Airport terminal charges and deemed-loan interest qualified as REIT income

Plain-English summary

A REIT held an interest in a partnership developing and operating a new international airport terminal. Airlines would pay for exclusive space based on square footage and for common terminal space based on departing-passenger counts, with fixed contractual rates and specified discounts. The agreements did not make rent depend on anyone’s income or profits, personal-property rent would remain within the 15% limit, and terminal services would either be customary landlord services or be provided through a taxable REIT subsidiary or qualifying independent contractor. The IRS ruled that the REIT’s share of the airline charges qualifies as rents from real property for both REIT income tests. It also exercised its IRC § 856(c)(5)(J) authority to treat interest on a deemed prepaid-rent loan arising under the terminal’s § 467 master lease as qualifying income for the 75% test because the loan arose from prepaid rent for real property.

Ruling snapshot

• Question: Do the airline terminal charges qualify as rents from real property, and does interest on the section 467 prepaid-rent loan qualify for the REIT’s 75% income test?
• Outcome: Approved; both the airline rents and deemed-loan interest receive qualifying-income treatment
• Key authorities: IRC §§ 467, 512(b)(3), 856(c), 856(d), 856(l); Treas. Reg. §§ 1.467-1, 1.467-4, 1.856-4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202510012 Third Party Communication: None
Release Date: 3/7/2025 Date of Communication: Not Applicable
Index Number: 856.00-00, 856.04-00,
856.05-00 Person To Contact:
-----------------------, ID No. -----------------
------------------------------------ Telephone Number:
----------------------------------------------- --------------------
--------------------- Refer Reply To:
------------------ CC:FIP:B02
---------------------------- PLR-118311-22
Date:
November 14, 2024

LEGEND

Taxpayer = ------------------------------------------------------
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Partnership = ----------------------------------------------

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

Public Agency = ------------------------------------------------------
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Company A = ------------------------------------------------------
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Company B = ------------------------------------------------------
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Company C = ------------------------------------------------------
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State = -------------

Property = ------------------------------------------------------
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PLR-118311-22 2

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

Date 2 = --------------------------

Year 1 = -------

Year 2 = -------

a = ---

b = -----

c = --

d = --

e = ---

f = --

g = ---

h = ---

i = --

k = --

l = ----

m = ---

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

  This ruling responds to a letter dated September 16, 2022, and subsequent

correspondence, requesting rulings on behalf of Taxpayer. Specifically, you have
requested the following rulings:

(1) Amounts received from Airline Users under certain leases, licenses, or other
    similar agreements are rents from real property under section 856(d) of the
    Internal Revenue Code (“Code”) for purposes of section 856(c)(2) and (3); and

PLR-118311-22 3

(2) Pursuant to section 856(c)(5)(J), the interest on the deemed loan created by the
section 467 rental agreement will be treated as qualifying income for purposes of
section 856(c)(3).

                                    FACTS

   Taxpayer is a State limited liability company and elected to be taxed as a real

estate investment trust (“REIT”) beginning with its taxable year ended Date 1. Taxpayer
owns a% of Partnership, a State limited liability company, which is treated as a
partnership for U.S. federal income tax purposes. Partnership was formed for the
purpose of aggregating equity financing for the development of a new, expanded
passenger terminal facility at Property for which construction began in Year 1
(“Terminal”).

    Partnership, through wholly-owned entities that are disregarded from Partnership

for U.S. federal income tax purposes, owns b% of the equity interests in Subsidiary, a
State limited liability company that has elected to be treated as a corporation for U.S.
federal income tax purposes. Taxpayer and Subsidiary have made a joint election for
Subsidiary to be treated as a taxable REIT subsidiary (“TRS”) with respect to Taxpayer.

  a. Lease Agreement with Public Agency

    In connection with the Terminal project, Partnership and Public Agency have

entered into a lease (“Public Agency Lease”) pursuant to which Public Agency leases to
Partnership certain areas of land at Property and the buildings and improvements
located thereon, including existing structures and the to-be-constructed Terminal (the
“Leased Premises”). In addition to access and use of the Leased Premises, Public
Agency has granted Partnership certain non-exclusive rights-of-ways and other access
rights to cross other parts of Property in which Public Agency holds rights. Taxpayer
represents that Public Agency Lease is treated for U.S. federal income tax purposes as
a master lease comprised of three separate leases, which sequentially provide to
Partnership the use of Leased Premises as certain milestones are met. The first lease
began in Year 1 and all three leases will expire on Date 2.

