A Hilo business owner is pursuing legal action against the state after the Board of Land and Natural Resources voted to change the terms of his lease agreement.
Back in 2018, Gov. David Ige signed Act 149, a bill that would allow lessees of land within the Kanoelehua Industrial Area in Hilo to extend their leases by up to 40 years so long as they made improvements to the properties. The bill was intended to combat the increasing decrepitude of the area, because lessees were unwilling to make needed renovations as their leases with the state approached termination.
Among those lessees who sought an extension was Michael Shewmaker, a partner in 69 Railroad LLC, a business entity that operates warehouses on a parcel on Railroad Avenue. After a long period of delays, the BLNR approved in February a development agreement submitted by Shewmaker’s business partner, and confirmed that the 30-year extension would not include new terms.
“We can’t update this lease, so we’re going to be continuing the 1961 terms for another 30 years from 2026, (the lease’s current expiration date),” Kevin Moore, assistant administrator for the DLNR Land Division, said in February.
Ron Kim, attorney for Shewmaker, told the Tribune-Herald that final negotiations continued through April, and the partners even received copies of a lease extension agreement signed by the state deputy attorney general.
“It had their signature on it, we signed it and got it notarized and sent it back for case to sign,” Shewmaker told the Tribune-Herald on Monday.
But not long afterward, Kim said the Department of Land and Natural Resources Land Division informed Shewmaker that following a review of the February agreement by the attorney general’s office, the matter would go back to the BLNR for amendments.
Land Division Administrator Russell Tsuji on Friday presented those amendments to the BLNR.
Tsuji said the 61-year-oldlease would be extended 30 more years and therefore should have its terms revised to be up to modern standards.
“This lease originally started in 1961, probably right around the time I was born, so it’s quite old, and its terms and conditions are sometimes not up to current standards,” Tsuji said during the meeting.
Tsuji added that two other leases that have been extended in the Kanoelehua Industrial Area also had their terms updated, saying that he feels that all leases granted such an extension should be on equal terms.
Tsuji also said the Land Division was scrutinized by a House investigatory committee earlier this year, which concluded that the division should be bringing its state land leases up to modern standards.
“It seems like a reasonable thing on the surface,” Shewmaker said, but added that the most pertinent change to the lease terms involves rent participation, which he called “a thinly veiled term for raising rent.”
Specifically, Shewmaker said the Land Division is seeking a cut of sublease rent generated from the property. The warehouses on the property are subleased to 11 sublessees, who pay rent to 69 Railroad LLC. Shewmaker said Land Division has proposed taking a cut of 30% to 40% of that sublease rent, in addition to the annual rent of the lease.
Shewmaker said that proposal is intolerable, particularly on top of the ballooning rent already owed to the state. In 2001, he said, rent on the lease was $49,000 a year. In 2006, it was $75,000; in 2016, it was $129,000; and in 2026, he said, it will be $192,000.
“It’s a staggering increase, but it’s not enough to satisfy them,” Shewmaker said. “They’re already getting a cut of the sublease rent. That rent we pay, it has to come from somewhere.”
Kim told the board on Friday that the whole situation exhibits “extraordinary dysfunction” within the Land Division, and urged them to reject the changes. He added that Act 149 only allows term changes to a lease extension under certain circumstances that do not apply to the situation.
However, the board voted to approve the changes to the extension agreement on Friday, leading Kim to tell the board that he would be pursuing a contested case. Kim on Monday said he and his clients are still weighing their options regarding that case, but added that he did file a lawsuit against the board last week.
“We were reluctant to do that, of course,” Shewmaker said. “But this could destroy us.”
Shewmaker said that following the February meeting, he sought a loan to pay for the site improvements necessary for the extension. Documents submitted to the BLNR indicate that those improvements, including parking lot repaving, installation of new rain gutters, solar panels, a new wastewater system, and more, will cost more than $600,000.
At Friday’s hearing, Shewmaker told the board those improvements are now 75% done, but if 69 Railroad has to give up a substantial portion of its sublease rent, the lender will refuse to lend.
“Lenders need to know what the rent is going to be,” Shewmaker told the board Friday.
Ultimately, Shewmaker said the whole situation seems to run contrary to the purpose of a state lease, which are supposed to operate under clear and stated terms.
“When you give someone a signed copy of a lease, and they sign it, it has power,” Shewmaker said Monday. “In the act of giving the lease your signature, you are agreeing to something. You can’t just withdraw it and start over.”
Email Michael Brestovansky at mbrestovansky@hawaiitribune-herald.com.