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Every day, the PNO receives many inquiries for interpretations of the Hart-Scott-Rodino statute and rules. Recently, several questions have related to transactions involving rental property, which implicate 16 C.F.R. 802.5, the rule that exempts acquisitions of "investment rental property assets." In responding to these questions, we determined that prior informal interpretations regarding which acquisitions qualified for the § 802.5 exemption expanded the rule’s application well beyond the original intent expressed in the Statement of Basis and Purpose. With this post, we are bringing the § 802.5 exemption back into line with the original intent of the SBP. Below, we explain how the PNO will interpret and apply the exemption going forward. 

What is Investment Rental Property?

Section 802.5, added to the HSR rules in 1996, was intended to supplement the specific exemptions listed in § 802.2 by recognizing additional categories of real property that are held as investment properties. In general, exempts the acquisition of "investment rental property assets," which is property rented or held for rent to third parties both before and after the acquisition, and held solely for rental or investment purposes. For more information on the background of § 802.5, you should review the SBP for the proposed and final rule.   

While the SBP acknowledges that § 802.5 covers a broad range of real property assets and places no limits on who may acquire the assets, it does require that the property be held solely for rental or investment purposes. To determine if the real property is held solely for rental or investment purposes, a key question is whether the buyer is behaving like a landlord (exemption applies), or is in some way participating in the business conducted on the property (exemption does not apply). To qualify for the exemption, the buyer must intend to profit from the investment in the real estate, not from the business conducted on the property. 

So what does this mean in practice? If the buyer is simply going to maintain the property, such as keeping a facility in good repair, and collect rent, it’s acting as a landlord and § 802.5 is available to exempt the transaction. Questions arise, however, when the buyer does not intend to behave solely as a landlord but also participates, even in a small way, in the business conducted on the property. If the buyer will derive revenue from a business service it provides on the property, rather than solely deriving rental income from the property itself, then § 802.5 is not available. Providing a business service would include leasing the property’s capacity (for example, providing storage or being a conduit for materials passing through the property), rather than leasing the premises and receiving rental income without regard to the specific use of the property. 

Scenarios

Here are a few examples that illustrate when § 802.5 is or is not available to exempt a transaction from the premerger notification requirements:   

• Pipelines: "X" proposes to acquire from "Y" substantially all of the assets relating to a gas gathering and compression system, comprised of four pipelines and two compressor stations, which are currently used to provide transportation services to natural gas producers. The business conducted on the property is midstream transportation services. "X" will use the assets to provide midstream transportation services. This is not an exempt acquisition of investment rental property unless the buyer and seller are only landlords. Here's how that scenario could work: "Y" holds the gas gathering and compression system, which it leases to third-party "C," and "C" operates the midstream transportation services business. "Y" only receives rental income from "C" and is not engaged in the transportation services business conducted on the property. If "X" seeks to acquire the pipelines, does not operate other pipelines, and only continues to lease the pipelines to "C," this is an exempt acquisition of investment rental property.   

• Billboards: "X" proposes to acquire from "Y" billboards, panels, and other displays. "X" will use the assets to operate an outdoor advertising business. This is not an exempt acquisition of investment rental property. "X" is using the billboard space as part of its advertising business to generate revenue from advertisers, rather than simply holding the real estate on which the billboard sits and generating only rental income.

• Telecom Towers: "X" proposes to acquire from "Y" telecommunications towers, which are used in the business of providing telecommunications and colocation services for wireless providers. "X" will use the assets to provide telecommunications and colocation services for wireless providers. This is not an acquisition of investment rental property. 

Here’s another twist: Say "B" is a landowner who holds a parcel of land that is leased to "Y," the telecom tower company that owns the tower constructed on the land. "X" proposes to acquire the land from "B." As a result of the transaction, "X" will take “B’s” place as the landowner, and will not control any telecom towers or otherwise compete in the telecom or colocation business. After the transaction, "X" will continue to lease the land to "Y." This is an exempt acquisition of investment rental property.

Our past informal guidance will be updated accordingly. As always, if you have questions about HSR filings, contact the PNO.