Rev procedure just released today on this point. Guidance says triple-net lease does not work.
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What is considered to be “active conduct of a trade or business” in the 50% gross income requirement?
How is the triple-net lease considered when it comes to the 50% gross income requirement?
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In one spot in the regulations, the IRS said that leasing is an active trade or business. In another spot, they said "but not MERE triple-net leasing." Some tax advisors have suggested that building the project and then serving as a landlord of a triple-net lease would be more than "merely" triple net leasing, but the IRS has indicated that the test is an annual one, in which case engaging in activities in the year of construction would not constitute an active trade or business if the entity undertook "mere" triple net leasing in a subsequent year. It seems unlikely that merely taking on responsibility for one of the components of the triple net lease (e.g., paying the taxes) would be sufficient, but perhaps there are some aggressive advisors who would take this position. Instead, it makes better sense to take on some additional activity, for example, being responsible for maintenance of the property. This is not to say that the entity must literally push the broom, but as between the landlord and the tenant, the landlord would be responsible for getting this done and responding to complaints if it isn't.
It is generally accepted by the tax community and the government that NNN leases, in which the landlord has no responsibilities whatsoever, are not trades or businesses. Double-net leases, in which the landlord typically only assumes responsibility for major structural issues, are probably not trades or businesses. For all other leases, the case law and other authority is quite unclear. The relevant statute says activity must be "regular, continuous, and substantial," so any lease involving true landlord day-to-day management will likely be OK as a trade or business. For single-net leases and other gray-area arrangements, the taxpayer's advisors need to make a judgment call based on facts and circumstances.
Triple-net lease is not an active business and will not qualify.
The second set of regulations provide different ways a business can meet the 50% gross income requirement. One: based on the time worked within the zone. Two, based on the compensation paid by the business for those hours. Three, based in where the management and property is located. Four, facts and circumstances. Triple-net leases are specifically excluded as a QOZB by the regulations.
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