Private Use Policy and Guidelines

Select the items below read the policy. | expand all

Use of Bond Proceeds

Bond proceeds may be disbursed for the following reasons:

1. Project costs
2. Capitalized interest
3. Bond issuance costs
4. Swap termination payments

Proceeds Tracking

The University allocates debt proceeds to capital projects being funded with tax-exempt debt. To be an eligible project, the property being financed must be (1) owned or, under certain circumstances, leased by the University; and (2) have an intended use that is consistent with the University’s 501(c)(3) exempt purposes.

The Office of the University Treasurer tracks debt proceeds on an issue by issue basis. The proceeds are tracked toward eligible project costs for allowability and to monitor the rate of bond proceeds spent. In addition, the University monitors that issuance costs related to tax-exempt debt do not exceed 2% of the "net proceeds" of such debt. On a quarterly basis, the University reconciles the monthly activity of the bond proceeds against the bond custodian accounts.

Retention of Detailed Records

The University expects to comply with regulatory record retention requirements. Federal regulations provide that records relating to a tax-exempt debt transaction should be retained for so long as they are material in the administration of any federal tax law. Therefore, it is recommended that material records be kept for the life of the debt, including any refunding of the debt, plus three years. Agreements and contracts that are not material will be retained according to University Policy 4.7, Retention of University Records. The University has contracted Digital Assurance Corporation LLC (DAC) to assist with record retention requirements.

Annual Compliance Checks

On an annual basis, the University Treasurer’s office conducts a review of bond-financed property to determine the amount of private business use of each outstanding bond issue for that year, by either using a survey (via Template) and/or reviewing the university's space inventory system. The Template is distributed to the University's finance groups to confirm space usage (to identify management and service contracts, leases and space rentals and research agreements) for each building for which the Cornell department has primary responsibility. The space inventory system identifies space on campuses utilized by external parties.

The University Treasurer’s office outsourced the tax-exempt debt records to DAC. DAC accumulates the private use information submitted by the University to compile Schedule K for each bond issue.

Common Examples of Private Use

Most private business use in a tax-exempt financed facility arises from the following arrangements:

Use by Cornell in unrelated trade or business (reported as UBIT): Use of bond-financed facilities in an unrelated trade or business is private business use.

Beneficial use by third parties:

Lease and rentals: A lease or rental of bond-financed property by an external party constitutes private use, with the following exceptions:

1. Short-term arrangements less than 50 days should not give rise to private use, if such arrangement is at fair market value, the property was not financed primarily for use by a private party, and the rental itself does not constitute UBIT.
   1. The exemption goes away if the charge is less than fair market value or free. All agreements must be made at-arms-length agreements and at fair market value or the transaction is considered private use.
2. Generally Available Use (public 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, the property was not financed primarily for use by a private party, and the rental itself does not constitute UBIT.

The Treasurer’s office will monitor leases provided by Cornell departments that involve the use of debt financed property, including the name of the lessee and the square footage of the space used by the lessee relative to the net square footage of the debt financed property.

Management or service contracts: An agreement with an external party in which the user provides management services with respect to the bond-financed property is considered private use. Management contracts include contracts for dining services or facility management but do not include arrangements incidental to the exempt uses of the facility, such as janitorial services, office equipment repair, or elevator maintenance.

In the event the University enters into a management contract, service agreement, operating agreement or license with a third-party the University will evaluate whether such arrangement results in private business use. The Treasurer’s Oofice shall be responsible for such evaluation and will review service contracts entered into involving the use of debt financed property provided by Cornell departments. It is the University’s intent to structure all Service Contracts, mpacting debt financed property and entered into prior to August 18, 2017, as to satisfy one of the private business use safe harbors set forth in IRS Revenue Procedure 97-13 (PDF) and subsequently modified by IRS Notice 2014-67 (PDF) (“97-13 safe harbors”). It is the University’s intent to structure all Service Contracts, impacting debt financed property and entered into after July 31, 2017, as to satisfy one of the private business use safe harbors set forth in Revenue Procedure 2016-44 (PDF) and subsequently modified by Revenue Procedure 2017-13 (PDF) (“2017-13 safe harbors”). If the University enters into a Service Contract that does not satisfy the either safe harbors, the University may consult with its bond counsel to assess the impact, if any.

