Private Use of Bond Financed Property

Public Finance Alert

Federal tax law limits the amount of private use of bond financed facilities. Private use restrictions apply throughout the life of such bonds (and any refunding bonds). Private use can arise if a management or service contract (including a physician agreement) is entered into with respect to operation of a bond-financed project. 

Revenue Procedure 97-13 (the "Revenue Procedure") established safe harbors for management and service contracts (including physician agreements) that will not be treated as giving rise to private business use of bond financed space.

In response to requests from health care providers attempting to navigate health care reform under the regime established by the Revenue Procedure, the IRS published Notice 2014-67 (the "Notice") in October 2014 which amplified the Revenue Procedure. Significantly, for contracts no longer than 5 years, the Notice provides one simple safe harbor that provides more flexibility than the safe harbor regime provided under the Revenue Procedure. No change was made to the rule that a contract gives rise to private use if it provides for compensation to the service provider based, in whole or in part, on a share of net profits from the operation of the bond financed facility.

For a table that illustrates the various safe harbors available under the Revenue Procedure and the Notice, click here, or contact any of the members of Orrick's Health Care Finance Team.