Private Use Template: Cornell Staff Resource

Click the items below to learn more. | expand all

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.

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 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.

Please provide to the University Treasurer’s office copies of leases that may be considered private use.

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 general, pursuant to IRS 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.

Please provide to the University Treasurer’s office copies of management or service contracts that may be considered private use.

Research agreements:
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.

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.

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.

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 the 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 Office of the University Treasurer 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.