Special Report: DLNR plan to lease promising state properties fizzles despite strong real estate market

SECOND OF THREE PARTS

Hard up for cash, the state Department of Land and Natural Resources nearly a decade ago identified 14 mostly vacant properties as having the best potential among its inventory of idled lands to start generating badly needed funds for park maintenance.

The goal was to lease the sites on a long-term basis to raise $12 million yearly to invest in the state’s deteriorating parks.

Nine years later, only one of the 14 properties has been leased, generating all of $110,000 annually for the department.

For a variety of reasons, the grand plans DLNR officials touted in 2009 largely have fizzled, despite a sustained real estate boom over much of that period.

DLNR officials, as it turned out, were not very good at marketing the properties or were overly optimistic about what needed to be done before some of the sites could be leased, according to interviews and a Honolulu Star-Advertiser review of department documents and other records.

Some DLNR staffers blamed ineffective marketing. In complaints filed internally against the agency’s Land Division management in 2016, about a half-dozen employees described the division’s marketing strategy as little more than pounding a “for lease” sign into the ground, running an ad and, in the words of one of the workers, sitting back “waiting for the phone to ring.”

They also said the agency lacked a comprehensive inventory identifying its core and noncore assets — a standard tool for landowners — and rejected staff proposals for a comprehensive marketing strategy that included working with outside brokers. Given that only a small percentage of DLNR land has income-generating potential, the workers added, marketing and targeting the best parcels are all the more important.

Commercial real estate broker Steve Sofos was even more blunt about the marketing savvy of DLNR officials.

“They’re inept,” he said.

Department officials defended their efforts and cited multiple factors to explain why most of the 14 properties billed as part of a “Recreational Renaissance” program, supported by the administration of former Gov. Linda Lingle, have not been leased.

To underscore the effectiveness of the agency’s marketing, DLNR officials said most of the public auctions the department conducts for leases generate competitive bidding.

“However, there are certain assets where traditional approaches have not yielded the desired results,” the department said in written responses to Star-Advertiser questions. “Land Division is exploring alternative marketing techniques.”

Among the alternatives the department is considering is working with brokers, though it says that can be problematic because of state procurement code issues.

Of the 14 properties on the Recreational Renaissance list, the only one that has been leased is a Kalihi site of less than an acre along Hart Street. The agency in 2011 awarded a 65-year deal to 4 Wheels Auto, which is operating a used car lot there. The company pays $110,000 annually for the lease.

No funding to prepare lands

None of the other properties has been leased, and one reason, according to DLNR, is that legislation to support the Recreational Renaissance program never was adopted.

Several of the properties also needed but never received major appropriations to ready them for leasing, and several others were controlled by other state agencies that wouldn’t release them to DLNR, department officials said.

One property linked to the need for an appropriation is in Hilo. A planning consultant hired by DLNR estimated the cost of creating an industrial subdivision with infrastructure to be as much as $100 million. In addition to funding that was unlikely to have been passed by the Legislature, the project may have required the potentially controversial condemnation of private property for road improvements, according to DLNR.

Similarly, the department noted, a parcel near Daniel K. Inouye International Airport in Honolulu was controlled by the state Department of Transportation, which after the 2010 change in administration to Gov. Neil Abercrombie was unwilling to turn it over to DLNR, the landowner.

Asked why properties with such major impediments to leasing were even included on the list, DLNR officials acknowledged the department back then was perhaps too optimistic about what was possible.

“We couldn’t just sit back and do nothing,” said Russell Tsuji, the current Land Division administrator, who in 2009 was DLNR’s deputy director. “(Lingle) was trying to do something.

“We definitely knew it was a very optimistic and time-sensitive thing where everybody would have to work together to try to achieve heroic results in a very short period of time,” Tsuji added during a two-hour interview session that included department Director Suzanne Case, five other DLNR staff members and a deputy attorney general.

Adding to the challenges, no marketing studies were conducted to gauge demand for any of the 14 properties, according to Tsuji.

“We came up with that list as being the best lands available, not so much because there was market demand,” he told the Star-Advertiser. “We never did a market study. The timing didn’t allow for it.”

