Integrated senior communities qualify as health care property

Plain-English summary

A real estate investment trust owned two integrated senior living communities containing independent-living and licensed assisted-living units. Residents could move to higher levels of care as their needs changed, and all residents had access to meals, wellness programs, emergency systems, health checks, medical transportation, housekeeping, and optional on-site health services. The REIT planned to lease each property to a taxable REIT subsidiary that would use an eligible independent contractor to operate it. The IRS ruled that the communities were health care facilities and therefore qualified health care properties under IRC § 856(e)(6)(D). Rent from the subsidiary would not be excluded from real-property rent under the related-party rule as long as an eligible independent contractor operated and managed the properties.

Ruling snapshot

• Question: Did the mixed independent-living and assisted-living communities qualify as health care properties for the REIT related-party rent exception?
• Outcome: approved
• Key authorities: IRC § 856(d)(8), (d)(9), and (e)(6)(D)

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201647005
Release Date: 11/18/2016
Index Number: 856.00-00
                                                            Person To Contact:
----------------------                                      ------------------------, ID No. ------------------
-----------------------------                               ----------------------------------------------------
---------------------------------------                     Telephone Number:
----------------------------------                          ----------------------
                                                            Refer Reply To:
                                                            CC:FIP:B02
                                                            PLR-108045-16
                                                            Date:
                                                            August 16, 2016


Legend:

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

         Partnership                =     -----------------------------------------------------------

         Property One               =     -----------------------------

         Property Two               =     -------------------------------------

         State                      =     --------------

         Tax Year                   =     -------


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

        This is in response to your letter dated March 4, 2016, 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) of the Internal Revenue
Code, as amended (the “Code”), for purposes of the related-party rent exception of
section 856(d)(8)(B).

Facts:

       Taxpayer is a State corporation that elected to be taxed as a real estate
investment trust (“REIT”) under sections 856 through 860 of the Code in Tax Year.
Taxpayer uses an overall accrual method of accounting and the calendar year for its
taxable year. Taxpayer was formed to own its properties through a subsidiary operating
partnership, Partnership, in which Taxpayer is the general partner and owns
substantially all the partnership interests.
PLR-108045-16                                      2


       Taxpayer has acquired two mixed-use senior housing communities, Property
One and Property Two, collectively, the Properties. Pursuant to the structure permitted
by the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, § 3061, 122
Stat. 2654, 2901-02 (2008) (“RIDEA”) 1, Taxpayer intends for each community to be
owned by Partnership (through a Delaware limited liability company wholly-owned by
Partnership and disregarded for U.S. federal tax purposes) and leased to a taxable
REIT subsidiary (“TRS”) of Taxpayer, which will, in turn, enter into an arm’s length
management contract with an eligible independent contractor within the meaning of
section 856(d). In order to properly lease and contract the Properties under section
856(d)(8)(B), each Property must be a “qualified health care property” within the
meaning of section 856(e)(6)(D).

       The Properties are “age in place” senior living communities that contain both
independent living (IL) and assisted living (AL) units. “Age in place” is an industry term
used to describe a resident’s natural progression across the spectrum of services that
the facility offers, starting with IL and ending with AL as the need arises. Property One
consists of three buildings connected by enclosed corridors that are operated as one
integrated community. Two of the buildings contain IL units and one contains both IL
and AL units. Residents may utilize the amenities at each of the buildings and there is
substantial integration of the IL and AL services so that residents can move seamlessly
between service offerings as health needs warrant.

         Property Two consists of a single building containing both IL and AL units on
different floors. Property Two is also operated as one integrated community offering
different levels of care. This structure allows residents to have access to increased
services as their conditions warrant without the need to move them into a different
facility.

