A REIT's billboard advertising income still counts as "rents from real property" despite short-term and TRS leases

Plain-English summary

A real estate investment trust (REIT) owns buildings with large billboard signs attached, and it leases the advertising space on those signs to tenants. It has elected to treat the signs as real property. Most leases are long-term, but some space is leased in short time increments (a rotation of ads), producing a small amount of "short-term" revenue, and the REIT also plans to lease the multi-tenant signs to its own taxable REIT subsidiary ("Sign TRS"). A REIT must earn most of its income from "rents from real property," and related-party rent (such as rent from a subsidiary the REIT controls) is normally excluded from that category. The REIT asked whether these two features would spoil its sign income. The IRS ruled they would not. The short-term ad leases are contracts for the use of advertising space (not for services), so their brief duration does not disqualify the income. And rent from the Sign TRS still counts, because the REIT meets the Section 856(d)(8) exception: at least 90 percent of each property's leased space goes to unrelated tenants, and the TRS's rent is comparable to what unrelated tenants pay. So the income qualifies as rents from real property under Section 856(d). The IRS did not opine on whether the taxpayer otherwise qualifies as a REIT or whether its services are "customarily furnished."

Ruling snapshot

• Question: Does a REIT's billboard advertising rent stay "rents from real property" under § 856(d) despite de minimis short-term leases and leasing to a taxable REIT subsidiary?
• Outcome: Approved (income qualifies as rents from real property)
• Key authorities: IRC § 856(c), (d)(1), (d)(2)(B), (d)(8); § 856(l)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202047003                                             Third Party Communication: None
Release Date: 11/20/2020                                      Date of Communication: Not Applicable
Index Number: 856.04-00
                                                              Person To Contact:
-------------------------------------------                   ----------------, ID No. ------------
-----------------------------------------------               Telephone Number:
---------------------------------                             --------------------
-----------------------                                       Refer Reply To:
----------------------------------------                      CC:FIP:B02
                                                              PLR-104841-20
                                                              Date:
                                                              August 19, 2020

Legend

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

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

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

Date 2 = ------------------

Parent = -----------------------------

Address A = -----------------------------------------

Address B = -----------------------------------------

a = --

b = --

c = --

d = --

e = ---

f = ---

Sign TRS = ------------------------------------------
PLR-104841-20 2

Type 1 Sign = ----------------------------------

Type 2 Sign = -------------

Portion A = --------------------

Portion B = --------------------

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

    This responds to a letter dated October 30, 2019, and subsequent submissions,

requesting a ruling on behalf of Taxpayer with respect to income derived by Taxpayer
for the use of advertising space on its Type 1 Signs (as defined below).

                                           FACTS

   Taxpayer is a State limited liability company that has elected to be treated as a

corporation and to be taxed as a real estate investment trust (“REIT”) under sections
856 through 859 of the Internal Revenue Code (“Code”), each election effective as of
Date 1.

   Through partnerships, Taxpayer owns real property, including buildings, located

at Address A and Address B. Affixed to the exterior sides of the building located at
Address A is a steel billboard superstructure to which d Type 1 Signs and b Type 2
Signs are attached (the Type 1 signs, the “Address A Type 1 Signs,” and the property
located at Address A, including the Address A Type 1 Signs and Type 2 Signs,
“Property A”).

   Affixed to the exterior sides of the building located at Address B is a steel

billboard superstructure to which a Type 1 Sign is attached (such sign, the “Address B
Type 1 Sign;” the property located at Address B, including the Address B Type 1 Sign,
“Property B;” Property A and Property B, the “Properties;” and the Address B Type 1
Sign and the Address A Type 1 Signs collectively, the “Type 1 Signage”).

   Taxpayer has made the election under section 1033(g)(3) and the regulations

thereunder to treat each Type 1 Sign as real property for purposes of chapter 1 of the
Code. Taxpayer leases the space on the Type 1 Signage to user-tenants wishing to
display advertisements to the public.

