Independent senior living facilities are not health care facilities under REIT rules

Plain-English summary

A real estate investment trust owned unlicensed independent retirement living facilities whose residents were responsible for their own personal and health care needs. The facilities supplied meals, housekeeping, transportation, an unrelated third-party emergency call device, utilities, and similar conveniences, but did not provide medical monitoring, licensed nurses, preventive screening, or round-the-clock resident supervision. The IRS ruled that the properties were not health care facilities under section 856(e)(6)(D)(ii). A taxable REIT subsidiary therefore could operate or manage them without losing TRS status. Services subcontracted to an eligible independent operator and paid for on arm's-length terms would not be treated as services furnished by the REIT, would not create impermissible tenant service income, and would not cause the rent to fail the rents-from-real-property test on that ground.

Ruling snapshot

• Question: Are the independent living facilities health care facilities, and will their management and resident services preserve TRS status and qualifying rental income?
• Outcome: approved, the facilities are not health care facilities and the described structure does not taint the rent
• Key authorities: IRC § 856(c), (d), (e)(6)(D), and (l); Treas. Reg. § 1.856-4(b)(1); Rev. Rul. 2002-38

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                            Third Party Communication: None

Number: 202020007 Date of Communication: Not Applicable
Release Date: 5/15/2020 Person To Contact:
Index Number: 856.00-00 ---------------, ID No. ------------
Telephone Number:
-------------------------- --------------------
----------------------------------------- Refer Reply To:

--------------------------------------- CC:FIP:B02
--------------------------------------------------- PLR-118894-19
Date:

                                                            February 7, 2020

Legend

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

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

a = ---

b = ---

c = ---

d = --

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

   This is in reply to a letter dated August 13, 2019, and supplemental

correspondence requesting rulings on behalf of Taxpayer. Taxpayer has requested
rulings with respect to the independent retirement living facilities described below.

     FACTS:

  Taxpayer is a State corporation that elected to be taxed as a real estate

investment trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code
(“Code”). Taxpayer’s business primarily consists of the acquisition, financing, and
owning of real property to be leased to third-party tenants in the healthcare sector.
Taxpayer primarily invests in senior health care facilities such as skilled nursing
PLR-118894-19 2

facilities, independent living, assisted living, continuing care retirement communities,
and memory care facilities. Taxpayer primarily derives its income through rents from
real property and in some instances, interest on mortgages secured by real property.
Rents received by Taxpayer are predominantly earned through triple net lease
arrangements whereby tenants bear the responsibilities for the maintenance, upkeep
and operating expenses of the facilities.

   Independent Retirement Living Facilities

    The independent retirement living facilities that are the subject of this ruling letter

consist of a facilities located in the United States (the “Facilities”). The Facilities are not
licensed health care facilities. The Facilities are marketed through brochures as
“Independent Retirement Living” and require that at least one resident be at least the
age of b. The marketing materials and resident leases specifically state that the
Facilities do not provide any health care services. Each Facility generally offers
amenities such as a common dining area, an activity room, a barber and beauty salon,
guest accommodations, a large screen TV lounge, community grounds, and, in some
instances, a chapel. Additionally, the hallways and common bathroom areas of the
Facilities are equipped with handrails.

   The Lease Agreement

    A resident of a Facility (the “Resident”) enters into a lease agreement (the “Lease

Agreement”) for an initial term of between c days and d months and continues month-to-
month thereafter. The Lease Agreement entitles the Resident to individual living
quarters within a Facility in exchange for fixed monthly payments (the “Monthly Rent”).
The living quarters include at least one bedroom, a kitchenette, bathroom, and living
room area. Taxpayer represents that any amounts to be received by Taxpayer that are
attributable to personal property leased in connection with the Facilities will not exceed
15 percent of the total rent for any taxable year attributable to both the real and personal
property leased under or in connection with such lease with the meaning of section
856(d)(1)(C).