Also, subsequent court rulings have meant the department in most cases has to shoulder the costs of environmental reviews before a lease can be approved, adding another financial hurdle, according to DLNR. Before the rulings, the department was able to approve proposals in concept, allowing the applicants to conduct environmental reviews at their own expense before a lease was pursued.

Industrial lots still vacant

DLNR, however, even had trouble leasing ready-to-develop parcels.

Take its six vacant lots in Mill Town Business Park in Waipahu. The 52-lot park is centrally located on Oahu, has infrastructure in place and nearby freeway access — three significant selling points.

And demand for leasehold industrial properties on the island has been strong over the past decade, commercial brokers and real estate experts say.

“I would think that the demand for ready-to-develop leasehold industrial lots continues to be great,” Lloyd Haraguchi, a retired real estate executive with Campbell Estate, said in an email to the Star-Advertiser.

Yet the six lots, clustered as one of the 14 properties on the Recreational Renaissance list, have remained unleased since DLNR acquired them in the early 2000s.

They are the only lots among the 52 in the park that are vacant or have no development plan in the works, according to Sofos, whose brokerage company manages the industrial subdivision.

The department twice held an auction to try to lease its parcels, grouping three contiguous lots as one offering and the other three as another. For a 2006 auction the minimum rent for one set was established at about $182,000, and $146,000 for the other.

But there was no interest in either offering, according to DLNR, even after it dropped the rent by 8 percent in a 2010 auction, eliminated a requirement for a minimum $3 million worth of building improvements within three years and offered to waive rent for 12 months upon completing construction of improvements.

Grouping the lots together, as recommended by former staff, excluded prospective bidders who may have been interested in leasing individual lots, according to the department.

It eventually received board approval to market the lots individually and had them appraised in 2016 in anticipation of a third auction. By then, public interest in the parcels had waned, and the auction was put on hold, the department said.

Haruguchi, the former Campbell executive, said many state-owned parcels that are considered “low- hanging fruits” have potential income-generating capacity that is not being realized. “Hopefully, these practices at the state have changed,” he said.

Sofos attributed the lack of interest in the department’s Mill Town lots to one factor: the excessive rents sought by DLNR that made constructing a building financially unfeasible to prospective lessees.

“Their idea of rent is so ridiculous,” Sofos said. “They’re like a horse with blinders on.”

If those lots were owned by a private entity, they would have been leased years ago, according to Sofos and other real estate experts.

Sofos said good people work for the department, but “something is missing.”

What it likely boils down to, he added, is “poor management.”

Current and former DLNR top managers say the agency cannot be run like a private landowner whose main objective is to secure the highest and best use of a parcel to maximize profits.

The department’s guiding mission, they noted, is to achieve the best public purpose and to do so transparently, fairly and within myriad other requirements under state law.

And managing leases and other land agreements, current and former managers say, is only one aspect of the many responsibilities entrusted to the Land Division.

Broader consultation needed

Considering the broad mission of the department, the challenges DLNR faces are not unlike those faced by many large institutions, according to Peter Young, who was DLNR director from 2003 to 2007 during the Lingle administration.

“It’s not just government,” he said, lauding the staff at DLNR. “I believe inefficiencies happen at large institutions.”

Young, who runs a consulting firm assisting property owners with land-use planning, said government agencies in general need to break down “silos” — the tendency to limit discussions to those within their own agencies or divisions — and consult across departments and outside state government to pursue what is in the public’s best interest.

Two years after Young left DLNR, the Recreational Renaissance program was born following the Legislature’s rejection of an agency request for funding to fix and maintain deteriorating state parks.

Sen. Laura Thielen, who took over from Young and was DLNR director when the program was launched, said legislators had been telling the department it needed to develop its own revenue sources to offset reductions in state general funds.

That’s when DLNR decided to identify state-owned lands in urban areas already planned for development and that mostly had infrastructure, with the aim of generating lease revenue for the parks, according to Thielen.

“That was a policy goal embraced by then-Gov. Lingle,” she said. “I don’t know whether that policy was changed by subsequent administrations, which was their right.”

Because state parks continue to deteriorate, Thielen added, the idea might be worth revisiting.