Call for REIT Guidance Data Centers Cloud Solutions

Over the past decade, the necessity for consumption and storage of information has elevated at an exponential fee. This has sparked a revolution within the knowledge middle area, leading to a motion in the direction of hyperscale amenities that may meet the calls for of corporations in an more and more cloud-based atmosphere.¹

Hyperscale amenities dwarf the footprint of conventional colocation knowledge facilities, host a wide range of companies, and cater to a variety of scalable purposes. Naturally, knowledge middle suppliers have been progressively investing on this area, together with house owners/operators which are structured as actual property funding trusts (“REITs”).²

Treasury Division steerage is severely missing for REITs internet hosting cloud-based options along with conventional colocation preparations in a hyperscale atmosphere. The IRS has not issued any Non-public Letter Rulings (“PLR”) on cloud-based transactions and their affect on REIT qualification, leaving taxpayers to judge a single proposed regulation relating particularly to cloud transactions and analogies from PLRs issued in reference to unrelated REIT-compliant industries to attract conclusions on the permissibility of offering cloud preparations to REIT tenants.

Proposed Rules

Proposed rules (“Rules”) on cloud transactions have been drafted from a world earnings tax sourcing perspective; nonetheless, in its present type, the steerage might lengthen into different areas of the tax regulation.³ The Rules take an “all or nothing” strategy to classifying cloud transactions as both the supply of companies or a lease, and they’re closely biased in the direction of the previous.⁴ The Rules don’t present a single instance of a contract for cloud infrastructure being categorized as a lease. As well as, the Rules considerably understate the significance of long-established actual property authorized principals similar to financial possession, location, or the supply of incidental companies in a tenant/landlord relationship. Whereas taxpayers will not be sure by proposed rules, the understatement of those elements and the “all or nothing” strategy of the Rules might dissuade cloud-heavy knowledge facilities from pursuing REIT buildings, regardless of the inherently actual estate-intensive nature of their enterprise and contracts.

Analogous Industries

Another strategy to counting on the Rules is to research earlier PLRs and last rules that deal with different industries which have enterprise traits just like these of cloud knowledge facilities.⁵ For instance, take the chilly storage trade as a similar sector. Chilly-storage has typically been blessed by the IRS as a REIT-compliant endeavor and shares the next parallels with cloud-heavy knowledge facilities:^{6, 7}

• Actual property footprint, capital-intensive facility build-out, and specialised constructing programs⁸
• Preparations with clients when it comes to who controls the asset, how clients might entry leased area, and the obligations of the supplier⁹
• The numerous lease of non-public property and the supply of each customary and non-customary companies¹⁰

One other comparable REIT-compliant trade is the oil and gasoline pipeline sector.^{11, 12} The pipeline and the cloud knowledge middle industries share the next contractual similarities, which all play a key position in REIT qualification:

• Buyer charges based mostly on throughput^{13, 14}
• The commingled nature of storage and utilization of merchandise¹⁵
• The substantial utilization of non-public property to facilitate the motion and storage of merchandise^{16, 17}

Amongst different non-traditional REIT companies, chilly storage and pipelines counsel that there could also be hope for structuring cloud-hosting hyperscale amenities right into a REIT, regardless of the shortage of authoritative steerage. As such, leveraging the technical and sensible experiences gained from different unconventional actual property industries will likely be of paramount significance in navigating this rising pattern for knowledge middle REITs.