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. (SD1)

HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 3
TWENTIETH LEGISLATURE, 1999                                S.D. 1
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  The legislature recognizes the unique and
 2 critical situation facing resort area lessees on Banyan Drive in
 3 Hilo, Hawaii.  With the majority of the leases expiring in 2015,
 4 these lessees are faced with the uncertainty of continued
 5 tenancy.  Under the current laws, as the end of the lease term
 6 nears, the lessees will have less and less incentive to make
 7 major investments in improvements to their infrastructure and
 8 ensure the long-term maintenance of their facilities.  As a
 9 result, deterioration of the infrastructure is likely to occur.
10      Under this Act, one group of lessees would be exempted from
11 the overall public policy of making public lands available to the
12 highest qualified bidder at auctions.  The legislature finds that
13 except under rare circumstances, state leases have a maximum term
14 of sixty-five years.  Upon the expiration of leases, the property
15 is made available to bidders via public auction.  This method
16 ensures maximum revenue generation for the beneficiaries of the
17 public land trust.  The legislature believes, however, that in
18 this specific and unique case, an exception to this public policy
19 is justified for the Banyan Drive lessees.

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                                     H.B. NO.           H.D. 3
                                                        S.D. 1

 1      This exception is based on the fact that the State owns
 2 virtually the entire Banyan Drive resort area, which represents,
 3 approximately eighty per cent of total overnight accommodations
 4 in east Hawaii.  Banyan Drive is an integrated resort area.  All
 5 of the existing structures were built as hotels although not all
 6 are in hotel use at this time.  It is important that the entire
 7 Banyan area be maintained as a resort area.  Because the State
 8 controls so much of the hotel space in east Hawaii, the State has
 9 a responsibility to ensure that its actions will not have a
10 harmful impact on the larger community as a whole.  Should the
11 State allow the Banyan Drive resort area to deteriorate,
12 including the structures not currently used directly for hotel
13 purposes, if and when the tourism market rebounds, east Hawaii
14 will not be in a position to promptly respond with adequate hotel
15 space.  The negative impact would magnify as ancillary
16 industries, dependent on the tourist market, would also suffer.
17 Furthermore, approximately five hundred direct resort jobs would
18 be affected, as well as many other indirect jobs.
19      The legislature finds that while an exception is justified
20 regarding the public policy of making public lands available to
21 the highest bidder, the legislature strongly feels that the
22 lessees should not be subsidized.  It is the intention of the
23 legislature to support the efforts of the State and the County of

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                                     H.B. NO.           H.D. 3
                                                        S.D. 1

 1 Hawaii and provide an opportunity for the tourism market to
 2 rebound in east Hawaii by ensuring that hotel rooms will still be
 3 available.  If the current downturn reflects a more long-term
 4 structural shift in the east Hawaii tourism market, then the
 5 State should see the resort market adjust, including the
 6 possibility that the Banyan Drive properties be put to other
 7 uses.
 8      The legislature further finds that prudent land management
 9 dictates that an exception be made in this specific case.  As the
10 landowner of virtually the entire Banyan Drive resort area, the
11 State has an interest in preserving the significant value of
12 these assets as the resort and other facilities represent
13 millions of dollars worth of improvements on state land.  Should
14 the State allow these assets to deteriorate, the land value will
15 decrease, thus lowering the value of all state land in the area.
16      The legislature believes that resort area use is the highest
17 and best use of these properties at this time.  Due to the
18 downturn in the tourism market, demand is very weak for these
19 leases as evidenced by the lack of interest shown in the one
20 vacant lot where the former Orchid Isle Hotel once stood.  As
21 such, it would be unwise to force these leases into auction and
22 risk deterioration of the improvements and loss of income should
23 the existing lessees decide not to continue.

Page 4                                                     827
                                     H.B. NO.           H.D. 3
                                                        S.D. 1

 1      Lastly, the legislature finds that the state and county
 2 governments are actively attempting to develop east Hawaii as a
 3 visitor destination area marketed, among other things, around the
 4 University of Hawaii, astronomy, geology/volcanoes, eco-tourism,
 5 and culture and the arts.
 6      The purpose of this Act is to stimulate tourism in east
 7 Hawaii by creating incentives for reinvestment in the resort and
 8 other infrastructure of the Banyan Drive resort area in Hilo,
 9 Hawaii.  This Act authorizes the board of land and natural
10 resources to issue new leases to existing lessees of the Banyan
11 drive resort area as an integral part of preserving and enhancing
12 the tourism base of east Hawaii.
13      This Act affects fifteen total leases in the Banyan Drive
14 resort area.  Of these fifteen leases, there are ten leases
15 covering three resort facilities (Naniloa, Hilo Bay, and Hilo
16 Hawaiian), three leases for each of three apartment/condominium
17 facilities (Country Club, Bayview Banyan, and Reed's Bay), one
18 golf course lease, and one restaurant lease.
19      SECTION 2.  Notwithstanding any law to the contrary, the
20 department of land and natural resources is authorized to issue
21 new leases to the existing Banyan Drive lessees, subject to the
22 following:
23      (1)  New leases shall contain such conditions as deemed

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                                     H.B. NO.           H.D. 3
                                                        S.D. 1

 1           appropriate by the department to carry out the purposes
 2           of this Act; and
 3      (2)  The department shall develop a process to ensure the
 4           assumption of no market demand for the leases holds
 5           true.  As such, the department may issue a request for
 6           proposal or other means to ensure that a fair, open,
 7           and competitive process is used to determine
 8           competition.  This process shall take into account any
 9           residual replacement value of tenant improvements for
10           the duration of the lease term prior to initiating the
11           request for proposal process.  The residual placement
12           value will be negotiated and agreed to between the
13           lessee and the lessor.  If the residual replacement
14           value is agreed upon, the department may initiate a
15           request for proposal process to reveal whether there
16           are other entities seriously interested in obtaining
17           the lease.  If this process shows a willing and able
18           bidder, the department would go out for auction with
19           the understanding that the successful bidder would pay
20           the existing lessee the residual replacement value of
21           the improvements in full at closing.  If there are no
22           qualified entities, or if the lessee is the successful
23           bidder, then a new lease may be issued to the existing

Page 6                                                     827
                                     H.B. NO.           H.D. 3
                                                        S.D. 1

 1           lessee for a term not to exceed fifty-five years;
 2      (3)  If a new lease is issued, then the following may be
 3           contained in the lease:
 4           (A)  Fair market rent, excluding tenant improvements;
 5           (B)  Percentage rent where gross receipts exceed a
 6                certain level;
 7           (C)  Assignment premium; and
 8           (D)  Requirements to improve the property.
 9      SECTION 3.  It is the expressed intent of this Act that the
10 legislature not interfere with market forces by subsidizing these
11 resort area uses to ensure that the State is receiving a fair
12 return from public lands and that investment is made into the
13 infrastructure associated with the leases.
14      SECTION 4.  The lands eligible for lease under section 2 of
15 this Act shall be limited to those existing fifteen state leases
16 with infrastructure located in the Banyan Drive resort area.
17      SECTION 5.  All costs for the issuance of a new lease,
18 including determining the residual replacement value and the RFP,
19 shall be paid for by lessees interested in acquiring new leases.
20      SECTION 6.  This Act shall take effect on July 1, 1999, and
21 shall be repealed on July 1, 2004.