As One Court Case over `Aina Le`a Is Settled, Another, Larger One Looms

posted in: August 2016 | 0

The state of Hawai`i has settled a lawsuit brought by Bridge `Aina Le`a, LLC, which had claimed more than $30 million in damages as a result of a decision by the Land Use Commission to downzone acreage the company had sought to develop.

The settlement, terms of which call for the state to pay Bridge $1 million, all but ends a case filed six years ago in federal district court in Honolulu. In addition, Bridge has won a commitment from the state Attorney General’s office that it will support a petition by the company to place the 1,893 acres of Agricultural land that Bridge owns into the state Rural land use district, where a broader range of land uses, including residential development, is allowed. That acreage surrounds on three sides the 1,099 acres in the Urban district that the LUC had attempted, six years ago, to shift back into the Agricultural district when the conditions of Urban redistricting had not been met by the developer.

In 2012, state Circuit Judge Elizabeth Strance ruled that the reversion was improper. Following that, Bridge brought a federal lawsuit against not only the state but also the individual commissioners.

The settlement in the Bridge case came just weeks before jury selection was set to begin on August 1. On July 5, the parties notified Judge Susan Oki Mollway that mediation was successful.

The state Legislature must still approve payment, and the court noted that “such approval is not likely until, at the earliest, late May 2017.” “To allow time for legislative approval, receipt by plaintiff of the settlement check, and submission of the stipulation to dismiss,” the judge closed the case until September 1, 2017, when she will entertain a stipulation to dismiss.

But lest anyone think this puts paid to litigation over the issue of rights and entitlements to develop the land in South Kohala lying between the Mauna Lani resort and Waikoloa Village, well, another lawsuit is looming on the horizon, one in which the aggrieved parties claim damages, as a result of the LUC’s action, far in excess of those Bridge had attempted to recoup.

A Proposed Deal

The state was put on notice of the new claims in a letter last February from Michael Jay Green, a Honolulu attorney representing DW `Aina Le`a Development, LLC, and Asian investors in a land trust that holds an ownership interest in some of the Urban land.

According to Green, direct damages attributable to delays brought about by the LUC action include an increase of $14 million in the price his clients had to pay for the Urban land; financing costs of $27,746,664; “the carrying over of operations … of $8,160,392;” payments to the general contractor of $7.2 million during the work stoppage caused by the LUC action; “interest on the land value … in excess of $23,701,920;” and additional legal and accounting costs in excess of $1 million.”

All that comes to $81.81 million.

But over and above that, Green says, “the damages for ‘goodwill and reputation’ are very large. The damages to DW `Aina Le`a Development, LLC, Asian marketing program is extensive. The damages for the delay in the public offering for DW `Aina Le`a Development, LLC, subsidiary is excessive. Once documented, these damages and others which can be claimed will be in excess of $200 million.”

DW `Aina Le`a Development (DWAL) is not the landowner. Rather, it has shares in `Aina Le`a, Inc. (henceforth, ALI), the company that does hold title to about 1,011 acres of the Urban District land subject to the LUC action.

(The remainder of the Urban lands consists of about 27 acres, zoned commercial by Hawai`i County, that are still owned by Bridge, and 61 acres, more or less, owned by `Aina Le`a, LLC – a related company – and 1,139 individuals in Singapore, Malaysia, and other Asian capitals who have purchased, collectively, more than 1,700 undivided land fractions, or ULFs, giving them partial title.)

On behalf of Robert Wessels, president of `Aina Le`a, Inc., Green has offered a deal to the state to avoid, in his words, “the turmoil of further litigation.”

“Mr. Wessels initially has three proposals,” Green wrote, “which will allow `Aina Le`a, Inc., to partially compensate the DW `Aina Le`a Development, LLC members and the Asian `Aina Le`a Land Trust.

A $77 Million Bond

The first proposal is to have the state “arrange the purchase of the Ziegler Securities Offered $77 million construction development bond at a rate yielding the state 2 percent or less.” It is unclear if Wessels intends the state to purchase the bond and then turn over the bond proceeds over to him to fund his construction, with Wessels paying the state 2 percent or less in interest. In that event, the state would have to pay Ziegler whatever interest rate Ziegler charges – which, presumably, would be significantly greater than 2 percent.

Reference to Ziegler popped up in the quarterly report of ALI with the Securities and Exchange Commission filed last February. The company stated it had “negotiated a $77 million bond issuance through the investment firm Ziegler Capital Markets.” Contrary to the representation in the Green letter that the bond was to pay for construction, the quarterly filing identifies its purpose as “to pay off the ULF investors.” In addition, the bond is to close only “upon the guarantee of Certificates of Occupancy by Hawai`i County,” the SEC filing states. If funds remain after paying off the ULF investors, the quarterly report says, they will be used to finance the other developments planned for the 61-acre parcel.

