Dozens of businesses operating on state lands could soon get a deal from the state to extend their leases another four decades.
While businesses say the measure would allow them to secure their interests for years to come, opponents worry that it circumvents a competitive process to select new tenants, and possibly get a better deal for the state.
Native Hawaiian groups have also expressed concerns over unsettled claims involving lands formerly held by the Hawaiian Kingdom and unfulfilled financial obligations to the state Department of Hawaiian Home Lands and the Office of Hawaiian Affairs.
House Bill 499 would allow the Board of Land and Natural Resources to extend current leases up to 40 years as long as the leaseholder makes improvements equal to 30% of the value of existing facilities on the property.
The board could also decide to not approve a lease extension, and find a new tenant instead. That’s what happens with leases that term out under the current law. The bill’s opponents want to keep it that way.
Any extension would also be subject to approval of a development agreement between the board and leaseholder. Under the current law, any improvements made to those lands become the property of the state.
In the last days of the legislative session, nine senators voted against it, as did 15 members in the 51-member House.
HB 499 is the latest in a series of laws passed by the Legislature to make it easier for current tenants to retain control of their properties. However, a 2017 law to balance the interests of lessees and the state was never used.
Acres of lands across the state are home to parking lots, warehouses, ice cream shops, stores selling tourist trinkets and hotels. All told, DLNR’s land division makes more than $17 million in annual rent from these businesses. The Sand Island Business Association is the single largest rent payer, contributing about $4.9 million each year to the state, according to data from the state’s Public Land Trust Information System.
HB 499 would also affect general leases under the auspices of the Department of Hawaiian Home Lands. While the more than 200,000 acres of land in the DHHL inventory is governed by the Hawaiian Homes Commission Act, a law passed by Congress in 1921, the department has also applied Hawaii’s public lands law to parcels deemed unsuitable for homesteading and set aside for commercial or industrial leases.
The 123 general leases under the DHHL bring in a total $15 million in annual rent revenue for the department, according to DHHL’s annual report.
Managers of the Prince Kuhio Plaza, a shopping mall in Hilo, have been among HB 499’s strongest supporters, saying they need a lease extension to secure long-term financing for improvements.
DHHL didn’t take a position on the bill during the legislative session. Though the Hawaiian Homes Commission could apply HB 499 to its leaseholders, the commission also must take an extra step of consulting with Hawaiian beneficiaries before making any decisions.
“At the end of the day, the commission is in charge,” Cedric Duarte, a spokesman for DHHL, said. “The commission will make the decision with the beneficiaries on what the next steps will be.”
HB 499 would expand a pilot program that sought to grant lease extensions to state lessees on certain lands in Hilo.
DLNR declined to comment for this story.
The department has opposed previous attempts by lawmakers to extend long-term leases. But it has recently taken a more supportive position and testified in favor of HB 499 during the legislative session.
“The Department believes that retaining long-term lessees in good standing is in the best interests of the State,” the department wrote in its testimony to lawmakers.
State lawmakers have spent the last five decades debating ways to extend leases.
The Legislature first expanded the conditions under which lease extensions could be granted in 1976. Act 196 that year made lessees on lands designated for intensive agriculture use or pasturing eligible for lease extensions as long as the extension was necessary for the tenant to gain financing for improvements.
The law also specified that the BLNR would cap the total lease terms at 65 years.
One of the four senators who voted against the measure was then-Senate Vice President Duke Kawasaki. He took issue with any lessee being able to get an extension without having to compete.
“If we have certain problems with people who want to obtain mortgages, I think the language could be so perfected that we give some consideration to these people … But a blanket language that almost assures that a present lessee can get another 35 years over anyone else who may be interested in such a piece of land, I think is very privileged legislation,” Kawasaki said during a final floor vote on the measure.
Between the late 1970s and 2000s, the Legislature added agriculture, aquaculture, mariculture, pasture and commercial enterprises to the types of leases that can be extended.
In 2011, hotels and resorts on state land were allowed to extend their leases beyond 65 years as long as resort owners promised to make substantial improvements.
But in 2017, lawmakers reached a compromise meant to help balance the interest of lessees that wanted to hang on to their land with that of the public and state, which benefit from increased rent.
The bill started as a measure similar to HB 499, allowing for long-term leases to be extended as long as there have been substantial improvements. What emerged was a law that limited the conditions for lease extensions, but still tilted in favor of current lessees, according to Sen. Karl Rhoads, one of the lawmakers who worked on the measure.