   Taxpayer further represents that Public Agency Lease is a true lease for U.S.

federal income tax purposes and that the leasehold interest in the Leased Premises is a
qualifying real estate asset within the meaning of section 856(c)(5)(B) for purposes of
the REIT asset test under section 856(c)(4)(A).

  Pursuant to Public Agency Lease, Partnership has agreed to design and

construct Terminal on the Leased Premises and will lease Terminal from Public Agency.
Taxpayer represents that the land, building, and improvements that will comprise
Terminal are and will be real property for purposes of section 856.
PLR-118311-22 4

    Partnership has also agreed to design and construct certain storm drains,

electrical duct banks, upgrades to a light rail passenger distribution system at Property,
and barriers to prevent large trucks from approaching Terminal, none of which are or
will be part of the Leased Premises (collectively the “Off-Premises Facilities”).
Partnership will assign its rights and obligations with respect to the Off-Premises
Facilities to Subsidiary. Pursuant to an agreement (the “Design Build Agreement”),
Partnership and Subsidiary will engage Company A, an unrelated third-party, to design
and construct Terminal and the Off-Premises Facilities in exchange for arm’s length
fees. Under the Design Build Agreement, Company A will acknowledge that Subsidiary
is the party under the contract with respect to the provisions related to the Off-Premises
Facilities. Taxpayer represents that Company A is an independent contractor with
respect to Taxpayer as defined in section 856(d)(3). Taxpayer further represents that it
will not derive or receive any income from Company A.

    The costs and expenses associated with the design and construction of Terminal

will be treated as in-kind rent from Partnership to Public Agency under Public Agency
Lease. The amount of the construction costs and the times that they are required to be
paid are fixed and determinable under the terms of Public Agency Lease as of the
commencement date, and such tenant improvements are in lieu of rent. Additionally,
Public Agency Lease allocates all of the fixed rent straight-line over the term of Public
Agency Lease.

   The terms of Public Agency Lease will cause Public Agency Lease to be treated

as a section 467 rental agreement within the meaning of § 1.467-1(c)(1). In addition,
the Public Agency Lease includes prepaid rent and a section 467 loan within the
meaning of § 1.467-4 made by Partnership to Public Agency (“Prepaid Rent Loan”). As
a result, over the term of Public Agency Lease, as the principal of Prepaid Rent Loan
amortizes, Partnership will recognize as income section 467 interest (“Prepaid Rent
Loan Interest”) on the Prepaid Rent Loan and will deduct rental expenses according to
the section 467 proportional rental accrual method schedule set forth in Public Agency
Lease.

   Pursuant to an agreement (the “Assignment Agreement”), Partnership has

assigned to Subsidiary, and Subsidiary has assumed, Partnership’s rights and
obligations under Public Agency Lease and Design Build Agreement with respect to the
design and construction of the Off-Premises Facilities in exchange for payments that, in
the aggregate, equal an arm’s length, fixed amount. Taxpayer represents that
Subsidiary will treat these rights and obligations as a long-term contract within the
meaning of section 460 and will therefore recognize taxable income under section 460,
and that Taxpayer will not recognize any income related to these activities. The fixed
amount paid by Partnership to Subsidiary pursuant to the Assignment Agreement will be
treated as fixed rent paid by Partnership to Public Agency for purposes of section 467
as costs and expenses incurred by Partnership in connection with the design and
construction of Terminal.
PLR-118311-22 5

   b. Management Agreements

  Pursuant to a program management agreement, Partnership will engage

Company B to provide consulting and management services with respect to the design,
development, and construction of Terminal in exchange for arm’s length management
fees. Company B’s services will include overseeing the day-to-day management of the
design and construction of Terminal, acting as the principal point of contact with all
construction contractors, establishing a working relationship with Public Agency, and, in
conjunction with Partnership, developing the manuals, policies, and procedures to be
used during the design and construction of Terminal.

