Whatever Happened to … The Villages of `Aina Le`a

posted in: January 2016 | 0

In 1989, the state Land Use Commission approved a redistricting petition that shifted about 1,000 acres of Agricultural land in South Kohala, on the west side of the Big Island, into the Urban district. Signal Puako, the landowner, had planned to build on that land and the surrounding 2,000 acres that remained in the Ag district six “villages” built around an equal number of 18-hole golf courses. The plan’s residential component called for building 2,658 units, a mix of both large lots for higher-end single family dwellings and multifamily buildings that would provide housing for workers at the growing number of Kohala hotels.

Two years later, the new owner, Nansay Hawai`i, proposed building the worker housing off site, with an “upscale residential community” being built on the Urban land.

Nansay eventually lost the land through foreclosure. After two more transfers of ownership, Bridge Capital ended up purchasing the land in 1999. Bridge eventually established a subsidiary company, Bridge `Aina Le`a, to hold title and develop all 3,000 acres, more or less following the plans established by Signal Puako, with residences built around six golf courses.

In 2005, with no construction having begun on the development, Bridge announced it had partnered with a California firm, Cole Capital/Westwood, but that the requirement that 60 percent of the units be affordable was no longer tenable. The LUC lowered the percent of affordable units, from 60 percent to 20, which translated to 385 units. At the same time, the LUC now was requiring that the affordable units be completed by November 17, 2010.

By 2007, Cole Capital/Westwood had dropped out of the picture and the LUC was told that a new development company, called DW `Aina Le`a, was prepared to move forward with construction. 

Over the next three years, the LUC grew increasingly frustrated with what it perceived as a lack of serious intent on the part of Bridge to develop the land. In 2008, it issued to Bridge an order to show cause as to why the land should not be reverted to the Agricultural district. DW `Aina Le`a and Bridge pledged to get at least 16 of the affordable units completed by March 31, 2010.

When that deadline slipped, the developer sought another time extension. In 2011, the LUC refused to grant it and instead voted to have the land revert to its pre-petition status – that is, back to the state Agricultural district.

`Aina Le`a and Bridge challenged the action in state and federal court, with the Hawai`i Supreme Court weighing in on the matter in November 2014. Our report picks up at this point:

More than a year has passed since the Hawai`i Supreme Court issued its ruling in the `Aina Le`a case. That case involved the landowners’ challenge to the Land Use Commission’s decision to revert more than 1,000 acres in the South Kohala district of the Big Island from the Urban land use classification back to Agricultural.

The court held that because the LUC had not followed its own rules when reclassifying the property, where some development had already commenced, the reversion was void. The case was remanded back to the court of origin for further proceedings “consistent with this opinion.” So far, none of the parties has made any filing with the 3rd Circuit Court. The judge who decided the case in the first instance, Elizabeth Strance, withdrew her petition to be retained on the bench last year when the Judicial Selection Commission recommended against her retention. No new judge has been assigned to the case.

While the litigation in state courts appears to be exhausted for all intents and purposes, a lawsuit is still moving forward in federal district court in Honolulu. In that case, Bridge `Aina Le`a, LLC, which used to own most of the land at issue in the LUC case, is seeking millions of dollars in damages from the state. Last August, Judge Susan Oki Mollway ruled that the individual commissioners, whom Bridge had named as defendants, were entitled to immunity – a huge relief for some of the commissioners, who had seen their personal finances affected by the looming threat of an adverse judgment. A settlement conference in that case is set for March 23. And if that doesn’t yield results, jury selection is scheduled to begin at 9 a.m. on June 8 in Judge Mollway’s courtroom.

Apart from the court cases, however, the real action seems to be occurring in the realm of finance.

