Cooperative interests qualify as REIT real property

Plain-English summary

A real estate investment trust planned to acquire membership certificates in a nonprofit mobile-home cooperative together with occupancy agreements granting long-term use of specific home plots. The certificates and occupancy rights were inseparable, and the cooperative’s governing documents limited it to owning and managing the community. The IRS ruled that these combined interests were sufficiently similar to tenant-stockholder interests in a cooperative housing corporation to qualify as interests in real property for the REIT asset test. The ruling did not cover any portion attributable to the cooperative’s personal property or determine whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: Do cooperative membership certificates coupled with rights to occupy designated manufactured-home plots constitute interests in real property for REIT purposes?
• Outcome: Approved; the described interests qualify under section 856(c), excluding any portion attributable to personal property.
• Key authorities: IRC §§ 216, 528, and 856(c); Treas. Reg. §§ 1.216-1 and 1.856-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201515009 Third Party Communication: None
Release Date: 4/10/2015 Date of Communication: Not Applicable
Index Number: 856.02-00
Person To Contact:
------------ ---------------------, ID No. ------------------
---------------------------- Telephone Number:
------------------------------------------ ----------------------
--------------------------------------------------- Refer Reply To:
------------------------------ CC:FIP:B01
PLR-125285-14
Date:
December 24, 2014

Legend:

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

Operating Partnership = -------------------------------------------------

Corporation = ----------------------------------------

State A = --------------

State B = ----------

Foreign Country = -----------------------------------

City = ---------------------------------

Date = ---------------------------

Year = -------

A = ----

B = ----

C = -----

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

   This letter responds to your letter dated June 24, 2014, requesting a ruling on

behalf of Taxpayer regarding whether an interest in certain cooperative corporations
PLR-125285-14 2

described below qualifies as an “interest in real property” under Section 856(c) of the
Internal Revenue Code.

Facts:

   Taxpayer is a publicly traded State A corporation that has elected to be taxed as

a real estate investment trust (“REIT”) beginning with its taxable year ended Date.
Taxpayer uses the calendar year and accrual method of accounting for U.S. federal
income tax purposes.

   Taxpayer currently owns and operates, directly and through a series of wholly

owned subsidiaries, manufactured home communities and RV resorts, which are
located in various states in the U.S. and Foreign Country. Taxpayer represents that
each of its subsidiaries are treated either as a REIT, a qualified REIT subsidiary as
defined in Section 856(i)(2) (a “QRS”), or a taxable REIT subsidiary as defined in
Section 856(l) (a “TRS”). Taxpayer’s business is operated through Operating
Partnership, a limited partnership of which Taxpayer is general partner and A percent
owner.

   Taxpayer is interested in purchasing, through Operating Partnership, interests in

Corporation. Corporation is a non-profit Mobile Home Cooperative Homeowners’
Association organized under State B law in Year for the purpose of acquiring and
managing an existing manufactured home community in City (the “Community”). The
Community consists of approximately B acres of land on which there are lots to
accommodate C manufactured homes. In addition, within the Community there are
certain shared facilities, including a clubhouse, swimming pool, and shuffleboard courts.

   Corporation operates in accordance with its articles of incorporation and bylaws

(collectively, the “Organization Documents”). Under the Organization Documents, the
purposes of the Corporation are limited to acquiring, managing and dealing with the
properties comprising the Community. Specifically, the Articles of Incorporation provide
that the purpose of the Corporation is to engage solely in the following activities:

     (1) Acquire certain parcels of real property, together with all improvements
     located thereon, commonly known as Corporation;
     (2) Own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and
     otherwise deal with the Community, and
     (3) Exercise all powers enumerated in the bylaws necessary or convenient to the
     conduct, promotion, or attainment of the purpose set forth in the articles of
     incorporation.

  Corporation is not permitted to incur indebtedness other than in an amount

necessary to acquire, operate, and maintain the Community, or to merge with or into
any other entity or convey or transfer its properties to any entity unless the
PLR-125285-14 3

organizational documents of the transferee or surviving entity contain the same
limitations.

   Each person interested in a home plot within the Community must buy a

membership certificate from Corporation or an existing membership certificate holder at
the prevailing fair market value, and become a member of Corporation. The
membership certificate entitles each member to vote on Corporation matters.

