Land Board Debates Practice Of Rent Discounts to Non-Profits
A recurring subject of dispute in recent discussions among members of the state Board of Land and Natural Resources has been the traditional discounted rent paid by non-profit organizations that hold leases of state land.
The practice of granting steep discounts to charitable, religious, and educational organizations is one of long-standing with the Land Board. Sometimes the rent is a nominal $1 a year. More recently, rents have been set at 20 percent of the market value of the lease, in the board’s belief that the Department of Land and Natural Resources cannot waive the Office of Hawaiian Affairs’ entitlement to 20 percent of the market-based value of ceded lands.
In any case, it would seem to have been the wish of the state Legislature that such discounts be granted. Section 171-41, Hawai’i Revised Statutes, gives the Land Board the power to lease, “by direct negotiation and without recourse to public auction,” public lands to religious, charitable, or educational organizations, for furtherance of those purposes.
But to at least some of the board’s newest members, the practice smacks of favoritism at best, and, at worst, a sort of bleeding-heart liberal mindset that has no place in the hard-nosed, dog-eat-dog, pull-your-own weight, hoist-by-bootstrap world that they seem to believe Hawai’i should become.
The most ardent exponent of this position is Kaua’i board member Lynn McCrory. After a relatively quiescent first year on the board she was appointed by Governor Benjamin Cayetano in 1996, and began service on the board in July of that year – McCrory has begun to reveal apparently deep-seated personal opinions and belief that, if enshrined as board policy, would change radically the status quo.
The Business of Religion
The first whiff of change came at the August 21, 1997, board meeting. Before the Land Board was a proposal to let St. Theresa’s Roman Catholic Church in Kekaha, Kaua’i, use about two acres of state land as a recreational area and ballfield. The report recommended letting the church rent the land for 25 percent of the market rental rate (yet to be determined by an appraiser).
After the routine presentation of the staffs recommendation, McCrory announced she had “a number of concerns.”
“My first concern,” she went on to say, “is, I think there’s a difference between a private non-profit and an organization that is a non-profit but the community benefits.” As trustees of a public trust, she said, the board members should be sure “we provide the highest return for our lands. To be discounting the annual rent by 25 percent for an organization that, for all intents and purposes, has many of the same features as a business, I find difficult.” It was tantamount, she said, to a “statement that the other 75 percent should be borne by everybody in the state for a lease of land that in essence will be used exclusively by the applicant, no different than any other business.”
McCrory was on a roll: “When I look at this activity and what they do, I can find very strong similarities between that [the church] and a business. They just happen to have the advantage of being a non-profit under the tax laws.”
If the church was providing a benefit to the community as a whole, McCrory said, she would not object to discounting the rent to “somewhere near the 75 percent” level.
“I just do not believe that we as the state and everyone paying taxes should subsidize an organization when the utility company does not or any of the other providers of service to this organization.”
McCrory went on to compare the church to “the Kaua’i North Shore Business Council or the Kaua’i Economic Development Board,” all of which, she said, were “401(c) (3)” [sic] organizations. Referring to the Catholic Church, she said, “They operate the same as a business operates. They have the same staffing, the same building requirements; their product just happens to be religion… And they’re looking to utilize this land in the same manner for the enhancement of their customers, and not for the community as a whole.”
At-large board member Colbert Matsumoto raised a point that the statute allowing discounts to religious groups (among others) might run up against the establishment clause of the U.S. Constitution. Hawai’i Board member Chris Yuen said he had no problem with the board asking the state attorney general for an opinion on that matter especially when the leased lands were being used for religious purposes rather than more secular purposes (as, for example, ballfields). “I think that if the Catholic Church leases land from the state for a ballfield to be used by the community, and the state gives it a discounted rate, I don’t think that’s any different than the Kiwanis Club leasing land from the state to put in a ballfield, at a discounted rate.” Yuen continued: “I have to say that generally, I very strongly support the state providing land to non-profit groups at a subsidized or discounted rate where they are providing services for the public benefit, like the Boy Scouts or various clubs. I think the non-profits do an incredible service. If the state and counties had to provide all the recreational activities that are provided by the soccer clubs and the canoe clubs – what they’re doing is extraordinary. And I think that the state, which owns about a third of the land in Hawai’i, has to do our best to make available what the state has to help them out.
