IRS rules a REIT's senior independent-living facilities aren't health care facilities and the resident services won't taint its rents

Plain-English summary

A real estate investment trust (REIT) gets its favorable tax treatment only if almost all of its income is "good" REIT income, most importantly rents from real property, and if it does not directly run certain kinds of operating businesses. This REIT owns age-restricted independent-living facilities for seniors. It wanted two assurances before changing how the properties are managed. First, that the facilities are not "health care facilities" under § 856(e)(6)(D)(ii), which matters because a subsidiary that operates a health care facility cannot qualify as a taxable REIT subsidiary (TRS) under § 856(l)(3)(A). Second, that the bundle of resident services (meals, housekeeping, transportation, social activities, an emergency call system) will not count as "impermissible tenant service income" that would disqualify part of the rent under § 856(d). The IRS agreed on both points. Because the facilities provide no nursing or medical care and residents remain responsible for their own health, they are not health care facilities, so the subsidiary can still be a TRS. And because the services will be provided by a TRS or an independent contractor paid at arm's length (citing Rev. Ruls. 2002-38 and 2003-86), they are treated as furnished by those parties rather than by the REIT, so the rents still qualify as rents from real property. The IRS expressly did not rule on whether the entity otherwise qualifies as a REIT.

Ruling snapshot

• Question: Are a REIT's senior independent-living facilities "health care facilities," and do the resident services create impermissible tenant service income that would spoil the rents?
• Outcome: Approved (not health care facilities; services do not create impermissible tenant service income)
• Key authorities: IRC § 856(d), (e)(6)(D)(ii), (l)(3)(A); Treas. Reg. § 1.856-4(b)(1); Rev. Ruls. 2002-38, 2003-86; IRC § 482

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

                                                               Third Party Communication: None
 Number: 202226002                                             Date of Communication: Not Applicable
 Release Date: 7/1/2022
                                                               Person To Contact:
 Index Number: 856.00-00
                                                               -------------------, ID No. -----------------
 -------------------                                           Telephone Number:

 -------------------------                                     --------------------
 --------------------------------                              Refer Reply To:
 ----------------------------------------------                CC:FIP:B01
 ------------------------------------------                    PLR-120379-21
                                                               Date:
                                                               March 31, 2022




Legend

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

PropCo           =        --------------------------------

Partner          =        -----------------------------------------

Subsidiary       =        --------------------------------------

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

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

a                =        ---

b                =        --

c                =        ---



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

       This is in reply to a letter dated September 29, 2021, and supplemental
correspondence requesting rulings on behalf of Taxpayer. Taxpayer has requested
rulings with respect to the independent retirement living facilities described below.
PLR-120379-21                                  2


                                           FACTS

      Taxpayer is a State limited liability company that elected to be a real estate
investment trust ("REIT") under sections 856 through 860 of the Internal Revenue Code
("Code"). Taxpayer primarily invests in independent living and assisted living facilities.

       Independent Living Facilities

         Taxpayer holds (through entities described later) interests in age-restricted,
senior residential facilities in various markets in the United States (the "Facilities").
Currently, a Facilities are operational and b Facilities are under construction. The
Facilities require that one resident living in each unit be at least the age of c. The
marketing materials and resident leases specifically state that the Facilities do not
provide any health care services, and the Facilities are not licensed health care
facilities. Each Facility generally offers amenities such as a common dining area,
beauty salon, a theatre room, bistro, and enhanced fitness and workout rooms.
Hallways and bathrooms of the Facilities are equipped with handrails.

       Taxpayer will make changes in the management and operation of the Facilities
upon a date as soon as feasible after receiving the requested rulings set forth below
(the "Effective Date"), which will be no later than Date. This description of the Facilities
pertains to periods beginning on or after the Effective Date.

       Resident Agreements

        A resident of a Facility (a "Resident") will enter into a month-to-month lease
agreement (a "Resident Agreement"). The Resident Agreement will entitle the Resident
to individual living quarters within a Facility and certain services in exchange for fixed
monthly payments (the "Monthly Rent").

