The owner of the largest lease issued by the state at Ke`ehi Lagoon is hundreds of thousands of dollars behind in its lease payments. The debt has been accumulating for the more than two years. On December 28, 1994, the state put the tenant on notice that the lease would be cancelled unless payment was made within 60 days.
Since then, the leaseholder, Ke`ehi Marine, Inc., has attempted to keep lease payments current, as well as payments on a month-to-month revocable permit. But according to statements made by Ke`ehi Marine’s attorney to the Board of Land and Natural Resources, prospects for full payment of the entire amount owed may still be many months away.
Late Notice
The Land Board first learned of the accumulating debt at its meeting of February 24, 1995. At that time, the Division of Boating and Ocean Recreation, responsible for managing the lease and the revocable permit, came to the board with a request to extend the month-to-month R.P. State law requires that the Land Board consent each year to renewal of revocable permits, and Ke`ehi Marine’s permit, covering the use of submerged lands for boat slips, was up for renewal.
DOBOR’s report to the board, addressing the matter of the permit extension, did not give particulars of the delinquency. The report did say, however, that “The applicant is currently seriously delinquent on rental payments under this revocable permit, as well as the adjacent premises demised under the terms and conditions of Harbor Lease No. H-70-14… The deadline to remedy the breach expires on February 27, 1995. If this matter is not satisfactorily resolved by this date, action will be initiated to terminate the lease and revocable permit.”
In his oral presentation to the Land Board, David Parsons, DOBOR administrator, described the agenda item as “a little bit out of the ordinary.” DOBOR, he said, had been “working with the applicant to resolve the delinquency,” which, he said, was the result of “unique financial problems.”
When Parsons informed the board that the amount owed was “well over $300,000,” board members appeared stunned. O`ahu board member Michael Nekoba, an accountant, asked Parsons, “How could it get so high?… Why didn’t we jump on it earlier?”
‘Not…Reasonable’
Parsons told the board that it really wasn’t his division’s fault. For the first two years after DOBOR had returned to the DLNR’s administrative umbrella from the Department of Transportation, the DOT Harbors Division had continued to handle the Boating Division’s accounts receivable, Parsons said. “They had had problems in getting specific information to us.” According to Parsons, the delinquency was not brought to DOBOR’s attention until October 1994.
At-large board member Colbert Matsumoto remarked, “That’s not a reasonable explanation… I don’t understand it… How could eighteen months go by with no action taken on the arrearages?”
Charles McKay, attorney for Ke`ehi Marine, told the Land Board the problems that the company had encountered with respect to managing the Ke`ehi lease. In the first place, he said, his client had “inherited” the operation from the former owners of Ke`ehi Marine. “Stock in the company was pledged as security in an inter-company loan” arranged between two Japanese corporations, McKay told the board. When the debtor company could not pay off the loan, the creditor company, Takayasu Kanko, took over the pledged property.
According to McKay, the Ke`ehi operation was not generating as much income as it should because income from subleases was set too low. “We can’t revisit them retroactively, but are renegotiating them as they expire,” he said.
His client, McKay said, “was on the brink of getting its finances together [to pay off the delinquency] when the Kobe earthquake occurred.” Takayasu Kanko owned hotels in nearby Osaka, and Japanese banks frowned on the corporation taking money to the United States while Kobe was still in rubble, McKay said.
An unhappy Land Board instructed Parsons to report by March 24 on the delinquency.
Whitewash
Parsons’ statements to the Land Board on February 24 did not describe the full extent of the problem. As revealed by the records obtained (with great difficulty) by Environment Hawai`i, at the time of the February 24 meeting, the amount owed by Ke`ehi Marine was more than $345,000. (The balance due on February 1, 1995, was $386,768. Payment of $45,000 was made shortly before the board meeting, but when late charges in excess of $3,800 were added to the tab, the outstanding balance stood at around $345,600.)
The arrearage had been accumulating at least two years. A balance sheet prepared by DLNR’s Fiscal Office indicates that from January 1993 to January 1995, quarterly lease payments had not been made. (Annual rent on the leased premises comes to $162,500 and is to be paid in four equal quarterly installments of $40,625. Rent on the revocable permit is an additional $4,935 per month.) On January 1, 1995, the total amount owed by Ke`ehi Marine on its lease and revocable permit stood at $423,027.71.
