“There comes a time when even the most optimistic real estate developer must concede that what lies at the end of the rainbow is a pile of debt, not a pot of gold.”
With that statement, attorneys for Bridge ‘Aina Le‘a, LLC, opened their devastating critique of a reorganization plan that was submitted last fall by ‘Aina Le‘a, Inc., which is seeking to work its way out of bankruptcy and move forward with development of more than 1,000 acres it owns in the South Kohala district of the Big Island.
Bridge ‘Aina Le‘a is ‘Aina Le‘a’s largest creditor, claiming that as of December 1, the debt stood at $29,382,747, “with fees and costs continuing to accrue.” The initial interest rate was 12 percent; that doubled when the loan went into default.
A decade ago, the two companies seemed joined at the hip in their efforts to move forward with the development of a planned community on the Kohala Coast of the Big Island. In 2009, when Bridge was under pressure to show it was legitimately performing on its commitments to move forward with development of the Villages of ‘Aina Le‘a, it brought forward ‘Aina Le‘a’s predecessor company, DW Aina Lea Development, LLC, as the eventual purchaser of the land and builder of the infrastructure and homes.
In recent years, though, the two companies have been at loggerheads. And the animosity between the companies seems only to have grown as ‘Aina Le‘a attempts to haul itself out of bankruptcy and move forward with development of its land, heavily burdened by debt.
Starting March 13, ‘Aina Le‘a’s reorganization plan will be subject to a hearing in federal bankruptcy court in Honolulu. Overcoming Bridge ‘Aina Le‘a’s objections is only the first hurdle the debtor faces. Other large, secured creditors have indicated their dissatisfaction with the reorganization plan. A Canadian company, Romspen Investment Corporation, provided credit to ‘Aina Le‘a of nearly $10 million, with ‘Aina Le‘a agreeing to a late charge of 5 percent of the overdue amount as well as to an interest rate of 17.5 percent on delinquencies. A Chinese investor, Libo Zhang, loaned ‘Aina Le‘a $6 million. Both Romspen and Zhang have expressed their displeasure with the reorganization plan ‘Aina Le‘a submitted last fall.
Since then, ‘Aina Le‘a has revised its reorganization plan, with the latest iteration submitted to the court on January 2.
But that document would seem, on its face, to do little to address the concerns noted in the replies of Bridge, Romspen, and Zhang to the earlier plan.
Land Use Action Plan
At the heart of ‘Aina Le‘a’s proposal to emerge from bankruptcy is what it calls its Land Use Action Plan. The company faces a number of obstacles before it can move forward with development, including the need to prepare and have approved a supplemental environmental impact state- ment (SEIS).
Yet ‘Aina Le‘a claims that it has Hawai‘i County Planning Department support for a plan that would allow it to begin building – and selling – some of the residential units before that SEIS process was complete. Proceeds from those sales would then pay off creditors, who would be made whole in six to 10 years’ time.
The construction, ‘Aina Le‘a says, could be done by obtaining “project district zoning” for the area proposed for afford- able housing (Lulana Gardens) and the adjoining Ho‘olei subdivision, proposed for single-family residences. Together, about 61 acres of land are involved. At the same time, the County Council would need to amend the zoning ordinance that authorized the entire project back in the 1990s, in order to remove the 61 acres from the “ambit of the ordinance,” as ‘Aina Le‘a phrases it.
Work on the two projects could com- mence, the company says, on the basis of a 2010 environmental impact statement – the same EIS that was deemed inadequate when challenged by the Mauna Lani Resort Association in a state court action and which resulted in the determination that a supplemental EIS would need to be done.
“The project district application will be supported by the existing FEIS [final environmental impact statement],” completed in 2010, ‘Aina Le‘a says, “with the understanding that ‘Aina Le‘a “will be concurrently preparing an SEIS for the project.”
But a confounding factor is the determination by Hawai‘i County that the SEIS would need to include not just the lands in the state Urban district owned by ‘Aina Le‘a, but also the surrounding 1,900 acres in the Agricultural district owned by Bridge ‘Aina Le‘a. The original development plan envisaged a unified community that covered all 3,000 acres, with shared infrastructure and services.
