Can REITs Charge for Charging Electric Vehicles?

Expansion of EVs and EV Charging Stations

Electric vehicles are becoming mainstream. But are EV charging stations customary?

Historically, real estate investment trusts were intended to be passive vehicles for investment in real property.¹ As such, the original REIT legislation severely limited the extent to which the REIT itself could manage and operate its properties and provide services to tenants.² Although the guidelines were liberalized to some extent in 1986,³ there remain a complex set of rules concerning the provision of services by REITs, largely developed through the many private letter rulings the IRS has issued on the topic. The effect of these rules, discussed below, is that it is difficult for REITs to become market leaders by providing new services to their tenants. And when REITs can provide these services, they are frequently limited in their ability to profit from them.

So what is a REIT to do when potential tenants are pushing for a new service, but it is unclear whether and how a REIT can provide that service? That is the state of play when it comes to EV charging stations. Today there are just over 46,000 EV charging stations across the United States.⁴ The Biden administration’s infrastructure plan under the Infrastructure Investment and Jobs Act⁵ has allotted $5 billion to increase this number to 500,000 over the next five years.⁶ But it is estimated that $87 billion of investment is needed in EV charging stations by 2030 to put the United States on a path to full light-duty vehicle electrification.⁷ Most of this investment is needed in public places (for example, shopping centers and offices) and at multifamily housing complexes.⁸

As EVs become mainstream, REITs will need to install EV charging stations at their properties to remain competitive with non-REIT property owners. Many REITs are already finding ways to provide EV charging stations at their properties.⁹ But the IRS has not to date issued any guidance addressing the installation and operation of EV charging stations by REITs. In light of the Biden administration’s push to expand EV services, formal guidance similar to the 2004 revenue procedure on parking garages¹⁰ is warranted. In the meantime, REITs will need to carefully apply the existing rules regarding tenant services to their facts when contemplating an EV charging station program. This article unpacks some of those considerations.

REITs — Rents From Real Property Generally

Among other requirements, at least 75 percent of a REIT’s annual gross income must consist of defined types of income derived from investments relating to real property, mortgage loans, or qualified temporary investment income (the 75 percent gross income test).¹¹ At least 95 percent of a REIT’s gross income must consist of income qualifying for the 75 percent gross income test and some other passive income, such as interest and dividends (the 95 percent gross income test).¹² The original legislative goal behind the 75 percent and 95 percent gross income tests was to ensure that most of a REIT’s income came from passive and real-estate-related sources.¹³ As a practical matter, most equity REITs satisfy these tests by ensuring that most of their income qualifies as “rents from real property.”

Generally, rents from real property are amounts received for the use of, or the right to use, real property.¹⁴ Specifically, rents from real property include: (1) rents from interests in real property; (2) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not separately stated; and (3) rent attributable to personal property that is leased under, or in connection with, a lease of real property, provided the rent attributable to the personal property does not exceed 15 percent of the total rental amount.¹⁵ Among some other limitations, rents from real property generally do not include amounts received or accrued for managing or operating the real property or for services provided to tenants (impermissible tenant services income, or ITSI).¹⁶ Also, if ITSI exceeds 1 percent of all amounts received or accrued by the REIT for a given property in a given tax year, all rents from that particular property will fail to qualify as rents from real property.¹⁷

Some service income may qualify as rents from real property if the services are customarily provided to tenants of other properties of similar class and location.¹⁸ The services must also be furnished primarily for the benefit of the REIT’s tenants, guests, customers, or subtenants in connection with the rental of real property.¹⁹ Ultimately, whether a service is customary is property-specific and must be determined case by case. To determine which services the IRS may consider customary, REIT practitioners often look to IRS private letter rulings issued to other REIT taxpayers, although those rulings, as a technical matter, may not be relied on by anyone other than the taxpayers to which they were issued.