Promises
On March 24, 1995, the Land Board once again discussed the Ke`ehi Marine lease and revocable permit. This time, the Land Board had before it a staff report recommending that the lease and revocable permit be cancelled. Although the report was still silent on the total amount of the delinquency, it did state that “from January 1993 to January 1995, no quarterly lease payments were made.”
DOBOR Administrator Parsons did not attend the March meeting. Representing that agency was Larry Cobb, its property manager. McKay again attended on behalf of his client, Ke`ehi Marine, Inc.
According to McKay, his client had made a payment of $18,000 in March (which, after the monthly rent and late charges are factored in, would have reduced the total balance by roughly $10,000) and was attempting to keep current “pending payment of the arrearage” in full.
McKay said his client wanted to make a “lump sum” payment to eliminate the delinquency, but for this, it would need to obtain a commercial loan. Bankers naturally wanted to know the company’s anticipated expenses during the time it would take to repay the loan, he said, but Ke`ehi Marine could not provide them with this information, since the lease is due to be renegotiated in February of 1996. In other words, until Ke`ehi Marine could go to the bankers with a more definite idea of what their rent payments will be to the state, it would be impossible for Ke`ehi Marine to get the money to pay off the outstanding balance owed.
McKay and Cobb both suggested to the Land Board that it might be appropriate to begin the process of rent renegotiation now rather than wait until next year. McKay went so far as to suggest that it “would help if the lease term was extended” beyond its present expiration date of 2016 — “but it is premature to ask for this,” he acknowledged.
In the end, the board deferred action. No date was set for reconsideration of the matter. According to Parsons, Ke`ehi Marine is to come up with a payment plan, while the state will be obtaining a real estate appraisal to be used in figuring the rent owed for the 1996-2006 period.
Imperfect Match
The lease held by Ke`ehi Marine was first issued in 1971 to Ke`ehi Drydock Corp. Term of the lease is 45 years, so it will expire in the year 2016, unless cancelled or extended by the Land Board. The leased area occupied is 162,305 square feet (approximately four acres) of dry land and 192,306 square feet (nearly five acres) of submerged land in the Ke`ehi Lagoon. Moorings for more than 150 boats have been built on the submerged land.
The dry land is used for drydock facilities, a convenience store, a clubhouse, marine fuel sales, Atlantis submarine offices, Ali`i Divers shop, and a host of retail establishments, including vendors of vacuum cleaners, paints, carpentry and upholstery services. While the Land Board is supposed to consent to all subleases, the list of subleases approved by the board does not match perfectly with a survey of present tenants at the Ke`ehi Marine leased site.
The revocable permit covers about 40,000 additional square feet of submerged land, most of which is used for 15 slips just beyond the reach of the leased area. According to Parsons, “after the lessee built the slips [in the area under lease], it came back in with a request to increase the number of slips. We could not amend the lease” — since it had been issued to the highest bidder, amending it would not be legal — “so an RP was issued” for the extra area.
From such records as the DLNR has on the subleases, Ke`ehi Marine receives rental income of more than $20,000 a month from its tenants. Rental income from the boat moorings on submerged lands under lease and revocable permit are not counted in this figure. According to one staffer at the Division of Boating and Ocean Recreation, with the prevailing mooring rental rates of $4 to $5 a linear foot per month at Ke`ehi Lagoon, a conservative estimate of Ke`ehi Marine’s income slip rentals would be in excess of $25,000 a month.
Where’d It Go?
Altogether, then, Ke`ehi Marine, Inc., may be, and probably is, receiving substantially more than $35,000 a month — $420,000 a year — from the rental of state-leased land, submerged and dry. Its annual obligations to the state for both the lease ($162,500 per year, to be paid quarterly) and the revocable permit ($4,935 per month), come to $221,720. For the entire year of 1994, however, Ke`ehi Marine paid the state just $27,000.
At the start of 1994, Ke`ehi Marine already had an outstanding balance owed to the state of $149,382, according to a statement of account prepared by DLNR’s Fiscal Office on the basis of information provided to it by DOBOR. With unpaid rents and late charges for the year are added to that amount, by December 31, 1994, the balance stood at $377,467.
The state is not the only creditor. As of April 17, according to the Grace Nakamura of the City and County of Honolulu Real Property Tax Collections Office, Ke`ehi Marine, Inc., owed the city $53,563 in unpaid taxes over the last three years.
— Patricia Tummons
Volume 5, Number 11 May 1995
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