In general, pursuant to Revenue Procedure 2017-13, a service contract between the University and a private party will not result in private use if the following guidelines are satisfied:

1. The compensation paid to the service provider must be reasonable.
2. The contract must not provide the service provider a share of net profits from operations of the managed property.
3. The service provider may not share in the burden of bearing net losses from the operation of the managed property or the risk of loss if the property is damaged or destroyed.
4. The term, including all renewal options must not be greater than the lesser of 30 years or 80% of the life of the property.
5. The University must exercise a significant degree of control over the use of the property.
6. The service provider must agree that it is not entitled to, and will not take, a tax position with respect to the property inconsistent with being a service provider.
7. The service provider must not have any role or relationship with the University that, in effect, would limit the University’s ability to exercise its rights under the contract.

The University Treasurer’s office recommends management and service contracts be reviewed by legal counsel for the safe harbor exceptions.

Research agreements: The Treasurer’s office will monitor Sponsored Research Agreements that involve debt financed property provided by the Cornell departments. The University will apply Revenue Procedure 2007-47 to any research sponsorship agreement with respect to debt financed property. Sponsored research that grants 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 (PDF).

To meet the safe harbors for sponsored research agreements:

1. The sponsored research being conducted must be basic research (i.e., research for the advancement of scientific knowledge not having a specific commercial objective), and not applied research (research that seeks to answer a question and solve a problem).
2. If the sponsor is granted an exclusive license to the project intellectual property, such license must be priced at fair market value determined at the time the intellectual property is available for use.
3. If the sponsor is granted no more than a non-exclusive royalty free license:
   1. The University determines the research and the way it is performed (i.e. the sponsor does not control the design or performance of the research);
   2. The University retains exclusive title to any patent or other product incidentally resulting from the basic research; and
   3. The technology is available for license to all parties, provided that the technology would be commercially valuable to parties other than the sponsor.
4. If the basic research is federally sponsored research subject to the Bayh-Dole Act regulations, such research will not constitute private use unless the government controls the design or performance of the research.

Research Agreement Compliance Flowchart (PDF, 84 KB)

Transaction Agreements (OTA) with the Department of Defense, Homeland Security and Food and Drug Administration are special agreements and may have special private use considerations. Please provide a copy of the agreement to the University Treasurer’s office.

Research sponsored by other 501(c)(3) organizations: The arrangement should not give rise to private business use provided that the research is in furtherance of the exempt purposes of the University.

Clinical trial agreements: The Treasurer’s office will monitor clinical trial agreements that involve debt financed property provided by the Cornell departments, including the term of the arrangement, the sponsoring entity, the trial to be conducted, and the amount paid by the sponsoring party.

To support the position that clinical trials do not result in private business use, the University must demonstrate some or all the following factors:

1. The clinical trials performed by a University are in furtherance of patient care, and, therefore, further the University's exempt purposes.
2. The University has intellectual property rights to discoveries that are related to the intended use of the study.
3. The University retains the rights to publish in a scientific journal the results of the clinical trials. The publication rights reserved by the University ensure that the results of the clinical trials will be in the public domain and further the science behind the study in question, as contrasted with providing the study sponsor with any special legal entitlements to a University’s bond-financed property.

Naming rights: Naming rights to individual donors not engaged in trade or business do not give rise to private use. By placing a name on the building, it would not provide the individual with legal right or entitlement to control the use of the facility. Naming rights to corporations may give rise to private use and the department should consult with the University Treasurer’s office and University counsel.

