Tax Notes Federal – April 4, 2022
Expansion of EVs and EV Charging Stations
Electric autos have gotten mainstream. But are EV charging stations customary?
Historically, actual property funding trusts have been supposed to be passive autos for funding in actual property.1 As such, the unique REIT laws severely restricted the extent to which the REIT itself might handle and function its properties and supply companies to tenants.2 Although the rules have been liberalized to some extent in 1986,3 there stay a posh algorithm in regards to the provision of companies by REITs, largely developed by means of the numerous non-public letter rulings the IRS has issued on the subject. The impact of those guidelines, mentioned under, is that it’s troublesome for REITs to grow to be market leaders by offering new companies to their tenants. And when REITs can present these companies, they’re steadily restricted of their capability to revenue from them.
So what’s a REIT to do when potential tenants are pushing for a brand new service, however it’s unclear whether or not and the way a REIT can present that service? That is the state of play in relation to EV charging stations. Today there are simply over 46,000 EV charging stations throughout the United States.4 The Biden administration’s infrastructure plan underneath the Infrastructure Investment and Jobs Act5 has allotted $5 billion to extend this quantity to 500,000 over the following 5 years.6 But it’s estimated that $87 billion of funding is required in EV charging stations by 2030 to place the United States on a path to full light-duty car electrification.7 Most of this funding is required in public locations (for instance, purchasing facilities and places of work) and at multifamily housing complexes.8
As EVs grow to be mainstream, REITs might want to set up EV charging stations at their properties to stay aggressive with non-REIT property homeowners. Many REITs are already discovering methods to supply EV charging stations at their properties.9 But the IRS has to not date issued any steering addressing the set up and operation of EV charging stations by REITs. In mild of the Biden administration’s push to develop EV companies, formal steering much like the 2004 income process on parking garages10 is warranted. In the meantime, REITs might want to rigorously apply the present guidelines concerning tenant companies to their info when considering an EV charging station program. This article unpacks a few of these issues.
REITs — Rents From Real Property Generally
Among different necessities, a minimum of 75 % of a REIT’s annual gross earnings should encompass outlined kinds of earnings derived from investments regarding actual property, mortgage loans, or certified short-term funding earnings (the 75 % gross earnings take a look at).11 At least 95 % of a REIT’s gross earnings should encompass earnings qualifying for the 75 % gross earnings take a look at and another passive earnings, equivalent to curiosity and dividends (the 95 % gross earnings take a look at).12 The authentic legislative aim behind the 75 % and 95 % gross earnings checks was to make sure that most of a REIT’s earnings got here from passive and real-estate-related sources.13 As a sensible matter, most fairness REITs fulfill these checks by guaranteeing that the majority of their earnings qualifies as “rents from actual property.”
Generally, rents from actual property are quantities obtained for the usage of, or the proper to make use of, actual property.14 Specifically, rents from actual property embody: (1) rents from pursuits in actual property; (2) prices for companies usually furnished or rendered in reference to the rental of actual property, whether or not or not individually acknowledged; and (3) hire attributable to private property that’s leased underneath, or in reference to, a lease of actual property, supplied the hire attributable to the private property doesn’t exceed 15 % of the whole rental quantity.15 Among another limitations, rents from actual property typically don’t embody quantities obtained or accrued for managing or working the true property or for companies supplied to tenants (impermissible tenant companies earnings, or ITSI).16 Also, if ITSI exceeds 1 % of all quantities obtained or accrued by the REIT for a given property in a given tax 12 months, all rents from that exact property will fail to qualify as rents from actual property.17
Some service earnings might qualify as rents from actual property if the companies are usually supplied to tenants of different properties of comparable class and placement.18 The companies should even be furnished primarily for the advantage of the REIT’s tenants, friends, prospects, or subtenants in reference to the rental of actual property.19 Ultimately, whether or not a service is customary is property-specific and should be decided case by case. To decide which companies the IRS might contemplate customary, REIT practitioners usually look to IRS non-public letter rulings issued to different REIT taxpayers, though these rulings, as a technical matter, might not be relied on by anybody aside from the taxpayers to which they have been issued.
