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The Honolulu Advertiser
Posted on: Saturday, March 1, 2003

DFS turns to lawmakers to waive delinquent rent

By Andrew Gomes
Advertiser Staff Writer

The airport duty-free retail contractor DFS-Hawai'i still owns the state about $40 million in back rent, but the Transportation Department and the company are no longer negotiating to remedy the growing delinquency.

HARAGA
The company instead is seeking relief from its rent obligation at the Legislature.

"It's somewhat of an impasse," said Rod Haraga, the recently appointed Transportation Department director who said he'd like DFS to resume negotiations, but acknowledges he can't forgive the roughly $40 million the company owes.

"This is a large amount of money we're talking about," he said. "As director of the department, I cannot forgive that rent. The airport needs the money."

At the same time, DFS said it can't afford to pay minimum rent of about $60 million a year because of a lasting drop in Japanese tourists and their spending since Sept. 11, as well as heightened security measures restricting retail business at the airport.

Instead, DFS, which operates 40 duty-free and regular retail stores under airport contracts, has been paying reduced rent under a self-imposed "hardship formula" since last May.

As of Thursday, the state said DFS owed $36.4 million in back rent. Another $15 million would have been due today for March-May rent, but payments have been adjusted so that DFS is now obligated to pay about $5 million a month.

WEINER
The state expected to receive partial payment for March rent but could not say when or how much. DFS declined comment on their payments.

The two sides had been trying to negotiate a new minimum rent formula, but efforts never resumed after late November when the previous transportation director under former Gov. Ben Cayetano left the issue to the administration of then-incoming Gov. Linda Lingle.

Before the hand-off, a $28 million minimum annual rent proposal was on the table, but Cayetano administration officials did not sign it.

Sharon Weiner, DFS Group vice president, said company and Lingle administration officials have since had discussions short of negotiating, though she declined to elaborate.

Haraga said DFS representatives and Lingle have not spoken directly, and that DFS is concentrating its hopes for relief at the Legislature.

Senate Bill 44, a measure headed for a full Senate vote after passed by two committees, would provide an estimated 25 to 30 airport concessionaires reduced rent if sales are below certain levels.

In most cases, the state requires airport concessionaires to pay minimum base rent or rent as a percentage of sales, whichever is higher.

Under SB44, if concessionaire sales are down 15 percent or more compared with the six-month average prior to the drop, base rent would be waived and tenants would pay rent as a percentage of their reduced sales.

If rent is down 25 percent or more, the state and concessionaires could negotiate new percentage rent. And if concessionaires are losing money, rent could be negotiated to allow a tenant to break even.

Under the break-even provision, if the state could find someone willing to pay at least 10 percent more rent, it could terminate a concessionaire's contract, though the tenant would get back its performance bond and security deposit and could rebid, which is barred under present law.

Relief under SB44 would be retroactive to Sept. 11, 2001, though offset by any prior relief received.

An emergency legislative session in 2001 provided eight months of rent relief that saved airport businesses $26 million, including $16 million for DFS.

Weiner said DFS, which has a $45 million performance bond with the state, has done all it can to slash costs, including cutting the equivalent of 370 jobs, while sales are still significantly lower.

For the first two months of this year, duty-free sales are down 27 percent from the same period in 2000, she said. Regular retail sales at DFS airport shops are down about 15 percent, except at Kahului Airport. At Kahului, which is under a separate short-term permit, Weiner said sales are up 17 percent and DFS has resumed paying normal rent.

Lingle spokesman Russell Pang said the governor is opposed to SB44. A similar bill passed last year was vetoed by Cayetano, who said he didn't agree the state should guarantee airport concessions stay in business at the expense of the public.