Beating The “Single Asset Real Estate” Exclusion From Subchapter V Eligibility (In re Evergreen)

A “single asset real estate”? (Photo by Marilyn Swanson)

Excluded from Subchapter V eligibility is a “single asset real estate” debtor.

We have a recent opinion on a Subchapter V debtor who beats that exclusion: In re Evergreen Site Holdings, Inc., [Fn. 1]

What follows is a summary of that opinion.

Eligibility Issue & Standards

The Evergreen issue is this:

whether Debtor is excluded from Subchapter V eligibility by its real estate ownership?

–Real Estate Ownership Exclusion

11 U.S.C. § 1182(1) says an eligible Subchapter V debtor:

includes a person “engaged in commercial or business activities”; but
excludes a person “whose primary activity is the business of owning single asset real estate.”

–Single Asset Real Estate Characteristics

11 U.S.C. § 101(51B) defines “single asset real estate” as real property ownership with three characteristics:

“constituting a single property or project, other than residential real property with fewer than 4 residential units”;
“which generates substantially all of the gross income of a debtor who is not a family farmer”; and
“on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto” (emphasis added).

All three of these characteristics must exist for Subchapter V eligibility to be denied on “single asset real estate” grounds. And a debtor has the burden of proving Subchapter V eligibility.

Ruling

The Bankruptcy Court rules that Evergreen is eligible for Subchapter V relief, despite its real property ownership.

That’s because:

Debtor’s two parcels of real property are not a “single project”—this finding is dispositive; and
The other two characteristics also favor Debtor’s Subchapter V eligibility.

–“Single Property or Project” Characteristic

The Bankruptcy Court describes the first characteristic (“a single property or project”) like this: Because there are two parcels of real estate in this case, the question is whether Debtor’s two properties, collectively, comprise a “single project.”

The meaning of “single project” is unclear from the statute and its legislative history; but

for two or more properties to constitute a single project, the properties must be linked together in a common plan or scheme;
the mere fact of common ownership, or even a common border, will not suffice; and
the common plan or scheme must govern the present use of both properties.

Examples of a common plan or scheme that excludes Subchapter V eligibility include apartment complexes, office buildings, shopping centers, and large resorts.

By contrast, two parcels of real estate sharing a common border, with one parcel rented and the other vacant land, do not have the requisite commonality for eligibility exclusion.

Determining whether multiple properties comprise a single project is a fact inquiry that includes:

use of the properties;
circumstances surrounding acquisition of the properties, including time of acquisition and funds used;
location of the properties and proximity to one another; and
plans for future development, sale or abandonment of the properties.

“Use of the properties” is the “sine qua non of a single project determination.” Where the properties are not presently used together in a common scheme:

a single project cannot exist; and
the remaining characteristics are irrelevant.

“Mixed-use” properties can be classified as “single asset real estate,” but only when the properties are planned developments.

–Operative Facts

In the facts of the present case:

Debtor rents one parcel to third parties for, (i) operation of a zipline business, (ii) use as a single-family residence, and (iii) use as three mobile home lots;
the other parcel is vacant land—it is not being used at all;
the County Auditor has assigned different use codes to each parcel:
- one parcel has a use code for lodges and amusement parks; but
- the other has a use code for vacant land; and
the two properties are not a planned development.

–Court’s Conclusion

The Court concludes:

“Debtor owns two parcels that are being used for two different purposes”;
Therefore, the two parcels are not a “single asset real estate”; and
Debtor is eligible for Subchapter V relief.

–Additional Findings

Even though its conclusion on the first characteristic (“single project”) is dispositive, the Court makes these additional findings on the other two characteristics (income generation and business activity):

Debtor wants to operate its own zipline business on the properties but is prevented from doing so because one of the properties is leased to another zipline operator, the zipline lease is in default and in litigation, and the litigation prevents Debtor from initiating its own zipline business; and

Debtor is investigating other income-producing possibilities for the two properties, including oil and gas leases, timber sales, special events, cabin rentals, expanded mobile home rental sites, and other home sites. But the pending litigation prevents Debtor from pursuing any of these possibilities. Debtor should be given a reasonable opportunity to pursue those use possibilities.

Conclusion

Here’s a “thank you” to the Southern Ohio Bankruptcy Court for this addition to the body of case law on the “single asset real estate” exclusion from Subchapter V eligibility.

——————–

Footnote 1. The In re Evergreen opinion issued on June 21, 2023, from the Southern Ohio Bankruptcy Court, in Case No. 22-52799 (Doc. 174).

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.