Attorneys Debate How Deadlines Apply to Kuilima Resort Expansion Project

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The Kuilima Resort Company seems to believe it has all the time in the world to fulfill its expansion plans; the state believes it can, and perhaps should, impose a deadline; and the nonprofit Defend O`ahu Coalition says that the deadline already exists and passed years ago.

Next month, the state Land Use Commission will discuss a status report on the progress KRC has made toward meeting nine conditions placed by the LUC in 1986 on the redistricting of 236 acres from agricultural to urban. Depending on the progress KRC has made, the LUC may choose to set a deadline for meeting those conditions.

It’s been a while

The last time the LUC sought a progress report on the Kuilima expansion was twenty years ago.

On May 6, 1988, Esther Ueda, then-executive director of the LUC, wrote to Kuilima Development Company manager Norman Quon requesting a status report on the company’s efforts to meet the nine conditions. The LUC had approved the redistricting more than two years earlier to allow the KDC to proceed with its master expansion plan, which would increase the number of resort units from fewer than 1,000 to more than 3,500. The conditions required KDC to 1) build hotels on adjacent property already in the Urban District, 2) construct employee housing, 3) improve Kamehameha Highway, 4) develop water sources and infrastructure, 5) help improve the adjacent Punaho`olapa marsh wildlife preserve, 6) protect archeological sites, 7) provide public access and parking, as well as a city park, 8) build a sewage treatment plant, and 9) implement a monitoring program for coastal resources.

When Ueda did not receive a reply, she warned Quon in an August 8 letter, “Please be advised that in the event we do not hear from you by August 22, 1988, this could be a basis for the Land Use Commission to consider initiating an order to show cause proceeding on the reclassification of your property.”

Quon responded on August 18. He first noted that after the LUC had signed its March 1986 findings of fact, conclusions of law, and decision and order granting the redistricting, Asahi Japan had bought all of KDC parent company Prudential Insurance Co.’s interest in the resort. He added that Asahi planned to start construction in the first quarter of 1989 and complete phase one within three-and-a-half years. Phase one was to include construction of a sewage treatment plant, road and drainage improvements, internal roads, wells, a water distribution system, improvements to the marsh and an existing golf course, a new golf course, a hotel at Kawela Bay, a commercial area, building pads for condo sites, and a stable.

With regard to the nine conditions, though, little action appeared to have been taken. According to Quon’s report, except for drilling test wells to meet condition four, the company was still in the planning, negotiating, and contracting phases. What’s more, with regard to condition eight, which required KDC to construct a private sewage treatment plant, Asahi wanted to file a petition for reconsideration.

On January 10, 1989, Jan Naoe Sullian, an attorney for KDC, filed a motion to amend condition eight to require the construction of a public, rather than private, sewage treatment plant. The LUC compromised on February 7, voting to amend condition eight to require KDC to develop a sewage plant to county standards.

Nothing in the LUC’s files suggests that the commission ever inquired again about KDC’s progress toward meeting the nine conditions.

Five-year rule

Nearly 20 years later, the promised phase one is nowhere near complete and recent efforts by current landowner Kuilima Resort Company to advance the project have been met with strong opposition from community groups, including the Defend O`ahu Coalition, Keep the North Shore Country, and the Sierra Club, Hawai`i Chapter.

In April, the coalition asked the commission to order KRC to show cause why the 236 acres should not revert to the Agricultural District. The group argued that administrative rules in effect in 1986 required substantial progress to be made on the expansion within five years – a standard, the group claims, KRC has failed to meet.

Section 6-3 of the 1973 Hawai`i Administrative Rules for the LUC states, “Petitioners requesting amendments to District Boundaries shall make substantial progress in the development of the area redistricted to the new use approved within a period specified by the Commission not to exceed five (5) years from the date of approval of the boundary change. The Commission may act to reclassify the land to an appropriate District classification upon failure to perform within the specified period according to representations made to the Commission…”

Section 6-2 of the rules, which also seems to have been overlooked, requires petitioners to provide proof that its development can occur within five years of LUC approval. If a project cannot be substantially completed within five years, Section 6-2 requires the developer to submit a schedule in increments and obliges the LUC to redistrict to urban only those portions to be developed in five years, with an indication that future redistricting approvals for the remainder would be given.

