REIT's data center buildings constitute qualifying real property.

• Author: Dell, Michael
• Position: Real estate investment trust

In Letter Ruling 201034010, the IRS ruled that apparent "data center" buildings, including their structural components, constitute real property for purposes of the REIT asset and income tests and that services furnished in connection with leasing space in the buildings will not cause any amounts received from tenants to be treated as other than rents from real property.

Facts

The taxpayer is a newly formed domestic corporation that will elect to be taxed as a real estate investment trust (REIT). The taxpayer intends to conduct all its business through LP, a newly formed limited partnership, in which it will be the general partner and a substantial limited partner.

LP intends to acquire, purchase, develop, and construct buildings, which it will lease to unrelated tenants. The space offered to tenants generally falls into two categories: wholesale space and retail co-location space. For the wholesale space, tenants typically rent designated space under leases generally ranging from three to ten years. Co-location space or a "meet-me" room is often an area in a building where tenants can connect with each other through telecommunication and networking media and exchange data. For retail co-location space, a customer is typically entitled to the use of a specially identified co-location suite, cage, or cabinet located in a common shared area under a license and service agreement. These agreements generally have terms ranging from one to three years. The tenants will normally use the space to accommodate their telecommunications, computing, and electronic data storage equipment, including computer servers and personnel.

Within each building, the tenant space may be constructed on raised flooring to accommodate the electric, ventilation, and air conditioning systems required by tenants. The buildings differ from other office buildings because of the magnitude and quality of the electrical power and air conditioning furnished to tenants and the redundancies built into the electrical and air conditioning systems.

The major structural components of the buildings are:

* Electrical distribution and redundancy system (electrical components);

* Heating, ventilation, and air conditioning system (HVAC components);

* Humidification system (humidification components);

* Security system (security components);

* Fire protection system (fire protection components); and

* Telecommunication infrastructure (telecommunication components).

Each component is...