The state of Hawai‘i has won a major preliminary battle in its years-long effort to condemn a parcel of vacant land at Ma`alaea Harbor that it has leased, at sky-high rates, since 1994.
At a hearing April 27, 2nd Circuit Judge Rhonda Loo determined that the value the state would have to pay to condemn the land would be based on the value of the land only, and not the land plus whatever rent remains to be paid for the term of the lease (which runs through 2024).
The lease dates back to September 1994, when the Department of Land and Natural Resources’ Division of Boating and Ocean Recreation entered into what may be, on a per-square-foot-basis, the costliest lease of privately owned land the state has ever entered into. If judged by the usefulness of the land over the intervening years, it’s the hands-down winner.
The parcel of leased land at Ma‘alaea Harbor on Maui is about an acre in size and, from the time the 30-year lease took effect until today, the state has made no improvements on the site. The only income it has generated has come from allowing a restaurant sign to be placed on the property for $18 a month for a short time and allow- ing part of the site to be used as a staging area when the Ma‘alaea Ocean Center was being built, which netted the state about $50 a month for a year.
That revenue pales when contrasted to what the state has been paying to the landowner, Don Williams. Initially, annual rent was set at roughly $150,000 a year. Under escalator clauses in the lease, it increased every two years, to $300,000 (not including excise tax), and then to $350,000. Although the lease rent was initially pegged to the land value, when land values sank in the late 2000s, the state was still stuck paying the high rent, thanks to a provision in the lease that says lease rents can never drop.
Since 2002, then, the state has been paying more than $1,000 a day in lease rent. On top of that, because the state is exempt from paying property taxes on land it owns or leases, Maui County has been deprived any tax revenue from the site for nearly a quarter of a century.
In June 2013 the state began efforts to condemn the property through eminent domain. The case had been set to go to jury trial on May 8, but that is postponed for now. The attorney representing Williams has said he intends to file an interlocutory appeal of Loo’s April 27 ruling.
Determining the basis on which the land’s value would be established was a key issue in the case. If the lease were to remain in place for the next seven and a half years, the state would be paying more than $2.5 million in additional payments to Williams, over and above the roughly $7 million in rent payments it has already made to him.
Attorney Robert Thomas, who represents Williams, disputed the state’s contention that the state should pay only the appraised value of the unencumbered land. The lease itself has value since it insures an income stream to Williams, he argued. By paying only for the fee, the state, he wrote, would eliminate “a valuable property interest (indeed, the most valuable aspect of ownership of the Ma‘alaea land is the right to receive $350,000 annual rent from the state)…”
In addition, Thomas asserted that the state had changed its position from the time of the original filing of the condemnation action. In 2014, he wrote, “the state argued that just compensation includes future rent payments which would have been paid by the state.”
Deputy attorney general Dan Morris disputed that. In the original filing, “the state condemned (and is only obligated to compensate for) the unencumbered fee interest rather than the leased fee interest or the income stream,” he replied.
Judge Loo agreed that whatever contentions the state had made in its earlier filings, the state’s condemnation law supports the determination that valuation should be based only on the fee-simple interest.
Appraisals
One of the issues sure to be litigated is the value of the land, both with and without the lease. According to the state’s motion to limit land valuation to the fee-simple interest (excluding lease value), a recent appraisal prepared for the state by the Hallstrom Group set the unencumbered fee value at $3.115 million — the same value that it came up with in 2013, when the state filed the condemnation action in 2013.
The land-plus-lease value, however, has increased since then. In 2013, it was estimated at $4.165 million, which is the amount the state has deposited with the court to cover estimated just compensation. Now, Hallstrom estimates the value of the leased-fee at $5.06 million, an increase of $895,000.
Not surprisingly, the appraisal done for Williams comes in higher. Robert Spangler, who appraised the property for Williams, adjudged the leased fee interest to be $7 million.
— Patricia Tummons