Even if a service is customary, a REIT may provide it directly only if the service could be provided by an organization described in section 511(a)(2) (a tax-exempt organization) without that organization being subject to tax on unrelated business taxable income under section 512(b)(3).²⁰ Rents will generally not be UBTI to a tax-exempt organization;²¹ however, payments for the use of space when services are also rendered to the occupant will be UBTI.²² A service will be considered rendered to the occupant if the service is primarily for the tenant’s convenience and is other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only.²³ A classic example is maid service. If a REIT cannot provide the service directly, it may only provide that service through an independent contractor (IK)²⁴ or a taxable REIT subsidiary (TRS).²⁵ Amounts received by the REIT for customary services provided by an IK or a TRS, however, will qualify as rents from real property for purposes of the 75 percent and 95 percent gross income tests.²⁶

If a service is not customary, as noted above, it must be provided by an IK or a TRS. If the service is provided by an IK, the cost must be borne by the IK, a separate charge must be made for the service, and the amount of the separate charge must be received and retained by the IK.²⁷ Consequently, the REIT cannot profit from that service. The provision of those services by a TRS is not subject to the restrictions, but the arrangements between the REIT and the TRS must be at arm’s length²⁸ and the TRS will be subject to federal income tax on its net income.²⁹ If these requirements are not complied with, income attributable to the services will constitute ITSI and will not be qualifying income for either the 75 percent or 95 percent gross income tests.³⁰ As noted, if ITSI received or accrued for a property in a given year exceeds 1 percent of all amounts received or accrued for the property in that year, no amounts received or accrued for that property will qualify as rents from real property.

There is little direct guidance on permissible services, and most come in the form of private letter rulings. However, Rev. Rul. 2004-24 specifically addresses the consequences of three hypothetical parking arrangements at a REIT-owned property and could shed light on the standard to be applied to EV charging stations. In the first situation, a REIT owned commercial real property including office buildings, shopping centers, and apartment complexes. Each property included a parking facility that was located on or adjacent to the leased premises for the use of tenants, guests, customers, and subtenants and was appropriate in size for their number. None of the parking facilities were attended. The REIT maintained, repaired, and lit the parking facilities and carried out other activities consistent with its fiduciary duties, such as dealing with taxes and insurance. No other services were provided.

The second situation was the same as the first, except that some properties included reserved parking spots. The REIT assigned and marked spaces in connection with leasing space in the building to tenants. Any recurring functions such as the enforcement of reserved spaces were handled by an IK from which the REIT did not derive or receive income.

The third situation was the same as the second, except that some facilities were attended and were also open to the general public. An IK handled and operated the parking facilities under a management contract with the REIT. The IK would remit the parking fees it collected to the REIT, and the REIT would pay the IK an arm’s-length fee for its services. The IK employed all the parking attendants and was responsible for all salaries, wages, and benefits as well as the administration and supervision of its employees. The IK would occasionally park cars to achieve maximum capacity or for reasons of safety and security. The IK would also occasionally provide “minor, incidental, emergency service” to parkers, such as charging a battery or changing a flat tire.

The IRS held that all three arrangements were permissible under the REIT rules on tenant services. In the first situation, the IRS held that the REIT’s activities at the unattended parking facilities were customary in all geographic markets, and because the parking facilities were appropriate in size for the number of tenants, guests, customers, and subtenants, any services were provided in connection with the rental of real property. In the second situation, the income from the provision of reserved parking qualified as rents from real property; it did not give rise to ITSI because the enforcement and other recurring functions were handled by an IK, not the REIT. In the third situation, the availability of parking to the general public did not result in the parking being provided other than in connection with the rental of real property because the facilities were appropriate in size for the use of the tenants, guests, customers, and subtenants and therefore could be expected to be used predominantly by them, and also because any related services were provided by an IK.

Although illustrative, Rev. Rul. 2004-24 is now 18 years old and was issued before EVs were readily available to the public. It can provide some guidance on the question of EV charging stations, but it doesn’t answer all the questions.

