The situation came to light after a Dunedin hotelier complained to Dunedin City Council chief executive Paul Orders and the Otago Daily Times last month.
The man - who would not be named - told the ODT his business was being undercut by the university, which had been advertising the residence for commercial use despite not paying commercial rates.
He first complained to the council in July last year, but alerted Mr Orders again, and the ODT, when adverts could still be found on an accommodation website and in a magazine in December.
He said room rates at the residence were ''quite low'' compared with his own, despite both operating in the same sector of the market.
''If you are not paying commercial rates then you can do that sort of thing,'' he said.
Council staff last week confirmed they had been in contact with university staff since June 1 last year - before the man's complaint - about the institution's use of the residence.
Council financial controller Maree Clarke said a timeline of contact - released to the ODT after an official information request - showed council staff had warned the residence could face higher rates if found to be operating outside its existing resource consent.
The university was ''non-rateable'' and only charged for drainage, water and other services, but the residence was supposed to be used primarily by university guests - not offered on the open market.
Mrs Clarke said university staff had responded on June 20 by changing a listing on the website, to show no availability, and ''hoped this was sufficient proof that the residence is not operating as a commercial activity''.
There was further contact after the Dunedin hotelier's complaint in July, and the university sought a legal opinion while considering a new resource consent for the residence, she said.
When the Dunedin hotelier complained again in December, council staff made contact again and were told the university now had a new consent to operate as a public accommodation provider, she said.
However, that meant the residence would face a ''large rates increase'', but not until July 1 this year, as council staff could not change rates partway through a financial year, she said.
The change would lift the rates bill for the residence from about $9000 to $31,000 a year, Mrs Clarke said.
University senior communications adviser Jo Galer, responding to detailed ODT questions, replied with a one-line statement from chief operating officer John Patrick.
''The university has been discussing this matter with the DCC, and is seeking a resolution that will be fair to Dunedin business interests.''