   With respect to the Address A Type 1 Signs, the space on each of c of the

Address A Type 1 Signs (the “Address A Single-tenant Signs”) is leased to a different
long-term user-tenant. These leases generally have terms of multiple years, and the
user-tenants display their advertisements continuously. With respect to the remaining
Address A Type 1 Sign (the “Multi-Tenant Address A Sign”), user-tenants will lease
increments of time to display advertisements, and each user-tenant’s advertisements
PLR-104841-20 3

will be displayed only for certain intervals of time in an e hour rotation with those of the
other user-tenants. While a portion of the lease agreements for space on the Multi-
Tenant Address A Sign are expected to encompass f days or more, others may be for
shorter periods.

   With respect to the Address B Type 1 Sign, the terms and nature of each lease

depends on whether the leased space is on Portion A or Portion B of the Address B
Type 1 Sign. Portion A of the Address B Type 1 Sign (the “Address B Single-tenant
Sign”, collectively with the Address A Single-tenant Signs, the “Single-tenant Signs”) is
divided into segments, each of which is leased to a different long-term user-tenant.
These leases have terms of multiple years, and the user-tenants display their
advertisements on their respective segments continuously. With respect to Portion B of
the Address B Type 1 Sign (the “Address B Multi-tenant Sign”, collectively with the
Address A Multi-tenant Sign, the “Multi-tenant Signs”) user-tenants lease increments of
time to display advertisements, and each user-tenant's advertisements are displayed
only for certain intervals of time in an e hour rotation with those of the other
user-tenants. While most of the lease agreements for space on the Address B Multi-
tenant Sign encompass f days or more, some may be for shorter periods.

    Taxpayer’s lease agreements for space on the Multi-tenant Signs are generally

expected to encompass f days or more, but Taxpayer may engage in relatively less
significant leasing activities with user-tenants for shorter periods (“short-term leases”).
Therefore, Taxpayer may realize income from short-term leases (“Short-Term
Revenues”), which will comprise no more than a de minimis portion of Taxpayer’s total
revenues from the leased signs at the Properties for the calendar year.

   Under each lease entered into with a user-tenant, the user-tenant pays Taxpayer

a fixed, arm's-length rent. Taxpayer represents that any services rendered by it will be
usual or customary services rendered in connection with the rental of Type 1 Signs in
the geographic area, and such services will not be rendered primarily for the
convenience of Sign TRS, as described below, or the other Type 1 Sign user-tenants.

    Taxpayer has formed Sign TRS, a subsidiary that is a State limited liability

company. Effective Date 2, elections have been made with respect to Sign TRS to treat
it as both a corporation for federal tax purposes and as a taxable REIT subsidiary
(“TRS”) pursuant to section 856(l). Taxpayer intends to enter into a lease with Sign
TRS of the Multi-tenant Signs, with a term of at least a years.

    Under any such lease entered into between Taxpayer and Sign TRS, Sign TRS

will pay to Taxpayer a fixed, arm's-length rent. Taxpayer represents that such rent will
be comparable to the rents paid by the other Type 1 Sign user-tenants, adjusted to
reflect the then-current market conditions. In the event Sign TRS rents the entirety of
the Type 1 Signage, Taxpayer represents that the rental payments by Sign TRS will be
substantially comparable to rents paid by unrelated tenants for comparable space
located in the same geographic area.
PLR-104841-20 4

   Other than the leases to Sign TRS described above, Taxpayer will lease all

space in the Properties to parties unrelated to Taxpayer. Taxpayer represents that in all
cases at least 90 percent of the leased space of Property A and at least 90 percent of
the leased space of Property B will be leased to persons other than TRSs of Taxpayer,
including Sign TRS, and other than persons described in section 856(d)(2)(B).

                              RULING REQUESTED

    Under the circumstances described above, Taxpayer’s income from leasing signs

at the Properties will not be considered other than “rents from real property” under
section 856(d) solely by reason of (1) the Short-Term Revenues or (2) the leases to
Sign TRS covering up to the entirety of the leased signs at each Property, so long as
TRSs of Taxpayer, including Sign TRS, and persons described in section 856(d)(2)(B)
lease less than 10 percent of the leased space at Property A and less than 10 percent
of the leased space at Property B.