Applying Existing Rules to EV Charging Services

The first question facing REITs that want to provide EV charging stations at their properties is whether the stations will be considered “customarily provided in connection with the rental of real property.” There are two components to this question: First, are EV charging stations customary for properties of similar class and location? Second, even if so, are they being provided in connection with the rental of real property?

The question whether EV charging stations are customary can be resolved only on a property-by-property basis, considering both the locale and the type of building. However, because of the novelty and rapid growth of EVs, this question is fraught. What may be customary in Palo Alto, California, for EV charging stations may not be customary in Punxsutawney, Pennsylvania. Similarly, EV charging stations may be customary at a class A office building, but not a class C strip mall. Moreover, this analysis will constantly evolve as the EV market grows, and what might not be customary now could become customary in short order.³¹

The “customary” question may resolve itself in time, but the question of whether EV charging stations are provided “in connection with the rental of real property” may be harder to settle. As discussed, the regulations say that a service is provided in connection with the rental of real property if it is provided primarily for the benefit of the REIT’s tenants and their guests, customers, and subtenants. In Rev. Rul. 2004-24, the IRS determined that this means that a parking facility must be appropriate in size for the number of tenants and their guests, customers, and subtenants. Applying this rule in the context of EV charging stations would be logical; that is, the number of EV charging stations available should be appropriate for the size of the facility. But what if a REIT wants to install EV charging stations according to the predicted growth of EV usage? Unlike parking spaces, the number of EV charging stations needed at a property is likely to grow even as the overall number of tenants, guests, customers, and subtenants remains the same. A REIT should not be punished for installing EV charging stations in accordance with predicted demand rather than current usage. But for the time being, if a REIT intends to take the position that its EV charging stations are customarily provided in connection with the rental of real property, it should keep data and records supporting both that the service is customary for the class of building and geographic area and that the number of EV charging stations installed is appropriate for the expected usage.

Assuming that the REIT is confident that the EV charging stations it wants to install are customary, the next question is how it can provide that service. As discussed, a REIT may directly provide services that can be conducted by a tax-exempt organization without being subject to the tax on UBTI. As interpreted through Rev. Rul. 2004-24, the scope of services that can be provided directly by a REIT in connection with parking facilities is quite narrow. The REIT was only permitted to maintain and repair the parking facility, provide lighting, assign and mark (but not enforce) reserved spaces, and manage fiduciary matters such as taxes and insurance. All the other activities described were handled by an IK. As such, Rev. Rul. 2004-24 would suggest that a REIT’s ability to provide services for EV charging stations is quite limited. Maybe it could assign reserved EV charging stations, which could make business sense at an office or apartment complex, but not a shopping center. Still, it would seem that any other recurring functions would need to be handled by an IK.

That said, under reg. section 1.512(b)-1(c)(5), the furnishing of heat and light are not considered services rendered to the occupant, and, thus, they are services that may be provided directly by a REIT. Moreover, REITs have historically been able to furnish utilities (including submetering) and generate power for use by tenants. In several instances, the IRS has allowed a REIT to purchase utilities from the grid at wholesale rates and then sell those utilities at retail prices to tenants.³² REITs have also been able to charge an administrative fee to tenants for the cost of providing the utility service.³³

Providing EV charging may be viewed as the provision of a utility. However, that utility is provided in connection with a parking space, not a building (at least not directly), and is to charge an EV, not to heat and light the building. The question to be addressed by the IRS is whether these are distinctions without a difference. In the absence of guidance, REITs may want to adhere to the more conservative guidance of Rev. Rul. 2004­24 and employ an IK to provide EV charging station services.

If the REIT cannot be confident that its EV charging stations are customary services under the standards discussed, it must use an IK or TRS to provide them. If an IK is used and EV charging stations are not customary, the IK must bear the cost of providing the EV charging stations, make a separate charge for their use (for example, through payment at the station), and retain that separate charge. Essentially, the REIT would be allowed to have the EV charging stations at its property, but all aspects of the stations would be handled by the IK, and the REIT would not be allowed to profit from their presence. If a TRS provided the service instead, the separately stated rules would not apply, but the REIT’s bottom line would still be diminished by the requirement that it pay the TRS an arm’s-length fee for managing and operating the EV charging stations.

