Ka'u Developer Owes Millions To an Offshore Caribbean Bank

posted in: July 1991 | 0

In August 1990, Mount Lebanon Hawai’i Corporation, controlled by Charles Chidiac, bought out most of the interest of a partner in the Hawaiian Riviera Resort proposed for the Ka’u District on the Big Island. The purchase price (according to real property tax records) was $42.5 million. Mortgages on record with the state show at least $37.5 million of that was to be paid off according to terms of two promissory notes that Mount Lebanon gave to its partner, Hawai’i Ka`u `Aina.

The land itself had not changed since HKA acquired it for just under $5 million in a series of transactions from 1980 to 1983. But in 1990, with prospects for reclassification of the property from the agricultural and conservation districts into the urban district appearing bright, Mount Lebanon was gambling that the land’s value would skyrocket. Hawai’i Ka`u `Aina’s principals, on the other hand, realizing an eight-fold increase in their initial investment, were satisfied enough with the price to accept a mortgage from Mount Lebanon that was subordinate to prior claims whose total face value at that time seems to have been roughly equal to HKA’s mortgage.

Dramatis Personae

Since the complicated sequence of transactions last August, Mount Lebanon Hawai’i absorbed Palace Development Corporation, which was actually the partner of HKA in developing the resort proposal. On February 1, 1991, Mount Lebanon officially merged with Palace, with Mount Lebanon being the survivor. Mount Lebanon turned around and, on the same day, assumed Palace’s name. Ownership of both corporations was vested in four trusts established on behalf of Chidiac’s four children. Chidiac, as trustee, was president of Palace and Mount Lebanon separately. He continues to be president of the surviving merged company.

Constituting the membership of Hawai’i Ka’u `Aina (as of last August) were three limited partnerships (Hawai`i Ka`u Ranch, Hawai`i Ka`u II and Hawai’i Ka’u III) and four revocable trusts (the Walter C. Witte Trust, with Witte as trustee; the Stephen M. Francis Trust, with Stephen Francis as trustee; the Linnea A. Francis Trust, with Linnea Francis as trustee; and the Witte Family 1990 Property Trust, with Patricia A. Berg and Diane M. Taylor as trustees).

The attorney representing HKA, Thomas A. Bodden of Maui, described the HKA partners to the Land Use Commission as follows: “I could tell you who the general partners are. First one is a gentleman named Walter Witte. Mr. Witte has had a general contracting license for about 35 years, he has been the developer of a number of projects in the Pacific Northwest. On the island of Maui he developed several major condominium projects.

“Next is a gentleman named J. David Page. Mr. Page is located in Tacoma, Washington. He’s one of the largest developers of housing, especially HUD-financed housing, in the Pacific Northwest.

“Next is a gentleman named Charles Taylor. Mr. Taylor is a CPA and handles most of the financial aspects of the partnership.

“And lastly is a gentleman named David Berg… formerly a CPA and now a dentist… They are collectively partners, not all of them in all three of the partnerships, but those are the general partners.”

Inflating Assets

At the time the Land Use Commission approved construction of the Palace portion of the resort (about half the original project proposed for the land), it knew little about the financial condition of Palace or Hawai’i Ka’u `Aina. The only financial information provided to the Commission was contained in a pair of nearly three-year-old balance sheets for HKA and Palace HKA’s net worth, as of September 15, 1988, was placed at $10,785,000,with $10 million of that being the value it assigned the Ka’u land (HKA stated that the $10 million represented what it paid to acquire the property. The records at the state Bureau of Conveyances do not bear that out.)

Palace’s balance sheet showed a net worth of $7,420,000 as of June 30, 1988. Its chief asset was its land in Ka’u, whose value was placed at $8,880,000. In testimony April 6, 1989, before the Land Use Commission, Robert Lombardi, then Palace’s senior vice president, stated that this figure was the amount Palace paid when it acquired the property from Mount Lebanon Hawai’i. (Actually, Palace received title to the land from Mount Lebanon Corporation, Chidiac’s Georgia-based predecessor to Mount Lebanon Hawai’i. No cost of acquisition is on record other than the nominal $10 that is standard in such title transfers. In any case, because both corporations were owned and operated by identical parties, shifts of funds from one branch to the other can hardly be counted as real gains or real losses.)

But to return to the actual cost of the land Bureau of Conveyance records show that Chidiac’s initial recorded payment for an undivided 30 percent interest in the 21,000-acre tract was $1,417,500; that was offset by $1,312,850 when he sold half that share, or a 15 percent interest, to Hawai’i Ka’u `Aina in 1983. To that point, in other words, Chidiac’s net cost for a 15 percent stake in the land was $104,650. If one further considers that Palace itself held only 740 acres, or 24 percent, of the total 3,128 acres assigned, by agreement with HKA, to Chidiac (Mount Lebanon Hawai’i held the remainder), the acquisition cost of Palace’s holdings would be proportionately reduced to, say $25,116. One could be generous and place a premium value on the Palace share of Chidiac’s holdings, since Palace’s land did include the prime resort acreage. No reasonable cost-based assignment of value to the Palace holding, however, would go far beyond the range of $60,000.

