Thanks, but no thanks.
That, basically, is the response of several divisions of the state Department of Land and Natural Resources to the recent proposal of the Sand Island Business Association to trade private lands worth about $175 million for the 70-acre industrial park it leases from the department.
“If they came in with $600 million to a billion [dollars], maybe we’d look at it,” said DLNR Land Division administrator Russell Tsuji at the Board of Land and Natural Resources’ January 25 meeting.
The DLNR’s Sand Island Industrial Park is its largest revenue-producing asset and is the state’s most concentrated industrial hub. The 113-lot park generates roughly half of the income that goes into the department’s Special Land Development Fund, which is the sole source of revenue for the Land Division and the Office of Conservation and Coastal Land and which also helps support several of the department’s other divisions and the Commission on Water Resource Management.
But, faced with having to pay market rent in a few years, SIBA wants out of its 55-year lease, which expires in July 2047. Since 2009, the association has pushed for legislation that would force the DLNR to sell the land so that it, and its tenants, can keep the $60 million worth of infrastructure improvements they’ve put in. They’ve also argued that the lease’s rental re-openings every 10 years make it difficult for tenants to secure financing for additional improvements.
To accommodate SIBA and its sublessees, the 2011 Legislature passed Act 235, which allows the Land Board to consider the sale or exchange of the industrial park’s lots to SIBA tenants. An appraisal last May determined that the market value of the land is about $175 million.
On January 25, Tsuji asked the Land Board for its input, while making it clear he wasn’t interested in letting go of the lands for anywhere near that sum. Tsuji noted that department initially granted the long-term lease — and gave SIBA a significant break on rent for the first 25 years — in exchange for infrastructure improvements. (Under the lease, SIBA was supposed to have dedicated the roads it built to the City and County of Honolulu, which it has yet to do.)
What’s more, Tsuji noted in his report to the board, “to assist the SIBA tenants’ financing efforts, the department agreed to conduct the rent reopening scheduled for July 1, 2017 immediately, which would result in the rent being fixed through June 30, 2027. This would result in a known rent period of 16 years, which would allow tenants to seek both short-term and long-term financing.” The DLNR did this despite finding “no conclusive evidence that long-term, real estate secured financing was required by a substantial number of SIBA tenants,” and that conducting the reopening early “puts the state at risk if the real estate market improves in a manner not anticipated in the appraisal,” the report states.
Currently, SIBA pays $5 million a year in rent, but will start paying market rent of $8 million a year in 2017.
“This asset is very valuable for this department. It is a steady source of income,” Tsuji said. In his report, he recommended that should the Land Board agree to a land exchange, “a significant premium over and above the fair market value determined by appraisal shall be included in the exchange values.”
“What will happen in the future when the cash runs out? It would be a disaster for everyone. Why sell such important revenue lands? It does not make any sense. We urge the Land Board to listen to all sides of the story, but in the end, please do the reasonable/rational thing, which is to oppose any sale so we may continue to fulfill our kuleana for the people of this great state,” wrote OCCL administrator Samuel Lemmo in testimony to the board.
Lemmo was joined by the administrators for the DLNR’s Engineering Division, the Division of Forestry and Wildlife, and the Water Commission in his opposition to SIBA’s proposal.
Water Commission director William Tam argued that selling or exchanging the Sand Island lands, located at the entrance of Honolulu Harbor, could abridge the public trust.
“While public lands in some locations might be replaced or substituted without undue burden on the government’s long term functioning or overall public trust responsibilities, harbor lands are different. They are unique and essential to the public good. There are no ‘substitute’ harbor lands. That is why courts carefully scrutinize any proposed transfer of harbor-related or submerged lands — and often strike down the transfer as a violation of the state’s Public Trust responsibilities,” he wrote.
Tam also pointed out that some portion of the industrial park may be needed for the city’s expansion of the Sand Island Wastewater Treatment Plant (WWTP). A 2010 federal consent decree requires the city to build a secondary treatment plant east of the existing WWTP.
“Some of the secondary plant will very likely require portions (or all) of various lots on the `Ewa side of the Sand Island Industrial Park,” he wrote. “If title to the land is transferred, the city may be required to turn around and condemn the very same land (at a higher valuation) in order to build its secondary plant.”
The Office of Hawaiian Affairs stated in written testimony that it would oppose any land exchange that did not provide private lands significantly more valuable than Sand Island and that did not offer an equal or greater income stream. (Currently, a number of state departments that owe OHA 20 percent of their revenue generated from ceded lands do not pay and DLNR makes up the difference, in large part, with money generated from Sand Island.)
“I personally cannot fathom the idea of selling previously submerged lands,” Tsuji told the board. “I don’t like selling the beach or the ocean. … Somebody else can do it.” (Sand Island is actually reclaimed land.)
A Win-Win Situation?
“I’m not in favor of entertaining this kind of thing. Why are we looking at this?” O`ahu Land Board member John Morgan asked Tsuji.
Tsuji pointed to 2011‘s Act 235 (which the DLNR had opposed). Although the act doesn’t force the department to do anything, “I would like to put this to rest,” he said.