       Taxpayer represents that the Properties offer services that are not commonly
offered by a typical apartment building or complex. Services available to all residents of
both Properties generally include daily meals in a community dining room, social and
recreational activities, routine pharmacy deliveries, vaccinations, blood pressure
checks, fitness classes, and transportation to medical appointments. Both Properties
have a daily check-in system with a follow-up for residents who do not check in by the
designated time and units in both Properties are equipped with an emergency call
system. If a resident is believed to be in need of medical attention, staff at both
Properties will contact emergency 911 services and will assist as necessary with the

1
 Sections 3031-3071 of the Housing and Economic Recovery Act incorporated significant portions of
proposed legislation introduced as the REIT Investment Diversification and Empowerment Act of 2007, or
                                            th      st
“RIDEA”. See H.R. 1147 and S. 2002, 100 Cong. (1 Sess. 2007). The portions of the Housing and
Economic Recovery Act that incorporated H.R. 1147 and S. 2002 are still commonly referred to as
RIDEA. See generally Tony M. Edwards & Dara F. Bernstein, REITs Empowered, 24 BNA Tax Mgmt.
Real Estate Jn’l No. 11 , Nov. 5, 2008, at 1-3.
PLR-108045-16                                 3

emergency. In both Properties, the AL units are licensed by the state in which they are
located. Additionally, AL residents receive assistance with activities of daily living
(ADLs) including, bathing, dressing, grooming, toileting, and eating. The assistance
with ADLs is provided as the resident’s condition requires.

       In addition to the included services, Property One also offers a wellness center
where IL residents can pay an additional fee for access to assistance with ADLs as their
needs require. Property Two offers onsite rehabilitation therapy provided by licensed
therapists as well as in-home supportive services.

       Each Property has several common areas where AL and IL residents can
congregate and socialize such as dining areas, hobby rooms, and libraries. The same
staff members provide services to all residents in regard to housekeeping, food service,
maintenance, and community life.

Law and Analysis:

      Section 856(c)(2) provides that at least 95 percent of a REIT’s gross income
must be derived from sources that include rents from real property.

      Section 856(c)(3) provides that at least 75 percent of a REIT’s gross income
must be derived from sources, that likewise include, 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, the 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.

         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 eligible
independent contractor.
PLR-108045-16                                   4

        Section 856(d)(9)(A) provides that the term “eligible independent contractor” with
respect to any qualified lodging facility or 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 lodging facility or qualified health care property, such contractor
(or any related person) is actively engaged in the trade or business of operating
qualified lodging facilities or qualified health care properties, respectively, for any person
who is not a related person with respect to the real estate investment trust or the
taxable REIT subsidiary.

       Section 856(e)(6)(D)(i) defines qualified health care property as any real property
which is a health care facility.

         A “health care facility” is defined in section 856(e)(6)(D)(ii) 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 that is eligible for participation in the Medicare program under Title XVII 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, each Property is located in one building or on the
same campus, and all of the AL units are licensed by the state in which they are
located. When a resident eventually requires assistance with ADLs, the resident may
transition from an IL unit to an AL unit (depending upon availability). The IL residents
are more physically independent, but the Properties offer services to help maintain and
improve the health and wellbeing of all of their residents: including daily check-ins, the
provision of emergency call systems, congregate meals, wellness programs,
transportation, and housekeeping. Both properties offer wellness-related services that
support the overall well-being of the IL residents including routine pharmacy deliveries,
vaccinations, blood pressure checks, and transportation to medical appointments.
Additionally, the Properties provide optional health care services on-site for residents.
These healthcare services are not typically available in general apartment buildings and
offer services for residents in a manner that provides for congregate care.

Conclusion:

         Based on the facts as represented, we rule that the Properties are health 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).
Accordingly, amounts paid to the Taxpayer by the TRS shall not be excluded from rents
from real property by reason of section 856(d)(2)(B) so long as the Properties are
operated and managed by an eligible independent contractor.
PLR-108045-16                                  5

       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.

      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,



                                           ______________________
                                           Susan Thompson Baker
                                           Senior Technician Reviewer, Branch 2
                                           Office of Associate Chief Counsel
                                           (Financial Institutions & Products)