UBIT Alert: Beware of “dual-use facilities” rentals where substantial services are provided.


Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). MBC rents out their basketball field house to a semi-pro, summer league basketball team. MBC’s employees provide janitorial and laundry services as part of the “rental” agreement. Pursuant to IRS rules, this constitutes a “dual-use” facility rental.
Revenues from the unrelated activities are generally unrelated business income. Expenses may be directly associated with the unrelated business activity or may be reasonably allocated to those unrelated business activities. It is key to utilize a reasonable allocation methodology.


From IRS Publication 598:
When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction.

Services provided with a lease. An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. It also provides dressing room, linen, and stadium security services for the professional team.

Leasing of the stadium is an unrelated trade or business. In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Therefore, the income from this lease is rent from real property and unrelated business taxable income.

From the 2014 Report of the ACT (EO), Appendix A:

Situation 2 – Y, a state university, leases its basketball arena to a for-profit entertainment business for a concert sponsored by a for-profit promotional company. In addition to the use of the arena, the Y agrees to provide utilities and security services and will operate the concession stands for the event. The concert does not contribute to the educational activities of the University. Due to the substantial services provides by the University, the rental income from this arrangement results in unrelated business income for the University.

Bottom Line

• The Internal Revenue Code generally allows that all rents from real property are excluded from the calculation of UBI.
• Various IRS rulings state that if substantial services are included in the rental agreement, the entire rental income will be UBI.
• Dual-Use, allocated expenses must employ a reasonable methodology.
• There must be a proximate and primary relationship of the expenses to the business activity.
• The term ‘reasonable basis’ has been an area of much contention over the years.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.