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BP Business Economic Loss Claim Appeal 2016-1714: Totality of Circumstances Do Not Support Client Is Real Estate Developer

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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.

Claimant appeals the denial of its BEL claim. The Claims Administrator determined that the claimant was a real estate developer and excluded the claim pursuant to Section 2.2.4.7 of the Settlement Agreement. The Claims Administrator determined that the “business was sufficiently engaged in Real Estate Development activity during 2010 such that it may reasonably be characterized as a Real Estate Developer.”
Two reasons were offered as being used in that determination: (1) the business derived ordinary revenue from real property sales other than depreciation recapture which it reported in its 2010 tax return as ordinary income; (2) “indications” that the business engaged in real estate development activity in 2010, including “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.
Claimant sought Reconsideration and the claim was again denied. The Claims Administrator explained: Claim is excluded as a real estate developer, as the NAICS code listed on all federal schedule C tax returns involves real estate activities. The claimant has not submitted any documentation to support otherwise.
Claimant is a single-member limited liability company whose sole member is XXX. Prior to December of 2010, Claimant was known as YYY before undergoing a name change. Claimant concedes that he and his wife individually are real estate developers but argues that the Claimant has never been involved in real estate activity but rather is a property management company that manages, operates and rents vacation units in a multi-family building in Carabelle, Florida. He contends that, although he and his wife are involved in real estate development activities “through various other entities,” the claimant is not one of them and, since exclusions are determined at the entity level, this claim should not be excluded.
Compounding the problem is the fact that the Settlement Agreement fails to define the term “Real Estate Developer.”Section 2.2.4.7 states that the term “includes, but is not limited to any Entity developing an entire subdivision . . . of Real Property, including condominiums with multiple residential units and/or a residential subdivision with contiguous home sites and homes . . .” Exhibit 18 states that “the applicability of the [Real Estate Developer]exclusion will be determined by the Claims Administrator based upon his review of (a) the claimant’s 2010 tax return, (b) 2010 business permits or license(s), and/or (c) other evidence of the relevant business’s or individual’s activities necessary for the Claims Administrator to determine whether the exclusion applies.” (emphasis added). There is no list of real estate NAICS Codes that automatically excludes a claimant as a real estate developer.
In an attempt to clarify the definition, the Claims Administrator adopted Policy 468. The policy notes that, in contrast to other exclusions, the Settlement Agreement “takes a more subjective approach” to who is or who is not a Real Estate Developer and “leaves that determination to the sound discretion of the Claims Administrator.”
The policy provides five criteria for the Claims Administrator’s analysis:
1.The Entity’s business designation on tax returns. If it is “expressly identified or described” its business as real estate development on Schedule B, a rebuttable presumption is created that it is an excluded Real Estate Developer.
2. 2010 Permits and/or Licenses of the Entity.
3.Any revenue from real property sales reported by the entity as ordinary income rather than as capital gains which is “typically”treated as revenue associated with Real Estate Development activity. This includes, but is not limited to, “the 2010 sale of any real property developed by the Entity, including individual condominium or vacation rental units, timeshare estates, timeshare interests, or vacation ownership interests. (emphasis added)
4.Expenses during 2010 “that are considered to be associated with Real Estate Development Activity” such as permitting, engineering,architectural, inspections, builder’s risk, surveying, etc.
5.Other available information such as making material changes in the use of buildings or land, renovation and release of existing buildings, the purchase of raw land for development, zoning approval, arranging of financing, marketing, etc.
Claimant’s financials demonstrate that of Claimant’s total 2010 income of $437,000, $425,000 (or 97%) was reported as “sales” in January 2010. The remaining $12,600 (3%) was derived from rental income of $1,800 per month from June through December 2010. Prior to that, the last reported revenue was in May,2008. While this contradicts Claimant’s representation that it merely “manages, operates and rents”vacation units, it does not, by itself, make the claimant an excluded developer.
After a thorough review of the record, and utilizing the criteria stated in Policy 468, this panelist cannot conclude that the record contains sufficient evidence that the claimant is a real estate developer. This conclusion is based upon the totality of the circumstances and includes the following considerations:
a.The Claims Administrator’s determination that Claimant has not submitted any documentation to contradict the conclusion that its NAICS Code involves real estate activities is incorrect. The NAICS Code 531390 relates to “Other Activities Related to Real Estate” and does not expressly identify or demonstrate involvement in real estate development. The Declaration of ***addresses this specifically and states that the claimant was not involved in the acquisition,development or construction of
and only rents, operates and manages the units.
b. There is no tax return for the claimant Entity.
c. There is no evidence that the claimant Entity has any 2010 business permits or licenses, especially none consistent with real estate development.
d. There is no revenue reported by the entity on its tax return since thereis none filed by the entity. There is no evidence that the sale in January 2010 involved real property developed by the Entity. There is evidence to the contrary that the Entity never developed any property.
e. There is no evidence of 2010 expenses by the Entity consistent with real estate development activity such as expenses for permitting, architectural, surveying, construction, draws to contractors, acquisition of raw land, land use planning, landscape architectural approval, etc.
f. There is no evidence that the claimant Entity produced promotional materials, maintained a website or any other activities associated with real estate
development.
Although the Claims Administrator is imbued with discretion when determining the applicability of this exclusion, this panelist concludes that the totality of the circumstances and the existing record fails to support the determination that the claim should be excluded. Accordingly, it is remanded to the Settlement Program for calculation of any compensation to which Claimant is entitled.

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