HFDC Must Pay Amfac $750,000 to Leave Unencumbered State Land, Board Says

posted in: August 1994 | 0

On February 24, 1994, Pioneer Mill Company’s lease of roughly 1,800 acres of state-owned land in the ahupua`a of Wahikuli, West Maui, expired. Paragraph 25 of that lease describes what was to happen upon expiration of the lease. Among other things, Pioneer Mill was to “peaceably deliver unto the Lessor [that is, the state] possession of the demised premises,” including fences, sewers, bridges, trees and roads.

On February 25, 1994, the day after all the improvements on that land became property of the state, the Board of Land and Natural Resources approved payment of some $750,000 to Pioneer Mill. The payment, which actually is to be made by the state Housing Finance and Development Corporation, is to cover half of Pioneer Mill’s costs of relocating or replacing several cane haul roads and part of its irrigation system. Eventually, the land is to become the site of HFDC’s $40 million Villages of Leali’i housing project; until site preparation begins, however, Pioneer Mill continues to cultivate sugar in the area.

HFDC had quite a different scenario in mind when it began work on the Lahaina Master Plan in the mid-1980s. After several years of talks with the county of Maui, HFDC selected an area of 1,120 acres mauka of Lahaina for a development intended to provide a range of housing choices for people living in West Maui. Sixty percent of the 4,800 housing units planned were to be in the “affordable” range. A golf course, irrigated with treated wastewater, was intended also to handle drainage problems. Plans called for two school sites and several parks and commercial areas. A total of fourteen “villages,” including single family houses as well as multi-unit buildings, were to be built in a total of fifteen years. Groundbreaking was scheduled for 1990.

In November 1987, the Board of Land and Natural Resources approved HFDC’s request for a right of entry onto several state-owned parcels, including land under lease to Pioneer Mill, so that HFDC could conduct “feasibility studies” to help it select among possible sites for future state-sponsored housing developments.

By March of 1989, HFDC was asking the Land Board for a right of entry onto the state land leased to Pioneer Mill so that HFDC could conduct more detailed topographic surveys and environmental and engineering studies. At the time, according to board minutes, John Arisumi, the Maui Land Board member, “wondered if it was possible to develop affordable homes at Wahikuli inasmuch as homes in that area are now selling for about $250,000…. Not only was he concerned about the homes being affordable, he was also concerned that prime sugar land was being taken away from Pioneer Sugar.”

Richard Hirata of HFDC, the minutes say, informed the board “that a typical three-bedroom house today would cost about $115,000 to develop.” To address Arisumi’s concerns about Pioneer Mill, Hirata said that HFDC would work “very closely with the sugar company in bringing down fields so that there won’t be any crop damage.”

Bert Hatton, Amfac/JMB-Hawai’i’s vice president for land administration, told the Land Board that if land were withdrawn from Pioneer Mill’s lease at the rate of some 60 acres of cane per year, as was planned, “this will permit Amfac/JMB time to evaluate the issues and risks associated with our agricultural activities on West Maui.” In what would become an oft-repeated refrain during later years of negotiation between Amfac and HFDC, Hatton told the board: “Pioneer’s ag infrastructure must be kept whole.” This would include keeping open the cane haul roads crossing state land because, Hatton said, these roads are used to bring out cane from adjoining Pioneer Mill lands as well as from state land.

In the end, the Land Board approved HFDC’s requested right of entry.

A Modest Proposal

By July 1989, HFDC’s executive director, Joseph K. Conant, was writing Land Board Chairman William Paty, asking for “an initial withdrawal of approximately 28.6 acres of state-owned land from the General Lease No. S-4229 below the lower cane haul road, “to enable HFDC to develop the first phase of housing units in this project.” Conant said the area was to be used for development of 54 single-family houses and a 150-unit multifamily rental project, which would be available for occupancy sometime in mid- to late 1991.

