Public lands; Banyan Drive

Authorizes the department of land and natural resources to issue
new leases to the existing Banyan Drive lessees, subject to
certain conditions.  (HB827 HD2)

HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  The purpose of this Act is to stimulate tourism
 2 in east Hawaii by creating incentives for reinvestment in the
 3 resort infrastructure of the Banyan Drive resort area in Hilo,
 4 Hawaii.  This Act provides authority for the board of land and
 5 natural resources to issue new resort leases to eligible existing
 6 lessees of the Banyan Drive resort area as an integral part of
 7 preserving and enhancing the tourism base of east Hawaii.
 8      This Act affects fifteen total leases in the Banyan Drive
 9 resort area.  Of these fifteen, there are:
10      (1)  Ten leases covering three resort facilities (Naniloa,
11           Hilo Bay, and Hilo Hawaiian);
12      (2)  Three leases for each of three apartment/condominium
13           facilities (Country Club, Bayview Banyan, and Reed's
14           Bay);
15      (3)  One golf course lease; and
16      (4)  One restaurant lease.
17      The legislature recognizes the unique and critical situation
18 facing the Banyan Drive resort lessees.  With the majority of the
19 Banyan Drive resort leases expiring in 2015, these lessees are
20 faced with the uncertainty of continued tenancy.  Under the

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                                     H.B. NO.           H.D. 2

 1 current laws, as the end of the lease term nears, the lessees
 2 will have less and less incentive to make major investments in
 3 the improvements and to ensure long-term maintenance needs are
 4 met.  As a result, deterioration of these assets will likely
 5 occur.
 6      The legislature understands that this Act would exempt one
 7 group of lessees from the overall public policy of making public
 8 lands available to the highest qualified bidder at auctions.
 9 Except under rare circumstances, state leases have a maximum term
10 of sixty-five years.  Upon the expiration of leases, the property
11 is made available to bidders via public auctions.  This method
12 ensures maximum revenue generation for the beneficiaries of the
13 public land trust.
14      The legislature finds, however, that in this specific and
15 unique case, an exception to this public policy is justified for
16 the resort leases.
17      The legislature finds that this exception is based on the
18 fact that the State owns virtually the entire Banyan Drive resort
19 area.  Because this represents approximately eighty per cent of
20 total overnight accommodations in east Hawaii, the State has a
21 responsibility to ensure its actions will not have a harmful
22 impact on the larger community as a whole.  Should the State
23 allow the Banyan Drive resorts to deteriorate, if and when the

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                                     H.B. NO.           H.D. 2

 1 tourism market rebounds, east Hawaii will not be in a position to
 2 promptly respond with adequate hotel space.  The negative impact
 3 would magnify as ancillary industries, dependent on the tourist
 4 market, would also suffer.  Approximately five hundred resort
 5 jobs would be affected, including many other indirect jobs.
 6      The legislature finds that the state and county governments
 7 are actively attempting to develop east Hawaii as a visitor
 8 destination resort marketed around the University of Hawaii,
 9 astronomy, geology/volcanos, eco-tourism, and culture and arts,
10 among other things.
11      The legislature also finds that while an exception is
12 justified to the public policy of making public lands available
13 to the highest bidder, the legislature strongly feels that the
14 resorts should not be subsidized.  It is the legislative intent
15 to support the efforts of the State and county and provide an
16 opportunity for the tourism market to rebound in east Hawaii by
17 ensuring that hotel rooms will be available.  If the current
18 downturn reflects a more long-term, structural shift in the east
19 Hawaii tourism market, then the State should see that the resort
20 market adjusts, including the possibility that the Banyan Drive
21 properties be put to other uses.
22      The legislature finds that prudent land management would
23 also dictate that an exception be made in this specific case.

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                                     H.B. NO.           H.D. 2

 1      The legislature further finds that as the landowner of
 2 virtually the entire Banyan Drive resort area, the State has an
 3 interest in preserving the significant value of these assets.  If
 4 the State allowed the resort assets to deteriorate, the land
 5 value will decrease, thus lowering the value of all state land in
 6 the area.  In addition, the resort facilities represent millions
 7 of dollars worth of improvements on state lands which should not
 8 be squandered.
 9      Furthermore, the legislature believes that resort use is the
10 highest and best use of these properties at this time.  Due to
11 the downturn in the tourism market, demand is very weak for
12 resort leases as evidenced by the lack of interest shown in the
13 vacant lot once occupied by the Orchid Isle Hotel.  As such, it
14 would be unwise to force these leases into auction and risk the
15 deterioration of the improvements and the loss of income should
16 the existing lessee decide not to continue.
17      SECTION 2.  Notwithstanding any law to the contrary, the
18 department of land and natural resources is authorized to issue
19 new resort leases to the existing Banyan Drive resort lessees,
20 subject to the following:
21      (1)  New leases shall contain current standard terms and
22           conditions and other conditions as deemed appropriate
23           by the department;

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                                     H.B. NO.           H.D. 2

 1      (2)  The department shall develop a process to determine the
 2           residual value on the tenant improvements for the
 3           duration of the lease term.  Should the department and
 4           lessee fail to agree, then the residual value shall be
 5           determined by arbitration, pursuant to procedures,
 6           terms, and conditions of the American Arbitration
 7           Association, with cost paid for by the lessee;
 8      (3)  If a new lease is issued to the existing lessee, the
 9           lease shall contain, at a minimum, the following:
10           (A)  Fair market rent, excluding tenant improvements,
11                at the resort use;
12           (B)  Percentage rent where gross receipts exceed a
13                certain level;
14           (C)  Assignment premium; and
15           (D)  A requirement to make substantial improvements to
16                the property.  As used in this subparagraph,
17                "substantial improvements" means any construction,
18                addition, alteration, modification, improvement,
19                or repair work undertaken on the leased property
20                equivalent to at least ten per cent of the
21                replacement cost of the existing improvements or
22                $2,000,000, whichever is greater;
23           and

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                                     H.B. NO.           H.D. 2

 1      (4)  New leases shall extend existing leases for a term not
 2           exceeding an additional thirty years.
 3      SECTION 3.  It is the expressed intent of this Act that the
 4 legislature not interfere with market forces by subsidizing these
 5 resort uses.  These provisions ensure that the State is receiving
 6 a fair return from public lands and that investment is made into
 7 the assets.
 8      SECTION 4.  The lands eligible for lease under section 2 of
 9 this Act are limited to those existing fifteen state leases with
10 infrastructure located along Banyan Drive that will be used for
11 resort purposes.
12      SECTION 5.  All costs for the issuance of a new lease shall
13 be paid for by lessees interested in acquiring new leases.
14      SECTION 6.  The department of land and natural resources may
15 promulgate rules to carry out the purposes of this Act, including
16 setting the terms for the completion of the substantial
17 improvements for each lease.
18      SECTION 7.  This Act shall take effect on July 1, 1999, and
19 shall be repealed on July 1, 2004.