Office of the TreasurerUniversity of CincinnatiDivision of Administration and FinanceOffice of the Treasurer

Office of the Treasurer

Tax-Exempt Debt

Exceptions and “Safe Harbors” from Private Business Use

Generally effective January 17, 2017


Private Business Use (PBU) refers to any use of a UC tax-exempt-debt-financed facility by a “nongovernmental user”, essentially any business entity other than a state or local government unit.  The university is required by the Internal Revenue Code to limit the PBU occurring in our debt-financed facilities.

PBU often arises from outside users who physically occupy our space.  A lease of space to a nongovernmental user is always PBU.  PBU may also include use by businesses operating under a management or service contract with UC, depending largely on the terms of the contract.  Examples include Aramark, Follett, Marriott and NovaCare.  Other situations, such as naming rights agreements, can also generate PBU.

The federal tax law provides several blanket exceptions from PBU, and also provides a set of contract-related “safe harbors” that allow a contract meeting those requirements to be exempted from PBU.


EXCEPTIONS – Contracts meeting any of these exceptions will not count as PBU:

  • Contracts with an individual, not in conjunction with a trade or business enterprise.
  • Contracts with state and local governments or units of those governments.
    • This is not limited to Ohio, but can be from any state or local government.  A public university will meet this requirement.
  • Contracts of fewer than 50 days.
    • We can count the days of actual activity under the contract.  So, a contract for 1 day per week, over a period of three calendar months, would count as 12-14 days instead of 90 days.
    • Any portion(s) of a calendar day is counted as one day.
  • Contracts for “incidental use” of the property.
    • Examples include janitorial services, office equipment repairs, and hospital billing services.
  • Contracts with service providers, if the only compensation is our reimbursement of their actual and direct expenses paid to unrelated parties.
  • Contracts which do not grant the other party any “special legal entitlement” to the UC property or its use.


SAFE HARBORS FOR MANAGEMENT/SERVICE CONTRACTS – Outside of those exceptions, contracts with service providers meeting all of the following “safe harbor” requirements will not count as PBU:

    • Compensation to the service provider must be reasonable.
    • Compensation to the service provider must NOT be a share of their net profits from the operation of the managed property for any fiscal period.  The compensation must not take into account both the managed property’s revenues and expenses for any fiscal period.
      • Incentive compensation is OK if eligibility is determined by the service provider’s performance in meeting one or more standards that measure quality of services, performance, or productivity.
      • OK if compensation for services is based solely on a capitation fee, a periodic fixed fee, or a per-unit fee.
    • The service provider must not bear the burden of any share of net losses from their operation of the managed property.  The compensation must not take into account both the managed property’s revenues and expenses for any fiscal period.
      • OK to reduce compensation by a stated dollar amount for failure to keep the managed property’s expenses below a specified target.
      • OK if compensation for services is based solely on a capitation fee, a periodic fixed fee, or a per-unit fee.
    • The contract’s term, including all renewal options, must not be greater than the lesser of:
      • 30 years, or
      • 80% of the reasonably expected economic life of the property
        • A contract that is materially modified gets retested as a new contract as of the date of modification.
    • UC must exercise a significant degree of control over the use of the managed property.  This control requirement will be met if the contract requires UC to approve:
      • The annual budget of the managed property;
      • Capital expenditures for the managed property;
      • Each disposition of property that is part of the managed property;
      • Rates charged for the use of the managed property; and
      • The general nature and type of use of the managed property (for example, the type of services).
    • UC must bear the risk of loss upon damage or destruction of the managed property (for example, due to force majeure).
      • OK for UC to insure against risk of loss through a third party, or to impose a penalty upon the service provide for failure to operate the managed property in accordance with the standards stated in the contract.
    • The service provider must agree that it is not entitled to, and will not take, any tax position that is inconsistent with its status as a service provider.  For example, the service provider must agree not to claim any depreciation, amortization or rent expense deductions, or investment tax credits, with respect to the managed property.
    • The service provider must not have any role or relationship with UC that, in effect, substantially limits our ability to exercise our rights under the contract.  This provision will be satisfied if:
      • No more than 20% of the voting power of UC’s governing body (Board of Trustees) is vested in the service provider’s directors, officers, shareholders, partners, members and employees;
      • UC’s governing body (Board of Trustees) does not include the service provider’s CEO or the chairperson of their governing board; and
      • The service provider’s CEO is not the President (CEO-equivalent) of UC or any of UC’s related parties.
    • A service provider’s use of the property that is functionally related and subordinate to its performance of services is OK, if it otherwise meets these safe harbors.
      • For example, their use of storage spaces to store equipment they use in performing their services under the contract, is OK and does not constitute PBU.


UC’s Tax Compliance office, working with UC’s Office of General Counsel and as needed with outside bond counsel, is responsible for making these PBU determinations for the university.