    Each Lease Agreement specifically stipulates that the Resident is responsible for

his or her own personal and health care needs and that the relevant facility is not
licensed as a nursing or health care facility. Thus, the Resident must be capable of
providing for his or her own health care and personal care needs and is responsible for
the provision of such care for the duration of the Lease Agreement. Also included as
part of the Monthly Rent (and not separately stated) are the Resident Services
described below.
PLR-118894-19 3

   Resident Services

    The following services are provided at the Facilities and included in the Monthly

Rent: (1) three daily meals plus daily snacks; (2) light housekeeping including linen
service; (3) scheduled transportation to and from local destinations and group activities;
(4) an emergency call system device; (5) utilities such as tap water, heat, electricity,
sewer, basic cable television, and garbage collection; and (6) upon a Resident’s
request, hard plastic containers are provided to safely dispose of hypodermic needles
and other sharp medical instruments (the “Resident Services”). The emergency call
system device is a hand-held, wearable device that is operated by an unrelated third
party (the “Emergency Operator”). The device connects the Resident to an agent of the
Emergency Operator who will (i) confirm the location of the Resident (ii) call emergency
services, roadside assistance, locksmith, or family of the Resident, and (iii) stay on the
line with the Resident until the situation is resolved.

      The Facilities intend to provide amenities and services to Residents for their

living convenience and social purposes. The Facilities specifically do not provide a
number of health care related services. They do not conduct preventative health
screening, monitor the Residents’ medical needs, or provide for a streamlined resident
transfer program to a facility with higher health care options. Prior to move-in, the
Facilities may conduct pre-admission interviews to ensure that the Residents are
ambulatory and have no apparent cognitive decline that would interfere with activities of
daily living. Additionally, the Facilities do not require a Resident to obtain consent from
the Facility before the Resident contracts with third-parties for in-home or other health
care services. They also do not provide for supervision of a Resident’s oxygen
equipment or require the employees on the premises to be licensed nurses. Finally, the
Facilities do not keep “Do Not Resuscitate” forms on file and do not have 24-hour on-
site staff to monitor the Residents. However, in the event of an emergency, on-site
personnel are allowed to call 911.

   Operational Structure of Taxpayer

    Currently, a wholly-owned taxable REIT subsidiary (“TRS”) of Taxpayer (the

“PropCo TRS”) holds the Facilities. The PropCo TRS leases the Facilities to another
wholly-owned TRS of Taxpayer (the “OpCo TRS”). The OpCo TRS subleases the
individual residences to the Residents under the Lease Agreements. The OpCo TRS
entered into a management contract with an eligible independent contractor, within the
meaning of section 856(d)(9), (the “Operator”) to provide the Resident Services (the
“Management Contract”). Under the Management Contract, the Operator is responsible
for the Resident Services, as well as staffing, managerial oversight, accounting
services, information technology services, billing, collections, marketing, maintenance,
advertising, rate setting (subject to the approval of Taxpayer/OpCo TRS), admissions
and regulatory compliance matters.
PLR-118894-19 4

    Upon receipt of the ruling, Taxpayer intends to revoke the PropCo TRS’s election

to be treated as a corporation for U.S. federal income tax purposes and its TRS
election. As a result of these revocations, the PropCo TRS will become a disregarded
entity of Taxpayer. The OpCo TRS will assign the Lease Agreements (subleases of
individual residences in the Facilities) to the PropCo TRS. The PropCo TRS and the
OpCo TRS will enter into a management contract providing that the OpCo TRS will be
responsible for providing the Resident Services. The OpCo TRS will subcontract the
provision of the Resident Services to the Operator who will continue providing the
Resident Services pursuant to the Management Contract. The PropCo TRS will collect
the Monthly Rent from the Residents and remit the payment to the OpCo TRS for the
Resident Services under arm’s-length terms based on principles described under
section 482.

   Rulings Requested

    Taxpayer requests the following rulings: (1) the Facilities do not meet the

definition of health care facilities under section 856(e)(6)(D)(ii); (2) the OpCo TRS is not
precluded from directly or indirectly operating or managing the Facilities for purposes of
section 856(l)(3)(A); and (3) the provision of services, including the Resident Services,
by the Operator does not give rise to impermissible tenant service income, and will not
cause any portion of the rents received by Taxpayer (through PropCo TRS as a
disregarded entity of Taxpayer) to fail to qualify as rents from real property under
section 856(d).

   LAW & 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.

    Section 1.856-4(b)(1) provides that 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 that are of a similar class are customarily provided with
the service.
PLR-118894-19 5

    Section 856(d)(2)(C) excludes impermissible tenant service income 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 a REIT for services furnished or rendered by
the REIT to tenants of such property, or for managing or operating such property.

   Section 856(d)(7)(C)(i) excludes from the definition of impermissible tenant

service income amounts received for 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 the REIT.

   Section 856(e)(6)(D)(i) defines qualified health care property as any real

property, and any personal property incident to such real property, which is a health
care facility or is necessary or incidental to the use of a health care facility.