Conclusion

The use of EVs and EV charging stations will continue to grow, regardless of the extent to which REITs can participate. The Biden administration has expressed its belief that government support of growth in the EV market can strengthen domestic supply chains,³⁴ create jobs,³⁵ and reduce emissions.³⁶ If the government would make it clear how REITs can participate in and support the growth of EV charging stations, it would help spur existing efforts to develop the nation’s EV charging station network.

¹ H.R. Rep. No. 86-2020, at 6 (1960).

² Former section 856(d)(2)(C), as in effect before the amendment 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-K)” (Feb. 22, 2022); Douglas Emmett Inc., “Annual Report (Form 10­K)” (Feb. 18, 2022); Regency Centers Corp., “Annual Report (Form 10­K)” (Feb. 17, 2022); Essential Properties Realty Trust Inc., “Annual Report (Form 10-K)” (Feb. 16, 2022); Urstadt Biddle Properties Inc., “Annual Report (Form 10-K)” (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 note 1.

¹⁴ Reg. section 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. section 1.856-4(b)(1).

¹⁹ Id.

²⁰ Section 856(d)(7)(C)(ii).

²¹ Id. Section 512(b)(3)(A)(i).

²² Reg. section 1.512(b)-1(c)(5).

²³ Id.

²⁴ A service provider will be an IK if (1) it does not own, directly or indirectly, more than 35 percent of the shares in the REIT and (2) not more than 35 percent of the IK’s stock, measured by voting power or number of shares (if it is a corporation), or 35 percent of the interests in the IK’s assets or net profits (if it is a noncorporate entity) are owned, directly or indirectly, by one or more persons who own 35 percent or more of the shares of the REIT. Section 856(d)(3); reg. section 1.856-4(b)(5)(iii). For this purpose, the attribution rules of section 318(a) apply, modified by substituting 10 percent for 50 percent in section 318(a)(2)(C) and (3)(C) and, in the case of partnership attribution under section 318(a)(3)(A), only taking into account interest of 25 percent or greater partners. Section 856(d)(5); reg. section 1.856-4(b)(7).

²⁵ A TRS is a taxable corporate subsidiary of a REIT that may earn income that would not be qualifying income if earned directly by its parent REIT, provided the subsidiary and the REIT jointly elect to treat the subsidiary as a TRS. Section 856(l). The assets and income of a TRS are not included in determining a REIT’s compliance with the REIT requirements. No more than 20 percent of the value of a REIT’s assets may consist of stock or securities of its TRSes. Id. Section 856(c)(4)(B)(ii).

²⁶ Id. Section 856(d)(7)(C)(i). An arrangement between a REIT and its TRS for the TRS to provide services to the REIT’s tenants must provide for arm’s-length compensation to the TRS. Failure to comply with this rule will result in the imposition of a 100 percent tax on “redetermined TRS service income,” which is the gross income of a TRS attributable to services provided to, or on behalf of, the REIT, less deductions properly allocable to those services, to the extent the amount of that income, less deductions, would be increased on distribution, apportionment, or allocation under section 482. Id. Section 857(b)(7)(E)(ii).

²⁷ Reg. section 1.856-4(b)(4).

²⁸ Supra note 26.

²⁹ Rev. Rul. 2002-38, 2002-2 C.B. 38 (holding that a TRS need not comply with the separately stated requirement applicable to IKs).

³⁰ Section 856(d)(7)(A).

³¹ One REIT already considers having EV charging stations at its retail shopping centers as essential to its business as having those shopping centers anchored by grocery stores. See Wheeler Real Estate Inv. Trust Inc., Annual Report (Form 10-K) (Feb. 28, 2022) (“We believe [our] centers that provide essential goods and services such as groceries and electric vehicle charging stations result in a stable, lower-risk portfolio of retail investment 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.