Amfac was agreeable to this withdrawal, Conant told Paty. “Amfac officials have agreed not to plant cane in the 11.8-acre area where the single-family units are proposed.” The remaining 16.8 acres that Conant was requesting were “currently under cultivation and will be harvested in July 1990,” Conant wrote. “We wish to permit Pioneer Mill to harvest this portion in July 1990, although the withdrawal” from the lease could occur earlier, he added.

Conant had two further requests of Paty: that an unspecified number of acres “above the cane haul road” be withdrawn “for new road easement, water storage tanks and pump facilities,” and that HFDC be given a right of entry to the upper portions of the state-owned land to conduct exploratory drilling for potable water.

But in November, Amfac’s Michael Burke provided HFDC with a list of demands as to how HFDC should address Pioneer Mill’s “major areas of concern:”

Cane Haul Roads. Major roads must be maintained or relocated. All remaining fields must have adequate access… Separated grade crossings will be required at all major road crossings.

Irrigation Systems. Our water systems must be kept ‘whole.’ … The irrigation systems include sources, main transmission systems, and in-field drip systems.

Buffer Areas. Pioneer Mill Company roads should not be located adjacent to residential areas. All roads should be adequately buffered to prevent future complaints. Developed areas should construct fences [sic] between them and our ag operations. With 4,800 homes proposed, we can anticipated many problems with trespassing, encroachment, etc.

Drainage. The drainage facilities of this project should be designed to handle future runoff of our mauka lands. Easements for water, drainage, cane haul roads, etc., should be located on state land. Encumbrances of Amfac land must be minimized.

Crop Damages. These should be avoided, but never are…

Administration. Pioneer Mill Company and Amfac will spend countless hours working to coordinate the project. All costs which we incur for anything related to the project should be paid for by the state….

Lease issues. Withdrawals will need to be coordinated; areas and lease rents must be adjusted. There will be some unamortized value of infield drip systems which will be due to Pioneer Mill Company.”

The Letter of the Lease

As with almost all other state leases, Lease S-4229 to Pioneer Mill provides for such withdrawals, although not at such high cost as Pioneer Mill was proposing. In describing the rights of the state over the leased land, the lease provides for the withdrawal of any or all of the land “for public uses or purposes, including residential, commercial, industrial or resort developments, for constructing new roads, for rights of way and easements of all kinds.” If lands under cultivation are withdrawn, the state is to allow the crops to be harvested from them, or pay to Pioneer Mill the value of the crops taken. Also, if the withdrawal involves the taking of any improvement that Pioneer Mill may have made, “the proportionate value thereof shall be paid, based upon the unexpired term of the lease.”

(As mentioned earlier, the improvements themselves became the property of the state as soon as the lease expired – in February 1994. At the time Burke was insisting on payment by HFDC of the “unamortized value of infield drip systems,” the lease itself provided for payment of no more than the proportionate value based on the remaining time in the lease that is, four twenty-fifths, or less than one-sixth, the original cost.)

Since 1969, when the 25-year lease term began, several withdrawals had been made from the leased area, including land on which was built the Lahaina Civic Center. Following those withdrawals, the state proportionately reduced the acreage on which Pioneer Mill was to pay rent, but no other adjustments were made or requested.

Gridlock

In April 1990, the Housing Finance and Development Corporation won Land Use Commission approval to place all 1,097 acres planned for its Villages of Leali’i in the Urban District. In June of that year, however, it was still trying to win approval of the Land Board for withdrawal of land needed for the first increment. Instead of the 28 acres it had been seeking in 1989, HFDC was now asking for withdrawal of 68 acres. The Land Board approved the withdrawal.

In September 1991, the Land Board approved withdrawing an additional 380 acres for HFDC’s project. This approval was subject to a number of conditions, including a requirement that there be a “three-party agreement” among Pioneer Mill, the Department of Land and Natural Resources, and HFDC concerning the extent of compensation to Pioneer Mill for its claimed losses. This requirement, the Division of Land Management staff report indicates, was included at the strong urging of Pioneer Mill.