The second proposal calls for the state to, “within four months and upon full approval, … arrange the purchase of $125 million of Community Facility District [CFD] bonds for the `Aina Le`a project.”

In Hawai`i, the County Council can authorize CFD bonds for specific projects; these permit the costs of infrastructure to be paid off by future landowners who are the presumed beneficiaries of the work. Ten years ago, Bridge initiated the process for obtaining CFD bonds and the County Council gave the initial approval, but that effort fizzled out. Wessels attempted to revive it three years later, but again, the process was not completed. CFD bonds are paid off through property tax assessments, collected by the county. It is unclear what role the state could have in arranging a CFD, as Wessels is proposing here.

The third proposal involves the state establishing a tax improvement district for the South Kohala area to improve “beaches, the roadways, etc.” Allocated to this fund would be “at least one-half of the taxes paid to the state by the `Aina Le`a Community Development.” Since property taxes are paid to the county (not the state), and it is the county that has the authority to establish tax improvement districts, it is again not clear what mechanism is available to the state to deliver the relief Wessels is seeking.

Sources in the Attorney General’s office say that there has not been any letter sent in response to Green’s demands.

‘The Eveready Battery’

Wessels faces long odds in his efforts to move forward with the Villages of `Aina Le`a. In `Aina Le`a’s filing last month with the SEC on its operations for the year ended March 31, it reported how its own accounting firm had expressed concerns over the company’s viability and had stated that its “current liquidity position raises substantial doubt about our ability to continue as a going concern.”

The challenges `Aina Le`a faces are detailed in that July 14 filing.

First, there’s the financing obtained for the land purchases. Bridge paid just $5 million for all 3,000 acres in 1998. `Aina Le`a, on the other hand, paid nearly that much — $5 million – in 2009 just for the initial 61 acres, where it began to build 385 townhouses (to satisfy the affordable-housing component of the LUC redistricting conditions) and now says it will build 48 “luxury villas” (“Whale’s Point”) and will develop 70 lots for sale to builders of single-family houses under a Planned Unit Development scheme.

Last November, `Aina Le`a closed on most of the remaining Urban land (1,011 acres) for $24 million and has an option, good until November 2018, to buy the remaining 27 acres of Urban land, zoned commercial by the county, for $22 million, bringing the land costs to at least $51 million. (Over and above land costs, Bridge dunned `Aina Le`a for carrying costs also totaling several million dollars.)

Wessels has been innovative in the ways he has raised capital for the land purchases and infrastructure development. As mentioned earlier, `Aina Le`a sold fractional shares of the 61 acres to more than a thousand Asian investors. This “raised approximately $44 million (before fees and commissions)” for the purchase and development of the 61 acres, the SEC was informed. The investors have been promised they will get their money back when Hawai`i County issues the first certificates of occupancy for the townhouses. To cover that payout, `Aina Le`a says, it has arranged the $77 million bond from Ziegler.

Much of the financing `Aina Le`a has received so far has come from China. In 2014, Shanghai Zhongyou Real Estate Group purchased $16 million worth of shares in the company, which it says was used to finance purchase of the 1,011 acres of residential-zoned land. It also received a loan last November of $6 million from Ms. Libo Zhang of Changchun City, secured by a mortgage on a part of the property. That loan comes due this November.

Finally, unable to come up with more than $10 million of the entire $24 million due Bridge for the sale of the property, `Aina Le`a gave a note to Bridge for $14 million, at 12 percent interest. (As of mid-July, `Aina Le`a was in default on that loan).

`Aina Le`a is hoping to raise a minimum of $17 million and perhaps as much as $27 million through an initial public offering of up to 2 million shares. The deadline for closing that offering has been extended multiple times since it was announced last November, suggesting sales have not been robust. The most recent deadline for closing was set at July 31.

Altogether, the company reported it had liabilities totaling nearly $63 million as of March 31, including almost $20 million in short-term debt. This doesn’t include nearly $40 million it owes to the ULF investors.

The fact that Wessels continues to press forward with the projects, finding unorthodox methods of financing and ever new sources of capital, has earned him a kind of grudging admiration from Ho`olae Paoa of Bridge.

When he was being deposed by state deputy attorney general William Wynhoff last May, in anticipation of going to trial over Bridge’s claims, Paoa was asked whether he thought Wessels would be able to exercise the option to purchase the 27-acre commercial property.

