Tampa, Florida


Email Tom Young Tom Young on LinkedIn Tom Young on Twitter Tom Young on Facebook Tom Young on Avvo
Tom Young
Tom Young
Attorney • (813) 251-9706

BP Business Economic Loss Claim Appeal 2015-929: Real estate development activity results in exclusion


The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

The Claims Administrator denied the BEL claim of this Zone A real estate company in Robertsdale, Alabama on the basis that it is an excluded real estate developer. Claimant appeals.

Claimant makes an impassioned argument that the Settlement Agreement only excludes “Real Estate Developers,” not all entities that engage in some real estate development activity. Citing Section 2.2.4 of the Settlement Agreement, Claimant argues that exclusions must be based on the substantive nature of the business. Because the Settlement Agreement does not fully define Real Estate Developers and since exclusions are to be determined at the entity level, Claimant urges that the performance of some real estate development activity does not mean that an entity is a developer. The Claimant describes itself as an entity that simply buys land, holds it for several years and resells the unimproved land without performing any significant development activity other than occasional platting.

Claimant points out that the Administrator assigned NAICS Code 531390 “Other Activities Related to Real Estate” and did not assign an NAICS code that would apply to a Real Estate Developer. Indeed, the program reviewer described Claimant as a “Real Estate – Land Sales and Leasing” business. Claimant argues that under Policy 480, an entity’s primary business activity controls whether it is, in fact, a Real Estate Developer. In other words, the activities identified as development activity must rise to such a level that it is reasonable to classify the entity, as a whole, as a real estate developer. Claimant further contends that the Administrator misapplied Policy 468 in concluding that its development activity was sufficient at the entity level to require exclusion. Claimant argues that an entity may have some development revenue and activity but should not be excluded unless its primary business activity is real estate development.

After the claim was denied, the Claimant requested Reconsideration and Re-Review. The Post Re-Review Denial Notice states:

1. Your claim is excluded under Section of the Settlement Agreement because your business is an excluded real estate developer. You may submit claims for Coastal Real Property, Wetlands Real Property, and Real Property Sales Damage, if you are otherwise eligible for those claims under the Settlement Agreement. The Claims Administrator determined that your business is a real estate developer based on the following:

a. The business is an excluded real estate developer because it derived ordinary revenue from real property sales other than depreciation recapture, which is reported on its 2010 tax return as ordinary income.

b. The business is excluded real estate developer because there are indications that it engaged in real estate development activity in 2010, including any activities involved in the making of any material changes in the use of buildings or land including the renovation and re-lease of existing buildings, the purchase of raw land for development, the sale of improved land or parcels to others and the planning, design, arranging of financing, zoning approvals, construction, marketing, sale, or lease of such projects.

The Claims Administrator’s decision was based on his interpretation of Section which excludes Real Estate Developers from the settlement class:

Real Estate Developers, including any Natural Person or Entity that develops commercial residential or industrial properties. This includes, but is not limited to, any Entity developing an entire subdivision (as defined by the law of the state in which the parcel is located) of Real Property, including condominiums with multiple residential units and/or a residential subdivision with contiguous home sites and homes, provided, however, that Real Estate Developers shall be eligible to assert Coastal Real Property Claims under Section 5.7 and Real Property Sales Damage under Section 5.9.

In Policy 468, the Administrator has adopted a more subjective approach to the determination of whether an entity is an excluded Real Estate Developer. Under this policy, the activities of the entity during 2010 will be examined based on a set of defined criteria in order to determine “whether it was more likely than not that the Entity was sufficiently engaged Real Estate Development activity during 2010 such that it may reasonably be characterized as a Real Estate Developer.” Two of these criteria are (1) revenue from real property sales reported as ordinary income, including 2010 sales of property developed by the entity, and (2) expenses associated with Real Estate Development activity. The Administrator may also consider other available information that discloses activities “involved in the making of any material change in the use of buildings or land, including the renovation and release of existing buildings, the purchase of raw land for development, the sale of improved land or parcels to others and the planning, design, arranging of financing, zoning approvals, construction, marketing, sale or lease of such projects.” Because Section does not contain a revenue threshold, Policy 468 leaves the determination of whether a Claimant is an excluded Real Estate Developer to the Administrator’s sound discretion.

A close reading of Section does not appear to leave much, if any, room for the exercise of such discretion. Under its plain wording, this provision excludes Real Estate Developers including any “entity that develops commercial, residential or individual properties.” This language does not state that an entity in the primary business of developing real estate is excluded. Section also specifically excludes “any entity developing an entire subdivision…” Again, there is no reference to the business or NAICS code of the entity nor to any particular year or time period. And importantly, terms such as “sufficiently engaged” or “more likely than not” are not included in In short, some of the Claims Administrator’s well intended terminology would appear to allow more room for interpretation than a strict reading of Section might permit. Here, it is unnecessary to analyze this distinction because the record in this case fully supports the Claims Administrator’s decision.

The record shows that between 2003 and 2009, the Claimant platted six subdivisions in Baldwin County, Alabama. In 2010, Claimant transferred or conveyed six lots from one of these subdivisions and reported $1,252,000.00 in ordinary income on its 2010 Federal tax return. Under Policy 468, any revenue from real estate sales reported as ordinary income on the 2010 return “typically shall be considered to be revenue associated with Real Estate Development activity.” Claimant also reported $631,969.00 in land sale costs on the same tax return. Policy 468 views the purchase of raw land for development as an indication of Real Estate Development activity. In addition, the record reflects that the Claimant added manufactured housing to some of the parcels it previously platted and recorded 26 property transfers of these lots in 2010. This panelist agrees with the Claims Administrator that these activities are clearly indicative of a pattern of Real Estate Development activity over several years, including 2010.

Although Claimant contends that the substantive nature of its business is not that of a Real Estate Developer, this panelist disagrees. While Claimant is correct that exclusions are made at the entity level and are determined on a substantive basis, an entity can have more than one primary business activity that is substantive. For example, Google is in the search engine business but it is also in the global mapping business. In the absence of a revenue threshold, both could satisfy an inquiry into the substantive nature of Google’s business. When this analysis is applied to the Claimant, an identical result must obtain. Claimant describes itself as a purchaser, holder and seller of land. Accepting this description as accurate, the Claimant is also substantively a Real Estate Developer under the dictates of Section The Claims Administrator was therefore correct in denying this claim.

Leave a Comment

Have an opinion? Please leave a comment using the box below.

For information on acceptable commenting practices, please visit Lifehacker's guide to weblog comments. Comments containing spam or profanity will be filtered or deleted.