjusted for reserved spaces
(including reserved areas that are physically segregated, referred to as “nested
spaces”) as designated by each REIT. For reserved spaces, each REIT will earn
income directly from its respective tenants.

  The operating expenses of the Parking Garages (including the fee paid to the

Independent Contractor) will be divided between Taxpayer and REIT A based upon the
square footage of each Parking Garage, as described above, except that reserved
spaces will be included in the calculation of the square footage of each respective
Parking Garage. The sharing formula will ensure that neither Taxpayer nor REIT A will
be apportioned Parking Revenues based upon a number of parking spaces that is in
excess of the total number of parking spaces available in its Parking Garage.

                             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
PLR-114655-19 6

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 tax year attributable to both the real
and personal property leased under, or in connection with, such lease.

     Section 1.856-4(b)(1) provides that, for purposes of sections 856(c)(2) and (c)(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 rendered 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. Parking
facilities are listed as an example of services which are customarily furnished to the
tenants of a particular class of buildings in many geographic marketing areas. 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. To qualify as a service
customarily furnished, the service must be furnished or rendered to the tenants of the
REIT or, primarily for the convenience or benefit of the tenant, to the guests, customers,
or subtenants of the tenant. The service must be furnished through an independent
contractor from whom the REIT does not derive or receive any income.

   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 tenants at the property, or for managing or
operating the property.

   Section 856(d)(7)(B) provides that if the amount of impermissible tenant service

income with respect to a property for any taxable year exceeds one percent of all
amounts received or accrued during such taxable year directly or indirectly by the REIT
with respect to such property, the impermissible tenant service income of the REIT will
include all of the amounts received or accrued with respect to the property. Section
856(d)(7)(D) provides that the amounts treated as received by a REIT for any
impermissible tenant service shall not be less than 150 percent of the direct cost of the
REIT in furnishing or rendering the service.

   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 taxable REIT subsidiary of the REIT shall not be treated as
furnished, rendered, or provided by the REIT.

 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
PLR-114655-19 7

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.

     Section 1.856-4(b)(5)(i) provides that no amount received or accrued, directly or

indirectly, with respect to any real property qualifies as “rents from real property” if the
REIT furnishes or renders services to the tenants of the property or manages or
operates the property, other than through an independent contractor from whom the
trust itself does not derive or receive any income.

   Section 1.856-4(b)(5)(ii) provides that the trustees or directors of a REIT are not

required to delegate or contract out their fiduciary duty to manage the REIT itself, as
distinguished from rendering or furnishing services to the tenants of its property or
managing or operating the property. Thus, the trustees or directors may do all those
things necessary, in their fiduciary capacities, to manage and conduct the affairs of the
REIT itself. For example, the trustees and directors may deal with taxes, interest, and
insurance relating to the REIT’s property.

     Revenue Ruling 2004-24, 2004-1 C.B. 550, identifies circumstances in which a

REIT’s income from providing parking facilities at its rental real properties qualifies as
rents from real property under section 856(d). In Situation 1, the REIT provides
unattended parking facilities for the use of the tenants of its buildings and their guests,
customers, and subtenants. Each parking facility is located in or adjacent to a building
occupied by tenants of the REIT and is appropriate in size for the number of tenants
and their guests, customers, and subtenants who are expected to use the facility. The
parking facilities do not have parking attendants. The REIT maintains, repairs, and
lights the parking facilities as well as performs certain fiduciary functions, such as
dealing with taxes and insurance, as permitted by section 1.856–4(b)(5)(ii). In Situation
2, the facts are the same as in Situation 1 except that at some of the REIT’s parking
facilities, parking spaces are reserved for use by particular tenants. The REIT assigns
and marks the reserved spaces in connection with leasing space in the buildings to the
tenants, and any recurring functions unique to the reserved spaces (such as
PLR-114655-19 8

enforcement) are provided by an independent contractor from whom the REIT does not
derive or receive any income. In Situation 3, the facts are the same as in Situations 1
and 2 except that some of the parking facilities are available for use by the general
public and have parking attendants. An independent contractor from whom the REIT
does not derive or receive any income manages and operates the parking facilities
under a management contract with the REIT whereby the independent contractor remits
the parking fees from those using the parking facilities to the REIT and receives arm’s-
length compensation. The independent contractor employs all of the individuals who
manage and operate the parking facilities, including the parking attendants and is
directly responsible for providing all salary, wages, benefits, administration, and
supervision of its employees. In addition to collecting parking fees from those using the
parking facilities, the parking attendants may park cars, without charging a separate fee,
and may provide minor, incidental, emergency service at a parking facility.

