Rev. Rul. 72-353

Advice has been requested whether amounts received by a real estate investment trust under the circumstances described below affected its status as a real estate investment trust under section 856 of the Internal Revenue Code of 1954.

A real estate investment trust leased office space in a building that it owned to 10 different tenants under 10 separate leases with 9 of the tenants paying a fixed sum rental. The lease with the remaining tenant provided for a rental based on a percentage of the tenant's net profits. For 1970 the fixed sum rental received from the 9 tenants amounted to 92x dollars. The rental received from the remaining tenant for 1970 amounted to 8x dollars. The trust had no other income for 1970.

Section 856(c) of the Code provides, in part, that for a trust to qualify as a real estate investment trust certain percentages of its gross income must be derived from specified sources.

Section 856(c)(2) of the Code provides that a trust must derive at least 90 percent of its gross income from, among other items, rents from real property.

Section 856(d)(1) of the Code provides that "rents from real property" does not include any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales).

Section 1.856-4(b)(1) of the Income Tax Regulations provides, in part, that where a trust leases real property to a tenant under terms other than solely on a fixed sum rental (i.e., for example, a percentage of the tenant's gross receipts), and the tenant subleases all or a part of such property under an agreement which provides for a rental based in whole or in part on the income or profits of the sublessee, the entire amount of the rent received by the trust from the prime tenant with respect to such property is disqualified as "rents from real property." Where in accordance with the terms of an agreement an amount received or accrued as rent for the taxable year includes both a fixed rental and a percentage of the lessee's income or profits in excess of a specific amount (usually determined before deducting the fixed rental and sometimes called "overage rents"), neither the fixed rental nor the additional amount will qualify as "rents from real property."

In the instant case the rent based on a percentage of net profits was received by the trust from just one tenant with respect to the office space that was leased by that tenant.

Accordingly, it is held in the instant case that the payment of rent by the tenant to the trust, which does not qualify as "rents from real property" since it is based on a percentage of the tenant's net profits, will not cause amounts that otherwise qualify as "rents from real property" paid by other tenants of the office building to the trust from qualifying as "rents from real property" within the meaning of section 856(d)(1) of the Code. Thus, in this case the amounts received by the real estate investment trust based on a percentage of net profits will not adversely affect its status as a real estate investment trust under section 856 of the Code since 92 percent of its gross income is derived from "rents from real property."