As for the question of the [public] trust, one of the purposes that the state lands can be used for is the provision of land for public purposes. Sidney Fuke, a planner appearing on behalf of St. Theresa’s, said that the ballfields were to be available for the use of all groups, without favor. The church was requiring groups to seek permission in advance merely to ensure orderly scheduling, responsibility for clean-up, and such.
In the end, McCrory won a deferral of a vote on the subject.
The Crippled Clientele
Later in the same meeting, the board took up a staff submittal to increase the rent of the Easter Seal Society for land it uses in Honolulu. Present rent is a $1 year (reflecting the rate set for the first 20-year period of the lease). Proposed rent is $6,500, roughly equal to 20 percent of the appraised market-based rental of $32,547 a year.
Although the proposed increase represented a 6500 percent increase in rent, McCrory thought that was insufficient. “I have the same problem with this lease that I have with St. Joseph [sic]. While they [Easter Seal Society] may be a non-profit, they’re not a non-profit that is in the overall benefit of the community. You have a very select client or customer – crippled children,” McCrory stated.
“You are once again looking at being subsidized in effect by the state, by all of us, for you to sell your product and take care of it. And it’s not that I’m not saying the product is not worthwhile, that it’s not very valid and important to all of us. But it is a product, and it is a business.”
Yuen again disagreed: “Let me say that I think organizations like this provide the state a tremendous service. It’s true that not everybody is a crippled child, but if we didn’t have a non-profit perform these services, the state would be out there having to spend more taxpayers’ money doing this. Actually, I even question our 20 percent policy. There’s nothing legally, morally, or ethically wrong with the state leasing land for a dollar a year to a non-profit who’s performing a service for the people of the state… This land is for a public purpose… these are the kinds of enterprises that benefit the entire community. I don’t think there’s any obligation on the state to charge rent for these kinds of operations.”
John Howell, executive director of the Easter Seal Society, appears to have been taken aback by the virulence of McCrory’s comments. The society turns no one away, and it serves more than just crippled children, he said – including persons with developmental disabilities, teenagers, and even adults.
“I do take one great exception with your comment” about state subsidies, Howell told McCrory. “We subsidize the state of Hawai’i. We run eight different programs, and we’re roughly at a $2.5 million operating budget. The state contracts that we have – not a single one of them comes close to covering the cost of our program. Not a single one. To provide the services… we cook huli-huli chicken, we do the Taste of Honolulu, we do our annual telethon – fund-raising events during the course of the year to subsidize the state of Hawai’i because they don’t fund the programs that we provide.”
McCrory asked if the electric company gives the Easter Seal Society a discount. No, Howell replied, “but they do give us grants. The net effect is the same. They don’t give grants to for-profit organizations.”
Howell went on to note that the increased rent would put the organization’s operating budget for the next year, which had projected a surplus of about $5,000, into the red unless compensating cuts were made in services. “If we pay the increased rent, I’m going to have to cut back services to people in the community, at a point where the state doesn’t even fairly compensate us in our contracts now, he said. “Hawai’i categorically is one of the worst states in the nation” – 48th or 49th, he later said – “in terms of providing funding on a per-capita basis for people with developmental and mental disabilities. And that’s where non-profits like Easter Seals have to step in.”
Yuen again went combat for the non-profit community. “My thought is that since OHA is suing the state on practically everything else concerning ceded lands, maybe we ought to return to leasing to non-profits for $1 a year. Let them take us to court on that and see if a judge will say that the state can’t lease to the Easter Seals at $1 a year.”
Howell made a final effort to get the board to understand how the Easter Seals was not a regular business with a “select clientele.” “One distinction – the work that we do is not one of a social issue, not one of choice…. Parents don’t choose that their child is going to have Downs Syndrome and the child doesn’t choose to have spina bifida. These are people that come into the world and didn’t have a vote, and there are very few organizations that do the work we do to take care of them.”
It was for naught. O’ahu board member Kathryn Whang Inouye made a motion to approve the staff submittal (with rent at $6,500 a year). Matsumoto seconded the motion. Other board members (including Maui board member William Kennison and board chairman Wilson) went along with the motion. Only Yuen dissented.
The Weinberg Foundation
On September 12, it was the Weinberg Foundation’s turn to plead with McCrory. A subsidiary of the foundation called the 300 Corporation, which provides office space to foundation-related charitable organizations, was seeking a revocable permit to allow the short-term use of 8,000 square feet of vacant land in Iwilei for a parking lot for tenants of the 300 Corporation’s adjoining building.
The state has no immediate plans for the vacant lot. Still, McCrory was insistent on charging full market-value rent to the Weinberg Foundation.