By February of 1992, HFDC was losing ground. The county of Maui was asking the Land Board to give the county almost 20 of the 68 acres whose withdrawal from the Pioneer Mill lease was approved in 1990 so that the county could use the land as a site to build a stadium for a winter league baseball team and a regional park. At the February 28 Land Board meeting. Then, HFDC saw its slice of the Pioneer Mill land shrink to 48 acres (although HFDC had no objections to the Maui County proposals).

Six months later, as HFDC prepared to break ground for the infrastructure needed for its first “village,” it suffered a further setback. In a memo to Paty, HFDC Executive Director Conant reported that Pioneer Mill had harvested the sugar crop on Field 565, part of the area to be withdrawn and was now “preparing to replant cane in this field.”

Conant continued: “We have also been informed that the DLNR (the lessor) is the only party that can direct Pioneer Mill (the lessee) not to replant cane in this field.

“Since the Housing Finance and Development Corporation is scheduled to commence construction of the first village soon, the HFDC wishes to avoid the unnecessary cost of damages and crop loss in field should Pioneer Mill proceed to replant cane. During the last eight months, the HFDC staff has been unsuccessful in executing an in-party agreement with Pioneer Mill, which was one of the conditions imposed by the Land Board for the withdrawal of lands under the subject general lease.

“We urge your attention and assistance in directing Pioneer Mill not to replant cane in Field No. 565.”

No response to Conant’s request could be found in DLNR files.

Gradual Take-Down

The next year, in July, Conant’s assistant, Richard Hirata, was making the same request first to the DLNR (in May) and, when that effort bore no fruit, to Amfac. This time, HFDC was asking that Fields 535, 540, 545, and 550 as well as 565 not be replanted once the current crops were harvested.

Amfac had a different idea. According to a response from Amfac’s Ann Lo-Shimazu, dated November 1, 1993, a “gradual take-down is a more practical solution. Besides allowing PMCo [Pioneer Mill Company] the opportunity to harvest one or two more crops before the land is actually needed for housing development, it may actually save HFDC some expense in maintaining and securing land that is out of production but not yet needed for the project.”

Lo-Shimazu provided further details of Pioneer Mill’s counter-offer. Two fields that HFDC had asked not be replanted in cane would be withdrawn beginning December 1995. The three others would see at least two more crops planted and harvested before HFDC’s site work would begin sometime in 1998.

HFDC had planned to use effluent from its sewage treatment plant for golf course irrigation, but with no golf course, HFDC had no place for effluent reuse. Pioneer Mill, Lo-Shimazu said, would accept up to .18 million gallons a day of sewage effluent scheduled to be generated by the first phase of HFDC’s development, but HFDC would have to bear the costs of delivering the effluent to Pioneer Mill’s reservoir. Since HFDC had planned to put in a drainage basin in the vicinity of the sugar company’s reservoir, Lo-Shimazu wrote, “from a cost standpoint, the two scenarios are almost identical.”

Finally, Lo-Shimazu said that Pioneer Mill would insist that HFDC “replace all necessary infrastructure, including but not limited to cane haul roads, irrigation pipelines, and power lines.”

Waiting It Out

Even as HFDC was trying to negotiate the required “three-party agreement” with Amfac representatives, Amfac was seeking an even longer tenure on the Pioneer Mill lease lands, among other lands owned by the state. In August 1993, the Division of Land Management proposed to the Land Board, at Amfac’s request, that the three leases held by Pioneer Mill in the Lahaina area be combined under one lease that would run for ten years. (Rent paid on “cultivatable lands”- barely half of the 1,500 acres under lease, in the case of General Lease S-4229 would be reduced 50 percent, to 2.125 percent of gross proceeds.)

The Land Board approved the staff recommendation, which authorized Board Chairman Keith Ahue “to offer the aforementioned conceptual proposal to Amfac/JMB Hawai’i, Inc., as a follow-up to their request of June 1, 1993.” The staff recommendation made no mention whatsoever of HFDC’s efforts to obtain the land.