Yet this is the land whose “cost-based” value was represented to the Land Use Commission as nearly $9 million. At the time, county tax records show that the entire 3,128 acres owned together by Palace and Mount Lebanon had an assessed valuation of $156,398 in 1988. HKAs land, consisting of roughly 17,500 acres, was assigned at the same time a value of less than $500,000.

Unreal Property

Still, Lombardi represented to the Commission that the “cost-based” valuation of $20 million for both HKAs and Palace’s holdings was conservative. You take that $20 million as a starting point, Lombardi said, and add in the money spent by both partners so far – about $10 million, he said – to take the Riviera Resort proposal through the process of amending the Hawai’i County General Plan and bringing it to the Land Use Commission. “That sets a value you could say at approximately $30 million to this real property,” he said.

However, he added, “That is not realistic in terms of the value that could actually be attributed to this property at this point.” Actual present value, he told the commissioners, was “more likely in the neighborhood of approximately $120 million.” He arrived at that figure, he said, by extrapolating from a recent appraisal that placed the value of the Palace-Mount Lebanon acreage at $37.5 million.

Lombardi made reference to a “substantial” line of credit obtained by Palace from a firm in Great Britain called Sleipner U.K. Limited. “If we are successful” in obtaining approval from the Commission for land reclassification, Lombardi said, that line of credit would be drawn on “for architectural, engineering and water development to get us through the county zoning and building permit stages.”

If Palace and Hawai’i Ka’u `Aina had spent $10 million for development of the property to this point, as Lombardi told the Commission, the source of that money is not on record. At the time of Lombardi’s testimony, the only financing statement displaying a claim on Palace’s assets filed with the Bureau of Conveyances showed a company called Hawaiian Palace Finance B.V. as the secured party Hawaiian Palace Finance was described as “a Dutch company in formation” with an address in Amsterdam. The extent of its claim and, thus, the extent of any loan advanced by Hawaiian Palace Financial to Palace Development Corp., is not evidenced in any public record.

Glen Winterbottom, a resident of Na’alehu in the Ka’u District and an intervener in the LUC proceedings, was openly skeptical of Lombardi’s report of the $37.5 million appraisal of Chidiac’s holdings. “If there was no possibility that this land could be redistricted, would the value still stand … would anybody pay $37 million for a parcel that could not be redistricted?”

Lombardi said he did not believe that the appraiser “was speculating on LUC approvals” but rather “was just indicating what the current value” was.

LUC Chairman Renton Nip was also curious about the appraisal. “Are you at liberty to indicate who that MAI was?” he asked Lombardi. (MAI stands for Members Appraiser’s Institute, a fraternal organization, not a certifying board.)

“Mr. Bloom, Robert Bloom,” Lombardi replied.

(An appraisal is not always the last word on property value. In the book Inside Job, which describes some of the scandals leading up to the savings and loan crisis, authors Stephen Pizzo, Mary Fricker, and Paul Muolo state that “many high fliers used to contend the letters actually stood for ‘Made As Instructed,’ a reference to appraisals done to suit the needs of the borrower.”)

Cash Advances

Contrary to Lombardi’s testimony the use of Sleipner’s promised line of credit did not await Land Use Commission approval. Within five days of Lombardi’s appearance before the Commission in April 1989, Sleipner made two loans to Palace totaling $11 million (Notes 1 and 2, as they are referred to in the documents on record at the state Bureau of Conveyances). As security for the notes, Chidiac put up his option to purchase HKAs property an option that the Commission had not been made aware of (although the Palace balance sheet did list, on the assets side, “option agreement payments” to which was assigned the value of $500,000).

Earlier, in 1987, Sleipner had essentially taken over Chidiac’s Smoki Foods of Hawai’i, Inc. By 1990, when Chidiac was negotiating mortgages with Hawai’i Ka’u `Aina to purchase its stake in the Ka`u land, there was no longer any pretext of Smoki Foods operating independently of other Chidiac firms. Provision was made in the mortgages to allow up to $300,000 of any loans Palace might obtain to be used for operating Smoki Foods. Winterbottom asked on several occasions for information concerning Smoki Foods but Chidiac’s agents before the Land Use Commission convinced the Commissions that Smoki Foods’ operation had no bearing on the Riviera Resort proposal. In the year following Lombardi’s initial testimony, public records show, Chidiac was to obtain additional cash advances totaling at least $25.7 million. Bergen Bank advanced Chidiac $1.7 million of that in November 1989 (referred to as Note 3). The remaining $24 million was advanced to Chidiac in May 1990 (Notes 5 and 6, each for $12 million) by a Netherlands Antilles firm called Parmenas Investments, N.V. Palace’s new vice president, Karl Hippmann told Environment Hawai’i that Parmenas is the “offshore booking vehicle” for Den norske Bank, the successor to Bergen Bank. Given that reporting requirements for Netherlands Antilles companies are lax, there is no easy way to verify this.