Yuen made his standard objection to McCrory’s position, noting that the Weinberg Foundation has made immeasurable contributions to the state in a number of areas.
In the end, the staffs recommendation was accepted. If the Weinberg Foundation wants the land, it will have to pay full value.
On October 10, the Land Board approved a policy for commercial hiking activities on public trails. At the same time, the board deferred a vote on a larger umbrella policy covering all commercial activities on state-owned or state-managed lands and waters.
Both policies are the outgrowth of the Commercial Use Task Force, under the leadership of Kaua’i forester Ed Perteys, and both came under fire from David Frankel of the Hawai’i chapter of the Sierra Club, inasmuch as they would define non-profit groups such as the Sierra Club as commercial operations any time a fee, however nominal, was charged for a hike.
The board’s discussion reflected a wide range of views. McCrory’s stand, predictably, was that non-profits should be pleased to pay 10 percent of any fees they collect for hikes: “Possibly the way the non-profits can look at it is that 10 percent or whatever they put back in is to the resource and it benefits the resource.”
Board member Inouye wanted to make all local residents exempt from charges, regardless of the nature of the organization sponsoring any tours they might take. In other words, Inouye seemed to be proposing that fee payments be restricted to non-resident tourists.
Matsumoto was concerned about the establishment of bogus non-profit organizations that would seek to circumvent fees levied on commercial operators. For some time, Matsumoto has been concerned that at least one of the water-ski clubs operating in Ke’ehi Lagoon is not a bona fide non-profit, but rather sells daily “memberships” to Japanese tourists who want to water ski. Still, Matsumoto indicated he was concerned “about unduly burdening what Chris Yuen characterizes as legitimate non-profits. It’s a difficult definitional problem… The mountains and the oceans don’t know the difference between someone who pays a fee and someone who doesn’t.”
As drafted, the policy would allow non-profit organizations that now lead interpretive hikes for a fee to obtain a “Memorandum of Agreement” from the Division of Forestry and Wildlife if they wish to continue operating in their usual fashion. This procedure is not spelled out in the commercial hiking policy adopted by the board, but is discussed at greater length in the umbrella commercial-use policy (on which the board deferred action). According to the umbrella document, agencies within the DLNR can determine which organizations are eligible for a memorandum of agreement on the basis of the use of fees collected, whether or not they provide the DLNR with in-kind services, the public-trust benefits that result from their use, the frequency of use, and “pertinent Hawaiian issues. “
For Yuen, this was too burdensome. “What I have in mind is that they [non-profits] can come down to the office, sit down and explain what they’re doing and get out of it with an exemption. I don’t want them to have to create a giant application for the Trail and Mountain Club to continue doing what they’ve been doing for the last 50 years on the trail. It’s gotta be simple.” He suggested that if the policy exempted groups that charged fees below a certain level, the bogus non-profits that worried Matsumoto would automatically be excluded. “The guided groups that are done by non-profits which may involve a dollar or two – to me, that’s the general public.”
Wilson argued against this, using as an example the Hawai’i Nature Center, a non-profit that conducts guided hikes from time to time for which participants pay a nominal fee. “Now, the Hawai’i Nature Center is an incredible asset to the state,” Wilson said. “We’re lucky to have them. But there’s no question it’s a commercial activity, in my view.
“But then, how to approach them in terms of an exception to these policies? Should they pay 10 percent? If they’re not going to pay 10 percent, if we make that exception, does that mean we should at least take a look at their books and tell the rest of the non-profits in Hawai’i when they ask why the Hawai’i Nature Center is being given an exemption?”
The questions drew a rapid response from Yuen. “My answer to both questions is NO,” he shouted in mock anger, pounding the table for emphasis. “We should not do these things to these people. It’s too much trouble. Why are we creating more paper work for people who are not a problem? Government drives people nuts.”
Nuts or not, the proposal carried the day. In his second to the motion to approve the policy, Yuen stated that he did so “with the understanding that… the activities of existing non-profit organizations that happen to charge an incidental fee to cover their expenses for educational nature hikes and the like are not illegal and are not required to go through the RFP [request for proposal] process to continue their activities.”
The controversial lease of more than 200 acres of state land to the father of state Senator Malama Solomon has ended. On October 10, the Land Board voted to cancel the non-bid lease to Randolph Solomon, doing business as Kohala Farms. The reason for cancellation is that Solomon claims he cannot make money off the land so long as he is restricted – under terms of the lease – to growing cattle feed.
