Private Business Use (Use of Buildings Financed with Tax-Exempt Debt)

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University Policy Number 2115


Responsible Office:

Policy Procedure:


Related Law & Policy:

  • US Code: Title 26, Section 141
  • IRS Revenue Procedure 97-13 (management contracts)
  • IRS Revenue Procedure 2007-47 (research agreements)
  • University Debt Policy

I. Scope  

Where tax-exempt debt is used to finance Capital Projects, the University must comply with IRS laws and regulations applicable to Private Business Use. Pursuant to the Private Business Use test set forth at 26 USC §141, the tax-exempt status of a bond issuance is jeopardized if more than 10% of the tax-exempt bond proceeds are used for Private Business Use.

II. Policy Statement

The University’s debt financing program will comply with all IRS laws and regulations applicable to Private Business Use in tax-exempt financed facilities. The University’s Senior Vice President for Administration and Finance is responsible for ensuring that any space in debt financed buildings allocated to Private Business Use does not exceed the legal tax limits.

III. Definitions

Basic Research:  Any original investigation for the advancement of scientific knowledge not having a specific commercial objective (see IRS Rev. Proc. 2007-47).

Capital Projects:  the renovation, construction or acquisition of facilities and capital equipment.

Private Business Use:  Use in a Trade or Business carried on by or for the benefit of any Non-Governmental Person. Private Business Use does not include use of a facility by a member of the general public where the facility is open to the public and the user has no special legal entitlement to use of the facility.

Trade or Business: Any activity carried on by a Non-Governmental Person other than an individual acting as a member of the general public.

Safe Harbor: A provision that shields a party from liability under the law provided that certain conditions are met. IRS revenue procedures contain several Safe Harbors relating to activities which could generate Private Business Use, the most important of which pertain to management contracts and research contracts.

IV. Types of Private Business Use

Most Private Business Use in a tax-exempt financed facility arises from five types of arrangements:

A. Ownership: A sale or transfer of ownership to a Non-Governmental Person of tax-exempt financed property. Ownership is determined under federal income tax principles.

B. Leases: Any arrangement that is properly characterized for federal income tax purposes as a lease to a Non-Governmental Person.

C. Management Contracts: A management contract is any arrangement whereby a Non-Governmental Person actively manages the operations of a facility. Management contracts include, for example, contracts for dining services, facility management, or vivarium services (management of an animal facility). However, there are exceptions for certain contracts meeting the Safe Harbors set forth in Rev. Proc. 97-13. In order to meet the Safe Harbors, the contract must provide for reasonable compensation to the Non-Governmental Person for services rendered with no compensation based in whole or in part on a share of net profits. Arrangements that generally are not treated as net profit arrangements and therefore satisfy the Safe Harbor requirements include contracts for a percentage of gross revenues or expenses (but not both), or a per person or per unit fee. Management contracts must be analyzed in advance by the Private Business Use Committee for their impact on tax exempt financed facilities.

D. Research Agreements: Sponsored research by a Non-Governmental Person (including the federal government and its agencies) may result in Private Business Use unless the terms of the sponsorship agreement meet the Safe Harbors set forth in Rev. Proc. 2007-47. In general, sponsored research will not result in Private Business Use if: (i) the research in question is properly characterized as Basic Research; (ii) the University’s licensing of the resulting technology to the sponsor is on terms no more favorable than those the University would extend to an unrelated, non-sponsoring party; and (iii) the price paid for that license is determined at the time the resulting technology is available for use. Additional exceptions (as described in Rev. Proc. 2007-47) apply for federally sponsored research and industry-sponsored cooperative research agreements.

E. Other Actual or Beneficial Use: Any other arrangement that conveys special legal entitlements to a Non-Governmental Person for beneficial use of tax-exempt financed property, such as an arrangement that conveys priority rights to use a tax-exempt financed facility, will result in Private Business Use. Examples of such “special legal entitlements” include summer camps having the exclusive right to use an athletic facility, specially designed courses open only to one company, signage on an athletic facility or use of a parking garage for a private event.

V.    Compliance

The Private Business Use in the facility needs to remains below the applicable limit for as long as the debt (including any refundings) remains outstanding.

For new capital projects, if debt financing is a contemplated, the Vice President for Facilities[1]  will distribute the University’s Private Business Use Questionnaire to the Deans and Directors of the planned space.  After completion of a Capital Project, the Vice President for Facilities is responsible for monitoring and reporting on the Private Business Use in the facility.  To monitor compliance, the Vice President for Facilities will distribute the University’s Private Business Use Questionnaire to the Deans and Directors annually. When completing the Private Business Use Questionnaire, the Deans and Directors are to include all necessary information for identifying and quantifying potential sources of Private Business Use.  Annually, the Vice President of Facilities will report the Private Business Use space data obtained and maintained from the Private Business Use Questionnaires to the Private Business Use Committee. The Private Business Use Committee will complete a Private Business Use analysis report.  The Private Business Use Committee will be chaired by the Vice President for Facilities and will include representatives from the Controller and Budget Office. University Counsel shall attend Committee meetings in an advisory capacity.

Annually, the Senior Vice President for Administration and Finance will utilize this Private Business Use analysis report to certify compliance to the Commonwealth of Virginia.  If the Private Business Use of the facility is determined to exceed the applicable legal limits, corrective action will be required by the Senior Vice President for Administration and Finance.

VI.        Forms

Private Business Use Questionnaire

VII.       Dates:

1. Effective Date:   

This policy will become effective upon the date of approval by the Senior Vice President for Administration and Finance and Provost.

2. Date of Most Recent Review:


VIII.     Timetable for Review

This policy, and any related procedures, shall be reviewed annually.

IX.    Signatures



 _____/S/____________                                         ____1/30/2014_____

Jennifer Wagner Davis,                                                  Date

Senior Vice President

for Administration and Finance                



_____/S/____________                                          _____1/27/2014_____

Peter N. Stearns,                                                               Date




[1] “Vice President for Facilities” applies to the Vice President or designee.