A private partnership leases university land, built and operates a student dormitory there for the university's benefit under a tightly restricted ground lease, and title to the building already belongs to the university's governing board -- is mold-remediation and repair work on the dormitory exempt from Texas sales tax?

Plain-English summary

This letter walks through an unusually detailed fact pattern about a university dormitory financed and operated through a private ground-lease structure -- worth understanding in full because the structure, not just the repair work, is what makes the exemption available.

The structure: A university's governing board (exempt from Texas sales/use tax under § 151.309 and Rule 3.322(c)(5)) leased campus land to a private individual (later succeeded by a Texas general partnership, "the Partnership") back in 1985, specifically so the private party could develop, build, own, and operate student dormitory and recreation facilities the public treasury couldn't fund directly at the time. The dormitory building itself was later completed and title was conveyed to the board, while the Partnership holds a 35-year operating leasehold, refinanced in 1995 through bond proceeds. Critically, the ground lease legally requires the Partnership to hold and operate the facility for the support, maintenance, or benefit of the university -- not for unrelated private residential use -- and the university must give priority dormitory assignment to freshmen and sophomores under 21, with only a narrow, occupancy-triggered exception letting the Partnership lease surplus units to non-university tenants. A joint board/Partnership committee approves the property manager, management agreement, annual budget, and occupant policies, and the Partnership can't sell or assign its leasehold without university consent. In practice, the Partnership has never leased to anyone unaffiliated with the university.

The current transaction: Mold was discovered in the dormitory, closing it for extensive remediation and repair -- HVAC cleaning/replacement, floor repair and carpet replacement, interior painting, power washing with water-penetration repair, pool and locker room repairs, surveillance system updates, plumbing repairs, and moisture-resistant ceiling tile replacement.

The ruling: Citing its own prior, "virtually identical" letters on leased dormitory facilities (referencing an earlier 1995 letter), the Comptroller confirmed this repair/remediation work is exempt under § 151.311, which exempts improvements to realty performed for the direct benefit of an exempt entity. Even though a private, for-profit partnership is the one hiring and paying the contractors, the tightly restricted lease terms -- title already in the board's name, mandatory university-benefit use, university housing-priority obligations, and joint governance -- established that the dormitory serves the university's own functions directly. The Partnership, as lessee, may issue a Texas Sales and Use Tax Exemption Certificate to the contractors doing the mold remediation and repair work.

What this means for you

Private developers/operators of university or government-affiliated facilities under ground leases

A private, for-profit entity CAN pass through a governmental exemption to its contractors -- but only when the lease structure genuinely ties the facility's use and operation to the exempt entity's own functions (restricted use, exempt-entity benefit requirements, governance oversight, and typically eventual or already-transferred title). A loosely structured private lease of government land, without these features, would not automatically get this treatment.

Contractors performing repair/remodeling work for privately-operated but government-affiliated facilities

Confirm whether your customer can legitimately issue an exemption certificate under this kind of structure before assuming a private lessee's payment means the job is automatically taxable -- and keep the certificate on file since this determination turns on specific lease facts, not just who signs your contract.

University systems and public entities structuring public-private facility partnerships

If tax-exempt treatment of ongoing repair/maintenance work matters to your deal, this letter is a template for the kind of lease provisions (mandatory benefit-of-institution use, title arrangements, governance/budget oversight, restricted third-party leasing) that support the § 151.311 exemption flowing through to a private operating partner.

Common questions

Q: Does a private company operating a government-owned or government-affiliated facility automatically qualify for the government's tax exemption on repair work?
A: No -- per this letter, it depends on specific lease/structural features showing the facility is genuinely used in direct fulfillment of the exempt entity's own functions, not just that the underlying land or eventual building title belongs to a government entity.

Q: Who can issue the exemption certificate to the repair contractors here?
A: The private Partnership itself, as the lessee responsible for hiring the contractors -- the exemption doesn't require the university or its board to be the one directly contracting for the work.

Q: Does this letter bind the Comptroller for other university-affiliated private developments?
A: No -- this is an informal 2001 letter addressing one specific, heavily-documented lease structure, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else; the letter itself notes it followed the reasoning of prior, similar dormitory rulings.