Now, though, ‘Aina Le‘a “asserts and steadfastly maintains that its project is separate and independent from any potential development by Bridge on its adjacent land and is in no way a segment of any alleged larger undertaking.”
The land use plan anticipates proceeding with construction even as the supplemental EIS is being prepared – an approach that, ‘Aina Le‘a says, “appears permissible under the Hawai‘i County Code given [‘Aina Le‘a’s] 2010 FEIS.” Although that document was challenged, it “substantively satisfies the requirements for processing the project district application. The project district application will be supported by the 2010 FEIS with the understanding that the FEIS will be supplemented prior to final action on the project district application.”
One of the major unresolved issues is the provision of potable water. Originally, ‘Aina Le‘a proposed to use water from wells on land owned by Bridge, but that is no longer possible. Now, ‘Aina Le‘a says, it will seek “to develop … in coordination with the state Department of Land and Natural Resources and the County of Hawai‘i Department of Water Supply the necessary water source, storage, and transmission facilities to provide an adequate supply of potable water to the project.”
‘Misleading, Speculative, Illusory’
The latest reorganization plan differs little from the one that has drawn fire from the other secured creditors, which Bridge attorneys characterized as “so haphazardly constructed, it is difficult to decide where to begin critiquing its deficiencies.”
First, they write, the claim that the current value of ‘Aina Le‘a’s land is more than $250 million appears to be “pure fiction” while the plan to obtain construc- tion financing of more than $100 million is “illusory.”
The proposal to pay off debt by selling units in the Lulana Gardens development consists of “a handful of spreadsheets with numbers plugged in seemingly at random. There are no studies, market data, absorption analysis, or any credible narrative explaining how and why the Lulana Gardens townhomes could be sold in the timeframes projected. … There is no detail regarding utility costs, or even a credible explanation of when and how utilities will be brought to the property. … It’s not clear how the Lulana Gardens project could possibly bring in $29 million in revenue in ‘year one,’ since the supplemental EIS must be completed and approved, the Queen Ka‘ahumanu intersection must be constructed, and the utilities must be brought to the property, before any sales could close.”
As to the county’s presumed consent to this development scheme, Bridge is similarly skeptical. “There is nothing anywhere in the [plan] that the county supports or agrees with this land use compliance plan, or that the county thinks it is feasible and viable. That appears to contradict statements that ‘Aina Le‘a, Inc.’s attorneys have made to this court, that ‘Aina Le‘a, Inc., was working ‘magic’ with the County of Hawai‘i Planning Department and that the County mayor was involved with and supportive” of the company’s plan.
Marguerite Fujie, attorney for Romspen, noted that the plan had “no confirming evidence that critical third parties, including the County of Hawai‘i, the Mauna Lani Resort Association, and the State Circuit Court, are amenable to the proposed course of action.
Going Forward
If the secured creditors block ‘Aina Le‘a’s path to reorganization, the company has indicated it may proceed to take legal action against certain of them.
In an attachment to the reorganization plan, ‘Aina Le‘a identifies “retained causes of actions,” including against the “statement [sic] of Hawai‘i,” based on the Land Use Commission’s decision to revert the Urban land into the state Agricultural district. Also, it threatens to take legal action against its former legal counsel, the law firm of McCorriston Miller Mukai MacKinnon, which now represents Romspen.
Against Bridge, it threatens legal action related to ‘Aina Le‘a’s purchase of the bulk of the land, citing, among other things, “fraudulent inducement, … breach of contract, misrepresentation, tortuous interference, and stay violation claims.”
The creditors are now being asked to approve ‘Aina Le‘a’s proposal to move forward with development and pay off its debt. Should they withhold their approval, it is still possible for the bankruptcy judge to decide to allow it, in what is known as a “cram down,” if the judge deems there is sufficient reason to believe it will work.
Should a reorganization plan not be approved, the creditors will have little recourse outside of court. Both Zhang and Romspen had initiated foreclosure actions at the time ‘Aina Le‘a filed for Chapter 11 bankruptcy protection in 2017.
If ownership of the land does end up shared among Bridge, Zhang, Romspen, and the 1,000-plus Asian investors who bought into ‘Aina Le‘a’s “undivided land fraction” offering, it is unclear just how any development could occur on the property. — Patricia Tummons
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