HFDC’s Conant appears to have learned of the board’s action two months later. On October 5, 1993, Conant informed Ahue that the action, “while a conceptual proposal at this point, greatly concerns HFDC since it includes General Lease S-4229, which encumbers lands which are to be conveyed to HFDC…

“HFDC’s biggest concern is whether our project can withstand the costs and delays in developing the project while sugar cane is simultaneously cultivated on the land. Pioneer Mill has reluctantly supported the Villages of Leali’i only on the condition that the takedown of their cane lands be gradual and that they be kept ‘whole’ in the process…. [in] prior communications Pioneer Mill has conditioned the takedown of cane lands on 1) the relocation of infrastructure estimated to cost HFDC in the neighborhood of $20 million, and 2) payment of crop damages estimated at $5,000 per acre.

“HFDC concluded that the tremendous costs associated with keeping Pioneer Mill ‘whole,’ as ‘whole’ was defined by Pioneer Mill, would gravely impact the continued viability of our project. As a result, HFDC made the decision to wait until GL S-4229 expired on February 24, 1994, so that HFDC could proceed with the project unencumbered.

“The news that DLNR may now grant a new ten-year ground lease and further encumber our housing development site is certainly a cause for alarm to HFDC. Should DLNR issue a new lease or extend the existing lease, HFDC’s ability to negotiate a feasible and cost efficient takedown plan will be negated and this may affect the residential master plan to the point that it becomes infeasible.”

Coming to Terms

The DLNR has not extended the lease term for Pioneer Mill, although it did reduce the lease rent. As the lease expiration deadline approached, talks among the DLNR, HFDC and Amfac resumed, but HFDC’s Conant made it clear to Amfac, in a letter of January 4, 1994, that “while we are willing to meet and to consider reasonable alternatives for continued cane cultivation operations in certain areas, we must reiterate our position that we are not in a financial position to be able to meet your ‘keep whole’ proposals.”

HFDC’s consulting engineer had completed his report on the cost of meeting Pioneer Mill’s demands for roads, fencing, irrigation systems, and the like, Conant said, and “HFDC is in a position to meet with you to further discuss takedown issues.”

(According to the report of the engineer, Warren S. Unemori, construction of the new connector road between the lower and upper cane haul roads would cost $647,000; construction of a grade-separated crossing of Leali’i Parkway and the cane haul road would cost $6 million; relocation of new field roads above the planned bypass highway would cost $308,000; rerouting of the irrigation main line would be $131,700; plumbing needed to pump sewage effluent into Pioneer Mill’s Wahikuli Reservoir would come to $375,000. Unemori could not come up with a calculation for the cost of Pioneer Mill’s irrigation system in the fields to be turned over to Leali’i Villages; however, the “capitalization recovery” was estimated at $400 an acre.

(As to Pioneer Mill’s insistence on fencing around the development area, Unemori noted that Pioneer Mill “has not required fencing around developments created by their parent company Amfac at Ka’anapall Resort, Kapunakea, and Kelawea Mauka. It is difficult to comprehend why they want the state to do so now, especially since they are only leasing the adjoining lands from the state on an interim basis.” (All totaled, the cost in Unemori’s estimate would be nearly $8 million.)

Shared Costs

Negotiations continued through February and, in fact, past the February 24 expiration of the lease. But far from the DLNR releasing the land to HFDC, the DLNR’s Division of Land Management proposed that the Land Board attach conditions to HFDC’s acquisition of the land conditions that, in the words of the staff report submitted to the Land Board at its February 25 meeting, would ensure that the conveyance would “not be done at the expense of Pioneer Mill Company.”

The staff proposed, and the Land Board agreed, that “HFDC will pay Pioneer Mill Company for up to 50 percent of the estimated ($1.5 million) cost of relocating infrastructure,” including half the $335,000 cost of placing fencing along the cane haul road. As to where the money would come from, the Division of Land Management proposed that upon transfer of the land to HFDC, Pioneer Mill would continue to cultivate sugar on it, with sugar being phased out as houses were phased in. HFDC, the staff report said, “may use the proceeds from the lease rent from Pioneer Mill Company as a credit against HFDC’s share of the infrastructure relocation costs” after deducting the proportionate share of the rent from all sugar land that goes to the Office of Hawaiian Affairs (20 percent) and the Department of Hawaiian Home Lands (30 percent).

