Is it an exemplary act of charity? Or is it a scheme to get rich at the expense of taxpayers? In either case, is it a worthwhile project?
Those are a few of the tough questions that inevitably arise after a hard look at the proposed $4 million purchase by the U.S. Forest Service of a conservation easement over roughly 9,000 acres of land at Kealakekua Ranch, in South Kona.
A good deal of the area under easement – some 8,100 acres – is already protected as a result of rezoning in the mid-1990s; the rezoning ordinance prevents the subdivision of that land for 40 years from the date development of lower portions of the ranch land commences. (That lower development, which can include a golf course and several hundred luxury “agricultural” house lots, has yet to get its first permit.)
What’s more, logging and other potentially commercial uses (ecotourism, for example) will not be disallowed under the easement being purchased over two years by the Forest Service.
Payment for the easement is only the start of the public funds that will flow to the Pace family, owners of the ranch. In addition to the Forest Legacy purchase, the state will be sharing in the costs of carrying out a forest management plan, under the Department of Land and Natural Resources Forest Stewardship Partnership program, to the tune of $750,000 over the next decade. Not least, the owners’ income tax liability could be reduced by a substantial amount, in the millions of dollars, over the next 15 years. That subsidy is not mentioned in the press release that the Department of Land and Natural Resources issued in late September to announce it had secured funds for the first half of the easement purchase.
A Burst Bubble
Since the 1800s, the ranch had been owned by the Greenwell family of South Kona. In 1990, it was purchased for nearly $15 million by a Japanese-based company, Kealakekua Development Co., which proceeded to seek rezoning from the Hawai`i County Council allowing eventual subdivision of the land into more than 500 lots, ranging in size from 1 to 40 acres, as well as construction of an 18-hole golf course and clubhouse, a wastewater treatment plant, and a recreation center.
The Office of State Planning, under director Harold Masumoto, objected to the rezoning and petitioned the state Land Use Commission to reclassify a large part of the ranch into the Conservation District, effectively placing it off-limits to development. In 1994, the OSP and the landowner reached an agreement calling for protection of 8,100 acres of mauka ranch land. The Hawai`i County Council incorporated the terms of the agreement into conditions of the rezoning ordinance passed in 1995 and amended in 1998. Those terms include preparation of a forest management plan (including re¬storation, public access, and “recreation consideration”), which was to be included in a restrictive deed covenant. Any termination of the plan would require not only approval by the County Council but also by the state Board of Land and Natural Resources, if termination occurred within 40 years of the effective date of the rezoning.
In 2002, a company called Koa Road LLC, one of whose principals was Honolulu developer Christopher Lau, purchased the land for $7 million. A year and a half later, in May 2004, the land was sold to Kealakekua Heritage Ranch, a business entity owned by the Pace family, who had acquired Hokukano Ranch in the mid-1990s. The purchase price for the entire ranch at that time was $11.5 million, roughly $110,000 an acre. Within months, the new owners had brought on tax lawyer Gregory Hendrickson and architect Clark Stevens to develop what Hendrickson called a “conservation alternative” for the ranch, “as opposed to the plan that was in place for development.”
State Cooperation
Before the year was out, Hendrickson had sold the DLNR on the project. In 2005, the Kealakekua Ranch easement was one of three acquisitions the state Forest Stewardship Advisory Committee was recommending for purchase by the federal Forest Service. Under the Forest Legacy Program, participating states forward their recommendations to the Forest Service, which then ranks them on a national priority list for acquisition. In 2005, the three DLNR applications were for purchase of two parcels (the 26,000-acre Wao Kele o Puna parcel and 1,300 acres above Hilo, known as the Carlsmith parcel), and the Kealakekua Ranch easement.
As Hendrickson explained, that year, Wao Kele o Puna was high on the national priority list, “which created downward pressure on other projects from the state.”
“We fell out fairly early in the process that year… We reapplied to get into the mix for the 2006 appropriation cycle, for the 2007 fiscal year. We were ranked first in the state, and then I think we were sixth nationally.”
In the Forest Service’s budget for fiscal year 2008, purchase of the second half of the easement was ranked 11th among 14 acquisitions, with the service seeking $1.989 million for the easement.