Selling Shares

In November, Bridge sold most of its remaining land in the Urban district – all but 27commercial-zoned acres – to `Aina Le`a, Inc. That company is a subsidiary of DW `Aina Le`a, which, since 2009, has been put forward as the developer of the property and which has had an agreement with Bridge to purchase all of the Urban acreage. (Bridge also owns about 2,000 acres of land in the Agricultural district that surrounds the core Urban land.) In exchange for the deed, `Aina Le`a gave Bridge a promissory note for $14 million, in addition to a down payment of at least $10 million.

To help finance future development and to pay off part of `Aina Le`a’s existing debts, the company sought – and, in late November, received – the approval of the federal Securities and Exchange Commission to sell up to 2 million shares, at $13.75 each. If at least 1,250,000 shares are not sold, the would-be purchasers are to receive their money back. The company is hoping to raise between $15.5 million and $24.75 million from this sale.

Among other things, `Aina Le`a’s filings with the SEC disclose details about the unorthodox financing mechanism used to raise capital for the development of Lulana Gardens, its first housing complex, which was to include at least 385 units of affordable housing.

“We have raised the initial capital … through an exclusive marketing agreement with Capital Asia Group Pte., Ltd.  (CAG), a land banking company headquartered in Singapore, to sell Undivided Land Fraction[s] (ULFs) to Asian investors,” `Aina Le`a told the SEC in a November filing, adding that it paid CAG a commission of 27.083 percent of all sales proceeds.

“From 2009 through September 30, 2015, we have raised approximately $44 million (before the fees and commissions paid) … from approximately 1,139 investors who participated in our ULF program,” the SEC was told. Proceeds from the sale of these fractional land shares would be used to complete the development of the first phase of construction, consisting of Lulana Gardens and Ho`olei Village.

The owners of the ULFs hold title to a fraction of the two lots on which these developments are proposed to be built, with their percentage of ownership proportional to the number of shares they have purchased. Also, most of the owners have agreed to contribute their deeds to one of two separate trusts, in exchange for an interest in the trust.  The trusts are vested with the power to approve development and otherwise act as the agents of the ULF owners. Since April 13, 2015, Emerald Hawai`i Services, Inc. – a company that registered with the state Department of Commerce and Consumer Affairs just four days earlier – has acted as trustee.

As of mid-November, 592 of the ULF investors had been bought out or had exchanged their deeds for shares of common stock.

When the ULFs were sold, at $9,600 each, purchasers immediately received $500 within the first 90 days and were promised to be paid an additional $12,000 in the earlier of 30 months or whenever the fractional interest held by the purchaser was sold – that is, when the townhouse or lot to be developed by `Aina Le`a was actually sold to a homeowner or builder. “As a result of construction delays … the company has not paid the $12,000 at or prior to the end of 30 months. … Accordingly, the company has accrued a penalty interest of 1 percent per month due on the $9,600 original investment,” `Aina Le`a stated. “As of September 30, 2015, the company owes net principal of $27,410,273 and net interest of $10,377,179” to the holders of the ULFs.

“The company is in the process of negotiating a $77 million bond issuance … to pay off the ULF investors,” `Aina Le`a said in its prospectus. “No assurances can be made that any or all of such financings will close or that such amounts will be made.”

The China Connections

Long after sales of ULFs slowed – the last one was recorded in February 2014 – Asia continues to be a major source of financing for `Aina Le`a.

In November, to help raise funds needed to close on the purchase of land from Bridge, the company took out a $6 million loan from Ms. Libo Zhang of Changchun City, in the far north of China. Under terms of the promissory note, the loan matures in a year, at an interest rate of 12 percent. In addition, “as a bonus for timely making” the loan, `Aina Le`a’s CEO, Robert Wessels, gave Zhang 23,091 shares of common stock – shares that, he said, had been issued to parent company DW `Aina Le`a Development, LLC, “in early 2013 in exchange for the funding and formation of `Aina Le`a, Inc.” If the loan is not repaid within six months, Wessels said, “DW `Aina Le`a Development, LLC, will deliver you an additional bonus of 10,000 shares” by June 12, 2016.

