Posted on: Friday, February 27, 2004
City considers new land sale
By Andrew Gomes
Advertiser Staff Writer
The city is considering selling the land under the commercial portion of the downtown luxury high-rise Harbor Court to its leasehold owner for about $15 million in what could be the city government's second major land sale this year.
Phoenix-based Pacific Realty Advisors Inc. and partner Rockwood Capital Corp. of Greenwich, Conn. approached the city about the buyout, which if completed would follow the 2002 sale of the city's leased fee interest in Harbor Court's residential units for $12 million to another partnership. Harbor Court's major tenants include Kapiolani Health and Palomino Restaurant.
The administration of Mayor Jeremy Harris and many City Council members have embraced the sale of city property to ease fiscal constraints in tight budgetary times, though some community members have criticized the objective as shortsighted.
Earlier this month, the City Council approved the administration-negotiated sale of the city's Block J parking lot downtown to automobile dealer Pflueger Group LLC for $10.5 million.
Administration officials also are negotiating to sell the land under Harbor Court's small sister building, Queen's Court, for an undisclosed amount to the leasehold owners of that property.
The Harbor Court and Queen's Court deals are subject to City Council approval.
Council budget chairwoman Ann Kobayashi said property sales could net the city as much as ground rent income in the long term, or even more, depending on the sale price and property taxes generated by private ownership of land.
For instance, Kobayashi said Block J could generate $750,000 a year in property taxes, or about twice as much as the city receives from parking revenue, if Pflueger builds residential condos on the site. The company has said it is considering the idea, but is not committed to such a project.
Under Pflueger's immediate plan to develop an automobile dealership, Kobayashi said the city would receive $212,000 in annual property taxes, or slightly less than parking revenues provided.
Kobayashi also said property sales reduce other city costs such as liability insurance and maintenance in the case of Block J.
For Harbor Court, the leasehold owners pay property taxes but are offering to compensate the city for some lost lease revenue and the value of the land.
Pacific Realty and Rockwood Capital have 70 years remaining on their Harbor Court lease with the city, which would receive $35 million over the next 20 years as annual rent increases from $1 million currently to $1.5 million for 10 years starting in May and to $2 million for the following 10 years. The last 50 years of lease rent would be negotiated.
The city values the land under Harbor Court's commercial units at $6 million for property tax purposes, which doesn't necessarily reflect fair market value.
The $15 million offer, based on an appraisal done by the leasehold owner, calculates the present value of future lease payments using estimates for inflation and interest rates.
City Deputy Managing Director Malcolm Tom said the administration hasn't made its own determination of the property's value, but is receptive to converting the leasehold property to fee-simple ownership. "We just want our full value for a lease that increases substantially over the next 30 years," he said.
Kobayashi said she hasn't received a cost-benefit analysis regarding the sale proposal, though she considers the offer fair.
"They're paying the appraised value," she said. "This seems like a better deal (compared with Block J)."
Representatives of Pacific Realty and Rockwood Capital did not respond to requests for comment.
The partnership has retained the Mainland firm Eastdil Realty and local real estate company CB Richard Ellis Hawaii Inc. to find a buyer for Harbor Court commercial units in a sale effort that brokers said would be easier if the title to the land can be acquired.
The city, for property tax purposes, values Harbor Court's commercial units at $36 million including the land and improvements, though the assessment again doesn't necessarily reflect fair market value.
The property, which includes about 186,000 square feet of office space and 15,000 square feet of retail space, is 80 percent leased, according to CB Richard Ellis.
Pacific Realty and Rockwood bought the commercial units and 325 parking spaces in 1999 from the property's second owner, a partnership between Trinity Investment Trust LLC and Apollo Advisors LP.
A financial adviser to Pacific Realty and Rockwood at the time said the partnership paid $31 million.
The entire 31-story Harbor Court building at 55 Merchant St. was conceived at the height of the speculative Japanese investment bubble in the late 1980s by a hui that included former Hawai'i real estate developer Mike McCormack and Trinity.
The McCormack partnership in 1989 won the rights to build the $185 million project on a city parking lot in return for paying the city a $15 million fee plus $90 million in lease rent over 30 years.
But the developer struggled with leasehold residential sales and fell behind on rent. In 1994, as the project was completed, the development agreement was modified to allow fee-simple residential sales, with the developer agreeing to pay the city $2 million in overdue rent, $10 million for the fee in 90 unsold residential units plus $50 million over 30 years from commercial unit lease rents.
Still, the McCormack group was unable to pay for the residential units and overdue lease rent, and lost ownership of the property to the Trinity-Apollo group in 1996.
In 1998, the Trinity-Apollo group paid $2.7 million to cover delinquent lease rent on the Harbor Court project, and in 2002 arranged a deal to pay for remaining leasehold residential units with a $7 million payment and agreement to pay another $5 million over five years.
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
