IRS Rules that Income Attributable to Electric Vehicle Charging Stations is Qualifying Income for REITs

Most recently, in Private Letter Ruling 202413004 (March 29, 2024) (the “PLR”), the IRS ruled that, based on the facts presented by the REIT seeking the ruling, income received by the REIT from EV charging stations will constitute “rents from real property” for purposes of the REIT gross income tests. The ruling provides helpful clarity to the increasing number of REITs considering EV initiatives and may further encourage REITs to provide electricity and EV charging stations at their rental properties under facts similar to those described in the PLR.

Rents from Real Property

Among other things, a corporation must satisfy two gross income tests annually to qualify as a REIT. Under Internal Revenue Code of 1986 (“I.R.C.”) section 856(c)(2), a REIT must derive at least 95% of its gross income from certain types of passive income, including rents from real property, and under I.R.C. section 856(c)(3), a REIT must derive at least 75% of its gross income from specified real estate-related sources, including rents from real property. I.R.C. section 856(d)(1) provides that “rents from real property” includes, among other things, “rents from interests in real property” and “charges for services customarily furnished or rendered in connection with the rental of real property.” Under Treasury Regulations section 1.856-4(b)(1), a service furnished to tenants of a particular building is considered customary if within the geographic market in which the building is located, the service is customarily provided to tenants in buildings of a similar class. Rents from real property does not include, however, any amounts received or accrued for managing or operating the real property or for services provided to tenants, such income constituting impermissible tenant services income (“ITSI”) (see I.R.C. section 856(d)).

The PLR

In the PLR, a limited liability company (“LLC”) intending to elect to be classified as a corporation and taxed as a REIT, plans to acquire and, where needed, develop outdoor industrial storage facilities (the “Facilities”). The LLC will enter into unrelated third-party agreements (the “Storage Agreements”) for the use of a specified amount of space, and sometimes, a specific storage space, at the Facilities for the storage of equipment. Where Facilities are near one another, the Storage Agreements may provide that a tenant’s allocated storage space may be available at any such Facility. The Storage Agreements will provide for a fixed fee, a specified term, and will automatically renew. The fee charged may increase based on market conditions upon renewal.

At the Facilities, the LLC may provide certain, customary services provided at similar properties within the geographic area, including maintenance, inspection, security, and repairs. Tenants will either move their own equipment in and out of the Facilities or utilize employees of a taxable REIT subsidiary (“TRS”) or an independent contractor (“IK”). The TRS or IK may provide additional services, like refueling, by contracting with tenants directly. Any space needed to perform such additional services will be leased by the LLC to the TRS at substantially normal rates, and the TRS may sublease portions of such space. Facilities may also have unattended parking areas appropriate for the number of tenants and expected guests or customers. Tenants will not pay for the parking, and the LLC will provide only maintenance and repair services.

A Facility may also include certain amenities available to all tenants, such as weigh stations, shower facilities, and EV stations. No services other than utilities, cleaning, and basic maintenance will be provided. At some Facilities, the amenities will be available at no charge, and at others, tenants may pay a separate access fee. Where tenants will pay a separate access fee, the LLC does not intend to treat the income from such access fees as rents from real property. The LLC will engage a third-party utility provider that is an IK to furnish electricity for lighting the Facilities and parking areas and, at particular Facilities, to power and charge tenant equipment and support EV stations and vehicle charging. Tenants will pay a higher fee under the Storage Agreements for storage space located near electricity sources, including EV stations.

As mentioned above, where Facilities will include EV stations, access to the EV stations will be made available to all tenants. There will not be an access fee for the EV stations, and the LLC will not charge a markup on the electricity drawn. EV station users will be charged for the electricity they draw, and the LLC will remit those amounts to the utility provider. The LLC intends to only install EV stations at Facilities where EV stations are considered customary at similar properties in the relevant geographic area, and the number of EV stations will be appropriate for the number of tenants and expected guests or customers. Although the EV stations may technically be accessible by the general public, the LLC represents that such public use will be de minimis.

The IRS concluded that storage fees contemplated under the Storage Agreements, the TRS lease income, and income attributable to parking will constitute rents from real property. The IRS similarly concluded that the proposed maintenance, inspection, security, and repair services, along with any moving of equipment by the TRS or an IK, will not result in ITSI and will constitute rents from real property; additional services that may be provided by the TRS or an IK will likewise not result in ITSI and instead constitute rents from real property. Because they are not services, the included amenities, the IRS ruled, will not result in ITSI, nor will rent attributable to the basic services provided in connection with the amenities (i.e., utilities, cleaning, and maintenance). Such income will instead constitute rents from real property.

Where Facilities include EV stations, the IRS ruled that such stations will not give rise to ITSI, and that any amounts the LLC receives in respect of such stations will constitute rents from real property. With respect to the services provided by EV station amenities (i.e., electricity and charging for electricity drawn by vehicles), the IRS ruled that the provision of such services is analogous to the submetering of utilities, which is considered a customary services for purposes of Treasury Regulations section 1.856-4(b)(1). Thus, any income attributable to EV stations will not be considered ITSI. Accordingly, the inclusion of EV stations in certain Facilities and the provision of electricity at those EV stations for use by tenants, guests, and customers will constitute rents from real property and will therefore be qualifying income for REIT qualification purposes.

Implications

The PLR is the first time that the IRS has addressed the tax treatment of amounts earned by a REIT in connection with EV charging stations located on the REIT’s rental property. While some open issues remain, such as the implications of charging an access fee for the use of an EV charging station or charging a markup on the electricity drawn, the PLR provides much awaited — and helpful — guidance to REITs with respect to EV charging. As the future of cars continues to appear increasingly electrified, many REITs will likely view installation of EV stations at their rental properties as a necessity to remain competitive with non-REITs. The PLR may serve as a helpful roadmap for REITs that would like to safely navigate the accelerating EV infrastructure surge and may comfort REITs that, under similar facts, are already in the driver’s seat racing away with such initiatives.