United States: IRS Rules That Parking Revenue Received By REIT, From REIT Subsidiaries, Is Rent From Real Property

In a private letter ruling (PLR 201341015), the IRS ruled that parking revenue received by a real estate investment trust (REIT) from certain parking facilities under parking management agreements with various taxable REIT subsidiaries qualified as rents from real property for purposes of Section 856(d).

Section 856(c)(2) generally provides that at least 95% of a REIT’s gross income must be derived from certain specified sources, including rents from real property.  Similarly, Section 856(c)(3) requires 75% of a REIT’s gross income to be derived from certain specified sources, including rents from real property. Income generated from providing services, however, including impermissible tenant service income, is generally excluded from the definition of rents from real property when applying these 95% and 75% gross income tests. Certain exceptions apply when the underlying services are provided by an independent contractor or a taxable REIT subsidiary. In Rev. Rul. 2004-24, 2004-1 C.B. 550, the IRS held, in part, that amounts received by a REIT for furnishing attended parking facilities managed by an independent contractor qualified as rents from real property.  

In the facts of PLR 201341015, the REIT taxpayer owned several parking facilities managed by independent contractors. The REIT received income from the parking facilities after a reduction for a management fee retained by the independent contractors. Subsequently, the REIT decided to use some of its taxable REIT subsidiaries to manage its parking facilities and canceled its management contracts with the independent contractors. The REIT’s arrangement with its taxable REIT subsidiaries was arm’s length for customary parking management services.

The IRS ruled that the parking revenue the REIT received from its parking facilities, which were now under management agreements with taxable REIT subsidiaries instead of independent contractors, qualified as rents from real property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.