        The living quarters will include a kitchenette, bathroom, and living room area and
at least one bedroom (or a combined bedroom/living area). Taxpayer represents that
the amount of rent attributable to personal property leased under, or in connection with,
a Resident Agreement will not, for any taxable year, exceed 15 percent of the total rent
attributable to both the real and personal property leased under, or in connection with,
such Resident Agreement within the meaning of section 856(d)(1)(C).

         Each Resident Agreement will specifically stipulate 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 Resident Agreement.
PLR-120379-21                                3

       Resident Services

        The following services will be provided at the Facilities and included in the
Monthly Rent: (1) a specified number of meals per day, generally three, at a central
dining facility; (2) light housekeeping including linen service; (3) scheduled
transportation to appointments, shopping and social activities; (4) social events,
community activities, and exercise classes; (5) an emergency call system; (6) utilities
except for personal phones and others expressly listed in the Resident Agreement; and
(7) upon a Resident's request, provision of hard plastic containers for disposal of
hypodermic needles and other sharp medical instruments (together, the "Resident
Services"). There generally will be no separately stated charge for the Resident
Services. From time to time, an activity or service may have an additional fee, and
Residents will be given notice. Most Facilities will have open parking lots that can be
used without charge. Some Facilities will have carports or garages, for which a monthly
fee will be charged. All parking facilities will be unattended. The emergency call
system will include pull cords or call buttons in the units that enable Residents to
contact a third-party operator who can contact the resident manager or concierge or
emergency services.

         The Facilities are intended to provide amenities and services to Residents for
their living convenience and social purposes. The Facilities will not provide health care
related services. They will not employ licensed nurses or other healthcare professionals
as on-site staff. They will 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. The Facilities will provide a program for flu
shots, which will be administered by a third party and will be for the convenience of the
residents, who will pay for the service. Before moving in, residents will represent that
they are capable of providing for all of their health care and personal needs. The
Facilities will not require a Resident to obtain consent from the Facility to contract with
third parties for in-home or other health care services. The Facilities also will not
provide for supervision of a Resident's oxygen equipment. The Facilities will not keep
"do not resuscitate" forms or any Residents' health records on file. The Facilities
generally will have 24-hour staffing, with either a resident manager or concierge who will
perform duties typical of those of a resident manager in an apartment building. The
resident managers, concierges and other staff will undertake no health monitoring, but
in the event of an emergency, they will be allowed to call 911.

        Taxpayer represents that the services that will be provided to tenants of the
Facilities, including the Resident Services, are customarily furnished or rendered to
tenants of age-restricted, non-healthcare independent living facilities in the geographic
markets in which the Facilities are located.
PLR-120379-21                                4

       Operating Structure

         Taxpayer owns a majority interest in PropCo, a limited partnership treated as a
partnership for federal income tax purposes. Partner owns the remaining interest in
PropCo. Propco holds its interest in each of the Facilities through a separate limited
liability company treated as a partnership for federal income tax purposes (each, a
"PropCo Sub"). PropCo holds all of the interests in each PropCo Sub other than small
profits interests held by individuals. Taxpayer also owns all of the interests in
Subsidiary, a taxable REIT subsidiary ("TRS") of Taxpayer.

        Each PropCo Sub will be the lessor under the Resident Agreements for units in
its Facility. Each PropCo Sub will also enter into a contract with a third party (an
"Operator") under which the Operator will provide the Resident Services in the PropCo's
Facility (a "Management Contract"). The Operator for a Facility may be Subsidiary, an
independent contractor from whom Taxpayer derives or receives no income (an "IK"), or
a partnership between Subsidiary and an IK. In the case of a Management Contract
with Subsidiary, Subsidiary may subcontract with a third party to provide the Resident
Services.

       Under each Management Contract, the Operator will be compensated at an
arm's length rate for the Resident Services, applying principles described under section
482.

