IRS Issues New Management Agreement Safe Harbor Provisions, Providing Enhanced Flexibility for College and University Food Service, Facilities Management and Similar Relationships

August 22, 2016

By: Edwin J. Kelley, Jr.

New management agreement guidelines were issued by the IRS today in a new Revenue Procedure (Rev. Proc.) 2016-44.  Rev_Proc_2016-44 provides revised safe harbors under which a private management contract does not result in impermissible private business use of projects financed with tax-exempt bonds.  The former limits on fixed and variable compensation in management contracts involving tax-exempt bond financed facilities have been eliminated. Rev. Proc. 2016-44 will be published in Internal Revenue Bulletin Number 2016-36, dated September 6, 2016. These revised safe harbors give colleges and universities the ability to enter into management contracts with private entities to manage or operate tax-exempt bond financed projects with more flexibility for incentives in reasonable compensation arrangements and longer terms of up to 30 years (subject to an economic life limit). The revised safe harbors also remove the previous requirements for prescribed percentages of fixed compensation for management contracts for different time periods. The revised safe harbors continue a longstanding existing prohibition against sharing of net profits, and add certain new principles-based constraints (governmental control, governmental risk of loss, and no inconsistent tax positions by private service providers). The revised safe harbors are effective for any management contract that is entered into on or after August 22, 2016.