On August 24, 1990, the same day the mortgages to Hawai’i Ka`u `Aina were recorded, Chidiac acknowledged additional cash advances from Den norske Bank (in Notes 4A, 4B and 4C) totaling $10 million.

When one totes up the cash advances on record (Notes 1-6), the sum is a staggering $46.7 million – and this does not include the promissory notes totaling $37.5 million that Palace has made to Hawai`i Ka’u `Aina, referred to in the mortgages.

Hippmann was questioned by Environment Hawai`i about the cash advances. He said that under terms of an agreement between Palace and the lending banks, Palace was constrained to use the funds in one of two ways: land acquisition or investment.

From documents at the Bureau of Conveyances, it seems clear that land acquisition was not the winner. The mortgages made by Palace/Mount Lebanon in favor of Hawai`i Ka’u `Aina do not suggest that any substantial part of the advanced funds was used to reduce the purchase price of HKA’s property – certainly not more than $5 million, which is the difference between the recorded purchase price and the face value of the mortgages.

Hippmann insisted that there was a very straightforward explanation. He said he would be happy to provide it, but that he would need clearance from the principals of the corporations involved before doing so. (By the time Environment Hawai’i went to press, Hippmann still evidently had not received clearance. Hippmann was not forthcoming on other matters either. He told the Commission he was of German nationality, had worked for Citicorp Bank in Germany before moving to Australia where he became a permanent resident, and that he had known Chidiac more than 20 years. When Environment Hawai`i asked where and how he had met Chidiac, he refused to say.)

Chidiac’s corporation has no apparent source of revenue. Moreover, in the financing strategy presented to the Land Use Commission, there is no prospect for income until three or four years from now at the earliest, when Chidiac can begin selling off the condominiums and lots for single-family houses (which Hippmann has referred to as his “bank”). Given this, one cannot help but wonder also how Chidiac is managing to carry the interest on the $84 million in loans, much less reduce the principal.

A Partner to the Rescue

When questioned as to its apparently thin capitalization, Palace put forward to the Land Use Commission the barest outline of a financial strategy. Following approval by the Commission of the reclassification of its land into the urban district, Palace would seek a partner that would have enough capital to carry the project forward to the point that standard construction financing could be obtained. The partner would ante up about $100 million. When combined with Palace’s land, which would be valued in Palace’s dreams, at least at between one and two times an equivalent dollar amount (that is, between $200 million and $300 million), Palace and the new entity would be partners. The exact relation between the partners might not give each an equal footing, the Commission was told, especially if doing so meant Palace would yield its total control over development.

In spring of 1990, the Commission was informed that Ralph M. Parsons Co., an engineering firm, had agreed to become a partner in the project by contributing in-kind services valued at $50 million. Palace’s former vice president, Richard Lombardi, stated at the time that the Parsons stake, combined with an agreement with Bergen Bank, would give Palace equity funding “sufficient to take us up through construction financing.”

Yet a year later, no one seemed to remember Lombardi’s claims to have had in hand “sufficient” funding. By February 1991, Hippmann was telling the Commission that Palace was negotiating with several banks and other institutions to obtain a “strong equity partner” who would “infuse a substantial amount of cash into this company” on the order of $100 million.

Rick Eichor, a deputy attorney general for the Office of State Planning, asked Hippmann, “Would that 100 million dollars be put back into the company for construction or costs, or is it going to be taken out or at least part of it used as profit to Mr. Chidiac and the other owners?”

Hippmanns response was “definitely no.” “A part of the money would be used to repay existing debt that is on the land,” he said, while “the balance will be used to carry the company from now to the construction financing stage.”

Hippmann was testifying in February 1991. The last information the land Use Commission had received in regard to Palace’s finances was the June 30, 1988 balance sheet, showing outstanding debts of $3 million. With the Land Use Commission having received no financial information since that time, Hippmann’s statement may have been comforting.

But if one had known (as Hippmann must have) that Palace’s recorded principal indebtedness was approaching $90 million (including the HKA mortgages and notes taken out for the purchase of other properties in Ka’u), Hippmann’s statement would be anything but an indication of a sound financial strategy.

Volume 2, Number 1 July 1991

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