Citations and references

Statutes:

• Tex. Tax Code § 151.309 (governmental entity exemption)
• Tex. Tax Code § 151.311 (exemption for realty improvements for the direct benefit of an exempt entity)

Rules:

• 34 Tex. Admin. Code Rule 3.322(c)(5) (exempt governmental entity purchases)

Prior guidance relied on:

• A prior Comptroller letter on virtually identical leased-dormitory facts (referenced in the original letter as "Al Van Allen letter dated January 10, 1995")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200108598L

Original ruling text

August 20, 2001

Dear **:

Thank you for your inquiry requesting a written ruling regarding the
applicability of Texas sales and use taxes to the real property repair and
remodeling transaction described below. Your background, fact situation and
question are restated below followed by my response.

Background

The ** (the "BOARD") entered into an Amended and Restated Ground
Lease Agreement as of November 1, 1995 (the "Lease"), with respect to LOCATION,
a dormitory on the campus of ** ("UNIVERSITY"), and related
facilities (the "Dormitory Facilities"). The Lease is with **, a
Texas general partnership (the"Partnership"), and has an initial term of 35
years from the date of the original lease, January 1, 1985. The BOARD and
UNIVERSITY are exempt from Texas sales and use taxes pursuant to Tex. Tax Code
151.309 and Comptroller's Sales Tax Rule 34 Tex. Admin. Code 3.322(c)(5).

As set forth in the Lease, the background and purpose of the Lease are as
follows:

Whereas, in order to assist in the development of campus housing facilities and
related facilities for students at ** ("UNIVERSITY"), the LESSOR
[BOARD] deemed it in the best interest of SCHOOL, and particularly for
UNIVERSITY and prudent in light of the unavailability of public funds for such
development, that a portion of the campus of UNIVERSITY be leased to INDIVIDUAL
A, an individual, the interests of whom were succeeded to by INDIVIDUAL B, an
individual residing in COUNTY, Texas in her individual capacity and as trustee
under a Declaration of Trust dated February 26, 1986 (herein in both
capacities, "INDIVIDUAL A"), for the purpose of developing, constructing,
owning and operating such student housing and related facilities;

Whereas, in furtherance of the aforesaid purposes, the LESSOR and INDIVIDUAL A
entered into a Ground Lease Agreement, dated as of December 1, 1985, as amended
by Amendment of Ground Lease Agreement, dated as of July 1, 1986 (as amended,
the "Original Lease"), whereby the LESSOR agreed to lease a tract of
approximately 5.865 acres of land on the campus of UNIVERSITY to INDIVIDUAL A,
and INDIVIDUAL A agreed to develop, construct, own and operate on the leased
premises a dormitory, for use by UNIVERSITY students and participants in
university-sponsored events, and a recreation center for use by such students
and participants and UNIVERSITY faculty and staff, subject to the terms stated
in the Original Lease;

Whereas, certain improvements constituting the Phase I Dormitory have been
constructed by INDIVIDUAL A on the Land, to which title has, concurrently
herewith, been conveyed to LESSOR;

Whereas, INDIVIDUAL A, with the consent of LESSOR, assigned all rights and
interests in and to the Original Lease to Phase I Dormitory Partnership, a
Texas general partnership (the "Partnership"), pursuant to an Assignment of
Leasehold Interest, dated as of November 1, 1995, between INDIVIDUAL A and the
Partnership (the Partnership is hereafter referred to as "LESSEE");

Whereas, the Partnership has agreed to assume, keep and perform covenants of
INDIVIDUAL A under the Original Lease;

Whereas, in connection with the issuance by the CITY B, FINANCE COMPANY of its
$** Educational Facilities Revenue Refunding Bonds (UNIVERSITY -
PROJECT) Series 1996 (the "Bonds"), the proceeds of which are being loaned to
LESSEE, LESSOR and LESSEE deem it necessary to enter into this Amended and
Restated Ground Lease Agreement, amending and restating the Original Lease (as
amended and restated, the "Lease");

The Partnership has leased and operated the Dormitory Facilities, title to
which is in the BOARD, since the date of the Lease. The BOARD has the option to
purchase the Partnership's leasehold interest in the Dormitory Facilities and
related equipment at any time at a purchase price equal to the fair market
value of the leasehold interest and related equipment, but in no event less
than the aggregate of all outstanding debt and other amounts advanced by the
mortgagee.

As consideration for the Lease, the Partnership is required to pay (i) the
BOARD annual rent of $**, and (ii) all payments required to be paid
on the promissory note executed to evidence the Partnership's receipt of the
proceeds of the Bonds (issued by CITY B, FINANCE COMPANY, as described above)
and certain notes issued by the Partnership.

