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Type of Private Use

In a public university setting, most private use arises from the following arrangements:

  • Leases and Rentals: A lease or rental of bond-financed facility by a nongovernmental party constitutes private use.  However, the IRS regulation provide certain exceptions:
    1. Non-public Use:  The rental will not be deemed private use if negotiated at arm’s length and at a fair market value, the use does not exceed 50 days, and the property was not financed primarily for use by a private party.
    2. Generally Available Use:  The rental of space made generally available for rental to private parties will not give rise to private use if the term of the rental, including renewal options, does not exceed 100 days and the property was not financed primarily for use by a private party.
  • Management Contracts:  Management contracts include dining services contracts or arena/stadium management agreements but do not include arrangements incidental to the exempt uses of the facility, such as janitorial services, office equipment repair, or elevator maintenance.  IRS Revenue Procedure 2016-44 also provides certain safe harbors for management contracts.  In general, the compensation terms of the contract must not be based on a share of net profits from the facility and the agreement must meet certain limitations with respect to duration and amount of variable compensation. Because of the complexity of these rules and to ensure that the contract meets the safe harbors, most University management contracts are reviewed by outside bond counsel.
  • Research Agreements:  Sponsored research that grants project intellectual property rights to the sponsor will constitute private use unless the terms of the sponsorship agreement meet one of the safe harbors established in IRS Revenue Procedure 2007-47:
    • Corporate Basic Research: Sponsored research for a corporate entity will not constitute private use if (i) the sponsor’s license to the project intellectual property is priced at fair market value and determined at the time the intellectual property is available for use, and (ii) the research is properly characterized as basic research, defined as an “original investigation not having a specific commercial objective for the advancement of scientific knowledge.”
    • Corporate Research with Grant of Nonexclusive, Royalty-free License: If the license granted to the corporate sponsor is limited to a nonexclusive, royalty-free license, the research will not constitute private use if (i) the University determines the research and the manner in which it is performed (i.e. the sponsor does not control the design or performance of the research) and (ii) the technology is available for license to all parties, provided that the technology would be commercially valuable to parties other than the sponsor.
    • Federally Sponsored Research: Revenue Procedure 2007-47 clarified that federally sponsored research subject to the Bayh-Dole Act regulations will not constitute private use unless the government controls the design or performance of the research.   
  • Unrelated Trade or Business:  Unrelated business taxable income (UBTI) does not constitute private use for a governmental entity.  In contrast, UBTI activities will give rise to private use in facilities funded with 501(c)(3) debt.
  • Naming rights:  Naming a bond-financed facility, or a portion thereof, for a for-profit business will give rise to private use under certain circumstances. Please contact this office if a naming arrangement is being considered.
  • Other Substantial Economic Benefit or Special Legal Entitlement:  Unusual fact patterns not described above may give rise to private use if the bond-financed property provides a substantial economic benefit to a private party or if the private party has a special legal entitlement to the property.  Please contact this office for more information.

Questions or Comments?

Please contact us with any questions about tax compliance issues or contracting activities.

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