Tax Exempt Financing
The University finances its capital projects with various sources of funds, including gifts, operating income, state appropriations and debt issued in the form of commercial paper and bonds. IRS regulations permit nonprofit and governmental entities to issue tax-exempt debt contingent upon use of the facilities for the issuer's charitable nonprofit or governmental purposes. The University has established policies governing the issuance of debt and post-issuance tax compliance.
Any use of tax-exempt funded facilities by or for the benefit of private parties is referred to as “private business use.” IRS regulations set strict limits on the amount of private use permitted in tax-exempt funded facilities: 10% for government-issued debt and 5% for debt issued by nongovernmental nonprofits. In governmental facilities, use by another state agency is generally not considered private use. As an agency of the Commonwealth of Virginia, the University primarily issues governmental debt. However, where the funded facility will be used primarily by a University-related foundation, the University sometimes will issue debt under the nongovernmental nonprofit rules.
- Measurement of Private Use
Private use is measured over the life of the debt instrument, meaning that the IRS will look to the average yearly private use to determine whether the University has complied with its tax-exempt debt covenants. To calculate the yearly private use for a given facility, IRS regulations require the University to consider the amount of use in terms of both time and space used. For instance, if 10% of a given property is used by a private party during half of the year, the IRS would calculate the private use of the facility to be 5%.
- Common Types 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:
- 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.
- 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.
- Bond Compliance
The University’s Treasury Management unit is primarily responsible for debt issuance and post-issuance tax compliance. Financial Operations is responsible for analyzing private use and for internal tracking of debt expenditures.
To ensure compliance with IRS private use rules, Financial Operations has established a policy on the use of buildings financed with tax-exempt debt. Prior to issuance of tax-exempt debt, Financial Operations reviews each project slated for inclusion to determine its impact on the private use limits.
- Annual Private Use Survey and Report
To ensure on-going compliance, each October Financial Operations distributes a private use questionnaire to the fiscal officers responsible for each project funded by tax-exempt debt. The questionnaire can be completed on-line using the on-line private use survey. This office reviews the data reported in the questionnaire and combines the results into an annual Private Use Report. The report lists the private use percentage for each tax exempt bond issuance for that year and identifies any developing private use concerns.
Tax Compliance Questions
If you need assistance or have questions please reach out to UVAFinance
- Mailing Address
University of Virginia Financial Operations
P.O. Box 400194
Charlottesville, VA 22904-4194
- Express Mail Delivery:
University of Virginia Financial Operations
1001 Emmet Street N.
Charlottesville, VA 22903