Less than two months later, the Land Board took up the matter yet again. This time, the staff of the Division of Land Management was proposing that the board amend its February action. According to the staff report, after the February meeting, HFDC had been questioned by its own governing board about the “appropriate-ness” of the DLNR conditioning transfer of the land upon payment of $750,000 to Pioneer Mill. According to a summary provided to the Land Board by Dean Uchida, the Division of Land Management officer supervising this for the DLNR, the attorney general’s office found that because the lease expired the day before the board’s action on February 25, “there was no contractual relationship between the state of Hawai’i and Pioneer Mill Company.” According to Uchida’s summary of the attorney general’s finding, HFDC could pay Pioneer Mill part of its costs of relocating only if there was some “mutual benefit” to both parties.

Gentlemen’s Agreement

The Land Board approved the amendment, so that the language listing the terms of the conveyance now read: “HFDC may pay Pioneer Mill up to half the cost of relocating the sugar company’s infrastructure, “provided that the relocated infrastructure is of ‘mutual benefit’ to both HFDC and Pioneer Mill Company.” According to the minutes of the Land Board meeting, Christopher Yuen, board member from the Big Island, “questioned the need for this amendment… ‘If we don’t have any authority to direct them to pay, why don’t we just take the whole thing out and do what they want?”‘

Johnson Wong, the deputy attorney general assigned to advise the Land Board, responded by explaining to Yuen that (according to the minutes) the amended language “is an attempt to reach some sort of an understanding to take care of the situation.” The use of the word “may” rather than “will” is, Wong said, “based on a gentleman’s understanding” that the money would be paid. How to justify the expenditure as being to the “mutual benefit” of HFDC as well as Pioneer Mill was up to the HFDC’s lawyers, Wong said.

By April 19, HFDC’s lawyer had developed the necessary list of benefits to HFDC that might accrue by paying the $750,000 to Pioneer Mill. Among other things, the “Mutual Benefit Analysis” stated that HFDC might be able to utilize part of the infrastructure, “subject to terms negotiated with” Pioneer Mill. HFDC might, for example, be able to use the relocated cane haul road connectors and the mauka-makai roads “as alternative accesses for emergency uses, or the transport of construction vehicles and materials.” Or, the analysis said, HFDC might use the new irrigation pipes for its own irrigation, if Pioneer Mill had “excess irrigation water.”

Fencing along the cane haul road would reduce liability for both parties, the analysis said. HFDC would also benefit by Pioneer Mill continuing to use the land for cane cultivation insofar as HFDC’s maintenance costs would be reduced and the undeveloped areas would be kept “green.” “Participating with PMCo on items of mutual benefit” that is, making the payment “promotes good will, cooperation, and support from the community,” the analysis stated.

On April 22, 1994, the HFDC Board of Directors voted to accept the terms and conditions placed by the Land Board on the transfer of the land to HFDC. In accordance with the Land Board action, HFDC’s board authorized Conant “to initiated negotiations with Pioneer Mill Company, Ltd., to draft a lease agreement between HFDC as lessor and PMCo as lessee for sugar cultivation, subject to final HFDC Board approval.”

On the Ground

According to the HFDC, by mid-July, no transfer of any land had been completed. HFDC has begun installing infrastructure on perhaps 70 acres of land, where the first phase of the Villages of Leali’i is to be built.

No money has been paid by HFDC to Pioneer Mill, nor has any lease been negotiated for Pioneer Mill’s use of the land that is to be transferred to HFDC.

Some seven years after the site was selected for the 4,800 houses in the 14 villages of Leali’i, the first dwelling is yet to be built.

— Patricia Tummons

Volume 5, Number 2 August 1994