Soaring rent leads to closing of Makiki Shell

By Sean Hao
Advertiser Staff Writer

Makiki Shell owner Warren Higa, left, helps Rodney Goda with his car, which was leaking oil. Higa's business, one of the last full-service gasoline stations in the Beretania Street area, will shut down Saturday and he'll take a job with Manoa Chevron. Jeff Widener • The Honolulu Advertiser

Higa, 58, said the decision to close Makiki Shell follows a tripling of the station's monthly rent by Shell Oil Co. to $19,000 over a three-year period.

"I could work here and pay that lease, but there would be nothing for me," he said.

The station at 1436 S. Beretania St. is expected to evolve into a Shell-operated gasoline pumps/convenience store operation. The change would mean the loss of one of the neighborhood's last full-service gasoline stations where drivers could buy regular gasoline for 1 to 2 cents a gallon lower than the competition and get repair jobs at a reasonable price.

Among Higa's customers who plan to follow him to the Chevron at 2927 E. Manoa Road are Makiki-area residents Samuel and Daphne Lowe.

"We've been coming to him since he was an employee here," Daphne Lowe said. "We'll follow him because he's so honest.

"If he fixes something and it's not right, he'll make it right for free. He's a real compassionate person."

Higa's predicament, as well as rent increases other Shell stations managers said they've experienced, comes as the state administration promotes the repeal of a law capping the rents that oil companies can charge dealers.

The law has been challenged by oil companies and is now tied up in the courts. While that dispute is in litigation, rents for Higa and other station owners have ratcheted higher than many could afford.

Oil companies also oppose another law set to take effect next summer that contains caps on gasoline prices as well as station rents.

Gov. Linda Lingle contends that repealing those laws would increase competition and drive down Hawai'i's gasoline prices, still the highest in the nation.

Shell said Higa and other dealers who feel their rents are too high can request a reappraisal.

Higa said he opted not to do that because he didn't believe it would have helped.

But Bill Green, owner of Kahala Shell across from Kahala Mall, is contesting his monthly rent, which has gone from $12,000 in 2002 to $26,000 this year. Next year, he is expecting it to rise to more than $30,000 a month.

Green said the escalating rents are unreasonable. He also criticizes the rent cap formula in the law that is being challenged, because the law, if in effect, would not lower his rent. The state law capped rent at 15 percent of a dealer's gross margin on gasoline sales.

Green also blamed a third state law, the so-called divorcement law, which he said makes it difficult for an oil company to justify buying out a lessee. Under the divorcement requirements, an oil company can only operate a station for two years before it must lease it to another dealer.

If not for the divorcement law, "the oil companies would have bought (out) the dealers and they wouldn't have to walk away," he said.

Higa is the second Shell lessee on O'ahu this year to turn over a station to the oil company.

Tommy Ko closed his Shell station at 2052 Dillingham Blvd. in Kalihi in July.

"I just didn't feel comfortable with the contract and because the rent was a little bit too high," said Ko.

Ko disagreed with provisions of Shell's three-year contract that allowed the oil company to terminate the lease if gasoline sales fell under a certain threshold and increase a monthly fee allowing Ko to service vehicles.

Ko said he chose to walk away from his $10,000 investment and instead started Tommy's Auto Service next door where he only services vehicles.

"You can sign the contract and sell, but nobody is willing to buy then because the rent is too high," he said. "It's not profitable for the dealer, so you gotta walk off with nothing."

Tim Hamilton, a petroleum industry consultant in Olympia, Wash., said the dilemma faced by Hawai'i Shell dealers illustrates the need for rent caps.

"Without a doubt what you have here is what the dealers were trying to tell the Legislature ... the oil companies were doing" when the rent cap law was passed in 1997, he said.

Hamilton said gasoline dealers nationwide are dealing with similar increases in rent as oil companies look to assert more control over the pricing of gasoline at the street level and maximize retail profits by consolidating the management of retail stations.

To do that without buying out a dealer, the oil companies offer lease terms that are unacceptable, he said.

"The oil companies make you a deal you can't accept," he said.

Cameron Smyth, a Shell spokesman, said Shell dealers who think their rents are too high can appeal them.

"Obviously, Shell worldwide, we're always looking for the best way to operate our business," he said. "Still nationwide, over two-thirds of Shell's retail network is dealer-operated."

Sen. Ron Menor, D-17th (Mililani, Waipi'o), an architect of the gasoline price-cap law, said local dealers need the protection of rent caps.

However, Menor agreed with Green that the portion of the divorcement law preventing the conversion of dealer operations to company-owned stations may need to be repealed, thus removing a disincentive to buying out dealers.

"Mr. Higa's story is one we've heard many times throughout the years," Menor said. "To encourage ... competition, we need to protect these dealers."

Any regulatory relief won't come soon enough for Higa, who bought Makiki Shell from its previous owner in 1979 for $45,000. Basing his calculations on business from his 10,000 customers, Higa figures the station could be sold for about $250,000, if not for the high lease.

"It's a business I bought and now they want it back," Higa said. "I feel like I'm getting screwed."

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.