“We were just joking today,” Paoa replied. “He’s like the Eveready battery. One thing about Bob, he doesn’t give up. I mean, he’s been at this forever. And, you know, any other developer would have filed for bankruptcy or would have, you know, just abandoned the project. He hasn’t.”

Paoa suggested that the actual costs `Aina Le`a faced in developing just the infrastructure and the golf course planned for the Urban land are far greater than what `Aina Le`a has projected.

In his deposition, as he was questioned about Bridge’s plans for the property before it was sold to `Aina Le`a, Paoa affirmed a statement Bridge made to the LUC in 2005 to the effect that the estimated cost of infrastructure and the golf course would come to roughly $300 million, excluding the cost of the land itself.

The $300 million would need to be sunk into the property before the first house could be built, Paoa said, “because you wouldn’t want to have construction ongoing while you’re selling homes because of the dust – you know, the problems, the accidents. You got major trucks, equipment, D9s, working the project. So, you want to have most of your infrastructure done prior to any sales of any market homes.”

Wynhoff then asked Paoa: “So, basically, what you’re saying … is you’re going to have close to $300 million in costs before you can get a nickel out of the property?”

Paoa agreed.

Meanwhile, at the County

In a deposition given last March in preparation for the Bridge trial, Robert Wessels stated that work on the `Aina Le`a site was ongoing. E.M. Rivera, the contractor, is “bringing the water in, the power. Bringing the sewer and the sewer lines. The access road and the roadways between the – the 27 separate units, pads on which the townhouses are being built,” Wessels said.

As to the status of construction, Wessels stated, “We have 16 units that we have completed a long time ago. … We have another eight that are about 70 percent complete. And we have another – another 24 that are, the plumbing is in and things like this …”

When asked if “vertical construction” of the planned townhouses was under way, Wessels said it wasn’t and wouldn’t be “until we’ve completed the infrastructure to the first units.” This he anticipated to be done by last April. Wessels added that water service would be by means of a hook-up to the private company, Hawai`i Water Service, that serves Waikoloa Village.

Before much more can be done on site, however, `Aina Le`a must complete the supplemental environmental impact statement, required as a result of a successful legal challenge brought by the Mauna Lani Resort Association to the original EIS for the project published in 2010.

In his deposition, Wessels suggested that the supplemental EIS (SEIS) was just weeks away from completion, awaiting only the county’s decision on whether it would “allow [`Aina Le`a] to mail it.”

When asked to clarify, Wessels added: “The county has required us to do all the detail in the original, in the mailing to the public,” Wessels said. “And there’s been a lot of changes and delays that have been requested by the county filing.”

According to Maija Jackson of the county Planning Department, she has not heard back from `Aina Le`a’s planner, James Leonard, since giving him comments months ago on a draft SEIS he had submitted to her agency.

A larger problem for `Aina Le`a may be the failure of the developer to comply with a condition of zoning.

Condition C of the 1993 zoning ordinance (amended three years later) requires subdivision plans to be submitted and approved within five years of the zoning being approved. `Aina Le`a was given an administrative extension several times over the course of the years since the ordinance was passed, but, according to Duane Kanuha, planning director, any further time extensions have to be approved by the County Council.

In the absence of the time extensions or compliance with any other condition, Kanuha is instructed to rezone the property “to its original or more appropriate designation.”

Alan Okamoto, an attorney for `Aina Le`a, has asked Kanuha to reconsider this determination. As of press time, no response had been sent.

Patricia Tummons

For Further Reading

Environment Hawai`i has published many articles over the years about the `Aina Le`a development. Those published prior to 2014 are available for reading, free of charge, on our website, More recent articles are available free to current subscribers. Others may pay $10 for a two-day pass to our complete online archive.

Here are several of the longer articles we’ve published on the subject:

  • “Hawai`i Planning Director Questions Whether `Aina Le`a Complied with Zoning Conditions,” April 2016;
  • “Whatever Happened to the Villages of `Aina Le`a,” January 2016;
  • “Supreme Court Rejects Most Findings of Lower Court in `Aina Le`a Appeal,” January 2015;
  • “`Aina Le`a Seeks Two-Year Extension of Deadline for Affordable Housing,” October 2010;
  • “Office of Planning: `Aina Le`a Project Has Not Met, Cannot Meet LUC Deadlines,” June 2010;
  • “Under New Management, `Aina Le`a Is Given Yet Another Chance by LUC,” October 2009;
  • “Two Decades and Counting: Golf ‘Villages’ at Puako Are Still a Work in Progress,” March 2008.

Volume 27, Number 2 August 2016

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