    Each such purchaser of a membership certificate simultaneously enters into a

corresponding occupancy agreement with Corporation. Each occupancy agreement
entitles the purchaser to quiet enjoyment and possession of a designated home plot for
a period of up to 99 years. Under the occupancy agreements, members agree to pay to
Corporation their allocable share of common expenses and debt service payments.
Each occupancy agreement specifies that the membership certificate is appurtenant to,
and inseparable from the related home plot designated for use by the member. The
bylaws of Corporation indicate that the membership certificate and occupancy
agreement may not be transferred without the approval of the board of directors of
Corporation and that, upon death of the member, the membership certificate and
occupancy agreement must be resold to Corporation for an amount equal to the original
purchase price paid, or sold to a third party at fair market value.

  Corporation files an annual U.S. federal income tax return on Form 1120-H as a

homeowners association, and reports its rental income as well as amounts received
under occupancy agreements as income.

    Operating Partnership proposes to purchase Corporation’s unsold membership

certificates, and to enter into one or more occupancy agreements that will grant
Taxpayer quiet enjoyment and possession of the Corporation’s currently unsold home
plots. Operating Partnership expects to lease these plots to individuals who will either
set their own manufactured homes on the home plots or reside in manufactured homes
that Taxpayer will situate on the plots, and Operating Partnership expects to derive
rental income from leasing the plots and manufactured homes.

Law and Analysis:

   Section 856(c)(4)(A) provides that at the close of each quarter of its tax year, at

least 75 percent of the value of a REIT's total assets must be represented by real estate
assets, cash and cash items (including receivables), and Government securities.

   Section 856(c)(5)(B) provides that the term “real estate assets,” for purposes of

section 856, means real property (including interests in real property and interests in
mortgages on real property) and shares (or transferable certificates of beneficial
interest) in other REITs that meet the requirements of sections 856 through 859.
PLR-125285-14 4

   Section 856(c)(5)(C) provides that the term “interests in real property” includes

fee ownership and co-ownership of land or improvements thereon, leaseholds of land or
improvements thereon, options to acquire land or improvements thereon, and options to
acquire leaseholds of land or improvements thereon, but does not include mineral, oil,
or gas royalty interests.

    Section 1.856-3(b)(1) of the Income Tax Regulations provides that the term “real

estate assets” means real property, interests in mortgages on real property (including
interests in mortgages on leaseholds of land or improvements thereon), and shares in
other qualified REITs. Section 1.856-3(c) provides that the term “interests in real
property” includes fee ownership and co-ownership of land or improvements thereon,
leaseholds of land or improvements thereon, options to acquire land or improvements
thereon, and options to acquire leaseholds of land or improvements thereon. The term
also includes timeshare interests that represent undivided fractional fee interests or
undivided leasehold interests in real property and that entitle the holders of the interests
to the use and enjoyment of the property for a specified period of time each year. The
term also includes stock held by a person as a tenant-stockholder in a cooperative
housing corporation (as those terms are defined in section 216). Local law definitions
will not be controlling for purposes of determining the meaning of “real property” for
purposes of section 856 and the regulations thereunder.

 Section 216(b)(1) provides that the term “cooperative housing corporation”

means a corporation—

   (A) having one and only one class of stock outstanding,
   (B) each of the stockholders of which is entitled, solely by reason of his
   ownership of stock in the corporation, to occupy for dwelling purposes a house,
   or an apartment in a building, owned or leased by such corporation,
   (C) no stockholder of which is entitled (either conditionally or unconditionally) to
   receive any distribution not out of earnings and profits of the corporation except
   on a complete or partial liquidation of the corporation, and
   (D) meeting 1 or more of the following requirements for the taxable year in which
   the taxes and interest described in subsection (a) are paid or incurred:
          (i) 80 percent or more of the corporation's gross income for such taxable
          year is derived from tenant-stockholders.
          (ii) At all times during such taxable year, 80 percent or more of the total
          square footage of the corporation's property is used or available for use by
          the tenant-stockholders for residential purposes or purposes ancillary to
          such residential use.
          (iii) 90 percent or more of the expenditures of the corporation paid or
          incurred during such taxable year are paid or incurred for the acquisition,
          construction, management, maintenance, or care of the corporation's
          property for the benefit of the tenant-stockholders.

PLR-125285-14 5

    Section 216(b)(2) provides that the term "tenant-stockholder" means a person

who is a stockholder in a cooperative housing corporation, and whose stock is fully
paid-up in an amount not less than an amount shown to the satisfaction of the Secretary
as bearing a reasonable relationship to the portion of the value of the corporation's
equity in the houses or apartment building and the land on which situated which is
attributable to the house or apartment which such person is entitled to occupy.

