4.6.1 Private Business Use
Private business use is the direct or indirect use of bond proceeds or bond financed property in the trade or business of a nongovernmental person. Private business use by a nongovernmental person may arise as a result of, among other things (1) ownership (determined in accordance with federal income tax principles), (2) actual or beneficial use of property under a lease (determined in accordance with federal income tax principles), (3) management or services contracts, (4) output contracts, or (5) research agreements.
In addition, other arrangements that convey similar special legal entitlements to a nongovernmental person for the beneficial use of bond proceeds or bond financed property will result in private business use. For financed property that is not available for use by the general public, private business use may result from a special economic benefit to one or more nongovernmental persons, even if those nongovernmental persons have no special legal entitlement to use the property. In determining whether a special economic benefit exists, all of the facts and circumstances must be considered, including whether (1) the financed property is functionally related or physically near to the property used in the trade or business of a nongovernmental person, (2) only a small number of nongovernmental persons receive the actual benefit, and (3) the cost of the financed property is treated as depreciable by any nongovernmental person.
Use by an employee of the issuer or an individual who is not carrying on a trade or business is not private business use. Use of financed property as a member of the general public is not treated as private business use. Use by a nongovernmental person of financed property in its trade or business will be treated as general public use if the property is intended to be available and is in fact reasonably available for use on the same basis by natural persons not engaged in a trade or business. Arrangements that convey priority rights or other preferential benefits are not use on the same basis as the general public. An arrangement providing for use by the general public at no charge or at generally applicable and uniformly applied rates does not convey priority rights or other preferential benefits, even if different rates apply to different classes of users (such as volume purchasers) if such differences are customary and reasonable, or a special rate arrangement is negotiated, but only if the user is prohibited by federal law from paying the generally applicable rates, and the established rates are as comparable as reasonably possible to the generally applicable rates.
By way of example, if a bond financed water system provides water to residences and private businesses and both the residences and the private businesses are charged a uniform rate for water services, purchases of water by the residences and businesses will be viewed as use by members of the general public and therefore not private business use. Conversely, if an issuer provides water to private businesses through “take or pay contracts” or similar output type contracts or on a basis other than the basis on which the service is provided to members of the general public under contracts fixing quantity and price, the use and the related payments will be private business use. A similar analysis would apply in the case in which an issuer is seeking to supply water through its bond financed facility to several water wholesalers or retailers for distribution. If any of the wholesalers or retailers (or any of the entities that purchase water from them) are not state or local governmental units, the issuer must analyze the amount of private trade or business use as well as any related payments generated by the water sales.