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REIT PLR addresses EV charging stations and other services provided at an outdoor industrial storage facility
April 2024
In brief
What happened?
In Private Letter Ruling 202413004 (PLR), the IRS issued several rulings to an entity (taxpayer) that intended to elect to be taxed as a real estate investment trust (REIT). The taxpayer intended to acquire outdoor industrial storage facilities (storage facilities). The PLR addressed several REIT income testing issues, holding that:
- the amounts received for services at amenities including electric vehicle charging stations (EV stations) and other services did not give rise to impermissible tenant service income (ITSI) and such amounts qualified as rents from real property;
- amounts received by taxpayer from unrelated third parties under leases, licenses, or other similar agreements including the use of non-designated space at certain outdoor industrial storage facilities qualified as rents from real property;
- amounts received by the taxpayer under a lease of certain assets and areas to its taxable REIT subsidiary (TRS) also qualified as rents from real property.
Why is it relevant?
The PLR addressed a few REIT income testing issues. Among other rulings, the PLR addressed services provided in connection with the use of EV stations. EV stations have become very common in the real estate industry in recent years, and this is the first PLR issued by the IRS on EV stations. In addition, while the PLR concluded that amenities are not services, the ruling suggested that fees received from tenants for amenities are non-qualifying income.
Action items to consider
REITs or taxpayers considering making a REIT election may want to consider seeking guidance from the IRS and consult with their tax advisors to determine whether their unique property holdings, including income from services provided at amenities such as EV charging stations, will impact the REIT income tests.
In detail
A REIT must meet certain requirements regarding the income it receives and the assets it holds. The income requirements must be met annually, while the asset requirements must be met quarterly. A REIT is restricted in the services it can provide, although it may provide more extensive services through an independent contractor (IK) or a TRS.
Storage agreements and certain services provided at storage facilities
The taxpayer planned to make a REIT election and formed a new entity that it planned to make a joint election with to be treated as a TRS of the REIT. The properties were comprised of (1) parcels of land that were paved, surrounded by fences, and improved with lighting or security cameras that would be used as outdoor industrial storage facilities once fully developed and (2) unimproved land that the taxpayer intended to hire an IK to develop into an outdoor industrial storage facility. Two of the properties were situated near one another. The taxpayer represented that the assets were either land, an interest in land, an improvement to land, and/or an inherently permanent structure.
The taxpayer intended to enter into agreements (storage agreements) with unrelated third-parties (tenants) for the use of its outdoor industrial storage facilities. All storage agreements would allocate a specific amount of space reserved for a tenant’s use and some agreements would designate specifically identified storage space for a particular tenant’s use. Further, for two of the properties that were in close proximity to each other, a storage agreement could provide that a particular tenant’s allocated amount of storage space may be available at either property without a specific designation of the space.
Tenants paid a fixed fee (storage fee) for their use of space, and they were obligated to pay the storage fee regardless of whether they used their storage space. The storage agreements had a certain term and would renew automatically, on a month-to-month basis, after the expiration of the initial term. The taxpayer could increase the storage fee solely due to market conditions and only in connection with the renewal of a storage agreement. The taxpayer represented that the storage fees did not depend on the income or profits of any person.
The IRS held that the portion of the storage fee attributable to the reservation of space at a property qualified as rents from interests in real property. The IRS noted that the storage agreements were for a specified amount of space that was reserved for a tenant at all times during the term of the agreement. The IRS further noted that whether a space is specifically identified or not does not change the fact that the tenants have reserved space at a specified property or properties.
Observation: The holding in the PLR is noteworthy because the taxpayer was permitted to use non-exclusive space at either property. This provides the taxpayer with optionality in the storage space that it can use at different locations so long as a specified amount is reserved at all times.
The taxpayer also specified that it would design, inspect, maintain, and repair the properties, and ensure that only equipment covered by a valid storage agreement was stored at a property. The taxpayer intended to provide security services at the properties, including monitoring through security cameras and providing security guards. The taxpayer represented that the foregoing services were not services provided to any particular tenant and customary in the geographic market where the properties were located.
The IRS held that designing properties was within the taxpayer’s fiduciary duties to manage the REIT itself and as such would not be treated as ITSI. The IRS further held that the portion of storage fees that were attributable to the routine inspection, maintenance, repair, and security of the properties, where such services are customary for similar properties in the geographic area and are not provided for the convenience of any particular tenant, did not give rise to ITSI.
Parking and EV charging stations
The taxpayer intended to provide unattended parking areas near the storage facilities in some of the properties. The taxpayer planned to provide electricity for lighting and electricity for the EV charging stations. The taxpayer intended to engage a third-party utility provider that was an IK from whom the taxpayer did not derive or receive income from for the provision of electricity.