   Pursuant to a management services agreement, Partnership will engage

Company C to provide consultation and management services with respect to the
operation of Terminal as part of a modern international airport in exchange for arm’s
length management fees. Company C’s services will include assisting with the
development of operational policies, procedures, budgets, schedules, and internal
reports, conducting market research and compiling relevant statistics, reviewing and
advising on various agreements, and providing experienced management personnel for
secondment to Partnership.

  Taxpayer represents that both Company B and Company C are independent

contractors with respect to Taxpayer as defined in section 856(d)(3). Taxpayer further
represents that it will not derive or receive any income from either Company B or
Company C.

   c. Airline User Agreements

   The Use of Space

    Each airline whose flights will depart from and/or arrive at Terminal gates

(individually an “Airline User”) will enter into an agreement with Partnership (individually
an “Airline User Agreement”). Taxpayer represents that Airline User Agreements will
have a term of multiple years, expected to be between c to d years and generally less
than e years in length, and in no event will the term of an Airline User Agreement be
less than a days.

    Pursuant to each Airline User Agreement, the relevant Airline User will be entitled

to use certain common space in Terminal and may also be entitled to use specified
exclusive space. Exclusive space leased to an Airline User may consist of exclusive
VIP check-in space, office space, support area space, and/or specific lounge space (the
“Airline Exclusive Space”). Terminal common space that all Airline Users will have the
right to use under each Airline User Agreement will generally include the gates, the
ramp area and taxiways; the building structure; the federal inspection service facility
(the “FIS facility”); passageways; public areas; retail halls; areas for meeting and
PLR-118311-22 6

greeting; pedestrian, vehicle, and aircraft access; ingress and egress rights; and rights
with respect to utilities and other services for Terminal as reasonably necessary and
appropriate for the Airline User’s operations and air transportation business, but
excluding areas that are Airline Exclusive Space, space leased pursuant to retail leases,
and space set aside for certain government agencies (the "Airline Common Space”).
Under each Airline User Agreement, the Airline Common Space will be available for use
by all Airline Users and their employees, patrons, and guests.

    Partnership employs industry knowledge and experience regarding flight

forecasts and terminal design parameters in selecting Airline Users with which to enter
into Airline User Agreements. However, a flight schedule cannot be specified for the
duration of an Airline User Agreement. Precise flight schedules are established in f
month blocks (each block, a “Scheduling Season”) and, in general, establishing an
Airline User’s flight schedule into and out of Property for a Scheduling Season (for each
such Airline User, its “Flight Schedule”) requires negotiation and coordination between
the relevant Airline User and a number of agencies and entities, including the Federal
Aviation Administration, foreign aviation agencies (for international travel), Public
Agency, and other local or regional regulatory or governmental bodies. Due to the
complexity of scheduling and limited space at Property to add additional flights, Airline
Users rarely modify their Flight Schedule from one Scheduling Season to the next.

    Pursuant to the Airline User Agreements, g days before the start of each

Scheduling Season, each Airline User is required to provide Partnership such Airline
User’s Flight Schedule for the upcoming Scheduling Season. Partnership then
allocates gate slots at Terminal throughout that Scheduling Season to each Airline User
based on the Airline User’s Flight Schedule for that Scheduling Season. Once finalized,
the gate allocation schedule is a binding contractual obligation of Partnership to each
Airline User. An Airline User’s allocated gate slots effectively represent its allocated
portion of Airline Common Space throughout the Scheduling Season, as the Airline
User, and its guests and customers, will use the Airline Common Space in connection
with the Airline User’s scheduled flights.

    Taxpayer represents that it will not oversell capacity of the Airline Common

Space. Once Partnership has established the amount of gate capacity (and therefore
Airline Common Space) at Property that is committed to existing Airline Users for a
given Scheduling Season, it knows how much excess capacity is available for potential
new Airline Users.

    All Airline Users will also have the right to use certain shared equipment in the

Airline Common Space (the “Common Equipment”), including check-in desks and
kiosks, computer equipment and related check-in software, baggage scales and
baggage tag printers, as well as other physical equipment that will support the Airline
Users’ operations, such as passenger boarding bridges, certain ramp equipment, flight
PLR-118311-22 7

and baggage information display systems, and baggage handling systems.1 Taxpayer
represents that Subsidiary or an independent contractor from whom the Taxpayer
derives or receives no income will operate, maintain, and repair such personal property.

