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Providing services to tenants won't disqualify REIT.

In Letter Ruling 9233008, the IRS addressed whether a real estate investment trust's (REIT) management activities with respect to its properties would disqualify its rental receipts as rents for real property under Sec. 856(d). Sec. 856(d) defines rents from real property as including charges for services customarily furnished or rendered in connection with the rental of real property. Sec. 856(d), however, specifically excludes from the definition of rental income all amounts received by a REIT in connection with services rendered or furnished directly to tenants, or from the operation or management of the property.

The REIT in this ruling, which owned 43 retail buildings, 11 office and commercial properties, and three industrial properties, provided only limited property management services (such as lease administration) directly to the tenants. Most other management services were provided by an independent contractor or by the tenants themselves. However, the REIT intended to provide all the ordinary, necessary, usual and customary services connected with the operation, leasing and management of these properties (including lease administration and accounting functions; solicitation of prospective tenants; maintenance, repair, security and landscaping services; background music for common areas; repair of heating, ventilation and air conditioning systems; direction of marketing and promotion activities of the shopping centers included in the properties; providing free parking to tenants, their employees and customers; reserving spaces for the handicapped; and providing a parking attendant). Any substantial services constituting personal service to a particular tenant would continue to be provided by independent contractors, from whom the REIT would not receive or derive any income.

The Service ruled that the activities the REIT intended to provide to its tenants would not cause the income from the REIT's properties to be treated as other than rents from real property within the meaning of Sec. 856(d). From Linda M. Kusch, J.D., and Elizabeth A. Luberto, CPA, Detroit, Mich.
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Title Annotation:real estate investment trust
Author:Luberto, Elizabeth A.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Mar 1, 1993
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