IRS Releases PLR 202012012 on Lease Rights and Percentage Rents from Billboard Site
On March 20, 2020, the Internal Revenue Service (“IRS”) released a Private Letter Ruling (“PLR”) addressing the treatment of lease rights and concluded that such rights constitute real property and real estate assets for purposes of Real Estate Investment Trust (“REIT”) asset testing.
Furthermore, the IRS ruled that the percentage rent from tenants of billboard sites as adjusted for agency fees and continuity discounts does not depend in whole or in part on the income or profits derived by any person at the billboard site for purposes of the REIT rules.
In order for an entity to qualify as a REIT, at least 75% of the value of the total assets of the REIT be represented by one or more of the following: (i) Real estate assets; (ii) Government securities; and (iii) Cash and cash items (including receivables)1.
Additionally, in order for an entity to qualify REIT, at least 75% of a REIT’s gross income must be derived from sources that include rents from real property, gain from the sale or other disposition of real property, dividends from REIT stock, and/or abatements and refunds on taxes on real property.
At least 95% of its gross income must be derived from sources that include qualifying income from the 75% test, plus dividends, interest, and gain on sale or other disposition of stock and securities2.
Percentage rent, if based upon gross revenues or sales, is considered qualifying income for the 75% & 95% tests, however, if the percentage rent is based upon net income it will be considered non-qualifying for the above tests, respectively.
2: §856(c)(2) and §856(c)(3)