Exceptions to Private Business Use
In addition to the safe harbors for management / service contracts and research agreements mentioned above , there are a number of “ short-term use ” exceptions providing that certain arrangements will not be treated as private business use if certain facts and circumstances are present . These exceptions set forth varying requirements based on the type of use , the length of the arrangement , and the circumstances of the financing . In general , the more a private user is treated on the same basis as a member of the general public and the more likely the facility is to be used by the general public , the longer the term of the arrangement may be without creating private use . There are also , for example , exceptions available regarding certain routine dispositions of personal property .
Next Steps
Identifying potential private business use is just a first step , with measuring and allocating private business use being another step in the process . It is also important to remember that a small amount of private use is permitted , and that even higher amounts of private use may not affect the tax status of a bond issue if the private payments test is not also met . In circumstances where both the private business use and private payment tests will be met if a certain action is taken , there are several options that can help issuers achieve compliance with federal tax laws , including contract renegotiation to meet safe harbors or taking a remedial action ( see Bracewell ’ s Issue Spot on “ Remediating Private Business Use of Governmental Bonds ”). With this in mind , we encourage issuers that have identified potential private business use to contact bond counsel to discuss these concerns and the options that may be available to protect the tax status of the bond issue .
Example
A city uses proceeds of an issue of bonds to build a downtown parking garage close to city hall . After a few years , the city determines that it would like to contract with a private third-party to manage the parking facility . Additionally , to increase poor hourly revenues , the city would also like to lease a portion of the spaces in the facility . The city expects that many of the monthly leases will be to area residents , but believes that there may be some businesses that might also enter into contracts to ensure that there is dedicated parking available for visiting customers . The city ’ s finance director is worried that these arrangements will create problems for the bond issue , which also financed a number of other city projects .
There are a number of ways that the tax status of the bonds might be protected , including :
• Ensuring that , based on the facts and after applying measurement rules , the 10 percent private use threshold for the bond issue as a whole will not be met ;
• Ensuring that , even if the 10 percent test for private use is met , based on the facts and after applying measurement rules , the private payments to be received will not cause the 10 percent private payments threshold to be met ;
• Negotiating the terms of the management agreement to meet the requirements of a “ qualified management agreement ” that does not create private business use ; and / or
• Structuring the monthly leases to meet the requirements of a short-term use exception .
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