Waikiki Galleria Tower owner sues DFS over back rent

BlackSand Capital and Waikiki Galleria Tower have filed a lawsuit against DFS, the current retail tenant of Galleria Tower, for nonpayment of about $7 million in back rent and failing to perform tens of millions in restoration work.

The lawsuit filed Jan. 14 in 1st Circuit Court alleges that DFS reduced Galleria Tower’s rentable space and floor area when it elected to expand its retail operations to Kalakaua Avenue by connecting the first two floors of the Galleria Tower with the DFS building.

The plaintiffs are seeking back rent from DFS. They also want relief since they allege that DFS did not decouple the buildings and restore Galleria Tower to its prior configuration on or before May 31 when its lease expired.

B.J. Kobayashi, chairman and chief executive officer of BlackSand Capital, said in a statement: “Despite it being over a year since DFS knew it would not be renewing its lease at Waikiki Galleria Tower, we have not observed any meaningful progress by DFS in satisfying its end-of-lease obligations.

“BlackSand Capital seeks to position the property to achieve its prime use as part of our significant investment into Waikiki — on one of the most visible blocks on Kala­kaua — which we believe is the heart of our State’s economy,” he said. “DFS’ satisfaction of its lease obligation is a critical step in our plan which will also help the State recover from the effects of the pandemic, create jobs, and improve the State’s tourism infrastructure.”

Blacksand Capital closed on the acquisition of the Waikiki Galleria Tower in July for $270 million. It’s been working on a plan to redevelop the 75,000-square-foot, two-story retail space ever since.

A DFS spokesperson said DFS chose not to renew its lease in January 2021 for a part of the building that it does not own, covering a two-story retail podium known as “the Walk” underneath the Waikiki Galleria Tower. The spokesperson said DFS has continued to pay rent at “the Walk,” honoring an agreement with the prior owner and pending reinstatement work to support the new landlord’s commitment.

“Our discussions to establish the scope of reinstatement work at Waikiki Galleria Tower have been ongoing since the beginning of 2021 with both the prior and current landlords, and we are disappointed that the lawsuit will only delay the resolution of these complex issues,” the spokesperson said.

The DFS spokesperson added that the lawsuit will further delay the reopening of the Galleria Tower store.

“We currently employ more than 80 staff in Hawaii and had planned to recruit more staff in line with our Waikiki reopening,” the spokesperson said.

DFS Hawaii has operated at various locations in Hawaii since 1962, and once was a retail powerhouse. But in recent years it has struggled.

The company cut its 660-person workforce in Hawaii by a quarter in 2019, laying off approximately 165 employees. The pandemic, which dropped international travel to Hawaii by nearly 88% through November, hasn’t helped the situation.

Still, DFS said it remains firmly committed to Hawaii, and has resumed operations at its stores in Daniel K. Inouye International Airport and Kahului Airport serving domestic travelers between Hawaii and the mainland, and looks forward to serving international travelers again in its duty-free stores as borders reopen.

Real estate analyst Stephany Sofos predicted six months ago that there would be more retail fallout in January, after the holidays, which are historically a time of hope for retailers.

“Retailers have more pain to get through because of COVID,” she said, but added that she remains bullish about Waikiki. “Give it 12 to 18 months, we’ll see new retailers coming back into the market.”