Senior communities qualify as congregate care facilities

Plain-English summary

A real estate investment trust owned age-restricted independent-living communities that offered meals, housekeeping, transportation, security, mobility features, wellness monitoring, emergency support, and assistance obtaining health care services. The services were designed to support residents' health and safety and were not commonly offered by ordinary multifamily rental properties in the same markets. The IRS ruled that the communities were congregate care facilities and therefore qualified health care properties under section 856. If the REIT directly owned the communities, leased them to a taxable REIT subsidiary, and used an eligible independent contractor to operate them, the related-party rent rule would not exclude the payments from rents from real property. The ruling did not decide whether the taxpayer otherwise qualified as a REIT or whether any contractor actually qualified as an eligible independent contractor.

Ruling snapshot

• Question: Are the age-restricted communities qualified health care properties eligible for the TRS rent exception?
• Outcome: Approved, subject to direct ownership and operation by an eligible independent contractor
• Key authorities: IRC § 856(d), (e)(6)(D), and (l)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201509019
Release Date: 2/27/2015
Index Number: 856.00-00
Person To Contact:
-------------------- ------------------------, ID No. ------------------
----------------------------------------------------------- ----------------------------------------------------
----------------- Telephone Number:
-------------------------------------------------- ----------------------
---------------------------------- Refer Reply To:
CC:FIP:B02
PLR-121396-14
Date:
November 17, 2014

Legend:

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

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

a = ----

b = --

c = --

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

    This is in reply to a letter dated May 27, 2014, requesting a ruling on behalf of

Taxpayer. Taxpayer has requested a ruling regarding the definition of “qualified health
care property” under section 856(e)(6)(D)(i) of the Internal Revenue Code, for purposes
of the related-party rent exception of section 856(d)(8)(B).

Facts:

   Taxpayer is a publicly traded domestic corporation that elected to be taxed as a

real estate investment trust (REIT) for its tax year beginning Date 1. Taxpayer has
intended to qualify as a REIT at all times since that date. Taxpayer owns a
geographically diverse portfolio of senior housing and health care properties.

    Taxpayer owns a unlicensed, age-restricted residential communities that provide

living quarters and significant congregate care services for residents (“Communities”).
PLR-121396-14 2

The Communities are currently marketed as age-restricted independent living
communities. Taxpayer directly owns b of the Communities. The remaining c
Communities are currently owned by Taxpayer’s wholly-owned taxable REIT
subsidiaries (“TRSs”), as defined in section 856(l). Taxpayer represents that if
Taxpayer is granted a ruling that the Communities are “qualified health care properties”
within the meaning of section 856(e)(6)(D)(i), Taxpayer and its wholly-owned TRSs will
jointly revoke the TRS elections, at which point the entities will be wholly-owned
subsidiaries of Taxpayer that are treated as disregarded entities and as qualified REIT
subsidiaries (QRSs) of Taxpayer for U.S. federal income tax purposes. As a result, all
the Communities will be directly owned by Taxpayer. Taxpayer will then lease the a
Communities to one of its existing TRSs. Taxpayer represents that each of the a
Communities will be operated by an Eligible Independent Contractor (“EIK”), as defined
in section 856(d)(9)(A).

    Taxpayer further represents that all services offered to residents of the

Communities will be provided by an EIK. Taxpayer represents that the Communities
offer or provide residents with assistance in obtaining certain congregate care and
wellness related services that are generally not offered by typical multi-family residential
rental properties located in the applicable geographic markets. The services available
to the residents of the Communities may be grouped into three general categories: (i)
Community Services, (ii) Wellness Services, and (iii) Healthcare Related Services.

    Community Services are those services that do not necessarily have specific

healthcare related purposes and are included in the monthly fees for all residents.
Community Services include daily meals in a shared and central location, housekeeping
and linen services, transportation services, social and recreational activities designed to
improve residents’ well-being, 24-hour security with staff assistance and monitoring of
residents, architectural modifications that include handrails, bathroom rails and other
improvements to facilitate mobility, and general maintenance service for all units. Some
Communities also offer companion services that provide residents with companions to
assist them during offsite transportation or shopping trips.

    Wellness Services generally involve on-site wellness program services and are

included in the monthly fees for all residents. Wellness Services are designed primarily
for the prevention of illness and injury and to support the health of the residents of the
Communities. Wellness Services include dietary assistance (i.e., meal planning
centered around proper nutrition and specific health concerns), personal emergency call
pendants, assistance in contacting and assisting emergency services personnel,
assistance with emergency response and evacuation, and monitoring residents for their
safety and well-being (including determining whether living conditions are appropriate
for the residents and whether alternative living arrangements should be made). For
example, assistance may be provided in obtaining an alternative living space for a
resident to increase resident safety. Specifically, if there is concern that a resident is a
wander risk (i.e., the resident may wander away from the property) and a family
PLR-121396-14 3

member disagrees, a third party may be contacted to provide assistance in keeping the
resident from wandering and to work with the family in relocating the resident to a more
suitable living environment.

