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Rocky road for Kealanani

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An aerial photograph of Kauai's northeastern coast shows the area planned for the agricultural subdivision Kealanani.
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Kauai residents Paul Kyno and Andy Friend were original partners with San Francisco developer Peter Lynch in the Kealanani agricultural subdivision. Their plan was to establish a tea farm, processing plant and visitor center as the heart of the subdivision and encourage residents to also grow tea.

Kealanani, a Kauai development on 2,021 acres of former sugar cane land, was envisioned to be a tea plantation integrated with other crops and 190 luxury homes. But lately the focus of the long-delayed project has been extracting money from a former financial backer.

The developer originally touted the project as a new kind of agricultural subdivision in Hawaii that would have stringent requirements for homeowners to make productive agricultural use of their property. There would be fines for homeowners not engaged in farming, the developer said.

Still, some observers — especially in Hawaii’s farm industry — criticized Kealanani as another variation on "gentlemen’s farms" that have carved much former plantation land on the neighbor islands into large-lot residential subdivisions with little or no commercial farming. The developments take advantage of state and county rules that allow construction of homes on agricultural land if they are an accessory to farming.

The Kealanani project has had a rocky history, and construction still hasn’t begun.

The most recent battle has been over an $18.4 million bank guarantee that one of Kealanani’s former investors set up to ensure completion of subdivision infrastructure.

Canpartners, a California lender that took over the project last year through foreclosure, has been pressuring Kauai County to tap the bank guarantee.

But the county on Tuesday let the guarantee expire, saying it would not have been in the public’s best interest to use the money.

Canpartners said in a news release the draw-down on the $18.4 million was part of a comprehensive deal that would have allowed development to proceed. Under the deal, Canpartners would have given the county $3 million, 15 acres of land and a popular rodeo arena.

But county officials said it didn’t appear Canpartners intended to use its proposed share of the money, $15.4 million, to construct subdivision infrastructure as intended by the guarantee.

"Their proposed package left us with questions as to whether the full $18.4 million would be reinvested back into our community," Gary Heu, administrative assistant for the county, said.

Heu also said the county had "grave concerns" about the legality of taking the money despite an offer from Canpartners to indemnify the county against any legal attack over the issue.

At this point, it’s uncertain whether Canpartners will pursue the project. A spokesman would say only that the company is evaluating its options.

County officials said the developer is in default of its subdivision agreement and that subdivision approval could be voided.

Kealanani has been in the works for about five years using land once largely farmed in sugar cane by Makee Sugar Co. and later Lihue Plantation in northeastern Kauai.

San Francisco developer Peter Lynch led the project with minority partners and Kauai residents Andy Friend and Paul Kyno.

Canyon Capitol Realty Advisors, an affiliate of Canpartners, loaned Lynch $41 million to buy the land in March 2006 for $49 million.

Lynch’s Plantation Partners Kauai LLC planned to develop and sell 190 home sites, from 3 to 100 acres each, for $500,000 to $3 million each.

Lynch planned to establish a large tea farm on the property along with a processing facility and visitor center, which would encourage homeowners to plant their own land in tea.

Kealanani buyers also would be required to plant at least 12 tropical fruit trees, including four cacao trees. Former cane irrigation water would be available to all lot owners.

Advocates of agriculture say such subdivisions inflate farmland values, making it harder for commercial farmers to survive, while providing lower tax rates for the estates.

Models like Kealanani have been pursued elsewhere in Hawaii, including one proposing luxury home sites amid an existing Maui coffee plantation, and another called Peahi Farms that had subdivision plans integrated with a proposed nursery, organic farm, cattle pasture and fruit trees.

Perhaps Hawaii’s most controversial ag subdivision was Hokulia on the Big Island, where a golf course and a 200-acre coffee farm were amenities for luxury home sites. Hokulia endured a drawn-out legal challenge, but eventually was allowed to move ahead.

Kealanani’s developers said their project would be an agrarian community that helps preserve Kauai’s rural character.

Plans were featured in the vacation home segment of the Robb Report, a magazine catering to ultra-affluent consumers, the Wall Street Journal and the New York Times.

A 2008 story in Dealmaker magazine described the "residential resort" this way: "As a condition of buying some of these 2,000-plus acres along the pristine northeastern shoreline of the island of Kauai, homeowners agree to involve themselves in ‘agriculture activity.’ You pick the crops … and in return receive the massive property-tax abatement that comes from having your seaside mansion serve double duty as a working farm."

Kealanani officials in 2006 projected that a first phase of sales would begin closing by mid-2007.

But Lynch was having financial difficulties and in early 2007 defaulted on mortgage payments for the Canpartners loan.

Maurice Kanbar, an inventor and real estate investor whose creations include SKYY Vodka, stepped in to try to save the project and protect a roughly $25 million loan he made to Lynch for Kealanani, according to Russ Pollock, chief operating officer of Kanbar firm MK Enterprises in California.

Under Kanbar, project officials made some progress with sales and permitting, including final subdivision approval in September 2007.

To satisfy a county requirement to ensure that road and other infrastructure work would be completed, Kanbar arranged letters of credit from Wells Fargo totaling $18.4 million that could be tapped by the county to finish any infrastructure left incomplete by the developer.

Project officials in February 2008 reported having sold 22 lots in the 47-lot first phase. But the unraveling of financial markets and the economy led buyers to withdraw. In late 2008, the Canpartners loan matured, and the lender foreclosed.

One of the developer’s provisions was that lot buyers wouldn’t be able to build homes until all infrastructure was complete. Such work never began, and no purchases were completed.

Pollock said conditions for the county tapping the infrastructure guarantee weren’t met. He said grabbing the money and splitting it with Canpartners would have been improper.

"Mr. Kanbar has had $18 million tied up for three years in these (letters of credit)," he said. "(Canpartners) hasn’t advanced the development. Nobody’s ever put a shovel in the ground."

Canpartners said it had a definitive handshake deal with Mayor Bernard Carvalho in July to claim the money. The lender retained University of Hawaii law professor David Callies to study the legality of taking the money, and said the county could safely do so.

The county said it made its own assessment and decided to let the letters of credit expire. "The county has at no time ever come to any agreement or accord with (Canpartners) to draw on the letters of credit, and we still maintain this position," Heu said.


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