Substantial economic benefit or special legal entitlement: Private business use may arise to the extent the bond-financed property provides a "substantial economic benefit" to a private business user, or private business user has a "special legal entitlement" to the property. Examples of Special Use Arrangements that must be reviewed include leases to nonqualified users, ownership arrangements with nonqualified users, corporate naming rights, conference center use, and research outsource centers.

Remedial Action

In the event a potential violation is identified, through the annual compliance checks or otherwise, the individual identifying the potential violation should immediately refer the matter to the University Treasurer’s office for review. The University Treasurer’s office will examine the matter and consult with internal and/or external counsel, as necessary, to determine whether a violation has occurred, or if a violation has not yet occurred, what steps may be taken to avoid a violation. If a violation has already occurred, the University may seek resolution through the IRS’s Tax-Exempt Bonds Voluntary Closing Agreement Program.

Arbitrage Yield Restriction and Rebate

Federal tax law requires the University (through the bond issuer) to "rebate" to the federal government any amounts earned from the investment of bond proceeds at a yield in excess of the bond yield, unless an exception applies. The University retains an outside rebate computation firm to calculate its liability, if any, for rebate for each of its bond issues. The University Treasurer’s office is responsible for maintaining the engagement with the firm, providing the firm with the documentation it requires, coordinating with the issuer to remit any required rebate to the federal government, and retaining appropriate records. The University Treasurer’s office is also responsible for monitoring the timing of proceeds spent.

Gifts

If the University receives a gift that bears a close relationship to bond financed capital costs, details should be provided to the University’s Treasurer’s office to determine whether such gift has a sufficient nexus to bond financed project thereby subjecting the gift to yield restriction.  The University’s departments should work in conjunction with the University Treasurer’s and University Counsel’s offices to structure any capital campaigns related to bond financed projects to avoid yield restriction of any gifts.

Filing of Returns

The University Controller's office is responsible for filing the University's IRS Form 990. The Office of the University Treasurer assists with the completion of Schedule K of Form 990, related to bond activity.

Responsibility for Maintaining Compliance

Cornell departments are responsible for the following tasks:

1. Reviewing the use of possible debt-financed property for any private use as defined above. See Buildings Funded with Tax-Exempt Debt for a list of buildings. 
2. Prior to the request for a loan, review any potential external use with the University Treasurer's office.
3. Contacting the University Treasurer's office if there is any change in the use of University facilities.
4. Submitting all management or service agreements, lease or rental agreements and research agreements with private use or potential private use issues to the University Treasurer’s office.

The University Treasurer has the primary responsibility of ensuring that the University’s outstanding debt issuances are, and will remain, in compliance with federal tax law. The University Treasurer will consult with other departments within the University, as well as third-party professionals (e.g., the University’s bond counsel, DAC, and arbitrage rebate provider), as needed, to ensure compliance with such rules, including these Policies and Guidelines. The University Treasurer’s office is responsible for monitoring compliance, including, but not limited to, the following tasks:

1. Providing oversight and coordination to assist University departments with tax-exempt debt compliance.
2. Coordinating a compliance team led by the Director of Debt.
3. Maintaining pertinent debt information for post-issuance compliance.
4. Maintaining pertinent debt information related to derivative agreements.
5. Monitoring the use of bond proceeds and timely expenditures of proceeds.
6. Maintaining records pertaining to the arbitrage yield restriction and rebate.
7. Monitoring actions under this policy.

Continuing Education

The University will continue to consult regularly with its bond counsel regarding the federal tax rules applicable to its outstanding debt and changes to the federal tax law, and the University will regularly update these Policies and Guidelines to reflect any such changes.

The University shall ensure that those who are tasked with bond compliance responsibilities shall undertake a reasonable amount of continuing education on an annual basis, including but not limited to, consulting with outside professionals, participation in conferences, reading informational updates from governmental resources and professional organizations, and participation in DAC webinars.