Last year, the ranch submitted to the state its proposal for participation in the DLNR’s Forest Stewardship Partnership program, outlining several of the reasons it qualified for assistance. “This land was once covered with dense native forest,” the proposal said, but went on to note that “all the past abuses committed upon Hawai`i Island west slope forests – wholesale clearing to create pastureland, repeated aerial application of exotic grass seeds, heavy cattle grazing, high-grade logging of koa and sandalwood – have left their marks on the land.” Still, the land features a 1,355-acre “`ohi`a savanna unit,” a 405-acre kipuka on a recent lava flow, described as a “biodiversity unit,” and higher-elevation mamane and mesic forest areas.
According to a fact sheet put out by the Forest Service, the appraised value of the total conservation easement came to $30 million; “the owner has also committed to donate a significant amount of the easement’s value (at minimum 30%),” the fact sheet states. If that value stands up through a second appraisal, the value of the donation could be $10 million or more.
A spokesperson for the state Department of Land and Natural Resources, which forwards recommendations for conservation easements to the Forest Service, said the state “had determined there was a viable threat to that area and a conservation easement was appropriate.”
Yet since 1994, 8,100 acres of the 9,000 or so acres that will be subject to the easement have been protected from development for the next four decades under the zoning ordinance.
Hendrickson said that while the land protected by the ordinance formed a substantial part of the land under easement, the easement would also extend to areas that could be developed under the zoning ordinance. “There won’t be a whole lot of value for the ranch in putting a perpetual easement on that portion of the property” called out for protection in the rezoning ordinance, he said. “The value to the ranch is in the significant reduction in units that occurs when we place the easement on the lower part of the property… We’re going to lose at least 350 of the 500 units to the easement.” When asked about the golf course that was also allowed under the zoning ordinance, Hendrickson said, “Our intention is to lose the golf course as well.”
Other advantages to the easement, he said, included the fact that it would be perpetual, where the zoning isn’t. “The easement will have a lot more in terms of specific provisions,” he said, including “exactly how that parcel can be managed in perpetuity. Then it will be regularly monitored by the state, at least once a year, for compliance with terms of the easement.”
Also, he said, “there’s a value in tying the whole conserved element, which is about 9,500 acres total, altogether into a unified block or management piece.”
“Our hope and intent here is to do something meaningfully different in the way
property gets preserved over time, for the benefit of people who live here and people in the community,” Hendrickson said.
Terms and Conditions
Under Japanese ownership, the owner’s attorneys filed the required annual progress reports. As early as 1997, Sandra Pechter Schutte, attorney for KDC, informed the county that “Mike Robinson … has started work on preparing a forest management plan. It is anticipated that the plan will be completed and submitted to the Planning Department for review and approval within a year.”
After Koa Road took ownership, its agent, William Moore, requested a time extension to comply with the condition that an approved water source be established before July 10, 2003, for the rezoning to become effective. The 1998 ordinance allowed the planning director to grant a one-year time extension; beyond that, approval of the full County Council would be required. Planning Director Chris Yuen responded by noting that he was still awaiting a report on development of the forest management plan: “We will not act on the time extension request until we have received a more satisfactory answer to our inquiries regarding the required Forest Management Plan.”
Yuen received no response for more than a year. Then, in July 2004, Clark Stevens faxed to Yuen copies of well application permits and an outline of a forest management plan, noting that “KHR acknowledges that all conditions of the rezoning ordinance and associated permits must be satisfied for development to proceed… KHR recently retained RoTo Architects Inc. [owned by Stevens] … as lead planners for the project. Among the first tasks assigned to RoTo was the preparation of a Forest Management Plan for the property.”
Even though the owners’ agents were working with the state on the forest management plan for the next year and a half, they neglected to keep the county informed. Thus, in March 2006, Yuen sought information on compliance with conditions of the rezoning ordinance. Not only were the well sources inadequate, he wrote, but the draft forest management plan that Stevens had provided in July 2004 “was more a description of steps that would have to be taken to do a forest management plan, rather than a forest management plan.”
“This plan is an important condition and the lack of one will affect our review and analysis of any time extension request. Please note as well that your annual progress reports are delinquent,” Yuen said. As to the wells, he said, the county “cannot conclude that the project had demonstrated the adequacy of the water supply by the deadline, even with an extension to July 10, 2004 (which was not even granted).”
Stevens responded in a rambling, three-page letter describing, among other things, how the Paces came to acquire Kealakekua Ranch. On a tour of Hokukano Ranch with Tom Pace, Stevens wrote, “Tom indicated his dismay that the Kealakekua land on his southern border was slated for development of ‘500 luxury houses and a golf course.’ He said that he would probably be forced to buy a number of the adjoining lots just to protect his parents’ house from encroaching development. I pointed out to him that if he bought such property and then chose to retire the development rights to protect his parents’ forest habitat and view-shed, that the value of that donation might lead to a tax deduction, at least. I also suggested that a buyer (or buyers) with the right combination of conservation mindset and tax burden might be able to purchase an entitled property like this and retire most or even all of those development rights and continue to operate it as an agricultural or agro-forestry operation that could still make after-tax economic sense.”
