PLR 202413004- REIT services and amenities including EV stations

Facts of PLR 202413004

The taxpayer is a REIT that owns outdoor industrial storage properties. The REIT requested a ruling on several issues regarding transactions between the REIT and its tenants. The IRS issued its first ruling on the provision of EV stations.

The storage agreements

The REIT will enter into storage agreements with unrelated third parties for a specific amount of space at a property for the storage of  equipment. Some storage agreements may allocate specifically identified space for a particular tenant's use, and all storage agreements will allocate a specified amount of space reserved for the tenant’s use. In addition, a storage agreement may provide that a particular tenant is allocated space that may be available at one or two of the REIT’s properties.

Consistent with prior IRS rulings, the REIT will always be obligated to ensure that the amount of space specified in the storage agreement is reserved for, and available to, the relevant tenant at the property, or property specified in the storage agreement. This is to ensure that the storage company does not overbook its space. In addition, the storage agreement will have a minimum term and will generally renew automatically on a month-to-month basis (based on the IRS’s private letter ruling policy, it is likely that this minimum term is 30 days.).

Pursuant to the agreement, the tenant will pay a fixed dollar amount for the space regardless of whether it uses the space. The storage rent may increase over time but only in connection with the renewal of a storage agreement. 

The REIT represents that the storage fee will not depend in whole or part on the income or profits or any person within the meaning of Code section 856 (d)(2)(a), which provides that rent based in whole or in part on a tenant’s profits or income is not treated as qualified rents. 

The REIT also represents that for each agreement, any rent attributable to personal property will not exceed 15% of the total rent for the taxable year paid by the tenant for both real and personal property leased in connection with the storage space. This is to ensure that the rent does not violate the 15% personal property test in Code section 856 (d).

Services and amenities

The REIT will design, inspect, maintain and repair the properties. The REIT represents that inspecting, maintaining and repairing properties are not services provided to any particular tenant and are customary services provided at similar properties in the REIT’s geographic area in which the properties are located.

This representation is to ensure that such services satisfy the requirements of the regulations that they are customary in the geographic area and meet the Section 512 standard for qualified rents.

Parking services and amenities

The REIT represented that the properties’ parking facilities are adjacent, or in close proximity to, the storage area of any such property. The REIT represents that any parking area will be appropriate in size for the number of tenants expected to use storage space in the property and for such tenants’ guests and customers.

These representations were made to satisfy the parking requirements of Revenue Ruling 2004 –24The parking facility will not have an attendant and neither the REIT or any other entity performs any services other than the routine maintenance, repair, and provision of electricity for lighting the facility and the EV charging stations.

EV stations (EVS)

The REIT will engage an independent contractor to provide tenants with certain utility services, such as furnishing electricity to light the properties and at some properties, to furnish electricity to power and charge equipment and to power EV stations.

The REIT intends to make electricity available in storage areas, including to EV stations, to power and charge tenants’ equipment and in the parking areas, through EV stations, for tenants, their guests, and customers to charge their vehicles.

Tenants will be charged a higher storage fee for space with access, or in close proximity, to electrical sources, including EV stations, to power and charge equipment. The REIT will not charge a separate access fee for the EV stations themselves, but a user will be charged for the electricity drawn from an EV station.

The REIT represents it will not charge a markup on the electricity and will remit the amount collected from the tenant to the utility provider, thus avoiding a potential prohibited transaction tax on “dealer” sales.

The REIT further represents it will only install EV stations at a property where the provision of EVS is customary for similar properties in the applicable geographic area. This is to meet the customary services in the geographic area test.

Also, the REIT represents that the number of EVS on any property will be appropriate for the number of tenants, their guests, and customers expected to use it. The EVS in the parking area may be accessible by the general public, but the REIT represents any usage of the EVS by persons other than tenants, their guests, and customers will be de minimus. This is to meet the Revenue Ruling 2004-24 requirements.

Security Services

The REIT will provide security at their properties. This may include security cameras and guards. The REIT represents that these services are customarily furnished to tenants of similar properties in the geographic area in which the properties are located and should, therefore, meet the regulation requirements for customary services in the geographic area. The REIT further represents that the service will be provided to all tenants and will not be a personal service for any particular tenant. This is meant to show that the service is not a non-customary service under Code Section 512.

Other services 

At some properties, the tenant may deliver its equipment to a staging area. One or more employees of a TRS or an IK will move the tenant's equipment to the appropriate area within the property. The taxpayer represents that the movement of equipment in the above matter is a service that is customarily provided to tenants of similar properties in the geographic market in which the property is located. The REIT also represented the service will be provided to all tenants with that type of equipment and will not be a personal service rendered to any particular tenant.

This representation is designed to ensure that the services meet the customary services requirement of Code Sections 856 and 512.

Amenities

Some of the properties will include certain amenities that will be available to all tenants, such as EVS, shower facilities or weigh stations. At some of the properties, access to the amenities will be available for no charge. At other properties, tenants may be charged a specific fee for access to an amenity. No services other than utilities, cleaning and basic maintenance will be provided with such amenities.

The REIT represents that the services rendered in connection with the included amenities are provided to all tenants and are not personal services rendered to any particular tenant and, therefore, satisfy Code Section 512. The REIT also represents that the services provided in connection with amenities are customarily provided to tenants of similar properties in the geographic area. This is designed to meet the Code Section 856 customary services test.