     A health care facility is defined in section 856(e)(6)(D)(ii) as a hospital, nursing

facility, assisted living facility, congregate care facility, qualified continuing care facility
(as defined in section 7872(g)(4)), or other licensed facility which extends medical or
nursing or ancillary services to patients and which, immediately before the termination,
expiration, default, or breach of the lease of or mortgage secured by such facility, was
operated by a provider of such services which was eligible for participation in the
Medicare program under Title XVII of the Social Security Act (42 U.S.C.A. § 1395 et
seq.) with respect to such facility.

   Section 856(l)(1) defines TRS to mean, with respect to a REIT, a corporation

(other than a REIT) if (A) such REIT directly or indirectly owns stock in such corporation,
and (B) such REIT and such corporation jointly elect that such corporation shall be
treated as a TRS of such REIT.

   Section 856(l)(3)(A) provides that any corporation that directly or indirectly

operates or manages a lodging facility or a health care facility is not a TRS. Section
856(l)(4)(B) provides that the term “health care facility” has the meaning given such
term in section 856(e)(6)(D)(ii).

   In Rev. Rul. 2002-38, 2002-2 C.B. 4, a REIT pays its TRS an arm’s length rate to

provide noncustomary services to tenants. The REIT does not separately state charges
to tenants for the services. Thus, a portion of the amounts received by the REIT from
tenants represents an amount received for services provided by the TRS. The TRS
employees perform all of the services and the TRS pays all of the costs of providing the
services. The revenue ruling concludes that the services provided to the REIT’s tenants
are considered to be rendered by the TRS, rather than the REIT, for purposes of section
856(d)(7)(C)(i).

  The Facilities focus on providing the Residents a convenient and social living

environment. While they do offer amenities and services that may be found in
PLR-118894-19 6

congregate care health care facilities, the emphasis of the amenities and services
provided at the Facilities is not the health and wellbeing of the Residents. Although the
Residents are provided with shared meals and transportation to local destinations and
group activities, these Resident Services are provided for convenience and to enhance
the social lives of the Residents as opposed to providing a health benefit. The Facilities
provide an emergency call device to Resident, however the device connects to the
Emergency Operator, which is a third party unrelated to Taxpayer, PropCo TRS, OpCo
TRS, and Operator. The employees of the Facilities are not licensed nurses and are
not available 24 hours to monitor or assist Residents. Furthermore, the Residents are
screened prior to signing the Lease Agreement to ensure that they are capable of
providing for their own health care needs, but the Residents are not monitored after they
move in, which suggests that the Facilities are not meant to be relied on to provide for
health care needs. Considering all the facts and circumstances, the services provided
at the Facilities are not focused on the health and well-being of the Residents.

   The Resident Services will be provided by the Operator through a subcontract

with the OpCo TRS. Taxpayer represents that the OpCo TRS will be compensated at
an arm’s length rate for the provision of the Resident Services. Although the PropCo
TRS will collect the compensation for the Resident Services as part of the Monthly Rent,
the Resident Services are not considered to be rendered by PropCo TRS or the
Taxpayer for purposes of section 856(d)(7)(C)(i).

   CONCLUSION:

    Accordingly, based on the facts as represented, we rule that the Facilities do not

constitute health care facilities within the meaning of section 856(e)(6)(D)(ii), and, as a
result, direct or indirect operation or management of the Facilities by the OpCo TRS will
not prevent the OpCo TRS from being treated as a TRS under section 856(l)(3)(A).
Additionally, the provision by the Operator of the services described above, including
the Resident Services that are not separately stated, will not be considered to be
provided by Taxpayer and, therefore, the provision of these services will not give rise to
impermissible tenant service income and will not cause any portion of the rents received
by Taxpayer (through PropCo TRS as a disregarded entity of Taxpayer) 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 whether Taxpayer
otherwise qualifies as a REIT or whether PropCo TRS or OpCo TRS otherwise qualifies
as a TRS of Taxpayer under part II of subchapter M of chapter 1 of the Code.
Furthermore, no opinion is expressed as to whether the Monthly Rents otherwise qualify
as rents from real property within the meaning of section 856(d). Specifically no opinion
is expressed as to whether any of the services provided at the Facilities, including the
Resident Services, are customary services within the meaning of section 1.856-4(b)(1).
PLR-118894-19 7

  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 M. Hoffenson__________________
                                   Andrea M. Hoffenson
                                   Chief, Branch 2
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)