Posted at 10:48 a.m., Monday, December 17, 2001
Published December 16, 2001

Beach Walk will breathe new life into Waikiki

• Project can proceed on Andrade lease land

By Mel Kaneshige

Outrigger Enterprises has an ambitious $300 million redevelopment plan for central Waikiki. The project may stall if land owners refuse to meet the company's terms. Advertiser library photo – July 9, 2001

It begins with small things: peeling paint, dented trash receptacles, minor maintenance jobs deferred. Like the body of an aging athlete, it deteriorates, at first almost imperceptibly. This is how urban decay — and resort decay — takes root.

Atlantic City, N.J.; Oakland, Calif.; the Bahamas; Tombstone, Ariz. They all had their heyday. But to see them today, you'd hardly know it.

Every ghost town was once a boom town.

Waikiki's boom has lasted decades, and with proper care it should last decades more. Even with the growth of Neighbor Island tourism and stirrings of broader economic diversification, Waikiki is still the engine of Hawai'i's economy. But for engines to work reliably, constant maintenance and periodic overhauls are essential.

We have all shaken our heads when we see the articles and hear the comments about how Waikiki's luster has been fading, about how the district needs renewal — whether an actual physical facelift, the provision of richer cultural experiences, a new injection of aloha spirit, or initiatives to attract more local residents.

And we've all smiled at the positive developments — the growth in meaningful expressions of Hawaiian and other local culture, the landscaping improvements and cultural investments by the city and county at Kuhio Beach and Kapi'olani Park, and renewal initiatives by hotels and other businesses.

Beach Walk project

When Outrigger announced its Beach Walk project in July, the response was enthusiastic. Over the years, the Lewers Street area has deteriorated. The narrow sidewalks, lined with a concentration of aging hotels and low-end retail establishments, have more in common with fading center-city areas on the mainland than with the fabled Waikiki that people save for years to visit.

So Outrigger's $300 million project — to clean and open up the area — was greeted like a fresh ocean breeze on a hot, muggy afternoon. Everyone was delighted with our plan to renovate or replace tired old buildings and create a tree-shaded plaza as a new, pedestrian-friendly area at the center of attractive retail, dining and entertainment options.

Create positive ripples

Moreover, people instinctively understood that revitalizing this faded area would create ripples that could lead to the reinvigoration of the entire district.

The Beach Walk project is recognized — correctly — as much more than an effort, with all its attendant risks, to boost the bottom line at Outrigger. It is also an effort by a kama'aina, family-owned company with a large stake in the future of Waikiki — and of Hawai'i itself — to strengthen the economic underpinnings of this entire district and, thereby, of our entire state.

So, with all the cheering, one might ask, when will we be bringing in the cranes? Regrettably, it is not quite so simple. A key step on the road to renewal is a visit to the bank. Projects of this magnitude don't get done with the money in the cash register. They depend on financing — on loans. And one of the first things potential lenders trip over is uncertainty.

Lending uncertainty

Uncertainty is the lenders' name for the issue that has recently arisen in the media — the question of Outrigger's efforts to buy the fee interests of five landowners who own portions of the land to be redeveloped. Lenders are extremely reluctant to invest in a development that is to take place on leased land. With leasehold land, the developer's ability to ensure the economic viability of the project is hemmed in with conditions and uncertainties, even in the case of long leases. If lenders are willing to extend loans on leased land at all — and few are — it is only at such a high cost to the borrower as to kill the viability of the project.

In short, for Outrigger to secure the financing that will enable us to move forward with this project, we must buy the fee interest in those parcels we do not own (about 10 percent of the project area).

Andrade Trust troublesome

The Andrade Trust, one of the landowners, is telling the community it sees no reason why Outrigger cannot continue with its development plans under the leasehold arrangement. I can unequivocally say that land ownership is critical to Outrigger.

What the Andrade Trust does not disclose is that it has a veto power over our development. The trust has warned us in writing that it has "sole and absolute discretion" to approve all elements of our plans. If we wanted to put an open space with fountains, benches, lush landscaping and other pedestrian-friendly uses on their lot, they would oppose it. They would oppose it because, beginning in 2019, their rent is calculated on the value of the buildings on the property, as well as the value of the land.