In situations where tenants are charged a separate fee for access to an amenity, the REIT will treat any amount it receives for such access as other than rents from real property.

The REIT represents that any impermissible tenant service income (ITSI) will not exceed 1% of the gross income with respect to a given property and therefore will meet the de minimis exception.

Some properties may include additional services offered by a TRS or an IK such as truck or equipment fueling, washing, or maintenance (“Additional Services”). The TRS leases any space necessary at the property to perform these services. The tenant will contract directly with TRS or IK for any Additional Services and will pay the TRS or IK directly for such services. The REIT represents it will not receive rent from any IK and it will not derive any income from the performance of these services, whether by the TRS or the IK, and will bear none of the expenses of providing the services.

This representation is designed to ensure that the REIT is not treated as providing the service, but that they are treated as provided by a TRS or an IK.

TRS lease

The REIT intends to enter into a lease with the TRS pursuant to which the REIT will lease a significant specified amount of storage space at some or all of its properties. The lease will be on a long-term basis to avoid the short- term rental period issue. The TRS, in turn, will sublease such space to third parties with a term of less than the minimum term (i.e., less than 30 days). If the TRS subleases such space, the REIT will still treat such subleased spaces as leased to the TRS. The REIT represents that with regard to the space it leases to the TRS at a property, at least 90% of the leased space will be rented to persons other than to the TRS or any other related persons.
 

The REIT further represents that the amount paid as rent will be comparable to the storage fees paid by tenants for comparable space, and if no comparable space at the properties is leased to an unrelated party, the amount paid will be substantially comparable to amounts paid for similar space leases to unrelated parties in the geographic area.

This is designed to make sure the lease terms meet the “limited rental exception” requirements of Code Section 856(d)(8)(A).

In addition, the REIT represents that rent attributable to personal property, if any, leased under, or in connection with, the lease to the TRS will not exceed 15%. This is designed to make sure that it does not violate the 15% personal property rule.

IRS’s rulings based on REIT’s representations 

1 - Services

1. Designing services are valid REIT services under Section1.856-4(b)(5) (ii), as REIT fiduciary services.
2. Inspecting, maintaining and repairing the properties are valid REIT services under Regulation section 1.856-4(b)(1) as customary services in the geographic area.
3. Submetering electric services will be treated as a customary service since the REIT represented that it was customary in the properties’ geographic area.
4. Security services will be treated as a customary service since the REIT represented that they were customary services in the properties’ geographic area.
5. These services also meet the Code Section 512(b)(3) exception to be treated as services that do not cause rents to be treated as UBTI (Unrelated Business Taxable Income).
6. Moving a tenant’s equipment in and out of a property for the purpose of stacking the equipment will be treated as a valid REIT service since the REIT represented that the services were customary in the geographic area and not for the convenience of any particular tenant and, thus, not treated as ITSI under Section 856(d)(7)(C).
7. Additional services like fueling, washing vehicles, or maintaining them, if done by an IK or a TRS pursuant to a lease, will not be treated as a REIT service provided to a tenant.

2 - EV stations in parking areas

1. The REIT will charge the tenant user solely for the electricity and not a separate access fee and thus qualifies as a customary service.
2. The REIT will not mark up the electricity to avoid a prohibited transaction issue.
3. The REIT will install EV stations at properties only where the provision of the EV stations is customary in the geographic area, so it meets Regulation Section 1.856-4(b)(1).
4. The REIT represents that the number of EV stations available at a property will be appropriate to the expected tenant’s use will meet the Revenue Ruling 2004-24 requirements, and that use by the general public is expected to be de minimis.
5. Charging tenants for electricity used is similar to submetering, which is customary.

Based on the above, the IRS held that any income from the REIT’s provision of EV Stations will be considered qualified REIT rents (i.e., not ITSI).

An important takeaway is that the IRS held that providing EV stations is an amenity that needs to meet Revenue Ruling 2004-24 parking standards and that providing electricity to EVS is a good REIT service.

3 - Parking

The IRS held that based on the REIT’s representations, the above parking services were similar to Situation #1 of Revenue Ruling 2004-24. Thus, amounts received for parking qualify as rents under Section 856(d).

4 - TRS lease 

The IRS held that based on the REIT’s representation that the lease met the requirements of Section 856(d)(8)(A) exception to related party rents, the rents qualify as good REIT rents.

Mazars’ insight

This ruling addresses many issues the IRS has already addressed, such as leases to TRSs structured to avoid related party rents and short-term versus long-term leases as good rents, and the use of TRSs or IKs to provide non-customary services qualified parking facilities.

With respect to charging tenants for the electricity to the EVS and the use of the EVS in parking facilities, the IRS analyzed it as the REIT providing a charge for electrical services, which they held was similar to submetering if there is no markup, and which they had already approved.

They then analyzed the availability of the EVS as a service to the tenants. They ruled providing EVS in a parking facility will be a good REIT service if it meets three requirements; customary in the geographic area, not for the convenience of a particular tenant, and located in a parking facility that meets the requirements of Revenue Ruling 2004-24.

It should be noted that the IRS specifically did not address situations in which the REIT charged a mark-up on electricity at EV stations used by tenants or the charging of access fees to use the EV stations.