In June of this year, the KRC responded to the coalition, arguing that the commission “consciously elected” not to apply the five-year requirements. Like the KDC’s September 1986 Unilateral Agreement with the Honolulu City Council that rezoned Kuilima’s land subject to 14 conditions, the LUC’s order imposed no deadline to meet the commission’s conditions. The KRC provided transcripts of LUC discussions that suggest the commission was aware of its own rules and of the fact that the development would not be completed within five years.

Deputy attorney general Bryan Yee, representing the state Office of Planning in this case, agreed with the resort’s take on the five-year issue. In his filings with the LUC, Yee wrote that while the commission’s order may be flawed by today’s standards in that it lacked any deadline or reporting requirements, the Office of Planning could not support the coalition’s motion because the 1986 order “does not give the petitioner fair warning of an obligation to perform within a specific time period and reliance upon a bare reading of the [administrative] rules is too uncertain.”

Like KRC, Yee pointed out various proceedings during which LUC commissioners seemed to know that the expansion was not going to be completed within five years. Yee also suggested that the five-year limit might not have been common knowledge at the time, since many projects that received LUC approvals back then remain undeveloped.

Imposing Deadlines

While Yee agreed with KRC that it would be improper to initiate an order to show cause proceeding, which could lead to the immediate reclassification of the land, he suggested that the LUC might want to impose compliance deadlines on the resort.

“In this case, a clarification of the decision and order to impose a reasonable time period…would not result in manifest injustice…To the contrary, a reasonable time period in which the conditions must be completed would prevent landowners from resting on their entitlements for excessive amounts of time, reduce the likelihood of entitlement trading in which landowners merely receive entitlements for the purpose of increasing the value of the property, and allow for proper planning…,” he wrote.

Yee added that the LUC’s administrative rules allow for the modification or deletion of any conditions for good cause and that because the order can be and has been modified, “reliance upon the belief that the existing language would never change cannot be reasonable.”

KRC, which claims it has spent more than $100 million in improvements in reliance on the LUC’s open-ended order, denounced the idea, stating that good cause for modification does not exist and has not been shown.

After hearing these and other arguments on the Defend O`ahu Coalition’s motion from all parties as well as taking testimony from several members of the public on July 11, the LUC decided it needed more time to discuss the complicated legal issues with its deputy attorney general. While the commission did not grant an order to show cause, it did order KRC to provide a status report on the project.

In the meantime

Whatever the LUC decides, the future of the property will be in limbo at least until a new buyer is found. If recently appointed resort manager Stanford Carr cannot find a buyer for the property by the end of the year, KRC parent company Oaktree Capital Management L.P. will lose the resort to its lenders, which include Wells Fargo & Co. and Credit Suisse Group.

Last Legislative session, Governor Lingle proposed purchasing the property and created a Turtle Bay Advisory Working Group to work toward that end. The coalition’s Mark Cunningham says that several coalition members sit on the advisory group and that they are hopeful a “green knight” will purchase the property as-is and let the community decide what should be done with it.

“We really have our fingers crossed,” he says, adding that he worries that the pressure to get top dollar for the property ensures that Carr will still seek to construct at least one new hotel there. Cunningham said he and the rest of the coalition are also “on eggshells” because KRC’s subdivision permits are still pending city approval. KRC has until September 29 to satisfy the city’s concerns about the project and if it does, Cunningham says, “It’s a done deal.” With the subdivision in place, no one interested in preservation will be able to afford the property and anyone who can afford it will need to build it out to recover their costs, he said.

— Teresa Dawson

Volume 19, Number 3 September 2008

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