Is the state Department of Land and Natural Resources going to get stuck with having to upgrade or maintain dilapidated sewage and drainage systems after the Sand Island Business Association’s lease ends?
In July 1992, the DLNR issued a 55-year lease to the association (or SIBA), which then developed the infrastructure necessary to turn the state’s 70 acres of reclaimed, undeveloped land in South Oʻahu into the 112-lot Sand Island Industrial Park. The park — where tenants include waste haulers, contractors, auto recyclers, plumbers, painters, and more — is now the single largest source of revenue to the DLNR’s Special Land and Development Fund, bringing in $9.3 million in rent this year. Next summer, SIBA’s annual rent is scheduled to increase to about $11.4 million.
Normally, the infrastructure — including roads; water, power, and sewer lines; the drainage system — would be dedicated to the city or appropriate utility after the subdivision was completed. In SIBA’s case, that would have been in 1999.
That didn’t happen.
While the lease requires SIBA to dedicate to the City and County of Honolulu various infrastructure components, it does not specify when that’s supposed to happen.
The water lines were dedicated in 2018, but the roads and sewer and drainage systems remain under SIBA’s control.
At the August 13 meeting of the Board of Land and Natural Resources, SIBA representatives explained that the organization has maintained control over the roads for security reasons. It also claimed that the city has said it doesn’t want the sewer and drainage systems without the roads.
SIBA executive director Milton Holt explained that at night, it closes the cattle gate at one of the two roads into the park and places a security guard at the other.
“If we didn’t close at night, it would be occupied by homeless. … Tenants have them on film scaling the fence and entering their property,” said SIBA’s treasurer, Sonny Borges.
“That’s why we haven’t dedicated the roads. It would open it to the public and there would be problems,” Holt added. (Because it’s chosen to retain the roads and sewer and drainage systems — and, therefore, has to maintain them at its own cost — SIBA recently argued unsuccessfully to the City Council that it shouldn’t have to pay as much in property taxes as those who receive the full suite of city services.)
Recognizing SIBA’s security needs, the DLNR’s Land Division recommended amending the lease to require the dedication to the city no later than five years before the lease expires. The division also recommended that, in the meantime, SIBA secure a bond to cover the estimated costs to upgrade the roads and sewer and drainage systems to city standards.
The lease is set to expire on June 30, 2047, but due to legislation passed earlier this year, the association could seek a 40-year extension.
Kevin Moore of the DLNR’s Land Division noted that in 2019, SIBA had an engineering study prepared for the roads. It estimated that they needed nearly $2.5 million worth of repairs.
Based on that, the division initially proposed requiring SIBA to post a bond totaling $2,733,500 (the cost of repairs plus a 10 percent contingency). However, because additional studies were necessary to determine the potential costs to upgrade the sewer and drainage systems, it recommended at the August 13 meeting that the dollar amount of the bond be left blank until those studies were done.
“My concern is not dedicating the improvements. The lease will run out. … It might be 50 years out. Sooner or later, the state will own the infrastructure. If it’s dedicated, the city will be responsible for maintaining it and keeping it working. I’m more concerned about sewers and drainage,” said Land Board member and former Hawaiʻi County planning director Chris Yuen.
Borges tried to assure Yuen that there have been no problems with the sewer or drainage systems. “Nobody complained about the sewer. … Nothing has gone wrong. We fixed the roads ourselves,” Borges said.
“Has anyone inquired about dedicating the drainage system without the roads?” Yuen asked. Borges replied that they hadn’t.
Yuen said he sympathized with SIBA’s security issues. “The government is not taking care of the situation,” he said. However, he added, “I am concerned with the state some day having a sewer line that is going to cost oodles of money to replace.”
Yuen asked if SIBA was carrying a bond right now.
Holt said originally, SIBA had a $9 million bond in favor of the city. “It’s come down to $1.7 million since we’ve completed all our improvements,” he said.
“I’m kind of shaking my head at this. … I’ve never had a situation where a bond rides 20 years after improvements are completed,” Yuen said.
He then asked if anyone had any idea whether the city would accept sewers 40 years after they were built.
“The city’s acceptance of this bond from year to year would indicate they were okay with delayed dedication,” Moore said.
Yuen said he was “happy on the whole” that SIBA had created “great place for people to do business.” However, he was concerned with the potential costs to upgrade the underground infrastructure.
In his motion to approve the recommended lease amendments, Yuen offered some of his own. He recommended that the contingency for the road bond remain at 10 percent, but those for the sewer and drainage bonds be increased to 50 percent above estimates for upgrades or repairs.
In addition, he recommended that SIBA, with the assistance of the state, try to get the city to accept the dedication of the sewage and drainage systems without the roads. He also recommended that the DLNR and SIBA ask the city whether it foresees any problems with dedicating old infrastructure at some point in the future and report back to the Land Board. He recommended the lease amendments not be finalized until after that report has been presented.