The Lease specifically requires that the Partnership hold its leasehold
interest in the Dormitory Facilities for the benefit of UNIVERSITY. In this
connection, the Lease provides as follows:

Section 4.01. Purpose of Lease. LESSEE enters into this Lease for the purpose
of developing and constructing and maintaining the Facilities in accordance
with the Plans and Specifications and of operating and maintaining the
Facilities in accordance with the Management Agreements. The Leased Premises
are to be used for no other purpose.

Section 4.02. Benefit of UNIVERSITY. Subject to Section 16.04, LESSEE shall
lease and hold the Leased Premises for the support, maintenance or benefit of
UNIVERSITY. The Leased Premises are not leased for a purpose not related to the
performance of the duties and functions of the state or are not leased to
provide private residential housing to members of the public other than On-
Campus Occupants.

Section 11.01. Management Agreements. LESSEE shall be responsible for the
operation of the Facilities. LESSEE shall enter into a Management Agreement
satisfactory to the Committee, and consistent with the terms of this Lease,
with a manager approved by the Committee. MANAGEMENT COMPANY or its Affiliate
is hereby approved as the initial manager of the Leased Premises. Each such
Management Agreement shall provide for the operation of the Facilities without
cost or expense to LESSOR in conformity with all applicable law and with the
rules, regulations and policies of LESSOR and UNIVERSITY.

The Lease requires UNIVERSITY to assign freshmen and sophomores under the 21
years of age to the Dormitory Facilities in priority over other UNIVERSITY
housing until the Dormitory Facilities achieve a 100% occupancy rate in the
fall semester and 95% occupancy rate in the spring semester and summer session.
If any units remain unleased for a period of two months and the Dormitory
Facilities do not generate rentals that would result from 91% occupancy, then
the Partnership is entitled to lease the unleased units to any persons,
including those that are not affiliated with UNIVERSITY, for a period of up to
12 months, subject to the requirement that the lease expiration date be at
least three days prior to commencement of the UNIVERSITY fall semester.

The Partnership has not leased any units in the Dormitory Facilities to persons
who are not affiliated with UNIVERSITY. In addition, it is unlikely that the
Partnership would be entitled in the future to lease to persons not affiliated
with UNIVERSITY, since UNIVERSITY is required to give preference to the
Dormitory Facilities in assigning certain students (as described above) and
assuming that UNIVERSITY's enrollment and demand for on-campus housing remain
the same or increase.

The Lease requires that the Dormitory Facilities be operated in conformity with
the rules, regulations and policies of the BOARD and UNIVERSITY. The BOARD and
the Partnership each appoint three members to a Committee that is responsible
for approving (i) the appointment of a property manager, (ii) the terms of the
management agreement, (iii) the annual budget and (iv) the policies and
operating procedures governing the occupants of the Dormitory Facilities.

During the Lease term, the Partnership cannot sell or assign its leasehold
interest in the Dormitory Facilities without the consent of UNIVERSITY, except
to certain persons specified in the Lease.

Current Transaction

As a result of the discovery of mold in the Dormitory Facilities, the Dormitory
Facilities recently were closed for updating, repair and remediation work. The
work includes: (i) cleaning, servicing and replacing portions of the heating,
ventilation and air conditioning service; (ii) repairing floors and replacing
carpets; (iii) painting interior components; (iv) power washing of walls and
windows, including repair related to water penetration; (v) repairing pool
surfaces and locker room walls, and replacing equipment and lockers; (vi)
updating surveillance system; (vii) repairing or replacing showers, sinks and
other plumbing; and (viii) replacing existing ceiling tiles with moisture
resistant ceiling tiles.

Ruling Requested

Based on the rationale of several ruling letters previously issued by the
Comptroller's office with respect to leased dormitory facilities under
virtually identical facts, we understand that the Dormitory Facilities
described above are used in support of the BOARD and UNIVERSITY and in direct
fulfillment of the BOARD's and UNIVERSITY's functions, and, thus, the Dormitory
Facilities are for the direct benefit of the BOARD and UNIVERSITY. See, e.g, Al
Van Allen letter dated January 10, 1995. Accordingly, the work being performed
on the Dormitory Facilities, as described above, is exempt from Texas sales and
use taxes pursuant to Tex. Tax Code 151.311, and the Partnership may issue a
Texas Sales and Use Tax Exemption Certification to the contractors performing
the work.

Response: Based on the facts provided the remodeling, repair and remediation
work performed on the Dormitory Facilities are for the direct benefit of the
BOARD and UNIVERSITY and are thus exempt from Texas sales and use tax. The
Partnership may issue a Texas Sales and Use Tax Exemption Certification to the
contractors performing the work.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, you may e-mail our tax help section at .
You may also call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Gilbert Zamora
Tax Policy Division