The taxpayer intended to make electricity available in storage areas to power and charge tenant equipment and in parking areas through EV stations for tenants, and their guests and customers, to charge vehicles. Tenants would pay a higher storage fee for a space with access to electricity sources. EV station users would not be charged an access fee for the use of the EV stations, although they would pay for the electricity they used. The taxpayer represented that it would not charge a markup on the electricity and would remit amounts collected to the utility provider. The taxpayer further represented that the provision of electricity and light is a utility service customarily furnished to tenants of similar properties in the same geographic area.
The taxpayer represented that EV stations would be installed only in properties where EV stations were customary for similar properties in the geographic area where the property was located and where the number of EV stations would be appropriate for the number of tenants, their guests, and customers. While the EV stations could be accessed by the general public, the taxpayer represented that such use would be de minimis.
The IRS held that the portion of the rents from the properties that is attributable to the routine lighting and provision of electricity did not give rise to ITSI. With respect to the EV stations, the IRS held that the service provided by an EV station is electricity and noted that charging for electricity drawn through an EV station is akin to the submetering of utilities. Because such services were represented to be customary in the geographic market in which the properties were located, and based on the taxpayer’s specific circumstances, the IRS held that income from the taxpayer’s provision of EV stations would not be treated as ITSI.
Observation: This is the first PLR to address income from EV stations. In reaching its conclusion that income from the EV station would not be treated as ITSI, the IRS noted the standard laid out in Revenue Ruling 2004-24 (parking ruling) (i.e., the number of EV stations being appropriate for the number of tenants, their guests, and customers, and the use of EV stations by the general public). This suggests that EV charging stations that do not meet this standard may be disconnected from the leasing of the space and therefore might not be eligible to be treated as rents from real property.
Observation: The IRS also noted in its analysis that the taxpayer did not charge a markup on the electricity sold. It is not clear why this would be relevant to the analysis because markups generally are qualifying income if they are provided by an IK and the service is customary, both of which were also present in the facts of the ruling.
Amenities
Some of the properties also could include amenities such as shower facilities, weigh stations, or as discussed above, EV stations. Tenants at some properties could have been charged a fee for accessing an amenity while at others these amenities were available at no charge. The only services provided to tenants in connection with the amenities were utilities, cleaning, and basic maintenance. The taxpayer represented that such services were provided to all tenants and were customary at similar properties in the geographic area where the properties were located. The taxpayer further represented that the services rendered in connection with the amenities were provided to all tenants and not personal services rendered to a particular tenant. Where the taxpayer received income for access fees for use of the amenities, the taxpayer treated such income as other than rents from real property.
The IRS held that income from providing all tenants with access to a space such as a shower facility or weigh station at no additional cost is not income from the provision of a service and is therefore not ITSI. With respect to the services provided in connection with the amenities, the IRS held that income from such services would not give rise to ITSI.
Observation: The IRS has ruled consistently in earlier PLRs that amenity spaces are not services themselves and therefore do not give rise to ITSI. In an earlier PLR, a REIT owned office buildings with fitness facilities that were available for use by tenants of the properties and the general public. The fitness facilities were viewed as amenities by the IRS, and in certain cases, the REIT received income for the use of the fitness facilities and the taxpayer treated such income as other than rents from real property. In this PLR, the taxpayer also treated the access fees for the use of the amenities as other than rents from real property. However, this PLR is distinguishable from the office property PLR because only tenants of the storage facilities used the amenities. The ruling appears to suggest that where an amenity fee is charged to either tenants or non-tenants at a property the IRS would conclude that such income is treated as non-qualifying income for purposes of the REIT income tests.
Stacking services and additional services
The taxpayer intended to provide a staging area where tenants could have their equipment stacked by the employees of the TRS or an IK. The taxpayer represented that the stacking service was customary for similar properties in the same geographic area, was provided to all tenants with such equipment, and was not a personal service provided to any particular tenant.
Some properties also could include additional services offered by the TRS or an IK, such as fueling, washing, or maintenance services for tenants’ trucks or equipment. The TRS would lease (TRS lease) from the taxpayer the space necessary at the property to perform the additional services. Tenants would directly contract with and pay the TRS or IK for such additional services. The taxpayer represented that it would not receive rent from any IK providing any additional services. The taxpayer also represented that it would neither derive any income from nor bear any of the cost of providing the additional services.
The IRS held that the stacking services and the additional services would not result in ITSI.
TRS lease
The taxpayer also intended to lease a specified amount of storage space to the TRS under the TRS lease. The TRS then would sublease portions of such space to third parties, sometimes on a short-term basis.
The taxpayer represented that with respect to each property, at least 90% of the leased space would be rented to persons other than the TRS or other related parties. The taxpayer further represented that storage fees paid by the TRS would be substantially comparable to storage fees paid by tenants for comparable space. Where there was no comparable space leased to a tenant, the fees paid by the TRS would be substantially comparable to fees paid for similar space leased to unrelated parties in the same geographic area.
The IRS held that rents received by the taxpayer under the TRS lease will be treated as rents from real property under the limited TRS rental exception.
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