7893. When will an asset be characterized as a real estate asset for purposes of the 75 percent asset test?Alexis Longrcline202014-09-18T14:43:00Z2014-09-18T14:43:00Z46873919Summit Business Media3294597147893. When will an asset be characterized as a real estate asset for purposes of the 75 percent asset test?In order to qualify as a REIT, at least 75 percent of a REIT’s assets must consist of cash, cash items (including receivables), real estate assets and government securities at the end of each quarter of a REIT’s tax year.IRC Sec. 856(c)(4)(A), Treas. Reg. 1.856-2. “Real estate assets” include real property (and interests therein), interests in other REITs (as long as the REIT issuing the interest was properly qualified as a REIT), and mortgage interests in real property. For a discussion of mortgage interests in real property, see Q 7894.Congress acknowledged that a REIT that receives new equity capital may have a difficult time quickly finding satisfactory investments that meet the asset-based tests. Because of this, the term “real estate assets” has been defined in the statute to include property attributable to temporary investment in new capital (even if not otherwise a real estate asset) if the property is stock or a debt instrument. This treatment of temporary investments is permitted for only a one year period.IRC Sec. 856(c)(6)(D)(ii). See also Let. Rul. 9342021. “New capital” for this purpose means an amount the REIT receives either (1) in exchange for stock (or certificates of beneficial interest) in the REIT or (2) in a public offering of debt instruments issued by the REIT which have maturities of at least five years.IRC Sec. 856(c)(6)(D)(ii). Real property includes not only the actual land investment, but also any improvements (including buildings) that are made upon that land.Treas. Reg. §1.856-3(d). “Interests in real property” include (whether with regard to the actual land or the improvements on the land): ownership interests, co-ownership interests, leasehold interests, options to acquire the property, and options to lease the property.Treas. Reg. §1.856-3(c).The definition of real property interests also encompasses timeshare interests (interests that grant the REIT the right to use real property only for a specified portion of each year) and stock in cooperative housing corporations. Mineral, oil and gas royalty interests are specifically excluded from the statutory definition of “interests in real property.”Treas. Reg. §1.856-3(c). The IRS has applied a “permanence” standard in determining whether improvements upon real property are considered real property for purposes of the REIT asset tests. In one private letter ruling, the IRS found that manufactured homes are “inherently permanent structures” based on examination of the property in light of the following questions:1.Is the property capable of being moved, and has it in fact been moved?2.Is the property designed to remain permanently in place?3.Are there circumstances that tend to show the intended length of affixation to the underlying real property?4.How substantial and time-consuming is the job of moving the property?5.How much damage will the property sustain if it is moved?6.What is the manner of affixation of the property to the land?Let. Rul. 8931039.The IRS has also ruled privately that so-called “real estate intangibles” can constitute real estate assets to the extent that the value of the intangibles is inextricably linked to the underlying real estate.Let. Rul. 200813009. In that ruling, a REIT purchased several well-known hotels, the value of which was significantly increased by the goodwill associated with the brand name. The increase in value associated with this goodwill was characterized as “real estate intangibles” for GAAP purposes. The IRS found that the value of the brand names was created by the underlying real estate assets that made the hotels unique—meaning that the names themselves would have no value but for the quality of the physical real estate to which they were attached. As such, these real estate intangibles were treated as real estate assets for purposes of the REIT asset tests. In order to advance solar energy, in May of 2014 the Treasury Department proposed regulations under IRC Section 856 clarifying that solar generating assets may qualify as “real property” eligible for inclusion in REIT corporate structures. Prop. Treas. Reg. 150760-13 See Q 7880.For a discussion of the definitions of cash items, receivables and government securities for purposes of the 75 percent asset test, see Q 7892. Classification of assets owned through a REIT’s interest in a partnership is discussed in Q 7895.