A year earlier, `Aina Le`a had raised $16 million from the Shanghai Zhongyou Real Estate Group, which in turn received 1,280,000 shares of common stock. Of the $16 million, $1,460,860 went to pay commissions and operating expenses. The bulk of the proceeds, however, was “to be used by the company to acquire the remaining 1,011 acres of residential property,” the company stated. As part of the same transaction, `Aina Le`a obtained a “convertible note” from Shanghai Zhongyou for an additional $9 million, convertible into 720,000 shares of common stock.

Besides the sources of capital in Asia, `Aina Le`a has also “closed on a two-year $12 million construction loan” with Romspen Investment Corporation, a Canadian firm. As of September 30, `Aina Le`a had drawn down $5,330,496 from the loan, paid advance fees of $712,112, and has accrued interest of $98,804. Furthermore, Romspen held back $1.25 million in an “interest reserve.” “There can be no assurance that the company will be able to make additional draws or receive the full amount of the loan,” `Aina Le`a said in its November SEC filing.

The County Concerns

Despite the sale of stock and the debt financing, `Aina Le`a cannot yet move forward with additional construction on its land, stalled out for most of the last five years.

In its prospectus, `Aina Le`a states that “32 units [are] in various stages of vertical construction in Lulana Gardens ranging from 58 percent up to 95 percent complete. Of these, there are 24 units that are considered substantially complete.” These are part of the townhouse development that is to include 385 units of “affordable housing” under present county guidelines and were put up in the 2009-2010 time frame, when `Aina Le`a was attempting to show the Land Use Commission that it was serious about fulfilling conditions of redistricting. Those units remain unserved by utilities, including water and sewer. Also, the intersection with Queen Ka`ahumanu Highway leading into the property is unimproved, so the units that have been built, more than a mile from the highway, are all but inaccessible to most vehicles.

Although representatives of `Aina Le`a have claimed recently that they are ready to resume construction, including required improvements to the highway intersection, until a final supplemental environmental impact statement is accepted by the Hawai`i County Planning Department, no work can be done. As a result of a lawsuit brought by the Mauna Lani Resort Association in 2011, which challenged the county’s acceptance of an EIS prepared in 2010, `Aina Le`a must prepare the supplemental EIS. Last month, `Aina Le`a’s consultant gave the county a proposed preparation notice for the supplemental EIS, but the county had not forwarded it to the state Office of Environmental Quality Control by press time.

Nor will `Aina Le`a be in the clear should it complete the supplemental EIS process.  In May 2015, Duane Kanuha, the county planning director, notified Wessels that “payment towards the fair share contribution for Parks, Police, Fire, Solid Waste, and Road and Traffic improvements … is due prior to the issuance of a certificate of occupancy” for any of the units `Aina Le`a builds. The current fair-share contribution for 432 units in the Lulana Gardens project alone came to $3,003,525.59, Kanuha said.

Golf Permits, CFD Financing

Nearly 30 years ago, when the Land Use Commission first received a petition for redistricting the land, the then-owner, Signal Puako, proposed developing no fewer than six “golf course villages” over the 3,000 acres it owned – only a third of which were the subject of the redistricting petition.

The Hawai`i County Planning Commission went along with the proposal in 1991, when it granted the developer a use permit allowing the construction of six 18-hole “championship golf courses,” a “golf teaching academy,” and other improvements. In 1996, with no work on these elements yet under way, the county granted a time extension, which required at least three of the six golf courses to be completed by September 30, 2011.

In the meantime, in 2005, the Legislature changed the state’s land use law, Chapter 205, to ban the construction of golf courses on land in the state Agricultural district, where three of the golf courses were to be sited.

Last month, the Hawai`i County planning director initiated procedures to revoke the use permit. In a memorandum to various state, federal, and county agencies announcing the move, both the failure to perform by the use permit deadline as well as the change in Hawai`i’s land use law were cited as reasons for the action. The Planning Department anticipated bringing this to the Planning Commission for action by February.

