Third-party agreements are everywhere in public finance.
Whether it’s a lease with a private tenant, a contract to manage a facility, or special parking rights for a donor, these arrangements often seem routine, but they can carry significant tax implications if they involve bond-financed property.
One of the key responsibilities (often done with the help of a bond counsel) is to preserve the tax-exempt status of bonds. This includes reviewing third-party agreements to determine whether they could result in private business use or otherwise jeopardize compliance with federal tax law.
And the reality is, many agreements do.
Leases, management contracts, research sponsorships, service arrangements, any of these can raise red flags if they’re not structured carefully or tracked appropriately over time.
In this blog, we’ve laid out a practical guide to evaluating the most common third-party agreements including what to look for, what questions to ask, and when to seek additional review with your bond counsel so you can stay ahead of compliance concerns.
Why Careful Review is Essential
When it comes to third-party agreements tied to tax-exempt bond-financed property, the margin for error is slim and the consequences can be costly.
If an arrangement creates too much private business use and pushes a bond-financed project over allowable limits, the IRS could determine that the interest on the bonds is no longer tax-exempt. That means higher borrowing costs, potential penalties, and serious reputational risk for the issuer.
What’s tricky is that it doesn’t always take a major misstep to cross the line. Sometimes it’s a simple oversight in a lease, or a service contract that didn’t get a second look.
Even well-meaning, routine agreements can create compliance issues if they’re not carefully structured or properly documented.
That’s why early involvement from bond counsel is so important.
A quick review at the right time can make all the difference such as flagging potential problems, guiding decision making, and giving the issuer confidence that they’re on solid ground.
Common Agreement Types That Warrant a Closer Look
Here are some of the most common third-party arrangements that may trigger tax compliance concerns if they involve bond-financed property:
Leases (even short-term)
Renting space to a private party, even just for a few days, can count as private business use.
Example: A city leases a community center room for a corporate training session. If it’s a business use, it may raise compliance issues.
Management contracts
Contracts where a private party operates a tax-exempt bond-financed facility need careful attention, especially when compensation is tied to net profits.
Example: A nonprofit hires a third party to manage its event center, paying a percentage of revenue. This may count as private use unless it fits within IRS safe harbors.
Service agreements with exclusivity or control
Giving a vendor exclusive rights or significant control over a public facility can look a lot like private use.
Example: A university grants one catering company exclusive rights to operate in a tax-exempt bond-financed conference space.
Research agreements with private sponsors
Sponsored research must be structured properly to avoid private use. Agreements that don’t meet IRS safe harbors can create compliance concerns.
Example: A hospital conducts drug trials funded by a pharmaceutical company in a tax-exempt bond-financed lab.
Output or utility contracts
Selling electricity, water, or other outputs from tax-exempt bond-financed infrastructure to private users may be considered private use.
Example: A county sells excess power from its solar array to local businesses through long-term contracts.
Special legal entitlements
Even without a formal lease, giving a private party exclusive access or rights can be problematic.
Example: A donor receives guaranteed, reserved parking at a performing arts center built with tax-exempt bond proceeds.
Disposition of bond-financed property
Selling or transferring tax-exempt bond-financed assets to a private party, even years after issuance, can trigger private business use if the bonds are still outstanding.
Example: A school district sells a portion of its tax-exempt bond-financed athletic complex to a private soccer league.
If any of these sound familiar, it's a good time to take a closer look or give your bond counsel a call.
Key Questions to Ask for Each Agreement Type
Not every third-party agreement results in private business use but many introduce enough uncertainty that a closer look is warranted.
This checklist can help issuers identify potential risks and determine when additional review or restructuring may be needed.
Who is the counterparty, and are they a private entity?
If the other party is a private business or nonprofit, the agreement may raise private use concerns. Government-to-government arrangements are generally less risky.
What is the term of the agreement?
Longer-term agreements typically carry more risk, but even short-term arrangements can trigger issues depending on the nature of the use.
Is there compensation involved? Who pays whom?
If a private party is paying to use a facility (such as under a lease) or being paid to operate one (as in a management contract), that’s a signal to dig deeper.
Is there exclusivity or special access involved?
Exclusive rights, priority access, or reserved use by a private party, especially if not broadly available to the public, can resemble private business use.
Does the arrangement resemble ownership or control?
Consider who truly has authority over the property. Agreements that give a private party significant decision-making power may blur the line between use and control.