Within 10 years of a lease ending, a lessee could ask the Board of Land and Natural Resources to solicit interest in the property. The board would have just under a year to identify anyone interested. The current leaseholder would still be able to compete.
However, if there were no other interested parties, the board could start negotiating a new lease directly with the current leaseholder.
Lingering uncertainty over possible competition has made that law unpalatable to current lessees, according to Jim McCully, a Hilo businessman.
No leaseholder has used the process since it took effect in 2017.
McCully has been farming in Hawaii since the late 1970s. He once grew vegetables and plants on the Big Island and now grows orchids out of a warehouse in Hilo owned by his company, Mauna Kea Orchids.
McCully also leases warehouse space to several other small businesses through another company, McCully Works. His warehouse and office space are all on state lands in Hilo.
Like many current lessees, the state assigned McCully his lease in the late 1990s after a partner of a former leaseholder died.
McCully has also been active in the Legislature, helping to write several bills that became laws in the last decade. He believes long-term leases are necessary to encourage leaseholders to make improvements to their properties.
He plans to make more than $1 million of improvements, including repaving parking, getting new septic tanks and painting the walls.
He says many leaseholders may be reluctant to upgrade in the last 10 years of a lease and the lands will fall into disrepair, which would make things difficult for the state when the lands eventually go up for auction.
“If you wait to go to auction, what is there left to auction?” McCully asked. “Who will do anything in the last 10 years of a lease, then you wait to go to auction and might be outbid by someone who has an extra dollar more than you do?”
Rhoads, chairman of the Senate Judiciary Committee, doesn’t buy arguments that leaseholders need extensions to make improvements. He says they are already required to keep up those properties anyway.
He was one of nine senators to vote against the measure in the final days of the 2021 session.
As for businesses needing certainty about the future?
“The certainty is this: you have (a lease) for 65 years and after that you don’t have it anymore,” Rhoads said. “If you were looking for more certainty, maybe you should have chosen another location and bought another property.”
Though HB 499 grants extensions of up to 40 years, it makes no guarantees beyond that. It’s plausible that leaseholders will run into the same problem, needing more time to secure financing.
Sen. Lorraine Inouye, a Big Island senator and proponent of lease extensions, said developers have told her they were fine with the 40-year extensions.
“It didn’t seem to me like there were any requests to extend it beyond that,” she said.
However, Inouye acknowledged that lessees may run into similar issues in 40 years. She said she plans to work with DLNR to find a permanent solution.
Rhoads doesn’t think there should be any more changes to the law, and believes that Act 215, the law that no leaseholders have taken advantage of, was the state’s best shot at finding a compromise between the interests of the public and leaseholders.
“If there’s someone out there willing to spend $1 billion on a lease because they’ve got the greatest idea since sliced bread on what to do with the property, then we want to give them an opportunity every once in a while to express interest,” Rhoads said. “On the other hand, it could be that the current lessee — who stands the most to lose and have their business interrupted and would have to move — they would pay a higher price than if all the bidders were new.”
Opponents of HB 499 worry that it could close off opportunities to the state to get more money out of potential bidders.
David Callies, a University of Hawaii law professor who teaches land use and property, supports long-term leases, but also said that the state must ensure that there are mechanisms to renegotiate rent so that it stays at market rates.
“It would be a good idea to have a fairly regular, medium-term review of the lease rent to make sure the state is getting a fair return,” Callies said.
For Native Hawaiian organizations and others that have opposed the bill, HB 499 would continue decades of unresolved land issues that go back to the U.S. overthrow of the Hawaiian monarchy.
The opposition has grown to include some religious organizations.
Kaleo Patterson, a chaplain at the Episcopal Church of Hawaii and president of the Pacific Justice and Reconciliation Center, likens the problems facing Hawaiians and land to a thorn in the foot.
“If you don’t take care of that, it’s going to get worse and turn into a kakio” or rash, Patterson said. “And if your foot is infected, you’ll lose your life.”
David Kauila Kopper, an attorney with the Native Hawaiian Legal Corp., which has been fighting HB 499, worries that the state may have trouble negotiating new lease terms if they drag on long enough.
He also raised concerns that lessees may try to keep the land beyond the 40-year extension.
“As a landlord, you want competition,” Kopper said. “You want leases to end and if there’s someone who can do better, you want that.”
Gov. David Ige has until June 21 to announce what bills, if any, he plans to veto.
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