The attorney general has determined – not once, not twice, but at least four times in this case alone – that changing the lease terms to allow pasturing of cattle (as Solomon wished) is not legally possible. Therefore, the Land Board decided to cancel Solomon’s lease. However, instead of putting the land out for bid immediately, the board agreed to let Solomon continue to use the land for one year under a revocable permit, which gives him additional time to recover part of his capital investment in the land, near Hawi, in the Big Island district of North Kohala.
The lease was approved in 1991, despite the fact that a state law allowing direct leases of state land to producers of cattle feed (i.e., hay) had a cutoff date for such leases of December 31, 1988. In February 1991, Mason Young, then administrator of the Department of Land and Natural Resources Division of Land Management, informed then-Land Board chairman William Paty that because the Land Board had approved disposing of the land by direct lease in advance of that December 1988 deadline, “Land Management is of the opinion that… this specifically approved lease may still be negotiated.” Specifically, Solomon was one of “three or four applicants” seeking state lands for production at the time, Young Wrote. In March 1986, he noted, the Land Board approved staff recommendation to select a lessee from this pool of applicants at a future time.
A year later, Solomon was virtually assured that he would be awarded the lease. On May 1, 1987, Paty wrote a letter to Solomon, recapping some points made during a meeting the two had had two days earlier (just as the 1987 legislative session was wrapping up). Paty informed Solomon that he (Paty) was “satisfied that all statutory requirements have been met and that we may now proceed with the lease disposition process… It is estimated that the lease can commence in about four to five months,” after the state had appraised the land and the attorney general had drawn up the lease documents.
That process took closer to five years than it did five months. The board approved Solomon’s lease of the Kohala land at its February 22, 1991, meeting, with the lease finally being executed in August 1991.
A scant two years later, Solomon was asking the board to change the lease terms to allow him to pasture cattle on the land. There was no money in the cattle feed business, he claimed at the board’s December 1993 meeting, accompanied by his prominent and powerful daughter.
The board approved Solomon’s request, subject to several conditions, the most significant of which was that the attorney general approve the proposed change in lease terms.
Dean Uchida, administrator of the Division of Land Management, informed the Land Board at its October 10 meeting of the series of events that followed that 1993 board action.
“In October 1994, the attorney general’s office informed us that they could not process the request that the board had approved because they believed the change in use was not permitted through directed negotiated leases.
“In December 1994, the department asked the attorney general to reconsider.
“In January 1995, the AG responded with the same conclusion. ‘The use cannot be changed to livestock farming, which is not specifically exempt from the public auction, as it would circumvent the general policy that the public uses should be issued through public auction. Thus, you cannot do something indirectly where you are prohibited from doing so directly.’
“In January 1995, the department again asked for reconsideration of the attorney general’s opinion.
“In December 1995, the attorney general’s office responded with a six-page opinion, supporting its earlier findings.
“In July 1996, the department asked for reconsideration, providing additional information.
“In August 1996, the attorney general’s office reiterated its support for the earlier position.”
(According to reports published in March 1995, the third request for reconsideration was drafted by John Goemans, an attorney for the Solomon family.)
In the end, the Land Board approved the recommendation of its staff to authorize the termination of the lease and issue a new revocable permit to Solomon, allowing him to use the land for pasture purposes. Departing from the staff recommendation, the board approved a condition that Solomon’s RP have a term of at least one year.
Withheld Files
In late March 1995, the Solomon lease made front-page news when it appeared that staff at the Division of Land Management were withholding documents from the lease file. An assistant land manager was reported to have instructed staff to withhold “sensitive” documents, consisting of faxes and notes of phone messages exchanged between Land Management and Senator Solomon’s office.
DLNR administrator Wilson immediately made a public announcement that nothing improper would be withheld.
In the files that Environment Hawai`i reviewed at the Hilo office of the Division of Land Management, there was little overt evidence of intervention by Senator Solomon on her father’s behalf. However, as recently as August of this year, Senator Solomon was using her office in the State Capitol to send faxes to the Hilo land office concerning grazing and foraging practices nationally.
At the time of the 1995 controversy, however, Dan Mollway, executive director of the Ethics Commission, said that state employees and officers were not allowed to use state time, equipment, or facilities – including fax machines – for private business.
