Lease Agreement No. B-94-4, between Don Williams, lessor, and the state of Hawai`i, lessee, covering a little more than an acre of land at Ma`alaea, Maui, sets forth the conditions under which the state Division of Boating and Ocean Recreation may use the property. Here are some of the lease conditions:
Option to Purchase
The state may purchase the property within five years of the effective date of the lease (September 1, 1994). The purchase price is to be the greater of either $1.88 million or the fair market value of the property at the time the option is exercised.
Rate of Return
Williams negotiated a rental rate that is based on an assumed investment of $1.88 million. Under the lease terms, Williams is assured at least an 8 percent annual return on this amount (even though his actual investment in the property appears to be $1.35 million, or more than half a million dollars less than the dollar value on which the rate of return is based).
The 8 percent rate means the state is paying $150,400 a year for the land.
Eight percent is on the high side of rates of return in the present market. According to one of the real estate appraisers hired by the state in July of 1996, the current rate of return of commercial and industrial properties ranges from 6 percent to 9 percent. One knowledgeable source told Environment Hawai`i that 8 percent is thought to be pretty good for leases of the most desirable commercial properties on O`ahu.
Nor is 8 percent the maximum return Williams is allowed under the lease, terms of which were negotiated by the Division of Boating. DOBOR has to pay an amount equal to an 8 percent rate of return (or better than that, if the “then-prevailing rate of return of land similar in type and location” exceeds 8 percent), based on the fair-market value of the premises. In no case can the rent fall below “the annual rental amount in effect during each of the two years immediately preceding the current two-year segment.”
In other words, Williams benefits from any rise in the fair market value of the property, but he is protected against any decline. And if the rental rate should be adjusted upward at any time (based on the two-year rental renegotiation clause in the lease), that new rental rate would become the new base below which the rent could never sink, from the time the new rate took effect until the expiration of the lease, in the year 2024.
No Cancellations
The lease contains no provision for cancellation, other than by the state exercising its option to purchase. However, a boilerplate provision in the lease concerning condemnation could be construed as giving the state the option to acquire fee title to all or part of the property through condemnation.
Owner Approval
The lease requires Williams’ approval for any sublease. (However, there is no indication in DOBOR files that Williams’ approval was sought for the Fresh Island Fish sublease, or the more recent sublease to Ma`alaea Triangle Partnership.)
Williams’ approval is also required if the state or any of its sublessees wants to “construct, place, maintain or install on the premises any building, structure, or improvement of any kind of description.” The lease requires the state to provide Williams with final plans and specifications for any such improvements and to await Williams’ written approval before undertaking them.
Fair and Reasonable?
The first two-year rental period expired on August 31, 1996. On May 2, 1996, Williams wrote Larry Cobb, suggesting that he had arrived at a “fair and reasonable adjustment to rent” that would raise the annual payments to $186,532.50, up $36,132.50 from the previous rate.
“You will remember,” Williams wrote, “that the property was appraised in 1994 for $2,100,000 and rate of return (ROR) estimates at that time were between eight and nine percent. If at that time we would have calculated rent from those estimates, $2,100,000 and say 8.5%, annual rent would have been $178,500. In the spirit of cooperation and to accommodate your needs at that time, we agreed upon an arbitrary value and ROR of $1,880,000 and 8%, resulting in annual rent of $150,400 for two years. That accommodation saved DLNR approximately $28,100 per year, or $56,200 over two years.”
Williams then explained how he had arrived at the “fair and reasonable adjustment.” Using the $2.1 million appraisal as the basis for calculating the land’s value in 1994, he added $94,500 in consumer price index adjustments (4.5 percent total for two years), boosting the land’s value to $2,194,500. With a rate of return of 8.5 percent, the annual rent would come to $186,532.50.
By accepting this “fair and reasonable adjustment” (a phrase Williams repeated), “the time and expense of another appraisal” could be avoided, Williams noted.
Parsons responded with a polite no. “We appreciate your efforts to facilitate the rental reopening process,” he wrote Williams on May 7. “However, it is the position of the state that any increase in lease rent must be determined by an independent appraiser.”
But while Parsons may have held the line, Cobb, his property manager, was edging over it. A letter from Williams to Cobb on Friday, May 10, refers to a meeting Williams and Cobb had two days earlier — or, to put it in perspective, just a day after Parsons declined Williams “fair and reasonable” offer.
“Thank you for your time and input Wednesday regarding your interpretation of Section 2.1 of the lease,” Williams wrote, referring to the language concerning rental renegotiation. “After our review, we agree with you that the world ‘and’ on line 16, page 5 of the lease should have been the word ‘or,’ to enable us to simply mutually agree in writing on rent and other charges.”
The difference is substantial. As written, the lease provides that if either party does not accept the independent appraisal and the parties cannot otherwise agree on a rate of return, the fair market value of the property, or both, then each party shall hire its own appraiser, with both these appraisers selecting a third if the differences in appraised valuation are more than 10 percent apart. The three appraisers are then to settle on a value for the property by majority vote. (If the difference is less than 10 percent, the two appraisals are to be averaged.)
To address this difficulty, Williams proposed inserting a new paragraph in the lease, in the interests of “efficiency and effectiveness.” The new paragraph would allow the parties to “determine the rental amount for the next two year rental segment by good faith, mutual agreement in writing, but in all cases subject to the minimum rental requirement.” In other words, the “time and expense” of appraisers could be avoided.
“We believe the addition of this language will allow us both to save time and money in the future,” Williams wrote, while using “a method of rent determination similar to the method we used at the commencement of the lease.”
Once again, Williams’ offer appears to have been rejected, although there is no further correspondence in DOBOR files on the subject.
In August, Larry Cobb left the Division of Boating and Ocean Recreation to accept a post in the property management division of the Department of Transportation. There has been no adjustment of the rental rate since then.
When David Parsons was asked about the current status of rental negotiations, he replied: “There are no ongoing negotiations.”
When Williams was asked about the same subject, his reply was, “No comment.”
Volume 7, Number 5 November 1996
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