At issue: About 1.8 acres of filled and submerged state lands under the Water's Edge Restaurant, the hotel's swimming lagoon and other areas that have been the subject of a 17-year legal battle.

The state was never paid lease rent for the portion of the hotel that is public land. Now state officials have approved in concept a plan to collect back rent and trade the land under the hotel site for private lands elsewhere to finally settle the dispute.

That doesn't sit well with critics, who blame the partnership Lanpar/HTL Associates for the problems. They want the state to lease out the public land under the hotel and collect back rent from Lanpar.

Lanpar bought the hotel property in 1986 before the hotel was built; the Hilton Waikoloa leases the land under the hotel from Lanpar.

North Kona resident Josephine Keliipio, who joined the gathering, said of the state's land-swap proposal: "Isn't that typical? Am I surprised and shocked? No."

Activist Palikapu Dedman said leasing the land instead of trading it will ensure that future generations will benefit from the income.

"They hope it will go away, but the claims won't and neither will the natives," Dedman said. "That's why I think we'll always prevail. We really don't have any place to go. We have to stand up and be Hawaiians."

Organizers called the gathering a "celebration" rather than a demonstration. Participants chanted in Hawaiian as curious hotel guests paddled in the lagoon and stared from the beach built along the edge of the lagoon.

The event was taped from a circling helicopter so video can be distributed to Honolulu television stations. The idea is to influence the outcome of a meeting Friday by the state Board of Land and Natural Resources, which will take up the issue.

The disputed lands once were tide pools makai of the shoreline — making them publicly owned submerged lands — but were filled in during hotel construction. The restaurant and other hotel facilities were built on the filled lands.

Part of the confusion over the ownership of the land stems from the state declaring the shoreline, or the public property boundary, to be in different places at different times.

In 1976 the state declared that the tide pools were public property, but in 1984 the state certified for a new owner that the shoreline was makai of the ponds, meaning the ponds were private property.

In 1986, Mervin Napeahi sued in federal court, alleging that the state had abandoned the public lands to a private landowner, which Napeahi alleged was a breach of the public land trust established by the Admissions Act.

Judge David Ezra agreed that the disputed property was actually ceded lands and ordered the state in 1997 to seek compensation from the "occupiers" of the land, including back rent.

Lanpar has told the state it does not want to lease the lands but rather own the lands or obtain a perpetual easement allowing Lanpar to use them. Lanpar blames the state for the problem, arguing that the partnership built the hotel on public property only because the state indicated the ponds were private lands.

State officials counter that the state's incorrect 1984 shoreline certification was based on information supplied by the developer, information that the court later ruled to be unfounded.

To resolve the issue, last year the land board approved in concept a plan for a land exchange to give Lanpar the filled lands, provided that the state gets land of comparable worth somewhere else.

Under that plan, Lanpar would be given an easement allowing it to use the submerged lands but would be required to pay back rent and interest dating back to 1986.

Now the two sides are quarreling over the value of the land: An appraiser for the state estimates the filled land to be worth $2.7 million today, but Lanpar rejected that appraisal.

On Friday, land board staff will recommend that the board use a panel of three appraisers to determine what the land is worth.

Jerry Rothstein, president of Public Access Shoreline Hawai'i, opposes that idea. "I feel that's going to drop the price and I feel the appraisal is low enough," he said.

"I don't think they should be rewarding any trespasser or squatter on state lands," said Alan Murakami, the Native Hawaiian Legal Corp. lawyer who filed the 1986 lawsuit.