Hotel investors are gearing up for a possible foreclosure sale of Naniloa Volcanoes Resort, a hotel and golf course on state leasehold land.
Lender First Citizens Bank & Trust, based in North Carolina, initiated foreclosure proceedings in August against Hawaii Outdoor Tours, doing business as Naniloa Volcanoes Resort. Other parties named in the suit were the Ken Direction Corp., resort owner Ken Fujiyama, the state and county of Hawaii and the state Department of Land and Natural Resources.
The case goes back to 2005 when Fujiyama, who owns Hawaii Outdoor Tours and is CEO of the Ken Direction Corp., successfully bid for a 65-year state lease on the land underneath the Naniloa. Fujiyama beat out more capitalized competitors such as Peter Savio, who was working with Outrigger Enterprises Group, and Starwood Hotels & Resorts working with an unnamed investment partner. Now these competitors say if the terms are right, they may want back in the game.
"It’s on an absolutely perfect location," said Keith Vieira, senior vice president and director of operations for Starwood Hotels & Resorts in Hawaii and French Polynesia.
Savio thinks the property would make a good mixed-use hotel and student dormitory to add to his expanding Pagoda hotel brand, which is known for economical prices and local style. Vieira envisions working with a partner to elevate it to an upscale three- or four-star resort that would appeal to business travelers, the group market or active visitors making trips to Volcanoes. However, both Hilo-bred hoteliers concur that substantial reinvestment will have to be made to make the resort viable.
"When we looked at it before, we thought it would take at least $20 million to make it work," Savio said. "(Fujiyama) won the bid because he was basing his rent on just $5 million in reinvestment. He didn’t do his due diligence, and the state created an auction process that favored the weaker buyer and the weaker use."
Vieira said Starwood’s bid also assumed that the property would need about $20 million in reinvestment.
"It offered really good potential for the right buyer, but $5 million was absolutely not enough money to do what was necessary," he said.
Fujiyama, who did not return a call or email from the Star-Advertiser, told the state earlier that he would restore the Banyan Drive landmark. However, Fujiyama is still short of his goal. At times, local business owners have criticized the state and Fujiyama for allowing the property to fall into disrepair and for impeding Hilo’s tourism growth.
Fujiyama’s finances are beleaguered, too. According to court records, he owes his lender about $9.9 million on what was originally a $10 million mortgage note. DLNR also issued him a notice of default in August for nonpayment of rent. Fujiyama, who has not made any lease payments since February, currently owes the state about $250,000 in rent plus late fees and interest.
"The State is a party to the foreclosure case and is represented by the Department of the Attorney General in the proceedings," according to an emailed statement from Kevin Moore, state Land Division assistant administrator. "The State’s role will be to ensure that the lessee, any receiver in foreclosure, and any assignee comply with the lease terms including payment of rent."
The state tried to recoup rent losses by applying a portion of the performance bond required under the lease to cover the six-month period from Feb. 1 through July 31, 2012, Moore said.
However, according to court filings, Fujiyama also owes about $501,078 in unpaid general excise and transient accommodations taxes and about $392,222 in real property taxes. The state has placed about 10 tax liens on the resort, court documents said.
"The lender understands that the defaults must be cured to avoid possible early termination of the lease, and previously cured a default by the lessee for its failure to maintain the full amount of the performance bond under the lease," Moore said.
He added that any foreclosure of the mortgage would be subject to the lease and that the lender or its assignee would have to comply with the lease to avoid early termination.
In the past, Fujiyama has blamed his struggles on the poor East Hawaii economy and tight credit markets. Fujiyama also has argued that he just needed time to turn the property around.
According to court records, Fujiyama’s attorney, Kevin Herring, said that Naniloa has received a letter of intent for a $6 million infusion from the American Asian Travel Center and Everbright International LLC to reduce capital on the existing loan, pay off overdue interest and penalties, pay taxes and replenish the cash bond. However, the investment would be subject to a lender’s agreement to extend the loan by two years.
Savio said he is watching these court proceedings with interest, and other investors are probably taking note, too.
"I’ve followed this religiously," Savio said, but added that whether he makes another bid depends on how the state structures the requirements.
"What they did last time was just wrong. If they do it the same way, I probably wouldn’t bid," he said.