Even if a service is customary, a REIT might present it straight provided that the service might be supplied by a company described in part 511(a)(2) (a tax-exempt group) with out that group being topic to tax on unrelated enterprise taxable earnings underneath part 512(b)(3).20 Rents will typically not be UBTI to a tax-exempt group;21 nevertheless, funds for the usage of area when companies are additionally rendered to the occupant can be UBTI.22 A service can be thought of rendered to the occupant if the service is primarily for the tenant’s comfort and is aside from these normally or usually rendered in reference to the rental of rooms or different area for occupancy solely.23 A basic instance is maid service. If a REIT can’t present the service straight, it might solely present that service by means of an impartial contractor (IK)24 or a taxable REIT subsidiary (TRS).25 Amounts obtained by the REIT for customary companies supplied by an IK or a TRS, nevertheless, will qualify as rents from actual property for functions of the 75 % and 95 % gross earnings checks.26
If a service will not be customary, as famous above, it should be supplied by an IK or a TRS. If the service is supplied by an IK, the associated fee should be borne by the IK, a separate cost should be made for the service, and the quantity of the separate cost should be obtained and retained by the IK.27 Consequently, the REIT can’t revenue from that service. The provision of these companies by a TRS will not be topic to the restrictions, however the preparations between the REIT and the TRS should be at arm’s length28 and the TRS can be topic to federal earnings tax on its web earnings.29 If these necessities should not complied with, earnings attributable to the companies will represent ITSI and won’t be qualifying earnings for both the 75 % or 95 % gross earnings checks.30 As famous, if ITSI obtained or accrued for a property in a given 12 months exceeds 1 % of all quantities obtained or accrued for the property in that 12 months, no quantities obtained or accrued for that property will qualify as rents from actual property.
There is little direct steering on permissible companies, and most come within the type of non-public letter rulings. However, Rev. Rul. 2004-24 particularly addresses the implications of three hypothetical parking preparations at a REIT-owned property and will make clear the usual to be utilized to EV charging stations. In the primary state of affairs, a REIT owned business actual property together with workplace buildings, purchasing facilities, and condo complexes. Each property included a parking facility that was situated on or adjoining to the leased premises for the usage of tenants, friends, prospects, and subtenants and was acceptable in measurement for their quantity. None of the parking amenities have been attended. The REIT maintained, repaired, and lit the parking amenities and carried out different actions in keeping with its fiduciary duties, equivalent to coping with taxes and insurance coverage. No different companies have been supplied.
The second state of affairs was the identical as the primary, besides that some properties included reserved parking spots. The REIT assigned and marked areas in reference to leasing area within the constructing to tenants. Any recurring capabilities such because the enforcement of reserved areas have been dealt with by an IK from which the REIT didn’t derive or obtain earnings.
The third state of affairs was the identical because the second, besides that some amenities have been attended and have been additionally open to most of the people. An IK dealt with and operated the parking amenities underneath a administration contract with the REIT. The IK would remit the parking charges it collected to the REIT, and the REIT would pay the IK an arm’s-length payment for its companies. The IK employed all of the parking attendants and was accountable for all salaries, wages, and advantages in addition to the administration and supervision of its workers. The IK would sometimes park automobiles to attain most capability or for causes of security and safety. The IK would additionally sometimes present “minor, incidental, emergency service” to parkers, equivalent to charging a battery or altering a flat tire.