       Rulings Requested

         Taxpayer requests rulings that, beginning with the Effective Date: (1) the
Facilities will not meet the definition of health care facilities under section
856(e)(6)(D)(ii), and, as a result, the direct or indirect operation or management of the
Facilities by Subsidiary will not prevent Subsidiary from being treated as a TRS under
section 856(l)(3)(A); and (2) the provision of services described in this ruling letter,
including the Resident Services, by the Operator will not give rise to impermissible
tenant service income, and will not cause any portion of the rents received by Taxpayer
to fail to qualify as rents from real property under section 856(d).

                                   LAW & ANALYSIS

        Section 856(c) provides that a corporation is not treated as a REIT for a taxable
year unless at least 95 percent of its gross income is derived from sources listed in
section 856(c)(2) and at least 75 percent of its gross income is derived from sources
listed in section 856(c)(3) (excluding from both computations any gross income from
prohibited transactions). Section 856(c)(2) and (3) both list 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
PLR-120379-21                                   5

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.

        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) 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 the REIT is not treated as furnished, rendered, or provided by the
REIT.

         Section 856(e)(6)(D)(i) defines qualified health care property as any real property
(including interests therein), 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.

         Section 856(e)(6)(D)(ii) defines health care facility 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 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
PLR-120379-21                                6

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).

        In Rev. Rul. 2003-86, 2003-2 C.B. 290, a REIT owned all of the stock of a TRS.
The TRS was a partner in a partnership with a corporation that qualified as an
independent contractor with respect to the REIT. The partnership provided non-
customary services to the REIT's tenants that were contracted and paid for separately
from the rent. The REIT did not receive income directly from the partnership or the
independent contractor but did receive quarterly dividends from the TRS. The ruling
notes that the REIT's only interest in the partnership was through the TRS and that
services furnished or rendered through a TRS are not treated as rendered by a REIT.
Therefore, the ruling concluded that the services provided by the partnership were
treated as provided by the TRS to the extent of its interest in the Partnership, and the
REIT would not be treated as providing impermissible tenant services to its tenants. The
ruling held that, under these circumstances, the services provided by the partnership
between the TRS and the independent contractor would not cause the rents paid to the
REIT to fail to qualify as rents from real property.

         While the Facilities will offer amenities and services found in congregate care
facilities, the emphasis of the amenities and services provided at the Facilities is the
Residents' convenience and social lives. The absence of nurses, other medical
personnel, health screenings, monitoring of medical needs, or transfer programs
suggests that the Facilities will not have a health care focus. The terms of the Resident
Agreements will place responsibility for health care on the Residents. 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 are services that will be furnished to the tenants of the
Facilities, the Residents. Based on Taxpayer's representations that Operator will be
Subsidiary (a TRS), an IK, or a partnership between Subsidiary and an IK and will be
compensated at an arm's-length rate for the provision of the Resident Services, the
Resident Services will not be considered to be rendered by Taxpayer for purposes of
section 856(d)(7). The inclusion of charges for the Resident Services in Monthly Rent,
with no separately stated charge, does not cause the Resident Services to be
considered rendered by the REIT.
PLR-120379-21                                  7

                                       CONCLUSION

       Accordingly, based on the facts as represented, we rule that, beginning with the
Effective Date: (1) the Facilities will not be health care facilities within the meaning of
section 856(e)(6)(D)(ii), and, as a result, the direct or indirect operation or management
of the Facilities by Subsidiary will not prevent Subsidiary from being treated as a TRS
under section 856(l)(3)(A); and (2) the provision by the Operator of the services
described above, including the Resident Services for which fees are not separately
stated, will not give rise to impermissible tenant service income and will not cause any
portion of the rents received by the Taxpayer (through the PropCo Subs) 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 (1) whether
Taxpayer otherwise qualifies as a REIT, (2) whether Subsidiary otherwise qualifies as a
TRS of Taxpayer, (3) whether any services provided at the Facilities are customary
services within the meaning of section 1.856-4(b)(1), or (4) whether the Monthly Rents
otherwise qualify as rents from real property within the meaning of section 856(d). In
addition, no opinion is expressed or implied on the treatment of any amounts received
or accrued by Taxpayer with respect to the Facilities for periods ending before the
Effective Date.

      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,


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




cc: