The state Division of Boating and Ocean Recreation, an arm of the Department of Land and Natural Resources, is charged with keeping the records of what is owed to the state by tenants at the state’s small boat harbors. Tenants include owners of boats who rent space at the harbors by the foot, and who might pay as little as $14 a month for the privilege. They also include much larger accounts, such as Ke`ehi Marine, Inc., or the Hawai`i Prince Hotel, which, according to David Parsons, DOBOR administrator, pays about $200,000 a year for the lease of space at the Ala Wai harbor. (The hotel uses the space for its makai drive-up entry.) Money received from those rents is placed into the Boating Special Fund, which is supposed to pay for improvements and upkeep of facilities at small boat harbors throughout the state.
DOBOR was placed under the administrative umbrella of the DLNR in 1992. Before that, it had been under the state Department of Transportation. Until January 1993, however, the DOT Harbors Division continued to handle DOBOR’s accounting tasks. At that time, the DLNR Fiscal Office took over DOBOR accounts, and the DOT boxed up many of the physical records involving Small Boat Harbor finances and had them moved to DOBOR’s new quarters, in the Melim Building on Queen Street in downtown Honolulu.
All this may explain, if not excuse, the poor condition in which Environment Hawai`i found Ke`ehi Marine’s fiscal record. But nothing seems to explain the absence of correspondence in the lease files relating to the determination of lease rent, the delay (of more than a year) in posting of charges for back rent owed, and other curious developments reflected in the account ledger. Answers might lie in records that still remain “under the ramp at Pier 11,” suggested Larry Cobb, DOBOR property manager. That is the site of a storage area used by the Department of Transportation Harbors Division. In any case, DOBOR has no inventory of what has and has not been transferred to its new office from the Department of Transportation, making it difficult, if not impossible, to reconstruct the history of its accounts.
Gaps
Environment Hawai`i looked at the past 11 years of Ke`ehi Marine’s account with the state. No records exist — or at least none was produced by DOBOR — for 28 months in that period.
Rental for the first 15 years of the 45-year lease was set when the lease took effect in 1971. After that, new rental rates were to be set at 10-year intervals.
Initial lease rent was $39,600 a year, payable in four quarterly installments. Rent for the adjoining area under revocable permit was $1,195, payable monthly. Late charges of 1 percent were assessed on balances that remained unpaid after 30 days. When the lease was transferred in 1984, payments on both the lease and the revocable permit appear to have been current.
On February 1, 1986, the rent was to have been adjusted upward, according to terms of the lease. On February 3, 1986, the state Department of Transportation informed Ke`ehi Marine that an appraisal done for the state established an annual rental of $162,564 as a fair rate for the 1986-1996 lease term.
Files at the Division of Boating and Ocean Recreation indicate that Ke`ehi Marine did not respond to the state’s offer until May 14, 1987, when Ke`ehi Marine’s attorney (and part owner), Renton Nip, informed the DOT that the rental proposed was unacceptable. The DOT advised Nip “to engage your own appraiser,” as set forth under terms of the lease.
Self-Appraisal
Instead, Nip appears to have made his own appraisal. In a letter dated February 3, 1988, Nip stated that the lease rent should not be based on “fair market value” of the parcel, but on its “fair market rental.” With use of the property limited “to a marine railway for boat repairs, a marine retail store…, a marine, and a clubhouse,” the rental value would be less than that for a parcel where use was unrestricted, Nip argued. Instead of a four-fold increase in rent, a more appropriate rate of increase would be 13.9 percent — “a rate commensurate,” Nip wrote, “with the increase in number of vessels moored on the water on O`ahu.”
While the lease does list the allowed uses of the property, in fact, holders of sub-leases from Ke`ehi Marine engaged in a far broader range of activities. This was noted on a routing slip attached to Nip’s letter, where one DOT staffer observed that in drafting their response, “Maybe we should mention his sub-lessees’ businesses: 1) vacuum sales; 2) marine magazines; 3) yacht broker.” (The list has grown since then.)
The dispute over the new lease rent escalated. On March 21, 1988, Nip wrote Edward Y. Hirata, then-director of the Department of Transportation, a “Dear Ed” letter, thanking him for having met the previous day to discuss lease rental questions. “We appreciate your intention to discuss the question of methodology with personnel in the department and look forward to hearing from you with regard to the results of your discussions with them.”
Vapor Trails
Hirata’s intercession, if any, cannot be reconstructed from the paper trail available at DOBOR offices. In any case, by June 15, 1988, Nip was notified — in a letter signed on Hirata’s behalf by Dan Kochi, DOT deputy director for Harbors — that he had 10 days to tell the DOT if he would be hiring his own appraiser. Otherwise, Kochi wrote, “we will proceed in billing you the fair market value of the premises …, retroactive to February 1, 1986.”
Nip responded to Hirata on July 1, stating his intention to hire an appraiser. “Alternatively, we are still willing to attempt to negotiate a settlement… [W]e propose that Ke`ehi Marine, Inc., pay 75 percent of the rental that the Department of Transportation has sought to impose, effective immediately.”
Nip’s 75 percent offer was rejected later that month, with the DOT instead demanding that Nip present the report of the appraiser of his choice by September 30, 1988. When that deadline passed with no response from Nip, the Department of Transportation appears to have taken (temporarily) a firm stand. It did not forward to the Land Board the necessary consents to sublease for six of Ke`ehi Marine’s tenants. (That, however, did not stop the tenants from occupying the premises, nor Ke`ehi Marine from collecting rent.) And on October 27, 1988, the sum of $359,415 was billed to Ke`ehi Marine’s account with the state. As mysteriously as it appeared, two months later, it disappeared — with interest. On December 28, 1988, a total of $390,222 was expunged from the outstanding balance, giving Ke`ehi Marine a credit of $27,210.35.
Larry Cobb, DOBOR property manager, told Environment Hawai`i that the $359,415 was probably the amount of back rent and late charges owed under the new rental rate, retroactive to February 1, 1986. (The difference between the state’s proposed new rate and the old rate, which had continued to be paid, came to $10,247 for the lease. A proposed change in the rent for the revocable permit put that at $2,278 a month — or an increase of $760 over the previous rate. The 32-month total for back rent on the R.P. and lease would have come to $352,224. Late charges probably would have accounted for the additional $7,191.)
A code alongside the ledger entries for both the billing and the credit refers to what the DOT’s accountants called “comp sheets” — the form that is given to bookkeepers, directing them to make adjustments to one or another account. With no paperwork in the lease file to explain the adjustments, a search was made at DOBOR offices for the books of sequentially numbered comp sheets, which might have given some indication as to who authorized the adjustments and why. Since the DOT shipped the boxes of records to DOBOR, however, the comp sheets for 1990 appear to have become lost. The paper trail all but runs cold at this point.
Agreement — and Sale
From October 1988 until February 1990, the lease file contains little correspondence to indicate anything was occurring to work out a lease rent acceptable to all parties. One of the few clues lies in a May 31, 1989, letter from the DOT to one Jon Yamaguchi. That letter, from DOT property manager Art Delos Reyes, suggests that Yamaguchi’s services as an arbitrator may have been used to settle the dispute.
On December 2, 1989, the sum of $354,066.07 was billed to the Ke`ehi Marine account. Once more, there is no record in DOBOR lease files to explain what this amount represented, or how DOBOR arrived at it. If it represents 46 months of back rent accumulated since February 1, 1986, then the average monthly difference between what was paid and the negotiated amount owed was $7,700.
In other words, the state, whose appraisal indicated the property was worth $162,564 a year, appears to have settled on an annual rental fee of about $130,000 — at least for the period that Nip was involved in ownership of the company.
Despite the protracted rental negotiations, Ke`ehi Marine was still, in December 1989, unprepared to pay its bill. Instead, its owners were negotiating a sale of the company to a Japanese corporation, Arudy.
On February 5, 1990, Nip asked that the invoice for bank rent ($354,066.67) be deferred until February 28. “We understand that there will be a 1 percent charge for any amounts that are due after February 1, 1990,” he added — indicating thereby that in the three months since the invoice was posted on December 2, the state had not assessed any late fees. (At 1 percent a month, three months of late charges on the $354,066 balance would have totaled more than $10,700.)
At the same time, Nip and his co-owners of Ke`ehi Marine were negotiating terms of the sale of the company (whose chief asset was the lease of state land) to Arudy U.S.A., Inc., a corporation registered in Hawai`i but owned by Japanese nationals. On March 2, 1990, just days after the sale was consummated, some $395,000 of the outstanding balance of $401,244 was paid. With the state forgiving $3,952 more in additional late charges, the balance due when Arudy began paying the bills was the equivalent of just one month’s billing on the revocable permit: $2,278.
Raising the Rent
The ledger report on the Ke`ehi Marine account with the state shows that on January 1, 1990, the billings charged to the lessee for lease rent increased to $32,500 per quarter, or $130,000 per year.
The Division of Boating and Ocean Recreation could not provide Environment Hawai`i with any account records for the two years from July 1, 1990, to June 30, 1992. At some time in that period (specifically, according to DOBOR’s Cobb, on February 1, 1991), the lease rent was increased more than 40 percent to $45,560 per quarter ($162,500 per year). On August 1, 1991, the monthly rent on the revocable permit rose as well, to $4,935, or more than double the 1990 rate of $2,278.
Lease conditions do not provide for phased-in rental rates. Rather, the lease rents are to be fixed throughout the periods set forth in the lease. When asked about the discrepancy in the Ke`ehi Marine lease, Cobb stated that for the 10-year period from 1986-1996, the division agreed to an initial five-year rental period of $130,000 a year, with the second five-year term set at $162,500.
Wouldn’t this phased-in rent constitute a change in lease conditions, Cobb was asked. “We’re allowed a little bit of flexibility in the lease,” he responded. “We can make changes in the lease regarding permitted uses, for example — to a certain extent.” Asked specifically whether DOBOR would be able to change the rent periods fixed by the lease, as it did in the Ke`ehi Marine case, Cobb responded: “I don’t know if that would be a change for which board approval would be needed.” In any event, Cobb stated, Land Board consent to the change in the rental periods was not sought or received.
Falling Behind
DOBOR records for the second half of 1992 do not show any serious delinquencies on Arudy’s account. However, Ke`ehi Marine’s management of the area under lease became the subject of growing complaints. In September 1992, one of the company’s tenants wrote the DLNR’s Division of Land Management inquiring if it would be possible for him to lease the land directly, since, “I suspect that Arudy is going to go either out of business or bankrupt in the near future.” (He was informed by DOBOR’s Parsons that, “If events similar to those described in your letter do occur, it is not likely that current sublessees will be offered individual leases for their areas. It is our position that the entire premises are best operated as an integrated unit under one management.”)
By October 1992, Arudy’s several creditors (including the state) received letters informing them that all stock in Ke`ehi Marine had been acquired by Takayasu Kanko Company, Ltd. The letters, signed by Hiroyuki Yanagimoto, Ke`ehi Marine’s new president, give an idea of the prior operator’s management style. “[M]any of the records of Ke`ehi Marine are either incomplete or missing,” Yanagimoto wrote. “In order to expedite our review and the payment of appropriate and verifiable debts, we would appreciate it if you would send us copies of all outstanding and unpaid invoices.”
Less than two months later, the state Division of Boating and Ocean Recreation, by this time an agency of the Department of Land and Natural Resources, sent to Ke`ehi Marine a “notice of termination” of the lease and the revocable permit. The notice, dated December 11, 1992, reports that the company’s unpaid balance was $61,479.55, of which $55,959.95 was more than 30 days delinquent.
Hollow Threat
Between the time that notice was mailed and April 1, 1993, the outstanding balance was reduced to zero. Soon thereafter, however, the unpaid balance began growing again, with no significant payments to be made for almost two years. On June 10, 1993, the state sent, by certified mail, another notice of termination to Ke`ehi Marine, this time noting an unpaid delinquency of $50,975.60, not counting charges for June. Payment was demanded within five business days, with failure to pay resulting “in termination of all privileges with the Boating and Ocean Recreation Division and your account being referred to a collection agency.” The letter was signed by Stephen L. Thompson, DOBOR’s O`ahu manager. (According to Thompson, the Boating Division stopped sending out all such notices, drawn up on printed form letters, shortly after this. Thus, not only did DOBOR not notify Ke`ehi Marine of its mounting delinquency for a period that lasted nearly two years, it did not notify any of its other tenants who may have been delinquent.)
No further action to collect from Ke`ehi Marine appears to have been made until December 1994. By then, the debt had multiplied more than seven-fold.
In a recent telephone interview, Parsons, administrator of DOBOR, said he knew nothing of Thompson’s efforts to collect payment on the Ke`ehi Marine account. The problem, he said again, was with the computer system operated by the Harbors Division of the Department of Transportation, which system was, in his words, “sporadic in nature.”
— Patricia Tummons
Volume 5, Number 11 May 1995
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