    Healthcare Related Services generally involve personalized related services.

Healthcare Related Services include assistance in obtaining third party healthcare
services such as on-site rehabilitation clinics for physical, speech and occupational
therapy, assisting residents in obtaining on-site skilled nursing services administered by
licensed professionals to provide treatments that promote functional independence and
improved health, and assistance in obtaining medication management services. The
Communities also assist in obtaining Medicare-certified personnel for rehabilitation
clinics and provide individualized health education and wellness programs.

    Taxpayer is requesting a ruling that its ownership interests in the Communities

represent interests in real properties that are “qualified health care properties” within the
meaning of section 856(e)(6)(D)(i). Specifically, Taxpayer requests a ruling that the
Communities are “congregate care facilities” within the meaning of section
856(e)(6)(D)(ii). Taxpayer further requests a ruling that, if ownership of the
Communities is transferred to Taxpayer’s wholly-owned QRS and the Communities are
rented to a TRS and operated by an EIK, amounts derived directly or indirectly by
Taxpayer from rental of the Communities to the TRS shall not be excluded from the
definition of “rents from real property” by operation of section 856(d)(2)(B).

Law and Analysis:

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

must be derived from, among other sources, rents from real property.

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

must be derived from, among other sources, 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 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 tax year attributable to both the real
and personal property leased under, or in connection with, such lease.

  Section 856(d)(2)(B) provides that rents from real property do not include

amounts received directly or indirectly from a corporation if the REIT owns 10 percent or
more of the total combined voting power or 10 percent or more of the total value of the
shares of the corporation.
PLR-121396-14 4

     Section 856(d)(8)(B) provides that amounts paid to a REIT by a TRS shall not be

excluded from rents from real property by reason of section 856(d)(2)(B) when a REIT
leases a qualified lodging facility or qualified health care property to a TRS, and the
facility or property is operated on behalf of the TRS by a person who is an EIK.

   Section 856(d)(9)(A) provides that the term EIK with respect to any qualified

health care property (as defined in section 856(e)(6)(D)(i)) means any independent
contractor if, at the time such contractor enters into a management agreement or other
similar service contract with the TRS to operate such qualified health care property,
such contractor (or any related person) is actively engaged in the trade or business of
operating qualified health care properties for any person who is not a related person
with respect to the REIT or the TRS.

   Section 856(e)(6)(D)(i) defines qualified health care property as any real property

which is a health care facility.

     Section 856(e)(6)(D)(ii) defines a “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 was operated by a provider of such
services which was eligible for participation in the Medicare program under Title XVIII of
the Social Security Act [subchapter XVIII of chapter 7 of Title 42 (42 U.S.C.A. § 1395 et
seq.)] with respect to the facility.

     In the present case, the services offered to the Communities’ residents are

specially targeted to monitor and help improve the health and well-being of its residents,
as well as provide the type of supportive services offered by a typical congregate care
facility. Each Community is managed by an EIK that assists residents in obtaining the
healthcare related services they desire. The EIK oversees various programs and
services such as health related educational programs, assists residents with obtaining
third party medical service providers and emergency service providers, and monitors
residents’ living conditions including whether such conditions are appropriate for the
residents and whether alternative living arrangements should be made. The EIK also
supports and monitors certain healthcare related activities of the residents. For
example, the EIK often facilitates the provision of in-home health care services from a
licensed third party by providing the residents with information regarding the type and
availability of such services. EIKs also provide emergency call systems to residents
and provide meals to residents in communal locations at the Communities. The
Community Services, Wellness Services and Healthcare Related Services available to
residents of the Communities are not commonly offered by typical multi-family
residential rental properties located in the relevant geographic markets and offer
services for residents in a manner that provides for congregate care.
PLR-121396-14 5

Conclusion:

    Based on the facts as represented, we rule that the Communities are congregate

care facilities within the meaning of section 856(e)(6)(D)(ii) and, therefore, constitute
“qualified health care properties” within the meaning of section 856(e)(6)(D)(i).
Accordingly, based on the facts and Taxpayer’s representations, including its
representation that the a Communities will be directly owned by Taxpayer, amounts
paid, directly or indirectly, to the Taxpayer by the TRS for renting the Communities shall
not be excluded from the definition of “rents from real property” by operation of section
856(d)(2)(B) provided the Communities are operated and managed by an EIK.

   Except as specifically ruled upon above, no opinion is expressed concerning any

federal income tax consequences relating to the facts herein under any other provision
of the Code. Specifically, we do not rule whether Taxpayer otherwise qualifies as a
REIT under part II of subchapter M of Chapter 1 of the Code or whether any of the
contractors qualify as eligible independent contractors under section 856.

  This ruling is directed only to the taxpayer requesting it. Taxpayer should attach

a copy of this ruling to each tax return to which it applies. Section 6110(k)(3) of the
Code provides that this ruling 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,


                                       Andrea M. Hoffenson
                                       Andrea M. Hoffenson
                                       Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)