If the permit is revoked, that will throw a spanner into `Aina Le`a’s plans for the overall development. A site map that was prepared as part of the master plan and included in the proposed EIS preparation notice shows several golf courses  continuing to be a part of the project.

Finally, `Aina Le`a has lost out on its bid to obtain community facilities district financing (CFD) for the infrastructure improvements that need to be installed before any of the subdivided lots may be sold. On August 3, county finance director Deanna Sako wrote Wessels, giving him the bad news: “We have reviewed your request for financing the infrastructure of the Villages of `Aina Le`a project with tax exempt community facilities district (CFD) bonds. I am sorry to inform you that the County of Hawai`i … declines to support your acquisition of CFD financing for your project.”

The decision, Sako continued, was based on, among other things, a review of `Aina Le`a’s disclosures to the SEC “and the numerous significant risk factors” they contained, including:

  • The negative net worth of the company “and its precarious current position;”
  • The “heavy, if not total reliance” on Wessels for project implementation “and no intention of acquiring key-man life insurance;”
  • The ongoing need for “debt and/or equity financing to move the project forward;” and
  • “Unresolved issues, such as obtaining a certificate of occupancy for the units in Phase I.”

Community facilities district bonds are floated by the county but are paid off by levies on property owners in the development.

In its November 20 filing with the SEC, more than three months after Sako’s letter to Wessels, `Aina Le`a states, “The County of Hawai`i has agreed to complete proceedings to establish a community facilities district that will issue land-secured public bonds to finance public infrastructure improvements in the Villages project. To avoid delay in the development of this project, we advanced the funds to finance the construction of the infrastructure generally paid from the proceeds of these bonds. As such, we expect to be reimbursed our advances from these bonds when issued. We currently anticipate that the community facilities district will be considered by the County of Hawai`i in late 2015 and, if approved, will be formed and we anticipate bonds will be authorized in the next 18 months.”

Bridge `Aina Le`a had proposed that the county establish a community facilities district as early as 2006. The Hawai`i County Council adopted a resolution stating its intention to designate the Villages of `Aina Le`a as its first CFD in October 2006, and the county’s Department of Public Works retained a consultant to do a preliminary report. That report, submitted to the council in early 2007, estimated that the cost of infrastructure to support development of land in the Urban district would be more than $72 million, with the maximum authorized bond indebtedness not to exceed $100 million.

But the resolution and the report are just the first steps in a long process. Ultimately, an ordinance authorizing the district needs to be passed, and this never occurred.

Sako, the finance director, told Environment Hawai`i that despite the rejection of the earlier CFD proposal, the company is able to file a new application and her department would give it due consideration.

— Patricia Tummons


For Further Reading

Environment Hawai`i has reported extensively on the `Aina Le`a development. Here are some of the articles marking milestones in its troubled history. Most may be downloaded for free from our website, http://www.environment-hawaii.org:

March 2008:

  • “Two Decades and Counting: Golf ‘Villages’ at Puako Are Still a Work in Progress;”

October 2009:

  • “Under New Management, `Aina Le`a Is Given Yet Another Chance by LUC;”
  • “Superfund Site, Failed Casino Project in History of New `Aina Le`a Developer;”

June 2010:

  • “Office of Planning …: `Aina Le`a Has Not Met, Cannot Meet LUC Deadlines;”

October 2010:

  • “`Aina Le`a Seeks Two-Year Extension of Deadline for Affordable Housing;”

April 2011:

  • “LUC Takes Another Step Forward in Reversion to Ag of `Aina Le`a Land;”

February 2013:

  • “Judge Halts Work at `Aina Le`a and Orders Supplementary EIS;”

January 2015:

  • “Supreme Court Rejects Most Findings of Lower Court in `Aina Le`a Appeal.”

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