   Amounts Received Under Airline User Agreements

   Pursuant to each Airline User Agreement, the relevant Airline User will make

payments to Partnership in exchange for the right to use (i) the Airline Exclusive Space
(the “Exclusive Space Charge”) (if applicable) and (ii) the Airline Common Space and
Common Equipment (the “Common Space Charge” and collectively with the Exclusive
Space Charge, the “Airline Rents”).

    Taxpayer represents that with respect to each Airline User Agreement, rent

attributable to personal property, including the Common Equipment, which is leased
under, or in connection with, the lease of the Airline Exclusive Space and Airline
Common Space will not exceed 15% of the total rent for the taxable year attributable to
both the real and personal property leased under, or in connection with, such Airline
User Agreement. Taxpayer further represents that the amount of the Airline Rents does
not depend in whole or in part on the income or profits derived by any person from the
Leased Premises within the meaning of section 856(d)(2)(A).

    Under each applicable Airline User Agreement, the Exclusive Space Charge will

be paid on a monthly basis and calculated as a specified dollar amount (adjusted
annually for inflation by reference to the Consumer Price Index (“CPI”)) per square foot
of leased Airline Exclusive Space. Different rates will apply to different types of space
within the Airline Exclusive Space. In addition, the Airline Exclusive Space may include
specified space for use as a passenger lounge. If such an Airline User grants a right to
a third-party (i.e., an airline passenger flying with another Airline User) to access the
lounge space on an hourly, daily, or similar per use basis, the Airline User must pay
Partnership h% of the gross revenue from the sale of such right. This revenue sharing
provision does not apply to lounge access granted by Airline User based on an
individual’s travel class of service, loyalty status, or similar criteria.

   The Common Space Charge will be paid on a monthly basis and based upon the

number of passengers that depart on the Airline User’s flights from Terminal (“Enplaned
Passengers”). Specifically, the Common Space Charge will be calculated as the
product of (i) a specific dollar amount (adjusted annually for inflation by reference to the
CPI) and (ii) the number of Enplaned Passengers in a given month. In determining the
appropriate dollar amount per Enplaned Passenger to charge an Airline User,
Partnership considered both projected Enplaned Passengers and historical cancellation
patterns. Taxpayer represents that in the last k years only l percent of scheduled flights

1 The check-in area of the Airline Common Space will contain numerous computer kiosks that will enable

self-service check-in and baggage processing and drop-off for customers of any Airline User. The shared
computer equipment and software will be provided by an independent third-party specialist in airport
technology.
PLR-118311-22 8

have been cancelled at Property. Additionally, Taxpayer represents that Partnership
anticipates actual Enplaned Passengers for each Airline User each month will be at
least m percent of projected Enplaned Passengers for such month. Finally, Taxpayer
represents that, other than in situations where an Airline User either discontinued its
operations at Property or was prevented from operating by a governmental agency,
Taxpayer is unaware of any Airline User that failed to have Enplaned Passengers
during any given month. Thus, an Airline User’s Common Space Charge each month
will be at least m percent of the projected amount based on the Airline User’s Flight
Schedule for that month.

    The Common Space Charge may be discounted in certain circumstances, for

example, if the number of Enplaned Passengers exceeds a specified amount for the
year or if an Airline User operates at least a specified minimum number of daily flights
departing from Terminal. Taxpayer represents that these discounts will be set dollar
amounts per passenger or set percentages laid out in the Airline User Agreement and
will not be based on the income or profits of any person. Not all Arline User
Agreements will provide for a discount.

    Certain Airline User Agreements will provide that the relevant Airline User is not

permitted to use any other Property terminal unless Terminal is unusable (e.g., due to a
natural disaster). If such Airline User uses another terminal despite this provision,
Airline User will remain obligated to pay the Common Space Charge as if the Enplaned
Passengers departing from such other terminal departed from Terminal. Unless Airline
User proves otherwise, airplanes will be deemed to be fully enplaned for this purpose.
The Airline User will also remain obligated to pay its monthly Exclusive Space Charge, if
applicable.

