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:
Here are a few highlights from the webinar:
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:
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.
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.
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.
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:
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.
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.
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.
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 sponsored by private organizations can be problematic unless safe harbor provisions are met.
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.
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.
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:
These tools give your team the visibility and confidence needed to proactively manage private use compliance before issues arise.
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.
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.