Selling a 'superblock'
| • | Marshland like gold mine over time |
By Andrew Gomes
Advertiser Staff Writer
Three brothers gathered together in a beach house on Kaua'i's north shore this weekend to discuss what to do with a piece of urban Honolulu property that has been a peculiar source of family wealth even though nothing but grass has grown on the land for 11 years.
Advertiser library photo
The parcel is known as the Ke'eaumoku superblock, a 10.5-acre chunk of real estate that in the last decade has become the block that no one has been able to develop despite spending tens of millions of dollars trying.
The Ke'eaumoku superblock remains undeveloped, protected by a Private Property sign and a chain link fence.
Value retailer Kmart, in a move to restrain spending while reorganizing in bankruptcy, was the latest to give up on the property when it terminated a purchase contract last week, ending plans to build what would have been the company's largest store in the state.
The failed plans by Kmart and other retailers and developers during the years stood the chance of dramatically redefining retail competition in Honolulu, tantalizing some consumers with convenience at low prices, and creating fears of competition and traffic congestion among others.
For the Wichman brothers — a retired rancher and auto dealer, a writer, and a semi-retired attorney — the effort to lease or sell the property has been long and somewhat disappointing, yet not without reward.
"It's been a very interesting, exciting, exhilarating experience," said middle brother Charles Rice Wichman, 77, the attorney.
The property has been in the family for 100-plus years — first as a residence and marshland, then leased and subdivided for commercial use for nearly half a century. For the last decade, it has been fallow, as an economic downturn, development competition and a little bad luck scuttled a string of plans for the site's future use.
Today, the Wichman Family Trust's superblock remains one of the most sought-after redevelopment opportunities as one of only a few large, available pieces of land in the middle of the island's population core.
"It still remains one of the great pieces of real estate in the country," said Roger Lyons, a senior vice president at CB Richard Ellis Hawaii Inc.
Site is too enticing to ignore
More than 200,000 people live in the area between Kalihi and Kapahulu, demographics that have attracted the attention of just about every retailer hungry to tap into such a rich consumer population with easy access to the superblock.
The 10-acre "superblock" site, owned by the Wichman Family Trust, has been the site of several stalled development dreams: 1989 September: Haseko Hawaii Inc. announces that it is interested in building high-rise offices and condominiums on the site. 1991 July: Haseko signs a 70-year lease with the Wichman trust and razes the site, displacing more than 100 small businesses. Plans are delayed by a weakening economy and legal requirements to remove fuel tanks. 1998 March: Haseko partners with Mainland firm Forest City Development and the trust, announcing adjusted plans to build the Pacific Entertainment Plaza, a $100 million-plus, 515,000-square-foot, 20-screen Consolidated Amusement Theatres multiplex and retail complex. 1999 May: Haseko withdraws from the development partnership. October: Forest City pulls out of the planned entertainment/ retail complex, saying a decision by Consolidated to establish theaters at Victoria Ward Centers rendered the Pacific Entertainment Plaza unfeasible. 2000 January: Wal-Mart signs a contract to buy the site. The following month, some residents criticize the big-box retailer's location and plans to build a double-decker Wal-Mart/Sam's Club superstore. 2001 April: Wal-Mart ceases negotiations, letting a purchase contract expire. May: Home Depot signs a purchase agreement for the property and says it is assessing what kind of store, or stores, to build. Weeks later, the early-stage deal falls apart. Home Depot says only that after further study of development options, the nonbinding purchase agreement will not work for the company. August: Kmart signs an agreement to buy the site and plans what would be its largest store in the state. 2002 January: Kmart files for Chapter 11 bankruptcy reorganization, but says it remains committed to proceeding with plans to build a store on the superblock. March: Kmart pulls out of the deal. The beleaguered retailer said in a court filing that it would not be in the best interest of the company and its creditors to spend $38.8 million to buy the site. A Wichman trust spokesman says the family is disappointed, but is confident that another retailer will sign a purchase contract soon.
In the last two years, Wal-Mart, Home Depot and Kmart have made bids to acquire the property, and brokers say others have taken hard looks at the site.
Big plans, big setbacks
"Obviously in Honolulu, where nearly every piece of land is developed, a vacant piece is prized," said Wal-Mart spokesman Bob Mcadam. "It's convenient to consumers, it's in a high traffic area where people are already there ... it just makes a lot of sense to serve people from that location."
Wal-Mart, which made a bid for the property but pulled out just before the deal closed last year, remains interested in the site, Mcadam said, though he could not say whether Wal-Mart is actively discussing another bid with the Wichmans.