  Activities and Services

    Partnership will provide various usual and customary activities and services

(whether directly or by engaging Subsidiary or an independent contractor from whom
Taxpayer derives no income) necessary for the successful operation of an international
airport pursuant to Airline User Agreements (the “Included Services”). Other services
will be procured either by Airline Users themselves (the “Excluded Services”) or will be
performed by governmental authorities (e.g., the processing of arriving international
passengers).

  Included Services

  The following Included Services provided within the Airline Common Space in

connection with the Common Space Charge will be provided by Partnership, an
independent contractor from whom Taxpayer does not derive or receive any income, or
Subsidiary (“Included Services A"):

    •   Customary utilities (e.g., water, electricity, heating, and cooling)

PLR-118311-22 9

    •   Security to ensure certain restricted areas within or adjacent to the Airline
        Common Space are not accessed by unauthorized individuals as well as
        the screening of inventory and supplies at the loading docks before such
        items are delivered to retail tenants to ensure no contraband enters
        Terminal. Security will not include the provision or supervision of police
        officers or any other government agents (e.g., TSA agents).
    •   Janitorial Services for the routine cleaning of the Airline Common Space.
        Janitorial Services will not include any services specific to tenant
        requirements.
    •   Repair and maintenance of the Airline Common Space for routine
        maintenance performed on a scheduled basis (for example, changing
        lightbulbs or repainting walls) and routine repairs (for example, fixing
        cracked sidewalks or floors) within the Airline Common Space. These
        services will not include any specific upgrades requested by a particular
        tenant.
    •   Removal of trash from the Airline Common Space.
    •   Snow removal from sidewalks and ramps.


    Furthermore, the following additional Included Services provided within the

Airline Common Space in connection with the Common Space Charge will be provided
by either an independent contractor from whom Taxpayer does not derive or receive
any income or Subsidiary (“Included Services B"):
• Operation, repair, and maintenance of the Common Equipment.
• Skycap services.
• Services to passengers with disabilities (e.g., wheelchair services) and
unaccompanied minors.
• Providing agents to assist passengers within the baggage claim hall (e.g.,
baggage belt agents)
• Operations management services that involve the Virtual Apron Control
Room (the “VACR”) to direct aircraft and vehicle ground traffic within the
exterior Airline Common Space and the Integrated Terminal Operational
Control Center (the “ITOCC”) to monitor the interior Airline Common Space
and coordinating services within that space (e.g., directing that a wheelchair
be sent to a particular gate or that a spill be cleaned up in a corridor). The
VACR services do not include the movement of traffic on runways or other
aircraft movement areas under the control of Public Agency.

    Airline Users will be responsible for cleaning, repairing, maintaining, and

removing trash from their Airline Exclusive Space and, therefore, such services in
Airline Exclusive Space are not Included Services. Airline Users will be provided utilities
PLR-118311-22 10

in their Airline Exclusive Space and Partnership will charge each Airline User for the
cost of utility usage in the Airline Exclusive Space at a rate equal to the actual unit cost
paid by Partnership for such utilities, taking into account any other direct costs of
Partnership in providing the utilities, but without any mark-up or administrative charge.

    Taxpayer represents that consistent with Treas. Reg. § 1.856-4(b)(1), all services

furnished to Airline Users are customarily provided to airline tenants of other large
international airports in the United States in connection with the rental of real property.
In the event Subsidiary provides the operations management services, Subsidiary may
lease the VACR and ITOCC space from Partnership and own the equipment therein. In
that event, Taxpayer represents that the space leased to Subsidiary plus any other TRS
or related party pursuant to section 856(d)(2)(B) will represent less than 10% of the total
leased Terminal space on the applicable testing dates set forth in section 856(d)(8)(A).

