The Hawaii Supreme Court on Wednesday overturned a city variance that was necessary for Kyo-ya to replace the existing eight-story Moana Surfrider Diamond Head Tower with a 26-story hotel and residential tower.

Former Honolulu planning director David Tanoue granted Kyo-ya a partial variance in 2010, permitting a soaring tower with a 74 percent encroachment into the coastal height setback along the Waikiki shoreline. The high court ruled that Kyo-ya did not prove it was facing the “unnecessary hardship” test required to get a variance from long-held Waikiki Special Design District guidelines, which set shoreline development limits.

According to the Supreme Court decision, “the findings set forth in the director’s decision are markedly inadequate in light of the magnitude of the requested encroachment into the coastal height setback.”

The court said that hardship claims must show that applicants would be deprived of the reasonable use of their land or building if the zoning code were strictly applied. They also had to show their request was due to unique circumstances outside of general neighborhood conditions. Furthermore, an approved request should not alter the essential character of the neighborhood or be contrary to the intent and purpose of the zoning ordinance.

“Here, none of the requirements were met,” the Supreme Court decision read. “Accordingly, the circuit court’s judgment, the (zoning board of appeals) order, and the director’s decision are reversed.”

Donna Wong, executive director of petitioner Hawaii’s Thousand Friends, called the decision a victory for the people.

“We knew that this case had merit. From the beginning, it seemed like a political decision,” said Wong. “The approval from the (city Department of Planning and Permitting) was not based on existing law. We were unanimously right.”

Hawaii’s Thousand Friends was joined in the suit to block the variance by the Surfider Foundation, the Ka Iwi Coalition and KAHEA, the Hawaiian-Environmental Alliance.

Kyo-ya did not return a call to the Star-Advertiser so it is not known how this decision will impact the company’s future renovation and redevelopment plans, which also included a substantial overhaul of the Sheraton Princess Kaiulani.

“Kyo-ya has a remarkable reputation in the islands, so we would hope that they would heed the Hawaii Supreme Court’s decision and abide by it,” Wong said. “They still will be able to refurbish the Diamond Head Tower and gain some of their revenue that way. “

Kyo-ya applied to the city for a coastal height setback in 2010, claiming that it would not be able to rebuild the existing Diamond Head Tower if made to follow the ordinance.

The hotel owner argued that if the state had completed a 1965 agreement to expand the beachfront, it would have been in compliance with setbacks.

Kyo-ya also said that the application was unique because the parcel was extremely narrow and it had foregone considerable financial gain by choosing not to redevelop the adjacent Moana Surfrider’s historic Banyan Wing.

Kyo-ya also asserted that many existing hotels along Waikiki Beach, which it characterized as a densely developed urbanized area, already encroached into the district’s coastal height setback. The company said the project was consistent with Waikiki Special District objectives since in its view it improved mauka views and provided more open spaces along the ground.

In ruling for the hotelier’s partial variance, Tanoue said that if the zoning code were strictly applied, Kyo-ya’s redevelopment of the Diamond Head Tower would have been constrained by a buildable area of 35 percent and a maximum height limit of 170 feet. In his decision, Tanoue said, “The new building is necessary to replace an aging, declining structure with a new, more attractive and functional structure, which will enhance Waikiki as a visitor destination; allow Kyo-ya to preserve the historic Banyan Wing; and provide public access to the beach, view channels from Kalakaua Avenue to the ocean, as well as other significant public benefits.”

Robert Finley, chairman of the Waikiki Neighborhood Board, said members supported Kyo-ya’s plans to build a new Diamond Head Tower as well as its planned Sheraton Princess Kaiulani redevelopment.

“It was a split decision, but those who supported the plans looked at the existing Diamond Head Tower, which really didn’t fit in with the Moana Surfrider complex and wasn’t really economical to repair,” Finley said.

He said supporters also favored Kyo-ya’s transparency and community givebacks, which among other things included $500,000 for sand replenishment.

Keith Vieira, principal of KV & Associates Hospitality Consulting, said the project is needed in Waikiki, which saw hotel units drop from 5,200 to 43,000 in the decade ending in 2013.

“People don’t realize that a lot of our success depends on airline seats and they won’t add more if there aren’t places for people to stay,” said Vieira, a former senior vice president of operations for Starwood in Hawaii and French Polynesia.

“From a Waikiki standpoint, we need the product, so I hope that there’s more to the story.”