John Hino, property manager for the DLNR’s Division of Boating and Ocean Recreation, has finally acknowledged that the state’s lease of an acre of land at Ma’alaea Harbor on Maui is a “boondoggle.” The lease, which can charitably be described as disadvantageous to the state, was the subject of a cover story in the November 1996 issue of Environment Hawai`i.
For the first time since then, the subject of the lease came before the Land Board at its September 26, 1997, meeting, when DOBOR sought the board’s approval to grant a revocable permit to Diamond Parking Company, for use as a parking lot.
Over the last few months, Environment Hawai`i has attempted, without notable success, to obtain documents relating to the lease between DOBOR and Don Williams, owner of the lot – especially documents relating to the lease reopening, which was to have occurred in 1996, and rent on the land paid by O’ahu Construction for use of the lot as a staging area while it is building the nearby Ma’alaea Ocean Triangle project.
We did learn that O’ahu Construction was to have paid $1,600 a year to the state under its lease (technically, a sublease) to use the land for a staging area. That breaks down to $133 a month, which, combined with the $18 a month rent paid by a restaurant to place a directional sign at the corner of the property, would make the state’s income off this land total $151 a monthly – which amounts to less than one percent of the $16,700 or so the state pays Williams each month.
However, O’ahu Construction apparently has no further need of the lot. This brings the income down to less than a tenth of a percent of the state’s monthly cost of the land.
On the matter of the rental reopening, Environment Hawai’i was told that the state was continuing to pay the $150,000 a year rent set for the first two years of the lease, which was based on an appraised value of $1.8 million for the land and a return rate 9.8 percent a year.
However, Hino, DOBOR’s property manager, informed the Land Board on September 26 that the state was now paying $200,000 a year. This, he told the board, was based on an appraised value of $2.2 million and a rate of return of 8.5 percent. (Actually, the annual rent would be $187,000 a year at this rate; without access to DOBOR records, it is impossible to know precisely how Hino has figured the rent payments.)
The Diamond Parking Company rent – which was proposed to be set at 80 percent of gross revenues, less expenses – was, Hino said, a way of diverting the loss until the state could get a developer in to use the land more profitably. “In the interim,” Hino acknowledged, the rent the state is paying “is just money down the drain.” Hino stressed the importance of moving forward with development within two years, when the state’s opinion to purchase the property would expire.
After that, Hino told the board, “we won’t have any leverage as far as amending the lease,” whether it be to extend the term to the point where a commercial developer would find it attractive or to renegotiate the base rent. “As it is now,” he continued, “every two years this rent is renegotiated at the capitalization rate, at the appraised value. And the next one [renegotiation] might be at 9 percent. And because of development right next door at the Ocean Center, I can see the appraised value of this property going to about $3.5 million.”
Board member Matsumoto asked what the option price was. Hino responded that it was whatever the appraised value was at the time, adding, however, that there was a floor of the current appraised value ($2.3 million, Hino said). “For all intents and purposes,” Matsumoto commented, “the option is worthless.”
Board member Yuen raised the more basic question of how the state got into the lease in the first place. Hino reminded the board that at one time, the state had wanted to build a fish-processing plant at the site.
Yuen: “What I don’t understand is, you know, if you have a commercial owner, and another commercial venture that wants to use the property, let him go do it. Why should we do it? Why should we spend the money to become a commercial landlord?”
Yuen mentioned that at the time the board approved entering into the lease, in 1994, he went along with it, not having any idea that the property would be appraised at such a high value.
With the board appearing desperate to bail out of the lease, Yuen raised the idea that if the land was indeed worth its appraised value, “then somebody should pay us money for our option… We can assign the option, can’t we?”
Hino: “I don’t think we can… It’s a tight lease, that’s all I can say. It’s in favor of the landlord.”
Wilson noted several other problems in the general vicinity of Ma’alaea. Among other things, he said that the construction done on the Ocean Center had caused enormous run-off problems. “As a result, there are tons of silt pouring into the Ma’alaea harbor,” he said, “and we’re, expected, I guess, by the property owners that are responsible for this situation, to just dredge the harbor ourselves.” (No small part of that runoff probably came from the state’s own land, which, in the course of use by O’ahu Construction, was stripped of vegetation and leveled.)
Wilson asked that further action on the Ma’alaea lease be deferred until the board could have a fuller presentation on all issues relating to the state’s management of that area.
Matsumoto supported the idea. “Let’s not go from one stupid lease to another dumb revocable permit,” he said.
On that note, the board voted unanimously to defer DOBOR’s request.
Volume 8, Number 5 November 1997
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