According to a consultant for the trust, interest among prospective buyers already has rekindled since news spread of Kmart's decision.
The consultant said the trust expects to sign another purchase contract soon, most likely with a big-box retailer.
The Wichman trust also is considering leasing the property or establishing an interim use, like a parking lot, to generate income in case more years pass before someone completes a deal to acquire and redevelop the land.
Options are being discussed this weekend in Ha'ena at a Wichman family beach house. Brothers Holbrook Wichman Goodale, a 78-year-old former Kaua'i rancher and Ford salesman, and Frederick Bruce Wichman, a 74-year-old author of books including "Kauai Tales," act as trust directors, leaving implementation of decisions to Charles Wichman, who concentrated on estate planning and real estate law as a former partner at the Honolulu law firm now known as Carlsmith Ball LLP.
Whatever they decide, the Wichmans are committed to holding on for what they consider a fair price.
In part, that's because the trust has been able to cover expenses for the site comfortably despite the more than $400,000 they spend annually on real estate taxes, property maintenance and fees for attorneys and consultants helping broker potential deals.
Part of that is because the trust has received income over the years from several prospective developers and buyers of the property who failed to realize their plans and forfeited contract deposits.
A big deal comes up short
In 1988, the Wichman brothers thought about soliciting development proposals for their property when an existing master lease covering about 100 small businesses on the property expired in 1991.
But before they could draft a request for proposals, Haseko Hawaii Inc., an affiliate of one of Japan's largest condominium developers, approached the Wichmans with an idea to lease the property and develop a massive office, residential and retail complex.
Haseko signed a 70-year lease in 1991. The company cleared the property, conducted an expensive cleanup of many underground fuel tanks and spent $16.8 million to buy and close a city street that split what became the superblock.
The cleanup and a souring local economy delayed Haseko's plans, which included a retail center the size of Kahala Mall.
The developer eventually canceled its lease in 1999, but had paid the Wichman trust an estimated $3 million a year in lease rent.
Haseko also gave the trust back a 70,000-square-foot chunk of the superblock it had bought from the Wichmans, as well as the $16.8 million piece of former road.
Retail suitors line up
Following Haseko's attempt have been several retail suitors, starting with Forest City Development, a multibillion-dollar publicly traded real estate investment trust that had partnered with the Wichmans, and briefly Haseko, to develop a $100-million-plus retail and entertainment center on the superblock.
That proposal fell apart when Consolidated Amusement Co. decided to build a movie theater at nearby Victoria Ward Centers.
The big-box retailers swooped in two years ago. Wal-Mart, Home Depot and Kmart all at various times signed agreements to purchase the site. Other national retailers, including home-improvement chain Lowe's, also explored the possibility.
A couple of the retailers left hefty deposits with the Wichman trust after backing out of contracts, including Kmart, which gave up $800,000.
Why deals fall through
There has been no common reason why so many development proposals have come undone.
Haseko's project was too much for the market to bear at that time, while competition nixed Forest City's idea. Wal-Mart eventually decided its plan for a double-decker Wal-Mart and Sam's Club store would not generate a sufficient return, and Kmart's bankruptcy got in the way of its planned store.
But local retail analysts say factors also making the superblock's sale difficult include high land value, a patient seller, special city design requirements, the property's large size and its odd shape.
Of those factors, land value constitutes the biggest hurdle. When Haseko agreed to pay $16.8 million for a street running through the site, the price at $500 a square foot was well above already inflated real estate values. Today, values along Kapi'olani are around $95 a square foot, while the city values the superblock at $89 a square foot, or $40.7 million.
Kmart agreed to pay $38.8 million, but would have had to spend an estimated total of around $50 million including store design and construction costs.
The parcel's high land value limits developments to those that generate less revenue at greater volumes, such as residential condominiums or office buildings, or less-dense retail that generates higher per-square-foot revenue.
"The (income) volumes need to be significant," Lyons said.
Stephany Sofos, a local real estate analyst, said she believes a mixed-use development that includes retail has a better chance of succeeding, given all the retail and entertainment competition at nearby Ala Moana and Victoria Ward centers.
A category killer or mass merchandise discounter, also makes sense, according to analysts, though big-box retailers who have tried have found the superblock's price a high one to pay for the strategic convenience of reaching consumers.
"They're not selling it at a Wal-Mart price," Mcadam said.
Charles Wichman said that despite the windfalls from broken deals, the trust would have preferred completing any one of the previously proposed sales or development proposals. He adds, however, that it has been engaging to negotiate with some of the most powerful companies in the world.
"I'm ready to go another 10 years," Wichman said. "We can hang in there."
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