   Excluded Services

    Under the Airline User Agreements, the Excluded Services are those that are

explicitly excluded from the Included Services and, therefore, must be procured directly
by Airline Users. The Excluded Services generally involve services integral to Airline
Users’ business operations, as opposed to services related to Airline Users’ use of
space within Terminal. The Excluded Services include:

      •   Aircraft deicing
      •   Aircraft fueling
      •   Aircraft cleaning
      •   Aircraft security
      •   Ground handling
      •   Baggage handling
      •   Providing passenger service agents, ticket agents, and gate agents
      •   Fitting out, staffing, cleaning, and maintaining Airline Exclusive Space.

   d. Retail User Agreement

    Partnership will also lease space in Terminal to retailers, such as restaurants and

gift shops (the “Retail Leases”). Taxpayer represents that the term of each Retail Lease
will typically be i years or longer (and in no case less than a days). Rent will generally
be calculated as a specific dollar amount per square foot of leased space plus the
greater of a percentage of gross receipts or a specified minimum amount. Taxpayer
represents that amounts received by Partnership pursuant to the Retail Leases will
qualify as rents from real property under section 856(c)(2) and (3).
PLR-118311-22 11

                             LAW AND ANALYSIS

   Section 856(c)(2) provides that at least 95 percent of a REIT’s gross income

must be derived from dividends; interest; rents from real property; gain from the sale or
other disposition of stock, securities, and real property (including interests in real
property and interests in mortgages on real property) which is not property described in
section 1221(a)(1); abatements and refunds of taxes on real property; income and gain
derived from foreclosure property; commitment fees to make loans secured by
mortgages on real property or on interests in real property or to purchase or lease real
property; gain from certain sales or other dispositions of real estate assets; and certain
mineral royalty income.

   Section 856(c)(3) provides that at least 75 percent of a REIT’s gross income

must be derived from rents from real property; interest on obligations secured by
mortgages on real property or on interests in real property; gain from the sale or other
disposition of real property (other than property described in section 1221(a)(1));
dividends or other distributions on, and gain from the sale or other disposition of,
transferable shares in other REITs; abatements and refunds of taxes on real property;
income and gain derived from foreclosure property; commitment fees to make loans
secured by mortgages on real property or on interests in real property or to purchase or
lease real property; gain from certain sales or other dispositions of real estate assets;
and qualified temporary investment income.

Ruling 1:

   Treas. Reg. § 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 the right to
use, real property of the REIT.

    Section 856(d)(1) provides that rents from real property includes (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 which is 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% 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 856(d)(2)(A) excludes from the definition of rents from real property any

amount received or accrued, directly or indirectly, with respect to any real or personal
property, if the determination of such amount depends in whole or in part on the income
or profits of any person from such property (except that any amount so received or
accrued shall not be excluded from the term “rents from real property” solely by reason
of being based on a fixed percentage or percentages of receipts or sales).
PLR-118311-22 12

    Treas. Reg. § 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 the tenants of a particular building
will be considered as customary if, in the geographic market in which the building is
located, tenants in buildings which are of a similar class are customarily provided with
the service. Additionally, where it is customary, in a particular geographic marketing
area, to furnish electricity or other utilities to tenants in buildings of a particular class, the
submetering of such utilities to tenants in such 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.

   Section 856(d)(2)(C) excludes from the definition of rents from real property any

impermissible tenant service income as defined in section 856(d)(7). Section
856(d)(7)(A) provides that impermissible tenant service income means, 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 the tenants of such property, or
for managing or operating such property. Section 856(d)(7)(C)(i), however, provides
that services furnished or rendered, or management or operation provided, through an
independent contractor from whom the REIT itself 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 for purposes of section 856(d)(7)(A). Additionally, section
856(d)(7)(C)(ii) provides that impermissible tenant service income does not include any
amount which would be excluded from unrelated business taxable income (“UBTI”)
under section 512(b)(3) if received by an organization described in section 511(a)(2).

     Treas. Reg. § 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 or directors may deal with taxes, interest, and
insurance relating to the REIT’s property. The trustees or directors may also make
capital expenditures with respect to the REIT’s property and make decisions as to
repairs of the REIT’s property, the cost of which may be borne by the REIT.

   Section 512(b)(3) provides, in part, that there shall be excluded from the

computation of UBTI 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 into service.

   Treas. Reg. § 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
PLR-118311-22 13

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 rents from real property. Generally, services are
considered rendered to the occupant if they are primarily for the tenant’s convenience
and are other than those usually or customarily rendered in connection with the rental of
rooms or other space for occupancy only.