    Section 1.216-1(e)(2) provides, in relevant part, that each stockholder of a

cooperative housing corporation, whether or not the stockholder qualifies as a tenant-
stockholder under section 216(b)(2) and paragraph (f) of that section, must be entitled
to occupy for dwelling purposes an apartment in a building or a unit in a housing
development owned or leased by such corporation. The stockholder is not required to
occupy the premises. The right as against the corporation to occupy the premises is
sufficient. Such right must be conferred on each stockholder solely by reason of his or
her ownership of stock in the corporation. That is, the stock must entitle the owner
thereof either to occupy the premises or to a lease of the premises. The fact that the
right to continue to occupy the premises is dependent upon the payment of charges to
the corporation in the nature of rentals or assessments is immaterial.

   Section 528(a) provides that a homeowners association shall be subject to

taxation under Subtitle A only to the extent provided in section 528. Section 528(b)
provides that a tax is hereby imposed for each taxable year on the homeowners
association taxable income of every homeowners association. Such tax shall be equal
to 30 percent of the homeowners association taxable income.

  Section 528(c)(1) provides that the term "homeowners association" means an

organization which is a condominium management association, a residential real estate
management association, or a timeshare association if—

  (A) such organization is organized and operated to provide for the acquisition,
  construction, management, maintenance, and care of association property,
  (B) 60 percent or more of the gross income of such organization for the taxable
  year consists solely of amounts received as membership dues, fees, or
  assessments from—
         (i) owners of residential units in the case of a condominium management
         association,
         (ii) owners of residences or residential lots in the case of a residential real
         estate management association, or
         (iii) owners of timeshare rights to use, or timeshare ownership interests in,
         association property in the case of a timeshare association,
  (C) 90 percent or more of the expenditures of the organization for the taxable
  year are expenditures for the acquisition, construction, management,
  maintenance, and care of association property and, in the case of a timeshare
  association, for activities provided to or on behalf of members of the association,

PLR-125285-14 6

  (D) no part of the net earnings of such organization inures (other than by
  acquiring, constructing, or providing management, maintenance, and care of
  association property, and other than by a rebate of excess membership dues,
  fees, or assessments) to the benefit of any private shareholder or individual, and
  (E) such organization elects (at such time and in such manner as the Secretary
  by regulations prescribes) to have Section 528 apply for the taxable year.

   Section 528(d)(1) provides that the homeowners association taxable income for

purposes of section 528 for any taxable year is an amount equal to the excess (if any)
of the gross income for the taxable year (excluding any exempt function income), over
the deductions allowed by Chapter 1 which are directly connected with the production of
the gross income (excluding exempt function income) computed with the modifications
provided in section 528(d)(2). Section 528(d)(3) provides that, for purposes of section
528, the term “exempt function income” means any amount received as membership
dues, fees, or assessments from owners of condominium housing units in the case of a
condominium management association, owners of real property in the case of a
residential real estate management association, or owners of timeshare rights to use, or
timeshare ownership interests in, real property in the case of a timeshare association.

   The Taxpayer’s acquisition of interests in Corporation and the corresponding

occupancy agreements will provide Taxpayer with quiet use and enjoyment of
designated parcels of real property. Furthermore, the purpose of the Corporation is
limited by its Organization Documents to owning and managing real estate and the
interests in Corporation are inseparable from the corresponding occupancy agreements
granting Taxpayer quiet use and enjoyment of the designated parcels of real property.
The interests in Corporation are similar to tenant-stockholder interests in cooperative
housing corporations that qualify as interests in real property under section 1.856-3(c).
See also, Rev. Rul. 77-459, 1977-2 C.B. 239 (holding that interest in trust is a “real
estate asset” under section 856 when trust’s only asset was a loan secured by a
mortgage). Although Corporation is organized as a homeowners association as
described in section 528 and not a cooperative housing corporation as defined in
section 216, an interest in Corporation confers rights similar to those held by a tenant-
stockholder in a cooperative housing corporation. Therefore, it is appropriate for
interests in Corporation to be considered interests in real property under section 856(c).

Conclusion:

   We hereby rule that an interest in Corporation as described above constitutes an

interest in real property under section 856(c).

   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. In particular, no opinion is expressed
PLR-125285-14 7

regarding any part of an interest in Corporation that represents or is attributable to
personal property owned by Corporation. Further, no opinion is expressed with regard
to whether Taxpayer otherwise qualifies as a REIT under subchapter M of the Code.

   This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent. In accordance with the
provisions of a Power of Attorney on file, we are sending a copy of this ruling letter to
your authorized representatives.

                                             Sincerely,



                                             Robert A. Martin
                                             Senior Technician Reviewer, Branch 1
                                             (Financial Institutions & Products)