Is the arrangement consistent with IRS safe harbor provisions?
For certain agreements, like management contracts or sponsored research, IRS safe harbors provide guidance. Falling outside those bounds can increase the risk of noncompliance.
Does this benefit a private party in a way that could be considered private use?
Even without formal agreements, a private party receiving a unique economic benefit, such as guaranteed access or branding rights, could raise compliance flags.
This set of questions isn’t exhaustive, but it’s a solid starting point. A structured review process can help ensure third-party agreements don’t create surprises down the road.
When to Consult Bond Counsel or Revisit Structuring Options
Spotting a potential issue early is always better than trying to fix a problem after the fact. That’s especially true when it comes to third-party agreements involving bond-financed property.
The earlier red flags are identified, the more options you have to adjust the structure, clarify terms, or mitigate risk before compliance is on the line.
Here are a few scenarios where it’s wise to pause and take a closer look or bring in bond counsel for additional support:
- The agreement doesn’t clearly fall within IRS safe harbor provisions.
If a management or research contract has terms that fall outside the IRS guidelines, additional review is needed to assess the risk of private use. - There’s a mix of public and private use in a single project.
Complex facilities with overlapping users or purposes often require careful allocation of use and may benefit from strategic structuring or segmentation. - The private party receives exclusive access or significant control.
Even without formal ownership, exclusive rights or operational authority can raise red flags. Revisiting the agreement’s structure can help rebalance control. - The compensation structure is based on net profits.
Profit-sharing terms can trigger private use unless carefully aligned with safe harbor rules. Tax counsel can help evaluate whether adjustments are needed. - You’re unsure how the IRS might interpret a unique or unusual arrangement.
Some situations fall into gray areas such as naming rights, donor recognition, or bundled service arrangements. In these cases, a private letter ruling from the IRS may be the safest path forward.
Bringing in bond counsel early can help clarify the risk, adjust the structure if needed, and document your position giving you greater confidence in your compliance strategy.
Documentation Best Practices
When questions arise months (or years) down the line, having a clear record of third-party agreements and the rationale behind your decisions can make all the difference.
Start by centralizing all third-party agreements related to bond-financed property in one easily accessible place. Scattered files and inconsistent record keeping increase the risk of missing something important, especially during audits or reviews.
Just as important: document the “why.” If an agreement was reviewed and determined not to constitute private use, record the factors that led to that conclusion.
Was it a short-term rental? Did it fall under a safe harbor? Did the private party lack meaningful control?
Capturing that analysis in real time helps support compliance and saves your team from scrambling later.
DebtBook can make this process easier. With DebtBook's Debt Management solution, you can:
- Store agreements, contracts, leases, and any other documentation related to a bond-financed project
- Track use by time, space, revenue, or other relevant metrics
- Receive alerts when private use thresholds are violated
- Generate reports on demand to support audits and ongoing monitoring
Clear documentation not only helps maintain tax compliance but it also gives your team and bond counsel peace of mind knowing there’s a reliable system in place.
How DebtBook Can Help
Managing third-party agreements across multiple bond-financed projects can get complicated fast. DebtBook's Bond Proceeds Management feature is designed to simplify that process by giving you the tools to track, monitor, and document private use with confidence.
With DebtBook, you can:
- Centralize your agreements in one place, tied directly to bond-financed projects and series
- Quantify private use through a number of metrics like time, space, and revenue across projects
- Document your analysis and rationale for each agreement so your decisions are easy to reference later
- Receive automated alerts when you violate private use limits
- Generate on-demand reports to support audits, reviews, or board-level questions
Instead of juggling spreadsheets or piecing together information from multiple departments, you get a single, reliable system that keeps everything organized and keeps your team prepared.
Whether you're reviewing new agreements or monitoring long-standing arrangements, DebtBook gives treasury teams the visibility and structure needed to support compliance every step of the way.
Stay Ahead of the Risk
Third-party agreements may seem routine but when bond-financed property is involved, every detail matters. A quick review today can help avoid costly compliance issues down the road.
That’s why building a repeatable process is so valuable.
Checklists, structured reviews, and centralized documentation ensure nothing slips through the cracks and gives your organization a reliable framework for making informed decisions.
Related Debt Management Reading
- Private Business Calculator: How to Determine the Measurement Period of Bond-Financed Property
- Breaking Down the Math Behind Municipal Bonds
- 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.