    Section 856(d)(3) defines the term “independent contractor” as any person (A)

who does not own directly or indirectly, more than 35% of the shares or certificates of
beneficial interest in the REIT; and (B) if the person is a corporation, not more than 35%
of the total combined voting power of whose stock (or 35% of the total shares of all
classes of whose stock), or, if such a person is not a corporation, not more than 35% of
the interest in whose assets or net profits is owed, directly or indirectly, by one or more
persons owning 35% or more of the shares or certificates of beneficial interest in the
REIT.

    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 such REIT.

    In Rev. Rul. 74-198, 1974-1 C.B. 171, a REIT entered into leases with tenants of

a shopping center owned by the REIT. The leases provided for fixed annual rental
payments to be paid in monthly installments. In addition to the fixed rent, each tenant
was required to pay a percentage rental equal to an amount, if any, by which a certain
fixed percentage of its gross sales each quarter exceeded that tenant’s monthly
installments for that quarter. The Service held that the rental payments described in the
ruling qualified as rents from real property as defined in section 856(d).

   The Airline Rents are comprised of a Common Space Charge and an Exclusive

Space Charge. The Common Space Charge is based on a set amount multiplied by the
number of Airline User customers that pass through the common space. Some Airline
Users may receive a discount for an excessively large volume of passengers or
airplanes flying in and out of Terminal, but this discount is still based on a specified, set
amount. Additionally, the gate allocation schedule obligates each Airline User to use
Terminal for that Scheduling Season. If specified Airline Users do not use Terminal for
one or more flights, they are still obligated to pay Partnership for those flights. Taxpayer
represents that only l percent of flights at Property have been cancelled in the last j
years and that, other than in situations where an Airline User either discontinued its
operations at Property or was prevented from operating by a governmental agency,
Taxpayer is unaware of any Airline User that failed to have Enplaned Passengers
during any given month. Taxpayer further represents that an Airline User’s Common
Space Charge each month will be at least m percent of the projected amount based on
the Airline User’s Flight Schedule for that month.
PLR-118311-22 14

    The Exclusive Space Charge is a set amount for each type of space multiplied by

the square footage of that space. All set amounts are specified in the Airline User
Agreements and are adjusted annually for inflation based on CPI, an inflation tracking
index. Taxpayer represents that no portion of the Airline Rents depends in whole or in
part on the income or profits of any person from the Leased Premises. Taxpayer also
represents that for each Airline User Agreement, the rent attributable to personal
property, including the Common Equipment, which is leased under, or in connection
with, the lease of the Airline Exclusive Space and Airline Common Space will not
exceed 15% of the total rent for the taxable year attributable to both the real and
personal property leased under, or in connection with, such Airline User Agreement.

   Taxpayer represents that the Included Services furnished to the Airline Users are

customarily provided to airline tenants of other large international airports in the United
States in connection with the rental of real property.

    Taxpayer provides that Included Services A will be performed by either

Partnership, Subsidiary (a TRS of Taxpayer), or an independent contractor from whom
Taxpayer does not receive or derive any income. Additionally, the Included Services A
are usually and customarily rendered in connection with the rental of common space in
airport terminals and are not tailored to the needs of any particular Airline User and,
thus, would not result in UBTI under section 512(b)(3) if received by an organization
described in section 511(a)(2). Taxpayer further provides that Included Services B will
be provided by either Subsidiary or an independent contractor from whom Taxpayer
does not receive or derive any income. Accordingly, the Included Services should not
give rise to impermissible tenant service income and should not cause any portion of
the Airline Rents to fail to qualify as rents from real property under section 856(d).
Based on the information submitted and representations made, we conclude that the
Airline Rents qualify as rents from real property within the meaning of section 856(d) for
purposes of section 856(c)(2) and (3).

Ruling 2:

   Section 467(a) provides that for a lessor and lessee under a section 467 rental

agreement, there shall be taken into account for purposes of the Code for any taxable
year the sum of (1) the amount of the rent which accrues during such taxable year as
determined under section 467(b), and (2) interest for the year on the amounts which
were taken into account under section 467(a) for prior taxable years and which are
unpaid.