SIBA executive director Rodney Kim, however, wanted to continue the conversation.
“We’re looking for a win-win situation. … It’s not like the state is going to be losing any revenues or lands,” he said. During the 2011 legislative session, Kim and several SIBA tenants testified that the sale of the industrial park would be pure profit to the state, since the land was raw and undeveloped before SIBA improved it.
Acquiring lands to exchange would be a major undertaking for SIBA, Kim told the board.
“We’d probably have to go out and find three or four parcels for an exchange. It could diversify your revenue streams,” he told the board. He also pointed out that Sand Island is practically at sea level and subject to tsunami inundation.
“All I’m asking is for your approval to get this started,” Kim said. “Without it, we can’t sit down and talk [with landowners].”
Christine Kam, SIBA’s real estate advisor, argued that the $175 million appraised value includes the significant premium Tsuji is seeking, noting that an earlier appraised value of only $97 million was used to determine the 2017 rent.
Land Board member Morgan, however, wasn’t satisfied with SIBA’s rationale for the sale of public land. The association may have made significant infrastructure improvements and turned what was basically a dumping ground and homeless camp into a thriving industrial center, but that was a requirement of the lease, he said.
“Wasn’t that part of the deal? They were financed by low lease rent. It was not all their risk,” Morgan said.
Given the unanimous testimony against the exchange from the DLNR’s divisions and the Water Commission, at-large board member Sam Gon recommended that SIBA try to persuade those offices to change their position.
“Until we get departmental buy-in, it’s unlikely this board will supersede [them]. … We take strong guidance from the staff of this department,” he said.
Big Island board member Rob Pacheco disagreed.
“The board serves a function … to look down the line strategically. There is some validity to the argument of diversifying,” Pacheco said, mentioning the threat of sea level rise. Although he was interested in a deal, he said it was impossible to endorse anything without more specifics, especially since an exchange would require the DLNR to manage multiple parcels rather than a single industrial park.
Pacheco added that he wasn’t clear on what SIBA wanted from the board.
Kim said he wanted the board to agree to $175 million as the value of the park, which would allow SIBA to identify potential exchange properties. Addressing Pacheco’s concern about having to manage multiple properties, Kim assured him that SIBA would consider being the master lessee should an exchange go through.
Kim admitted that not all of SIBA’s sublessees are capable of buying their lots, but “the willingness is there.”
In any case, the current low interest rates and property values are “compelling reasons to rush this forward,” Kim said, adding that a lot of the potential exchange properties SIBA had identified in 2011 are off the market now.
Pacheco asked Tsuji whether the DLNR has investigated what an appropriate premium would be. It had not, Tsuji said. When prodded further, Tsuji said he would not consider an exchange of lands with equal value, but might consider a deal that provides an equal revenue stream.
“Like my dad always told me, it never hurts to look at a deal,” Pacheco told Tsuji. “I think you gotta lean on them. They’re the ones who want this.”
Forcing the Issue
A week and a half after the Land Board’s meeting, the state Senate Committee on Water, Land, and Housing leaned on the DLNR.
On February 5, the committee amended a bill that proposed to provide funds for the Sand Island Ocean Recreational Park master plan to also require the DLNR to negotiate a land exchange with SIBA for the Sand Island Industrial Park, “to be complete on or before June 30, 2014.”
Former DLNR director Laura Thielen, who sits on the committee, did not vote that day, but when the committee voted unanimously to pass the amendments on February 13, Thielen voted in favor but with reservations.
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West Wind Works Bows Out, Successors Downsize Project
More than half a million dollars in arrears on payments to the DLNR, West Wind Works, LLC (3W), is now backing away from its commitment to develop a mix of renewable energy facilities — which together would generate 20 megawatts of power — on 110 acres at O`ahu’s Campbell Industrial Park.
3W signed a development agreement with the DLNR in 2010 for the project. But after the company missed performance deadlines and failed to make scheduled payments, the DLNR’s Land Division proposed terminating the agreement last May. 3W, however, had just found a new partner in International Electric Power, LLC (IEP), and asked the board for more time to work with the Land Division on amending the development agreement.
The Land Board agreed to a deferral and by the end of the year, after submitting two unsatisfactory proposals to the Land Division, 3W and IEP had come up with a final proposal that replaced 3W with O`ahu Renewable Energy Park, LLC (ORP), a company in which 3W has an ownership interest. Under the proposal, IEP would pay the $530,000 in back fees in four installments. The first payment would occur when the Land Board assigned the development agreement to IEP-ORP and their partners. The second would be made if and when IEP-ORP is short-listed for Hawaiian Electric Company’s request for proposals for renewable energy. The third, if and when IEP signs a power purchase agreement with HECO. The final payment would occur if and when IEP-ORP secures financing and a long-term lease with the DLNR.
IEP-ORP would not be required to pay of annual fees of $550,000 until the PPA was issued and financing closed, under the proposal.
