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Don Howard Williams Jr. thought he had a reliable, long-term source of income when he entered a 30-year lease with the State of Hawaii for prime undeveloped property on Maui’s South Shore in 1994.
But 20 years into the deal, the state decided not to make lease payments anymore. Instead, the government filed a lawsuit to take Williams’ land using the state’s power to condemn property.
But the property has sat undeveloped for two decades. And the state has come under fire for paying the market rate for prime waterfront land that it has chosen to use as a dirt parking lot.
Now Williams, a 73-year-old Texan who thought he had realized the elusive dream of owning waterfront property in the Maui community he once called home, seems likely not just to lose the land; he also might have to fork over $1 million to the state as the result of a state judge’s preliminary ruling in his case.
Williams’ case centers on what represents “just compensation” for property taken by the government when there’s a long-term lease on the property.
The key issue: whether the value of a lease should be considered when determining the land’s market value.
The State of Hawaii has flip-flopped on the question.
In 2013, the state argued that the “the proper method for determining just compensation of property under a lease accounts for the value of the lessor’s right to collect agreed-upon rents.”
But later, Hawaii Attorney General Doug Chin invoked a legal doctrine known as the “undivided fee rule” to say the lease money owed Williams shouldn’t be factored into the equation. Maui state Circuit Court Judge Rhonda Loo, who is presiding over the matter, has agreed with the state.
As a result, the jury deciding how much Williams should be paid won’t be allowed to hear about the lease, which is now worth $350,000 a year for about 10 years.
Williams’ attorney, Robert Thomas, says Chin and Loo are mistaken.
“It’s a crackpot theory,” Thomas said of the state’s interpretation of the undivided fee rule. “No court in the United States has accepted that argument, and no condemning authority has had the chutzpah to make that argument.”
The case touches on issues facing landowners beyond Maui. Takings law involves a fundamental right: the U.S. Constitution’s Fifth Amendment says governments can’t simply take private property without paying for it.
Although state eminent domain statutes outline a process by which governments can take property from private landowners, the Constitution provides broad rules: takings must be for a “public use,” and the government must provide “just compensation.”
The overarching principle is that landowners are supposed to be made whole, says Leslie Fields, executive director of Owners Counsel of America, a network of eminent domain attorneys who represent landowners.
“Unfortunately, often things come into play that sabotage that goal,” said Fields.
She said judges too often put arcane case law above the overriding concern of fairness the Constitution calls for. And this, she said, appears to be one of those cases.
“The state’s been awful,” Williams said in a telephone interview from Costa Rica, where he now lives in retirement. “I’m not an attorney, so I guess I don’t know what awful really means. But it seems unfair.”
Williams’ history with the property dates back to 1994. Williams started visiting Maui in the early 1970s, and by the early ’80s had moved to Maalaea and rented a condo in the Maalaea Mermaid, he says. He got his real estate sales license in 1985, state records show.
Walking around the neighborhood, Williams would often see the vacant lot next to the Mermaid and wonder why it was undeveloped. When he saw a “For Sale” sign go up around 1993, Williams recalls, he jumped at the chance to buy it.
Williams turned to a friend in Dallas whom he had helped buy property in Paia, and his friend agreed to invest with him in the Maalaea land: a 1.1-acre waterfront parcel.
As it turns out, Williams says, the property was owned by the Church of Scientology, which was looking to unload it for $1.9 million. Williams was able to negotiate the price down to $1.35 million, he says, and the church went for it.
Meanwhile, the state also became interested in the property and agreed to lease it from Williams, who was able to use the state’s proposed lease to secure financing. As a result, Williams was able to do the deal himself without the help of his friend from Dallas, he says.
“It’s hard to own anything in Hawaii, especially when you don’t have much money,” he says.
The lease calls for the state to pay what amounts to a market rate to rent the property, based on the fair market value of the land and the prevailing rental rate of waterfront land in Maalaea, so the lease fee could rise with property values.
As a consequence, the state’s payments started at $150,000 in 1994 but had risen to $350,000 by 2013.
Daniel Morris, a deputy attorney general who is working on the condemnation case for the state, said the lease “has not been great for the state.”
In 2013, the state filed a complaint to take the property rather than to continue to make lease payments. The lease had a provision saying that the lease would be terminated in the event of condemnation.
So, for instance, if the County of Maui took the property through condemnation, the state would not be able to stay on the land.
As for the value of the lease, the state initially took the position that the lease’s value would be included when determining just compensation for Williams.
When it filed the condemnation suit, for instance, the state deposited $4.17 million to cover its estimated just compensation for the property, based on the state’s appraisal, which included both the land and the value of the lease.
And when Williams claimed the state had breached his contact and asked for the money owed under the lease as damages, the state’s lawyers argued the value of the lease would be accounted for in the amount awarded to Williams for the taking.
Based on the state’s arguments to the court, Williams thought he would be made whole.
Meanwhile, the state was coming under criticism in the media for paying millions of dollars over the years to rent oceanfront property that it was maintaining as a lot for parking and storage.
“This is the classic example of the public being fleeced,” Carroll Cox, an environmental activist and longtime critic of the state Department of Land and Natural Resources, told Hawaii News Now in a piece titled “State paid millions to lease vacant dirt lot.”
By March 2017, the state had changed its position regarding just compensation.
With a trial scheduled for May 2017, the state filed a motion asking Judge Loo to determine how to value Williams’ property and to prevent the jury from knowing about the lease when it decided the land’s value.
Loo sided with the state and is scheduled to revisit some of these arguments in a hearing on Tuesday.
The attorney general has asked the court to dismiss Williams’ breach of contract claim; Williams’ attorney has asked Loo to reconsider her motion to exclude the value of the lease from what the jury can consider when determining the fair market value of the land.
In the meantime, Williams said he’s concerned about the state’s latest appraisal. Although one of the state’s appraisals valued the property at about $5 million, the latest values the land at $3 million.
Facing mortgage payments on the property, Williams said he took the $4.17 million deposited by the state and used the lion’s share to pay off outstanding loans on the property.
“The end result is the state says the property has decreased in value,” Thomas said, “and Williams owes the state $1 million for taking his land.”