   Revenue Ruling 2004-24 quotes from the conference report underlying the 1986

revision of section 856(d) (“the 1986 conference report”).1 The 1986 conference report
provides guidance on services performed directly by REITs, as well as services
performed through an independent contractor, and it provides, in part:

    The conferees intend, for example, that a REIT may provide customary
    services in connection with the operation of parking facilities for the
    convenience of tenants of an office or apartment building, or shopping
    center, provided that the parking facilities are made available on an
    unreserved basis without charge to the tenants and their guests or
    customers. On the other hand, the conferees intend that income derived
    from the rental of parking spaces on a reserved basis to tenants, or
    income derived from the rental of parking spaces to the general public,
    would not be considered to be rents from real property unless all services
    are performed by an independent contractor. Nevertheless, the conferees
    intend that the income from the rental of parking facilities properly would
    be considered rents from real property (and not merely income from
    services) in such circumstances if services are performed by an
    independent contractor.

   Revenue Ruling 2004-24 holds that amounts received by the REIT for furnishing

unattended parking facilities, under the circumstances described in Situations 1 and 2,
and for furnishing attended parking facilities, under the circumstances described in
Situation 3, qualify as rents from real property under section 856(d).

  Based on Taxpayer’s representations, the Parking Garages are similar to the

parking facility in Situation 3 of Revenue Ruling 2004-24. As in Situation 3, each
Parking Garage is part of a property that includes office, retail, or multi-family residential
use, and each Parking Garage is located in or adjacent to a building occupied by

1 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-220 (1986), 1986-3 (Vol. 4) C.B. 220.
PLR-114655-19 9

tenants of the owner of that Parking Garage. As in Situation 3, the owners of the
Parking Garages will make the Parking Garages available to tenants (including some on
a reserved basis) and their guests, customers, subtenants, and the general public. As
in Situation 3, the Parking Garages are appropriate in size for the expected number of
tenants, guests, customers and subtenants. Unlike the parking facilities in Situation 3,
however, each Parking Garage is connected to the other Parking Garage, so that the
Parking Revenues received by Taxpayer may not represent the exact amounts
attributable to cars parked in the Parcel 1 Office Garage. Based on Taxpayer’s
representations that the connection of the Parking Garages is required by the permits
for the project, that each Parking Garage will be used for parking predominantly by
tenants (and their customers and guests) of the REIT owning such Parking Garage, and
that Parking Revenues and expenses will be shared so as to replicate as closely as
possible the revenue and expenses that each REIT would have if the Parking Garages
were operated separately, the Parking Garages are sufficiently similar to the parking
facilities described in Situation 3 of Revenue Ruling 2004-24 that the Parking Revenues
should be subject to the same analysis as the parking income received in Situation 3.

   Based on Taxpayer’s representations, the parking services to be provided in the

Parking Garages are also similar to those provided in Situation 3 of Revenue Ruling
2004-24. As in Situation 3, all services rendered at the Parking Garages will be
services customarily furnished or rendered in connection with the rental of space in
parking garages in the geographic area in which the Parcels are located. As in
Situation 3, an independent contractor from whom Taxpayer and REIT A derive no
income will, under the Management Contract and in exchange for arm’s-length
compensation, manage and operate the Parking Garages, employ the attendants and
other individuals who manage and operate the Parking Garages, and perform all
recurring functions unique to reserved spaces. Therefore, as in Situation 3, the services
furnished or rendered, or management or operation provided by the Independent
Contractor in connection with the Parcel 1 Office Garage will not be considered
furnished, rendered, or provided by Taxpayer.

                                CONCLUSION

   Based on the information submitted and the representations made, we conclude

that, under the circumstances described above, Taxpayer’s share of the Parking
Revenues will qualify as rents from real property for purposes of 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. In particular, no opinion is expressed concerning whether
Taxpayer otherwise qualifies as a REIT under part II of subchapter M of chapter 1 of the
Code. Additionally, we express no opinion as to whether the Independent Contractor
qualifies as an independent contractor under section 856(d)(3) of the Code.
PLR-114655-19 10

  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.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalties of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

     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,


                                   ___________________________
                                   Steven Harrison
                                   Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)

cc:
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