In addition, the scope of the project was much smaller. Instead of developing the entire 110-acre lot, IEP-ORP proposes up to two 5MW biomass plants on just 17 acres.
Because so many of the payments in the proposal were contingent on events that may or may not occur, and because the proposed location of the biomass plants would interfere with the development of the rest of the lot, the Land Division recommended on January 25 that the Land Board amend the proposal to require IEP-ORP to develop the plants in another part of the lot and to post a bond covering the delinquency as well as all future payments under the agreement. The Land Division also recommended that IEP-ORP have a draft environmental assessment published by August 31 and submit a subdivision application to the City and County of Honolulu no later than January 31, 2014.
Either that, or the Land Board should terminate the agreement, a Land Division report recommended to the board.
Attorney William McCorriston, representing IEP-ORP, proposed amending the agreement rather than terminating it. He said his client agreed with the Land Division’s suggested amendments, but needed time to do some due diligence on the alternative facility sites.
“We’re not trying to kick the can down the road. This can’s been kicked and kicked,” he said. McCorriston noted that HECO’s RFP was coming out soon, so the Land Board and his client needed to resolve the development agreement terms in the next 60 days.
“If we don’t … then we’ve missed the boat,” he said. Still, he added, “sometimes the devil’s in the details. We’d like to use the next 30 to 60 days to firm those details up.”
At-large Land Board member David Goode seemed concerned about the project’s drastic evolution.
“The ‘can’ keeps changing. In fairness to others who were interested, it looks like [you were] tying it up.” Under the newest proposal, “we’re left with one-eighth of the can. … I just want to get this resolved,” he said.
“I hear you. If I were sitting there, I would ask the same question of me,” McCorriston said.
In the end, the Land Board voted to defer the matter.
Should the Land Board choose to amend the development agreement, IEP plans to supply its biomass plants with feedstock from the PVT construction and demolition landfill in West O`ahu.
IEP-ORP has a letter of intent with PVT land to use its C&D debris, according Paul Shinkawa of 3W and ORP. The landfill collects 1,200 tons of construction debris a day. The plants would need 300-400 tons a day, he said.
“We plan on having a feedstock processing area, chipping PVT feedstock down to size,” he told the board.
“They’ve [PVT] actually been pretty clever, unlike the Waimanalo Gulch landfill … separating material” for sale, McCorriston said.
“They separate out the metals, organic materials, toxic [materials] so materials that can be reused, they know where they’re located,” Shinkawa added. “This type of planning helps Hawai`i and them as a business. It extends the life of the landfill. They’re the only C&D landfill in the state.”
* * *
Board Allows Kayak Tours in Kealakekua State Park
Last month, the Land Board sidestepped its longstanding policy to put the state’s natural resources first, the public second, and commercial interests third. After a month-long ban on all non-motorized vessels in Kealakekua Bay State Historical Park, the Land Board allowed the three permitted commercial kayak tour operators to return to the bay, but not the general public. Its reason: the Division of State Parks needs more time to figure out how to reintroduce non-commercial users of the bay without creating an opportunity for illegal kayak rentals. What’s more, the resumption of kayak tours may reduce the number of hikers in the park, many of whom have been relieving themselves among the cultural sites throughout Ka`awaloa Flats.
In January, the DLNR banned kayaks, stand-up paddle boards, surfboards and other non-motorized vessels so that it could address the overuse of the bay, as well as various alleged illegal activities, including unpermitted kayak rentals and drug dealing. With access to the bay cut off, however, resource impacts on land increased as more visitors took to the park’s hiking trails.
“We have a new archaeologist that did a very extensive survey. Four sites are being abused; toilet paper [has been found] next to the [Captain Cook] monument,” State Parks assistant administrator Curt Cottrell told the board at its January 25 meeting.
Cottrell reported that his division was working toward launching a permitting website for kayak rentals this month. The division is considering establishing a maximum daily capacity of 20 to 30 rental kayaks, but is still struggling with how to prevent illegal kayak rental businesses from restarting once the bay is reopened to the general public, Cottrell said.
Shortly before the closure, one area resident had counted 86 kayaks in the bay at one time, according to testimony submitted to the board.
“I’ve seen the department and the state struggle with these issues of demand,” Big Island Land Board member Robert Pacheco said. “One of the things is, when there’s a demand for a natural resource, it’s very difficult to shut it off. … People find a way to squeeze through.”
Kealakekua Bay is one of those resources, he said. “This is a really compelling place. … As a natural resource, it’s a jewel.”
He suggested that the department needs to have staff on site.
“We need to find the funds. … Can you imagine if Diamond Head was managed the same way we’re managing Kealakekua Bay?” he asked, adding that the DLNR and the state Legislature need to step up because the commercial pressures on the bay are not going to go away.
“If there’s money on the table, people are going to be going for it,” he said.
“You’re right. The two options are we privatize it or we staff it up,” Cottrell said. “The problem is we need the money first. We gotta do this triage first.”
“This is just a microcosm of what is going on around the state,” added Land Board chair and DLNR director William Aila.
Volume 23, Number 9 — March 2013