   Under Treas. Reg. § 1.467-1(c), a section 467 rental agreement is, generally, a

rental agreement that has increasing or decreasing rents (as described in § 1.467-
1(c)(2)), or deferred or prepaid rents (as described in § 1.467-1(e)(3)).

   Treas. Reg. § 1.467-1(e)(3) provides that section 467 interest on a section 467

loan is treated as interest for all purposes of the Code.
PLR-118311-22 15

   Section 856(c)(5)(J) provides that to the extent necessary to carry out the

purposes of Part II of Subchapter M of the Code, the Secretary is authorized to
determine, solely for purposes of such part, (i) whether any item of income or gain that
does not otherwise qualify under section 856(c)(2) or (3) may be considered as not
constituting gross income for purposes of section 856(c)(2) or (3), or (ii) whether any
item of income or gain that otherwise constitutes gross income not qualifying under
section 856(c)(2) or (3) may be considered as gross income that qualifies under section
856(c)(2) or (3).

   Legislative history indicates that Congress intended part II of subchapter M to

apply to certain “organizations specialized in investments in real estate and real estate
mortgages.” H.R. Rep. No. 2020, 86th Cong., 2d Sess. 4 (1960), 1960-2 C.B. 819, 820.
Congress intended to restrict the beneficial tax treatment of part II of subchapter M to
“what is clearly passive income from real estate investments, as contrasted to income
from the active operation of businesses involving real estate.” Id.

   Taxpayer represents that Public Agency Lease is an interest in real property and,

therefore, a real estate asset for purposes of section 856(c)(4)(A). Taxpayer’s rental
payments to Public Agency under Public Agency Lease consist of the costs to design
and construct Terminal, which Taxpayer represents is real property.

  Taxpayer’s arrangement with Public Agency under Public Agency Lease will

cause Public Agency Lease to be subject to section 467 resulting in the Prepaid Rent
Loan created by the section 467 rental agreement. As a result, Taxpayer will impute
and recognize Prepaid Rent Loan Interest on the deemed Prepaid Rent Loan and will
deduct rental expenses according to the section 467 proportional rental accrual method
schedule set forth in Public Agency Lease.

    The Prepaid Rent Loan Interest is interest that constitutes qualifying income for

purposes of section 856(c)(2). The Prepaid Rent Loan Interest, however, does not
constitute qualifying income for purposes of section 856(c)(3). The Prepaid Rent Loan
is created by the in-kind prepayment of rent for an interest in real property and pursuant
to ruling 1, the Airline Rents that Taxpayer receives from the Leased Premises qualify
as rents from real property. Thus, treating the Prepaid Rent Loan Interest as qualifying
income does not interfere with or impede the objectives of Congress in enacting section
856(c)(3). Accordingly, pursuant to section 856(c)(5)(J)(ii), it is appropriate for the
Secretary to determine that income from the Prepaid Rent Loan Interest is treated as
qualifying income for purposes of Sections 856(c)(3).

                                CONCLUSIONS

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

rule that:
PLR-118311-22 16

(1) Taxpayer’s allocable share of the income from Airline Rents qualifies as rents
from real property within the meaning of section 856(d) for purposes of section
856(c)(2) and (3).

(2) Pursuant to section 856(c)(5)(J)(ii), Taxpayer’s allocable share of income from
the Prepaid Rent Loan Interest will be treated as qualifying income for purposes
of section 856(c)(3).

    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. No opinion is expressed concerning the
valuation of personal property for purposes of the section 856(d)(1)(C) 15% personal
property limitation. Additionally, except as expressly provided herein, no opinion is
expressed or implied concerning whether any income is qualifying income for purpose
of section 856(c)(2) and (3). Furthermore, except as expressly provided herein, no
opinion is expressed concerning any services performed by Taxpayer, OP, any TRS or
any other party. Finally, no opinion is expressed regarding whether Taxpayer otherwise
qualifies as a REIT or whether Subsidiary otherwise qualifies as a TRS under
subsection 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 cite 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
                                               Senior Technician Reviewer, Branch 3
                                               Office of Associate Chief Counsel
                                               (Financial Institutions & Products)

PLR-118311-22 17

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