The Paces did acquire the land, Stevens noted, and brought on Hendrickson, “a nationally respected leader in the field of conservation easement law … to consult on a conservation easement approach and to help make the overall land use plan an ecological, social, and financial success.”
Changing Course
But now the Paces were not ready to give up the entitlements, Stevens said: “Unfortunately, loss of the entitlements provided by the ordinance would at this late date change the economics of the project significantly, and jeopardize the Forest Legacy Program funding… Reverting to A-20 zoning [allowing subdivision into 20-acre agricultural lots] would support only a homogeneous and likely more fragmentary approach to subdivision, while the ordinance entitlements can allow for place-appropriate clustering of inhabitation within site-specific areas of the small lot zoning, reducing the development footprint considerably and allowing for a more socio-economically diverse mix of agricultural ownerships while preserving large remainder parcels of agricultural and forest lands in a functionally continuous and legally undivided state.”
Then Stevens addressed the failure to provide the county with information in timely fashion: “Our full and open communication with the county has to some extent been limited by the requirements of obtaining a valid and defensible conservation easement: The problem with presenting a forest management plan to you or any county official … is that any increase in forest restoration and conservation lands (and therefore reductions in development footprint, numbers, and ‘amenities’ such as a golf course) would jeopardize the tax value of the potential conservation easements that such reductions and restrictions would provide.”
Stevens told Yuen that “the forest management plan is well under way.” Because its approval was a precondition to development, he wrote, “we were confident … that we could safely work with the county as on [sic] its specifics as soon as the entitlements vested” and, at the same time, “maintain our prospects for the tax value of the future easements.”
He continued: “In light of two years of such careful planning, to get word of your decision not to vest those entitlements a full year and a half after our submission of the materials in satisfaction of its [sic] condition is generally unfortunate, on a financial investment level for the owner very problematic; on a personal level as a conservationist, it is heartbreaking.”
‘A Concerted Gift’
Hendrickson also responded to Yuen’s letter, with a progress report (the first since the Paces acquired the ranch). “While I am aware that you have not been kept up to date on the programs and projects…, and for that I apologize, I hope you will appreciate our exercise of discretion in the matter,” he wrote. “Our hope and anticipation has been, and continues to be, to move toward the completion of our conservation, rehabilitation, educational, and cultural goals without fanfare or braggadocio… We hope that this project will come to the knowledge of the general public as a pleasant surprise and be seen as a concerted gift by Mr. Pace and our public and private partners (as it is!), and not come by way of public expectation.”
“Once again, for the benefit of our ongoing efforts, and the efforts of our public and private partners we request that you reconsider your decision regarding the status of entitlements on the ranch … and provide us with an extension of time to rectify any concerns that you may have with our submissions,” Hendrickson concluded.
The files at the county Planning Department do not contain any correspondence since March 2006.
Yuen told Environment Hawai`i that in the event conditions associated with a rezoning ordinance are not met, “the zoning doesn’t automatically revert, but we won’t process any approvals based on the rezoning.”
“The law says you don’t just automatically revert. But in the meantime, they’re in limbo,” he said.
Hendrickson, when asked if he thought the zoning was still viable, replied: “I don’t know…. We’d like the zoning to still be in effect. We think it’s a better way to go about dealing with the ranch. But the family doesn’t need the zoning to be in effect.”
“I don’t think it’s possible for you to have no entitlement on the land,” he said. “This is obviously something that has to be clarified before we do the easement.”
Whatever happens, Hendrickson said, the Paces are committed to the forest management plan that has been presented to the state and have already put in 15 miles of fencing. “We have native forest starts in our nursery, and have fenced a significant part of what we committed to fence in Year 1” of the plan, he said.
No signed agreement with the state exists yet. Before that can occur, an environmental assessment must be prepared. Hendrickson said he had been informed by a DLNR staffer that he could merely update the EA prepared more than a decade ago in connection with the rezoning. “We need to hire someone to do that work,” he said, “and need to do that before we have a contract with the state that provides us reimbursement.”
— Patricia Tummons
Volume 18, Number 5 — November 2007
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