Private Use Policy and Guidelines

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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

Every year, the University Treasurer’s Office reviews bond-financed property to see how much each of those properties is used for private business. They gather this information in one of two ways:

1. Distributing a survey to relevant finance groups: A survey is distributed to university finance groups to confirm space usage. The survey identifies management and service contracts, leases, space rentals, and research agreements for each building the Cornell department has primary responsibility.
2. A review of the university’s space inventory system: The space inventory system identifies space on campuses used by external parties.

The University Treasurer’s office outsourced the tax-exempt debt record management to Digital Assurance Certification (DAC). DAC compiles private use information Cornell submits to prepare Schedule K for each bond issue.

Common Examples of Private Use

Private business use in tax-exempt financed facilities most usually comes from these arrangements:

Unrelated Trade or Business Use
If bond-financed facilities are used for unrelated trade or business, it counts as private business use. This means the business or trade is unrelated to the educational purpose that is Cornell's basis for tax-exempt status.

Third-Party Use
Lease and rentals: When an outside party leases or rents bond-financed property, it counts as private use unless these cases apply:

1. Short-term arrangements: If the arrangement lasts less than 50 days, it does not create private use if all these conditions are met:
   1. The arrangement is at fair market value.
   2. The property was not financed primarily for use by a private party.
   3. The rental does not constitute unrelated trade or business use.
2. Generally available use (public use): Rentals open to the public do not count as private use if all these conditions are met:
   1. The term, including renewal options, does not exceed 100 days.
   2. The property was not financed primarily for private party use.
   3. The rental does not constitute unrelated trade or business use.

The Treasurer’s office monitors lCornell department leases that use debt-financed property. Data include the lessee's name and the square footage of the property used relative to the total bond-financed debt.

Management or Service Contracts: A contract with an external party to manage bond-financed property is considered private use. Examples include contracts for dining services or facility management.  Contracts for incidental services, such as janitorial work, equipment repair, or elevator maintenance, don’t require private use monitoring.

The Treasurer’s office will evaluate management contracts, service agreements, operating agreements, or licenses Cornell has with third parties to determine whether they result in private business use.

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:

• Contracts made before August 18, 2017: Cornell should structure these to meet the safe harbor provisions in Revenue Procedure 97-13 (PDF), as modified by IRS Notice 2014-67 (PDF) (“97-13 safe harbors”).
• Contracts made after July 31, 2017: Cornell should structure these to meet the safe harbor provisions in Revenue Procedure 2016-44, as modified by IRS Revenue Procedure 2017-13 (“2017-13 safe harbors”).

If a service contract doesn’t meet either safe harbor, Cornell can consult bond counsel to help assess how it might affect the tax-exempt status of any outstanding debt.

Safe Harbor Guidelines - IRS Revenue Procedure 2017-13
The Treasurer’s Office recommends that all management and service contracts involving debt-financed property be reviewed by legal counsel to confirm compliance with applicable safe harbor provisions.

A service contract between Cornell and a private party will generally not result in private use if the following statements are true:

1. Compensation to the service provider is reasonable.
2. The contract does not provide the service provider with a share of net profits from property operations.
3. The service provider does not share in net losses or bear risk of loss if the property is damaged or destroyed.
4. The term, including renewal options, does not exceed the lesser of 30 years or 80% of the property’s useful life.
5. The University retains significant control over the property’s use.
6. The service provider agrees not to take any tax position inconsistent with being a service provider.
7. The service provider has no role or relationship with the University that limits the University’s ability to exercise its contractual rights.

Research Agreements: The Treasurer’s office will monitor Sponsored Research Agreements involving debt-financed property provided by Cornell departments. Cornell will apply Revenue Procedure 2007-47 (PDF) to any research sponsorship agreement involving such property. Unless the terms of the agreement meet one of the safe harbors established in IRS Revenue Procedure 2007-47, sponsored research that grants intellectual property rights to the sponsor will be considered private use.

To meet the safe harbors for sponsored research agreements:

1. The sponsored research must be basic research. This means it aims to advance scientific knowledge without a specific commercial goal. It cannot be applied research, which focuses on answering specific questions or solving defined problems.
2. 2. If the sponsor is granted an exclusive license to the project’s intellectual property, the license price must reflect fair market value. This value is set when the intellectual property is ready for use.
3. If the sponsor is granted no more than a non-exclusive, royalty-free license:
   1. Cornell sets the research scope and methods. The sponsor does not control the research design or how it's performed.
   2. Cornell owns all patents and products resulting from the basic research.
   3. The technology must be available for licensing to anyone interested. This applies if the technology is commercially valuable to others besides the sponsor.
4. If the federal government funds the basic research and follows the Bayh-Dole Act, it won't be considered private use unless the government controls how the research is designed or carried out.