The IRS held that every one three preparations have been permissible underneath the REIT guidelines on tenant companies. In the primary state of affairs, the IRS held that the REIT’s actions on the unattended parking amenities have been customary in all geographic markets, and since the parking amenities have been acceptable in measurement for the variety of tenants, friends, prospects, and subtenants, any companies have been supplied in reference to the rental of actual property. In the second state of affairs, the earnings from the supply of reserved parking certified as rents from actual property; it didn’t give rise to ITSI as a result of the enforcement and different recurring capabilities have been dealt with by an IK, not the REIT. In the third state of affairs, the provision of parking to most of the people didn’t outcome within the parking being supplied aside from in reference to the rental of actual property as a result of the amenities have been acceptable in measurement for the usage of the tenants, friends, prospects, and subtenants and due to this fact might be anticipated for use predominantly by them, and likewise as a result of any associated companies have been supplied by an IK.
Although illustrative, Rev. Rul. 2004-24 is now 18 years outdated and was issued earlier than EVs have been available to the general public. It can present some steering on the query of EV charging stations, nevertheless it doesn’t reply all of the questions.
Applying Existing Rules to EV Charging Services
The first query dealing with REITs that need to present EV charging stations at their properties is whether or not the stations can be thought of “usually supplied in reference to the rental of actual property.” There are two elements to this query: First, are EV charging stations customary for properties of comparable class and placement? Second, even when so, are they being supplied in reference to the rental of actual property?
The query whether or not EV charging stations are customary could be resolved solely on a property-by-property foundation, contemplating each the locale and the kind of constructing. However, due to the novelty and fast development of EVs, this query is fraught. What could also be customary in Palo Alto, California, for EV charging stations might not be customary in Punxsutawney, Pennsylvania. Similarly, EV charging stations could also be customary at a category A workplace constructing, however not a category C strip mall. Moreover, this evaluation will continually evolve because the EV market grows, and what may not be customary now might grow to be customary in brief order.31
The “customary” query might resolve itself in time, however the query of whether or not EV charging stations are supplied “in reference to the rental of actual property” could also be more durable to settle. As mentioned, the rules say {that a} service is supplied in reference to the rental of actual property whether it is supplied primarily for the advantage of the REIT’s tenants and their friends, prospects, and subtenants. In Rev. Rul. 2004-24, the IRS decided that which means that a parking facility should be acceptable in measurement for the variety of tenants and their friends, prospects, and subtenants. Applying this rule within the context of EV charging stations can be logical; that’s, the variety of EV charging stations obtainable needs to be acceptable for the dimensions of the power. But what if a REIT desires to put in EV charging stations in accordance with the expected development of EV utilization? Unlike parking areas, the variety of EV charging stations wanted at a property is more likely to develop whilst the general variety of tenants, friends, prospects, and subtenants stays the identical. A REIT shouldn’t be punished for putting in EV charging stations in accordance with predicted demand reasonably than present utilization. But for the time being, if a REIT intends to take the place that its EV charging stations are usually supplied in reference to the rental of actual property, it ought to hold information and data supporting each that the service is customary for the category of constructing and geographic space and that the variety of EV charging stations put in is suitable for the anticipated utilization.
Assuming that the REIT is assured that the EV charging stations it desires to put in are customary, the following query is the way it can present that service. As mentioned, a REIT might straight present companies that may be performed by a tax-exempt group with out being topic to the tax on UBTI. As interpreted by means of Rev. Rul. 2004-24, the scope of companies that may be supplied straight by a REIT in reference to parking amenities is sort of slender. The REIT was solely permitted to keep up and restore the parking facility, present lighting, assign and mark (however not implement) reserved areas, and handle fiduciary issues equivalent to taxes and insurance coverage. All the opposite actions described have been dealt with by an IK. As such, Rev. Rul. 2004-24 would recommend {that a} REIT’s capability to supply companies for EV charging stations is sort of restricted. Maybe it might assign reserved EV charging stations, which might make enterprise sense at an workplace or condo advanced, however not a shopping mall. Still, it might appear that every other recurring capabilities would should be dealt with by an IK.
