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REIT PLR addresses the definition of “health care facility” for an independent living community
June 2024
In brief
What happened?
In Private Letter Ruling 202415001 (PLR) the IRS determined that certain independent living communities (ILCs) owned by a real estate investment trust (REIT) did not have a health care focus and, therefore, were not health care facilities under the REIT rules. The IRS held that the mere presence of unrelated commercial tenants who provide health and personal care services that were available to both the residents of the ILCs and the general public did not cause the ILCs to have a health care focus.
With respect to another ILC that the REIT owned, which was registered as a regulated community by the relevant state regulatory body and was required to comply with state health care regulations, the IRS ruled that that this ILC was a “congregate care facility” and, thus, a “qualified health care property” (QHCP) under the REIT rules.
Why is it relevant?
The IRS continues to issue rulings that, in the absence of features at a property that indicate a focus on the health and well-being of its residents, an ILC will not be considered a congregate health care facility or any other type of facility that qualifies as a “health care facility” under the REIT provisions.
Action items to consider
REITs that operate or plan to operate an ILC may want to consider seeking guidance from the IRS or consult their tax advisors to determine whether the ILC may qualify as a health care facility under the REIT rules, which would require specific structuring considerations for REITs.
In detail
REIT background
A REIT must meet certain requirements regarding the income it receives (the REIT Income Tests) and the assets it holds.
Rent received from related parties is not qualifying income for purposes of the REIT Income Tests unless it satisfies certain specific exceptions. A related party is any tenant where the REIT owns 10% or more of the voting power or value of the ownership interests of the tenant. One such exception is that a REIT may lease a health care facility or a lodging facility to a taxable REIT subsidiary (TRS) if the facility is a qualified health care property or a qualified lodging facility and the TRS hires an eligible independent contractor (EIK) to operate the facility. A TRS is a corporation (other than a REIT) in which a REIT, directly or indirectly, owns stock if (1) a joint election is made by the REIT and the TRS for the entity to be treated as a TRS of the REIT and (2) the entity does not operate or manage a health care facility or lodging facility.
A QHCP is any real property and any personal property incident to such real property that is a “health care facility” or is necessary or incidental to the use of a “health care facility.
A health care facility is any hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility that extends medical or nursing or ancillary services to patients and which, immediately prior to the termination, expiration, default, or breach of the lease of or the mortgage secured by the facility, was operated by a provider of such services that was eligible for participation in the Medicare program with respect to such facility.
PLR facts and analysis
The REIT in the PLR owned a diversified portfolio of health care-related properties, including age-restricted ILCs. The ILCs included: (1) communities leased to a TRS and operated by EIKs (Leased Communities); (2) communities managed by a TRS and sub-managed by EIKs (Managed Communities); and (3) property (Property). The REIT treated the Leased Communities as QHCPs. The REIT intended to convert the Leased Communities into Managed Communities, at which point health care or personal care services no longer would be provided at the Leased Communities.
Managed Communities
The Managed Communities provided amenities such as common dining areas, activity rooms, and community grounds, as well as common bathrooms and hallways equipped with handrails. The Managed Communities were not licensed under state or local law as facilities licensed to extend medical or nursing or ancillary services to patients.
The lease agreements with the residents of the Managed Communities (Resident Agreements) required the residents to pay a fixed monthly rent for a specified term. The Resident Agreements did not require an initial health screening and did not include any health care services provided by the Managed Communities.
The staff at the Managed Communities (Community Staff) were not healthcare professionals and did not monitor the residents’ health and medical needs. In addition, the Community Staff did not assist residents with basic living activities (e.g., dressing, toileting, and bathing). The Community Staff did, however, provide assistance in calling 911 and obtaining emergency medical services, contact family when needed, and could provide assistance to first responders as well as first aid. They also could offer information to residents through pamphlets, brochures, or websites.
The Managed Communities offered a host of services to their residents (Resident Services) as part of their rent. The taxpayer represented that the provision of the Resident Services was primarily for the residents’ living convenience and social purposes. The taxpayer further represented that the Resident Services were customary for similar age-restricted, non-health care ILCs in the geographic markets in which the Managed Communities were located. These services included:
- Meals provided in a common dining area;
- Transportation to and from local destinations and group activities;
- Social, cultural, fitness, and worship activities;
- Emergency call pendants that connect to third-party care providers, family, or emergency services;
- Utilities;
- Light housekeeping, including linen service;
- Containers to safely dispose of medical instruments; and
- Age-appropriate activities (e.g., exercise classes and programs about physical, social, and mental wellness).
The IRS held that the Managed Communities did not meet the definition of “health care facility” under Section 856(e)(6)(D)(ii). The IRS held that while there may be an overlap between the services found in congregate care facilities and those offered by the Managed Communities, the focus of the services and amenities in the Managed Communities was not the health and well-being of the residents but rather the residents’ living convenience and the provision of a social living environment. The IRS noted that the Managed Communities lacked medical personnel and that the Resident Agreements stipulated that the residents be capable of taking care of their own personal and health needs. Therefore, the IRS concluded, the Managed Communities were not intended to be relied on to provide for health care needs.