The trust also does not disclose that it would have veto power over the form of legal ownership of our project, as well. Since our project will be mixed-use and there will likely be different ownership entities for different parts of the buildings, the Andrade Trust would also have "sole and absolute discretion" over how we structure the ownership of the project. This veto power simply makes it too risky for Outrigger or an investor to make the $300 million financial commitment to the area's renewal.

We cannot master plan the development, nor can a financial partner invest in it, with constraints that are contrary to the overall beauty and feasibility of the project.

In fact we have been negotiating to buy these fee interests for a long time. The issue became public only after we hit a stumbling block in the negotiations. We are offering fair market value. The landowners, however, are holding out for a higher price. A much higher price — two to three times above market. Such steep prices, just like the high cost of borrowing on leasehold land, would sink the project.

They would make it impossible to earn a reasonable return.

We have valued the property at $29 million; the Andrade Trust has valued it at $53 million. That's a $24 million disagreement.

Land valuation gap

Let's look at this negotiating gap. First, I should note that Outrigger owns about 90 percent of the land in the Lewers-Kalia area, so we are quite familiar with land values there. In negotiating with the Andrade Trust, we stated our view that for the parcel in question (under the Ohana Reef Towers), a hotel room was worth $95,000 and the land $350 per square foot. The trust's Mainland-based real estate adviser responded with estimates of $175,000 per room and $1,040 per square foot.

The most recent hotel transactions in Waikiki support our valuation. Marriott bought the Hawaiian Regent Hotel for just over $98,000 per room in November 2000. The Ilikai sold for just over $80,000 per room in February 2000. The Hawaiian Waikiki Beach Hotel sold for just over $107,000 per room this year, and the Alana Doubletree Hotel sold last year for just over $77,000 per room. Much as we hate to admit it, these are all better hotels than the Ohana Reef Towers, yet in real, arms-length transactions their per-room value is about half what the Andrade Trust is holding out for.

The most expensive land in Waikiki is along either the beach or Kalakaua Avenue. This year, beachfront land under the Sheraton Waikiki Hotel was valued at $677 per square foot. Also this year, land at the corner of Kalakaua and Royal Hawaiian avenues was valued at $500 per square foot.

These are real, arms-length transactions involving the most valuable land in Waikiki — yet the Andrade Trust is insisting on nearly twice as much for land that is on neither the beach nor Kalakaua.

What's interesting is that our negotiating partners — the Andrade Trust beneficiaries with whom we have had longstanding friendly and mutually beneficial relations — also favor the project. It is regrettable that they are holding out for a price that would kill it.

It is also regrettable that some of them have tried to cast the disagreement in "big guy vs. little guy" terms. Since when do people worth millions of dollars — and playing hardball to double the value of their holdings — qualify as little guys?

Eminent domain a last resort

It was only after reaching a negotiating impasse that we began exploring an option that could provide a win-win solution for everyone — Outrigger, the landowners, the City and County, and the general public, which has an enormous stake in the revitalization of Waikiki. Regrettably, this option has an unpleasant, lawyerly sounding name: "condemnation" through "eminent domain."

Through its right of eminent domain, government can "condemn" and acquire land needed for an important public purpose. Under law, the owners must be paid fair market value. While this mechanism is commonly used by government when it needs land for public purposes, such as road widening, it has also been used when such purposes are served by a private development. The World Trade Center and the Times Square renewal project in New York City, for example, could not have been built without the use of eminent domain as a means to acquire the land at fair market value.

The same holds true here in Honolulu for the Pali Shopping Center at the corner of Vineyard Boulevard and Pali Highway (home to Safeway and Long's Drug Store), the York Office Building across from St. Andrew's Cathedral, the Chinese Cultural Plaza in Chinatown, and the Hosoi and Borthwick Mortuaries, all of which are located on lands acquired by government and resold to the private sector for redevelopment.

When eminent domain is used to facilitate a private sector project with an important public purpose, the government purchases the land at fair market value, then resells it to the developer at the same price, plus costs incurred in the transactions.

In the case of the Beach Walk project, we would much prefer to negotiate a reasonable purchase price directly with the landowners. However, it seems clear to us that if they insist on a price that is so far out of the ballpark as to make the project undoable, the only alternatives are either 1) for the City and County to acquire the land, which will result in a fair price to the landowners and a green light for this vital project, or 2) to abandon the project and continue shuffling down the road to Atlantic City — or Tombstone.

Mel Kaneshige is chief operating officer of Outrigger Enterprises.