That mentioned, underneath reg. part 1.512(b)-1(c)(5), the furnishing of warmth and light-weight should not thought of companies rendered to the occupant, and, thus, they’re companies which may be supplied straight by a REIT. Moreover, REITs have traditionally been in a position to furnish utilities (together with submetering) and generate energy for use by tenants. In a number of situations, the IRS has allowed a REIT to buy utilities from the grid at wholesale charges after which promote these utilities at retail costs to tenants.32 REITs have additionally been in a position to cost an administrative payment to tenants for the price of offering the utility service.33
Providing EV charging could also be seen as the supply of a utility. However, that utility is supplied in reference to a parking area, not a constructing (a minimum of indirectly), and is to cost an EV, to not warmth and light-weight the constructing. The query to be addressed by the IRS is whether or not these are distinctions with out a distinction. In the absence of steering, REITs might need to adhere to the extra conservative steering of Rev. Rul. 200424 and make use of an IK to supply EV charging station companies.
If the REIT can’t be assured that its EV charging stations are customary companies underneath the requirements mentioned, it should use an IK or TRS to supply them. If an IK is used and EV charging stations should not customary, the IK should bear the price of offering the EV charging stations, make a separate cost for their use (for instance, by means of cost on the station), and retain that separate cost. Essentially, the REIT can be allowed to have the EV charging stations at its property, however all points of the stations can be dealt with by the IK, and the REIT wouldn’t be allowed to revenue from their presence. If a TRS supplied the service as an alternative, the individually acknowledged guidelines wouldn’t apply, however the REIT’s backside line would nonetheless be diminished by the requirement that it pay the TRS an arm’s-length payment for managing and working the EV charging stations.
Conclusion
The use of EVs and EV charging stations will proceed to develop, whatever the extent to which REITs can take part. The Biden administration has expressed its perception that authorities help of development within the EV market can strengthen home provide chains,34 create jobs,35 and scale back emissions.36 If the federal government would make it clear how REITs can take part in and help the expansion of EV charging stations, it might assist spur current efforts to develop the nation’s EV charging station community.
1 H.R. Rep. No. 86-2020, at 6 (1960).
2 Former part 856(d)(2)(C), as in impact earlier than the modification by the Tax Reform Act of 1986.
3 Tax Reform Act of 1986, 100 Stat. 2085 (1986).
4 Department of Energy, “Alternative Fuels Data Center — Electric Vehicle Charging Station Locations.”
5 Infrastructure Investment and Jobs Act (P.L. 117-58), 135 Stat. 429 (2021).
6 Department of Transportation, “President Biden, USDOT and USDOE Announce $5 Billion Over Five Years for National EV Charging Network, Made Possible by Bipartisan Infrastructure Law” (Feb. 10, 2022).
7 Lucy McKenzie and Nick Nigro, “U.S. Passenger Vehicle Electrification Infrastructure Assessment: Results for Light-Duty Vehicle Charging,” Atlas Public Policy, Apr. 28, 2021.
8 Id.
9 See, e.g., Tanger Factory Outlet Centers Inc., “Annual Report (Form 10-Ok)” (Feb. 22, 2022); Douglas Emmett Inc., “Annual Report (Form 10Ok)” (Feb. 18, 2022); Regency Centers Corp., “Annual Report (Form 10Ok)” (Feb. 17, 2022); Essential Properties Realty Trust Inc., “Annual Report (Form 10-Ok)” (Feb. 16, 2022); Urstadt Biddle Properties Inc., “Annual Report (Form 10-Ok)” (Jan. 13, 2022); Blink Charging Co., “Blink Deploys EV Charging Stations at Edgewood Real Estate Investment Trust Multifamily Properties in Missouri,” GlobeNewswire, Oct. 27, 2020; Electrify America, “Electrify America Collaborating With Nine Additional Companies to Host More Than 30 Ultra-Fast Electric Vehicle Charging Stations,” Apr. 24, 2019.
