Renting facility space can be a great way for a private school to generate additional revenue, especially during the summer months when school is not in session. However, schools must carefully consider the following factors before making these arrangements:
A lease is an agreement granting a third party the exclusive right to occupy the school’s real property for a specific period. The lease typically gives the tenant exclusive possession and use of the property, meaning the tenant may generally exclude the owner from the premises. A leasehold interest is typically transferable and irrevocable, unless otherwise stated in the lease agreement.
In contrast, a Facilities Use Agreement (FUA) typically conveys a license to use the facility for an event or a certain period of time, rather than providing a leasehold interest. Unlike a lease, an FUA does not grant extensive property rights. Instead, it permits a third party to use the school’s property for a specified purpose. A FUA is usually non-transferable, revocable, and can be either exclusive or non-exclusive.
Ultimately, the language of the FUA determines the rights a school will grant to the third party. If the school intends to provide a license for temporary use rather than an exclusive possessory interest, it should use an FUA rather than a lease.
Unrelated Business Income Tax (UBIT) is a tax imposed on income generated by tax-exempt organizations from business activities that are not substantially related to their exempt purpose. This is important because excessive UBIT may jeopardize a private school’s tax-exempt status.
Determining whether income from facility use is subject to UBIT is highly fact-specific and depends on multiple factors.
Ways to Avoid UBIT:
Please be aware that renting facilities to for-profit or non-charitable entities may jeopardize a school’s property tax welfare exemption. Schools should consult with their legal counsel prior to making these types of arrangements.
If a school allows a third party to use its facilities, the contract should include indemnification and insurance provisions to protect the school and to reduce potential liability and risk.
An indemnification provision can protect the school from lawsuits or claims related to incidents that occur during the third party’s use of the facility. The FUA should also include a duty to defend clause, requiring the third party to provide a defense for the school for any litigation or claims asserted against the school.
Users should also be required to maintain adequate insurance coverage based on the type of use of the school’s facilities and provide proof of that insurance before they use the facilities. Schools should check with their broker to ensure that the user provides sufficient coverage. The school should ensure endorsements on the policies name the school as an additional insured and waive rights of subrogation against the school.
Schools should ensure the FUA includes their right to terminate the FUA and stop the event at any time and for its own convenience, including during the event itself. This will give the school the right to immediately stop an event or use of its facilities if a user or that user’s guests or invitees are not following the school’s rules or are otherwise not complying with the FUA.
Final Considerations
Private schools should carefully evaluate these factors before agreeing to allow third parties to use their facilities. A well-drafted agreement is the best way to minimize risks and liability. Schools should consult trusted legal counsel before entering into any agreements to ensure all potential risks are fully assessed.