Private business use rules are a fundamental aspect of maintaining the tax-exempt status of bond series. From leases and management contracts to research agreements and special entitlements, both tracking private use and calculating private use by bond series can be challenging.
On April 9, 2025, DebtBook hosted the webinar Private Business Use: Applying the Third-Party Use Limitations to Tax-Exempt Debt-Financed Projects with Mike Larsen, a public finance tax expert and Partner at Parker Poe.
The session provided a detailed overview of private business use regulations and offered practical guidance for identifying potential issues before they become compliance concerns.
Key learning objectives included:
- Understanding what constitutes private business use for both governmental and 501(c)(3) bonds
- Learning how to measure private use and apply relevant exceptions
- Identifying common third-party arrangements that may trigger private use concerns (and knowing when to consult bond counsel)
- Exploring how to allocate and measure use across complex projects and multiple bond series
Here are a few highlights from the webinar:
Missteps in Private Business Use Compliance
Private business use rules are often less intuitive than they seem. In the webinar, several real-world examples highlighted how easily organizations can cross the line.
Here are a few scenarios to keep in mind:
Leases vs. Management Contracts
If a third party is paying you to use a bond-financed space, it’s likely a lease. If you’re paying them to operate the facility, it’s probably a management contract. Each is subject to different treatment and safe harbors under the rules, so knowing the distinction is critical.
Short-Term Rentals Aren’t Always Exempt
Renting a facility for a day doesn’t automatically avoid private use concerns. If the activity involves a trade or business (such as selling goods at an event) it may still count as private use.
The 5% Limit Can Add Up Quickly
For 501(c)(3) bonds, the private business use limit is just 5%, and 2% of that is often used for issuance costs. That doesn’t leave much room for error when tracking other types of private use.
These examples show the importance of closely reviewing third-party arrangements. Even seemingly routine agreements, like a food vendor in your facility, could trigger private business use if not properly evaluated.
Why It Matters
The consequences of noncompliance with private business use rules can be significant. If the IRS determines that a bond-financed project exceeds allowable private use limits, the interest on those bonds could become taxable—potentially resulting in substantial financial liability for the issuer.
Common Arrangements That May Trigger Private Business Use
While some forms of private business use are easy to identify, others are often hidden in everyday agreements. If you’re involved in managing bond-financed property, these are the types of arrangements that may warrant a closer look or a conversation with your bond counsel:
Ownership
Selling tax-exempt bond-financed property to a private party, even years after the bonds are issued, constitutes private business use.
Example: A city sells a parking garage financed with tax-exempt bonds to a private company three years after construction. That sale creates private use.
Leases
Leasing space in a bond-financed facility to a private party is a classic example of private business use, regardless of the lease length.
Example: A hospital leases office space in a tax-exempt bond-financed building to private physician groups–those leases are private use.
Note: One-day rentals for personal use typically don’t count, but business use (even short-term) can trigger compliance concerns.
Management Contracts
Service agreements to operate or manage a facility can result in private business use if not structured carefully. Key considerations include profit-sharing arrangements, control over the facility, and contract terms.
Output Contracts
Selling the output, like electricity, gas, or water, from bond-financed infrastructure to private entities may constitute private use, depending on the terms of the contract.
Research Agreements
Research sponsored by private organizations can be problematic unless safe harbor provisions are met.
Special Legal Entitlements
If a private party receives rights that resemble ownership, leasing, or exclusive control (without a formal lease or contract) this may still be considered private business use.
Example: A hospital guarantees a private corporation exclusive parking access in a bond-financed garage. This could give rise to private use.
Special Economic Benefit
Even absent a legal agreement, private use may be established if a non-governmental entity receives a unique economic advantage and the facility is not open to the public.
These situations are highly fact-dependent and should be evaluated carefully, often with input from bond counsel.
How DebtBook Can Help
Tracking private business use is complex, but managing it doesn’t have to be. DebtBook’s Bond Proceeds Management feature is designed to simplify compliance by helping finance teams stay organized, informed, and audit-ready.
With DebtBook, you can:
- Record private use at the project level using metrics such as time, space, revenue, or other relevant factors
- Tie projects to relevant bond series, and view spending and private use calculations on a bond series basis
- Receive automated alerts when private use thresholds are exceeded as of any specified date
- Maintain a centralized, well-documented repository of project details, usage data, and supporting documents
- Generate real-time reports to monitor private business use on a project or date-specific basis
These tools give your team the visibility and confidence needed to proactively manage private use compliance before issues arise.
Watch the Full Webinar On-Demand
In the webinar, Private Business Use: Applying the Third-Party Use Limitations to Tax-Exempt Debt-Financed Projects, Mike Larsen walks through the rules, offers practical examples, and highlights what to watch out for.
Don’t leave compliance to chance. Watch the full session to ensure you’re equipped with the knowledge you need to stay on solid ground.
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- Debt Service Calculator for Tax-Exempt Bonds
Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.