10 Rev. Rul. 2004-24, 2004-1 C.B. 550.
11 Section 856(c)(3).
12 Section 856(c)(2).
13 Supra observe 1.
14 Reg. part 1.856-4(a).
15 Section 856(d)(1)(A)-(C).
16 Section 856(d)(2)(C) and (d)(7)(A).
17 Id.
18 Reg. part 1.856-4(b)(1).
19 Id.
20 Section 856(d)(7)(C)(ii).
21 Id. Section 512(b)(3)(A)(i).
22 Reg. part 1.512(b)-1(c)(5).
23 Id.
24 A service supplier can be an IK if (1) it doesn’t personal, straight or not directly, greater than 35 % of the shares within the REIT and (2) no more than 35 % of the IK’s inventory, measured by voting energy or variety of shares (if it’s a company), or 35 % of the pursuits within the IK’s property or web earnings (if it’s a noncorporate entity) are owned, straight or not directly, by a number of individuals who personal 35 % or extra of the shares of the REIT. Section 856(d)(3); reg. part 1.856-4(b)(5)(iii). For this function, the attribution guidelines of part 318(a) apply, modified by substituting 10 % for 50 % in part 318(a)(2)(C) and (3)(C) and, within the case of partnership attribution underneath part 318(a)(3)(A), solely considering curiosity of 25 % or larger companions. Section 856(d)(5); reg. part 1.856-4(b)(7).
25 A TRS is a taxable company subsidiary of a REIT that will earn earnings that will not be qualifying earnings if earned straight by its mum or dad REIT, supplied the subsidiary and the REIT collectively elect to deal with the subsidiary as a TRS. Section 856(l). The property and earnings of a TRS should not included in figuring out a REIT’s compliance with the REIT necessities. No greater than 20 % of the worth of a REIT’s property might encompass inventory or securities of its TRSes. Id. Section 856(c)(4)(B)(ii).
26 Id. Section 856(d)(7)(C)(i). An association between a REIT and its TRS for the TRS to supply companies to the REIT’s tenants should present for arm’s-length compensation to the TRS. Failure to adjust to this rule will outcome within the imposition of a one hundred pc tax on “redetermined TRS service earnings,” which is the gross earnings of a TRS attributable to companies supplied to, or on behalf of, the REIT, much less deductions correctly allocable to these companies, to the extent the quantity of that earnings, much less deductions, can be elevated on distribution, apportionment, or allocation underneath part 482. Id. Section 857(b)(7)(E)(ii).
27 Reg. part 1.856-4(b)(4).
28 Supra observe 26.
29 Rev. Rul. 2002-38, 2002-2 C.B. 38 (holding {that a} TRS needn’t adjust to the individually acknowledged requirement relevant to IKs).
30 Section 856(d)(7)(A).
31 One REIT already considers having EV charging stations at its retail purchasing facilities as important to its enterprise as having these purchasing facilities anchored by grocery shops. See Wheeler Real Estate Inv. Trust Inc., Annual Report (Form 10-Ok) (Feb. 28, 2022) (“We imagine [our] facilities that present important items and companies equivalent to groceries and electrical car charging stations lead to a steady, lower-risk portfolio of retail funding properties.”).
32 LTR 200052031; LTR 200052023; LTR 9850009; LTR 9536013; LTR 9431052; LTR 9403012; and LTR 9014022.
33 LTR 200052031; LTR 9536013; and LTR 9850009.
34 White House, “The Biden-Harris Electric Vehicle Charging Action Plan” (Dec. 13, 2021).
35 Al Root, “Tesla Finally Gets a Mention as Biden Talks Up Electric Vehicles,” Barron’s, Feb. 8, 2022.
36 Seung Min Kim and Dino Grandoni, “Biden Lauds Electric Cars in Michigan as Climate Agenda Hits Road Bumps in Washington,” The Washington Post, Nov. 17, 2021.
https://www.jdsupra.com/legalnews/can-reits-charge-for-charging-electric-8467625/