“One of the things I’m really concerned about is, with sea level rise, saltwater intrusion into the sewer lines. I don’t know what the situation is right now. … Maybe I’m crazy, but I’m worried about it. … If you can, dedicate the sewer lines, try to see if you can talk them into it, then we can get out of this whole bond situation,” Yuen told Borges.
“That’s an excellent suggestion,” Borges replied.
“We can try to see if the city will just take the sewer. We’ll make that effort,” Holt added.
With that, the Land Board approved Yuen’s motion.
In addition to approving the amendments regarding the dedication of infrastructure, the Land Board also rescinded its requirement that SIBA get board approval for any subleases. It also approved the Land Division’s request to issue SIBA a revocable permit for a portion of a lot within the park that was not included in the master lease.
Lot 113, where SIBA has long housed its office trailer, was originally intended to be the site of a commercial center developed by either the state or SIBA. If and when that center was built, SIBA would have been allowed to keep a 1,000-square-foot office there for free.
That center was never built, but SIBA has parked its office trailer there for years and used the rest of the lot as a parking area for its tenants and their employees.
SIBA’s tenants employ thousands of people and most of them park on the street, double park in the subdivision, or park on Lot 113, a Land Division report states.
The report explains that division staff have been working with SIBA for years on a plan for the disposition of the lot “so that it can be utilized more fully.”
SIBA had sought to amend the master lease to include the lot and published an Environmental Assessment and received a Finding of No Significant Impact for the development of office space and parking on it. However, SIBA ultimately balked at the appraised rent.
Last September, an inspection of the lot by division staff found several unauthorized uses, including the “parking of numerous vehicles for purposes unrelated to the SIBA office, multiple abandoned or unattended vehicles, storing of construction materials, and an unauthorized structure,” the report stated.
On September 3, 2020, the department issued SIBA a notice to stop all of the unauthorized uses within two months. SIBA asked for another month to comply. A December inspection found that the site was just being used for SIBA’s temporary office trailer and SIBA staff parking.
Negotiations over the long-term disposition of the lot are ongoing, the report states, adding that the revocable permit is an interim measure.
For any uses of the lot that extended beyond 1,000 square feet, SIBA would have to pay fair market rent.
While SIBA testified in support of the lease amendments proposed by the Land Division, the organization would rather get out of its lease altogether. It’s tried repeatedly over the years to get legislation passed that would help achieve this. About a decade ago, a land exchange was contemplated, but ultimately rejected.
This past legislative session, Senate Bill 176 proposed amending the state law regarding industrial parks to allow lessees to purchase their lots. The bill would also have limited the escalation of lease rents over a five-year period to the percentage specified in the Consumer Price Index or 10 percent, whichever was smaller.
Holt noted in written testimony that 2011’s Act 235 authorized the DLNR to consider the sale of the Sand Island parcels to SIBA tenants, but the DLNR and SIBA were unable to agree on a price.
“Professional real estate appraiser Jon Yamaguchi estimates that the state revenues generated by this bill would amount close to $200 million dollars, which shall be distributed in equal amounts to the state general fund and the special land and development fund. These monies will significantly help to balance the State’s budget and manage the projected shortfall due to the SARS-CoV-2 pandemic,” Holt wrote.
He also asked the Legislature for help with the rent increases SIBA is facing under its current lease. “SIBA would … appreciate your assistance in addressing our rent escalation of 22.5 percent at the end of the fifth year of each ten-year reopening period. The step-up was intended to compensate the state for discounted rent in the first 25 years of the lease. However, SIBA contends that rent for the first 25 years was reasonable rent, not discounted rent, due to SlBA’s immense investment in excess of $41 million that was necessary to develop the industrial subdivision that had no infrastructure,” he wrote.
The Office of Hawaiian Affairs opposed the sale of what it said were ceded lands.
The DLNR also objected to the idea of selling the lands. DLNR director and Land Board chair Suzanne Case noted in written testimony that the SIBA lease rents “account for about half of the revenues the Department’s Land Division generates annually. [Special Land and Development Fund] revenues cover the entire annual operating budget for the Land Division, the department’s Office of Conservation and Coastal Lands, and the Dam Safety and Mineral Resources Programs of the department. The revenues fund over 80 department staff positions, including six positions within the Commission on Water Resource Management, and provide funding support to the Division of State Parks and various resource protection programs administered by the Division of Forestry and Wildlife such as the protection of threatened and endangered species, removal of invasive species, wildland firefighting and lifeguard services.”
She added, “The sale of the parcels in the industrial park would deprive the SLDF of a critical income source and severely compromise the department’s operations. Instead of lease rent for the next 25-30 years, the SLDF would instead receive the income from the fee sales. However, those revenues would be split between the SLDF and the general fund. Furthermore, if the revenues from the sales exceed the spending authority of the SLDF, the surplus funds could also be subject to raids and diverted to the general fund as well, leaving the department with no revenues from the sale or future lease rent.”
While the bill crossed over to the House of Representatives, the house never held a hearing on it.
(For more background on this, see, “Board Talk: OHA, DLNR Reject Sand Island Sale,” from our March 2013 issue.)