                                LAW & 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” includes (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 the term “rents from real property” does not

include any amount received or accrued directly or indirectly from any person if the real
estate investment trust owns, directly or indirectly, in the case of any person which is a
corporation, stock of such person possessing 10 percent or more of the total combined
voting power of all classes of stock entitled to vote, or 10 percent or more of the total
value of shares of all classes of stock of such person.

   Section 856(d)(8) provides that amounts paid to a REIT by a TRS of such REIT

shall not be excluded from rents from real property by reason of section 856(d)(2)(B) if,
with respect to any property, at least 90 percent of the leased space of the property is
rented to persons other than TRSs of such trust and other than persons described in
PLR-104841-20 5

section 856(d)(2)(B). The rents will only be excluded to the extent that the amounts
paid to the REIT as rents from real property are substantially comparable to such rents
paid by the other tenants of the REIT’s property for comparable space.

   Taxpayer expects the vast majority of revenues from leasing signs to user-

tenants to be attributable to long-term leases. In the limited cases in which Taxpayer
may lease space directly to user-tenants on a short-term basis, Taxpayer represents
that the resulting Short-term Revenues will represent at most a de minimis portion of
Taxpayer’s overall revenue from leasing signs. The Short-Term Revenues will be
derived from contracts for the use of advertising space and not contracts for the
provision of services. Under the facts submitted and representations made, the short-
term nature of the leases resulting in the Short-term Revenues will not preclude
Taxpayer’s income from the leased signs at the Properties from qualifying as rents from
real property within the meaning of section 856(d).

    In addition, Taxpayer represents that Sign TRS will lease less than 10 percent of

the leased space at each Property. Taxpayer further represents that in all cases at
least 90 percent of the leased space of each Property will be leased to persons other
than TRSs of Taxpayer and other than persons described in section 856(d)(2)(B).
Furthermore, Taxpayer represents that the rent paid by Sign TRS will be comparable to
the rents paid by the other Type 1 Sign user-tenants, adjusted to reflect the then-current
market conditions. If Sign TRS rents the entirety of the Type 1 Signage, Taxpayer
represents that the rental payments by Sign TRS will be substantially comparable to
rents paid by unrelated tenants for comparable space located in the same geographic
area. Although section 856(d)(2)(B) excludes related party rents from the definition of
rents from real property, Taxpayer meets the requirements of the exception provided for
rents received from a TRS under section 856(d)(8). Therefore, under the facts
submitted and representations made, the fact of Sign TRS leasing the entirety of the
leased signs at the Properties will not cause Taxpayer’s income from leasing signs at
the Properties to fail to qualify as rents from real property within the meaning of section
856(d).

                                 CONCLUSION

    Accordingly, based on the facts submitted and representations made, we rule

that Taxpayer’s income from leasing signs at the Properties will not be considered as
other than rents from real property within the meaning of section 856(d) solely by
reason of (1) the Short-term Revenues or (2) the leases to Sign TRS covering up to the
entirety of the leased signs at each Property, so long as TRSs of Taxpayer, including
Sign TRS, and persons described in section 856(d)(2)(B) lease less than 10 percent of
the leased space at Property A and less than 10 percent of the leased space at
Property B.

  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
PLR-104841-20 6

referenced in this letter. Specifically, no opinion is expressed or implied whether
Taxpayer otherwise qualifies as a REIT or Sign TRS otherwise qualifies as a TRS under
part II of subchapter M of chapter 1 of the Code. Further, no opinion is expressed or
implied whether any service is customarily furnished within the meaning of
section 856(d)(1)(B). Additionally, no opinion is expressed or implied with regard to
whether Taxpayer is eligible to make an election under section 1033(g)(3) with respect
to any property.

    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 it may not be used or cited as precedent. The ruling contained in
this letter is based upon information and representations submitted by Taxpayer under a
penalties of perjury statement executed by an appropriate party. While this office has
not verified any of the material submitted in support of this ruling request, it is subject to
verification on examination.

     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,


                                   Bernard J. Audet, Jr.
                                   Bernard J. Audet, Jr.
                                   Assistant to the Branch Chief, Branch 2
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)