Hawaii Pacific University will get a $1 million break from the state while it converts much of the now largely dormant Aloha Tower Marketplace at Honolulu Harbor into a mix of retail and university uses, including student dorms.

HPU, which acquired ownership of the retail marketplace on land leased from the state in 2012, recently sought and obtained retroactive relief from paying the state $1 million in rent for the current fiscal year, which began July 1.

The approval was made by the Aloha Tower Development Corp., a state agency governed by three representatives of the Department of Transportation and Department of Business, Economic Development and Tourism.

HPU, a nonprofit and Hawaii’s largest private university, began renovation work on the marketplace five months ago and expects to be finished in June.

Bob Endreson, a local entertainment industry consultant who was involved in an earlier revitalization plan for the marketplace that was replaced by HPU’s plan, contends that the state is getting a bum deal.

"The ATDC has negotiated itself and the state out of a good deal and into a really bad one," he said in written testimony to the agency.

ATDC deemed the rent relief reasonable given that HPU has committed to spend at least $40 million on changes to the 165,000-square-foot marketplace that years from now will revert to state ownership after the ground lease expires.

Waived or reduced rent during construction on leased land is not uncommon for large commercial development projects in the private and public sector.

Randy Grune, deputy director of DOT’s harbors division and an ATDC board member, said the situation with HPU is not too different because HPU is receiving almost no revenue from what is left of marketplace tenants during construction.

At the time HPU acquired the marketplace, it was about 70 percent vacant. In March, 17 mostly small retail tenants were moved out by HPU to make way for construction, leaving Gordon Biersch Brewery Restaurant, Hooters and Star of Honolulu Cruises and Events. HPU said remaining tenants are getting breaks on rent during construction.

Grune said the state benefits by earning taxes related to the construction work and having a more valuable asset in the long term.

"They’re essentially starting a new lease with a big investment," he said. "The state gets a reinvestment on its land."

ATDC approved the rent abatement at a meeting Oct. 29. The agency also approved a memorandum of understanding with HPU that calls for both entities to consider amending the ground lease for a new 65-year term.

The current lease runs to 2058 and calls for minimum annual rent of $1 million. The lease contains a provision for higher rent equivalent to 10 percent of the marketplace’s annual gross revenue if that amounts to more than $1 million.

Grune said the state would seek to increase its ground rent in negotiating a new lease, given that terms of the original lease that were partly based on land values were established 20 years ago. Conversely, HPU would try to get the best terms it can.

Under the current lease, the state will continue to receive at least $1 million a year in rent after this fiscal year. "This is their guaranty," said Janet Kloenhamer, HPU vice president and general counsel. "They’re getting their million dollars."

Aloha Tower Marketplace originally was part of a developer’s master plan that was conceived in the late 1980s and created eye-popping expectations of rent revenue for the state.

The initial plan projected the state would receive $4 billion in ground rent over 65 years for 17 acres between Piers 5 and 14.

The plan included the marketplace, two condominium towers, an office tower, a business hotel, a cruise terminal, 2,000 underground parking stalls and a pedestrian bridge over Nimitz Highway.

The state, which entertained bids to develop the area, negotiated an initial marketplace lease that obligated the developer to pay rent during construction. According to the lease, the amount equated to half the marketplace’s gross revenue achieved in the first year after opening, with a limit of $500,000 during the initial year of construction.

The marketplace opened in 1994 anchored by Gordon Biersch and other new retail attractions, but a weakening economy and pullback from lenders financing the project killed development of other phases that would have helped support shops and restaurants.

Without that support or sufficient parking, the retail component struggled and led to the original developer and one subsequent owner filing bankruptcy.

Real estate developer Ed Bushor bought the marketplace for $14 million in 2011 with HPU providing most of the money for the purchase. Bushor created a $32 million improvement plan dominated by ground-floor retail and dorms for 300 HPU students on the second floor.

The developer’s plan also included turning an adjacent building at Pier 10 into a sports and entertainment complex with an indoor spectator capacity of 1,000 to 2,000 and accommodating university basketball and volleyball games, concerts, performances and other community events.

HPU bought out Bushor’s interest in the project in 2012 and revised the plan to devote more ground-floor space to the university and to eliminate the sports and entertainment complex.

The university’s plan calls for using a little less than half the ground-floor space for school facilities.

Endreson contends that HPU’s plan will generate less income for the state because less retail will produce less in general excise taxes and reduce the potential for ATDC to earn higher ground rent based on HPU’s gross revenue.

ATDC has said it wasn’t in control of HPU buying out Bushor’s interest and modifying elements of the plan that still conform to the broad concept of an improvement project allowed under the existing lease.