Observation: The IRS continues to issue rulings that in the absence of factors that indicate a focus on the health and well-being of its residents, an ILC will not be considered a congregate health care facility or any other type of facility that qualifies as a “health care facility.” Provision of services that are primarily for the residents’ living convenience and their social well-being does not appear to suffice for this purpose.
Commercial Tenants
Some of the Managed Communities also leased space to commercial tenants (Commercial Tenants) that typically provided services such as personal care (e.g., beauty salons) and in-home health care that were open to the general public. The REIT made several representations, including that:
- The REIT did not proactively seek Commercial Tenants.
- The Commercial Tenants were not required to provide their services exclusively to the residents, and the space leased to a Commercial Tenant was accessible to all Commercial Tenant’s customers, including non-residents.
- The monthly rent amount under the lease agreements with the Commercial Tenants (Commercial Leases) was consistent with the fair market value rent of the premises, was not based on the volume or value of any referrals, and the rent paid by the Commercial Tenants was insignificant compared to the aggregate rent received from the residents and the Commercial Tenants.
- The Commercial Leases did not provide for any profit shares, kickbacks, or access fees and prohibited any referral fees.
- The Managed Communities did not make any representation to the residents that in-home health and personal care providers would be among the businesses operated by the Commercial Tenants, and they did not influence the residents to choose any in-home services or to select a particular service provider.
- The REIT did not have access to the Commercial Tenant’s customer base, and it did not engage in any marketing activities related to the business of the Commercial Tenants.
- The Managed Communities did not manage, control, or supervise the services provided by the Commercial Tenants.
- Most Commercial Leases provided that neither the Commercial Tenants nor any of their employees were employees of the Managed Communities.
- The Commercial Tenants had to comply with all applicable licensing laws, maintain their own liability insurance, and follow the Managed Communities’ code of conduct, including a prohibition on soliciting residents’ business door-to-door or in common areas.
The IRS held that the mere presence of the Commercial Tenants that provide in-home health care and personal care services did not cause the Managed Communities to be treated as furnishing services and amenities with a health care focus. The IRS noted that while the Commercial Tenants may provide in-home health care, neither the REIT nor the Managed Communities controlled, supervised, or managed the Commercial Tenants’ business in the provision of health or personal care services. The IRS noted that while the residents of the Managed Communities were more likely to procure services from the Commercial Tenants as opposed to the general public, the space leased to the Commercial Tenants was equally accessible to both. The IRS also noted that there were no other amounts exchanged between the REIT and the Commercial Tenants other than the rent payments.
Observation: The IRS’s holding that the presence of the Commercial Tenants did not cause the Managed Communities to be treated as furnishing services and amenities with a health care focus is consistent with earlier PLRs analyzing the definition of health care facilities. Although the residents of the Managed Communities may have been the most significant customers of the Commercial Tenants, the IRS’s analysis of whether the Managed Communities were health care-focused appears to be based on whether the Managed Communities or the REIT had significant control, influence, supervision, or management of the Commercial Tenants’ business operations. This analysis implies that neither the Managed Communities nor the REIT were viewed by the IRS as participating in the business operations of the Commercial Tenants.
Observation: While this PLR and earlier PLRs discussed the presence of commercial tenants at non-health care ILCs, the IRS has not yet issued any PLRs where commercial tenants were present at ILCs that constituted QHCPs. This raises the issue of whether the IRS would view the commercial space as part of the ILC such that a TRS could not manage or operate the commercial space.
Property
The Property provided many of the Resident Services offered by the Managed Communities to their residents in addition to health care services. The Property was registered as a regulated community by the relevant state regulatory body and the state regulations required it to conduct an initial health screening for each resident before move-in and yearly thereafter. The regulations also required the Property to have a formal agreement with at least one licensed home health care provider (Property Licensed Provider) whose services were required to be available to the residents. Nevertheless, the residents were free to choose any provider. If residents chose health care services from a Property Licensed Provider, such services were arranged by the management of Property.
The IRS determined that the Property met the definition of “congregate care facility” and, therefore, constituted a QHCP. The IRS noted in its analysis that the Property had an emphasis on the health and well-being of its residents because the Property had to comply with state health care regulations to provide initial and periodic health screenings and was active in the management in procuring health care services when required by residents pursuant to a written agreement with a licensed health care provider.
Observation: The IRS’s holding that the Property met the definition of a “congregate care facility” was similar to its holding in earlier PLRs where such facilities had an emphasis on the health and well-being of the residents. The discussion in the PLR of features that differentiate an ILC that constitutes a “congregate care facility” from one that is a non-health care ILC helps clarify the line between a health care facility and a non-health care facility in the ILC context. If a facility is a congregate care facility, a REIT may not engage its TRS to operate or manage the facility, but the REIT can lease the facility to a TRS if the TRS engages an EIK to operate and manage the facility on behalf of the TRS.
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