Research Agreement Compliance Flowchart (PDF, 84 KB)

Transaction Agreements (OTA) with the Department of Defense, the Department of Homeland Security, or the Food and Drug Administration are special and may have unique private-use considerations. Departments must provide a copy of any such agreement to the University Treasurer’s office.

Research Sponsored by Other 501(c)(3) Organizations: Arrangements with other 501(c)(3) organizations usually don't create private business use, as long as the research supports Cornell's exempt purposes.

Clinical Trial Agreements: The Treasurer’s office monitors clinical trial agreements where Cornell departments provide debt-financed property, including tracking the agreement’s term, the sponsoring entity, the trial’s nature, and the sponsor’s payment amount.
To show that clinical trials do not result in private business use, Cornell must be able to demonstrate some or all of the following:

1. The clinical trials further patient care and thereby further Cornell's exempt purposes.
2. Cornell keeps the intellectual property rights to discoveries related to the study's intended use.
3. Cornell reserves the right to publish the clinical trial results in a scientific journal, which makes the results public and helps the relevant scientific field, rather than giving the study sponsor special legal rights to a bond-financed property.

Naming Rights: Naming rights given to individual donors who are not in business usually don’t count as private use. Putting a donor’s name on a building doesn’t give them any legal rights or control over the facility. However, naming rights given to corporations may be considered private use, so departments must consult with the Treasurer’s office or General Counsel in these cases.

Substantial Economic Benefit or Special Legal Entitlement: Private business use can happen if bond-financed property gives a “substantial economic benefit” to a private user or if a private user has a “special legal entitlement” to the property. The following are examples of arrangements that need review:

• Leases to non-qualified users.
• Ownership arrangements with non-qualified users.
• Corporate naming rights.
• Conference center use.
• Research outsourcing centers.

Remedial Action

If a potential violation is identified during annual compliance checks or at any other time, it must be referred immediately to the University Treasurer’s office. The Treasurer’s Office will investigate and consult with internal and/or external counsel as necessary to determine if a violation has occurred. If a violation is found, they will determine the necessary steps to correct the issue and may seek resolution through the IRS’s Tax-Exempt Bonds Voluntary Closing Agreement Program. If no violation has occurred, they will identify what steps can be taken to prevent one.

Arbitrage Yield Restriction and Rebate

Unless an exception applies, federal tax law requires Cornell to rebate to the federal government through the bond issuer any investment earnings on bond proceeds that exceed the bond yield. To calculate liability for each bond issue, Cornell engages an external rebate computation firm. The Treasurer’s office is responsible for the following tasks:

• Maintaining engagement with the firm.
• Providing necessary documentation.
• Coordinating with the issuer to pay required rebates to the federal government.
• Retaining appropriate records.
• Monitoring when proceeds are 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 compliance 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 applicable buildings. 
2. Reviewing with the Treasurer’s office potential external use before requesting a loan.
3. Notifying the Treasurer’s office of any change in facility use.
4. Sending to the Treasurer’s office all management, service, lease, rental, or research agreements that could impact private use.

The University Treasurer is responsible for ensuring all outstanding debt issuances comply with federal tax law. The Treasurer’s office will consult with relevant Cornell departments and third-party professionals, such as bond counsel, DAC, and arbitrage rebate providers, as needed. The Treasurer’s office will also:

1. Providing oversight and coordination to assist departments with tax-exempt debt compliance.
2. Lead a compliance team headed by the Director of Debt.
3. Maintain pertinent debt information for post-issuance compliance and derivative agreements.
4. Monitor the use and timely expenditure of bond proceeds.
5. Maintain records for the arbitrage yield restriction and rebate.
6. Monitor actions under this policy.

Continuing Education

Cornell will consult regularly with bond counsel to stay informed about applicable federal tax rules and changes in federal tax law. As needed, these Policies and Guidelines will be updated. Staff members responsible for bond compliance must complete a reasonable amount of continuing education each year, which may involve the following.

• Consulting with outside professionals.
• Participating in conferences.
• Reviewing governmental and professional organization updates.
• Attending DAC webinars.