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The Honolulu Advertiser
Posted on: Sunday, March 9, 2008

Pier review

By Andrew Gomes
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

3 decades of trying to revitalize and redevelop the Aloha Tower area have seen far more challenges than change.

Advertiser library photos

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170,000

Square footage at Aloha Tower Marketplace

300 million

Estimated cost in dollars of planned Pacific Quay project at Piers 5 & 6

100 million

Cost in dollars to build Aloha Tower Marketplace

82

Number of years ago Aloha Tower was completed

27

Number of years Aloha Tower Development Corp. has been in existence

9

Number of piers within the current development boundary of Aloha Tower.

Development Corp.

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Hawaii news photo - The Honolulu Advertiser
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Hawaii news photo - The Honolulu Advertiser

The state has struggled for nearly three decades to foster private redevelopment around landmark Aloha Tower. The present redevelopment area stretches over 17 acres from Pier 5 to Pier 14, excluding Pier 7.

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Aloha Tower for much of its 82-year history served as a welcome sign for shipboard tourists, but in the last 30 years the historic Honolulu Harbor clock tower has been more like what an open flame is to moths for developers seeking to build in the area.

A half dozen or so developers have run into trouble after launching plans to revitalize state land adjacent to the tower.

Ken Hughes of Dallas-based Hughes Development LP is the latest to have ambitious visions dashed after working with the area's gatekeeper, the Aloha Tower Development Corp.

Hughes spent the past five years crafting and revising conceptual plans tentatively accepted by the 27-year-old agency to attract private development to the site.

Dubbed Pacific Quay, the $300 million Hughes project called for a complex of 300 condominiums, retail and a waterfront pedestrian promenade at piers 5 and 6.

But disagreements late last year over issues that include ground rent and providing parking for nearby Aloha Tower Marketplace tripped up a final agreement.

Now, some observers looking at the ATDC's history question whether private redevelopment of the area can ever be accomplished.

"Perhaps the state should cut its losses (and) forget about building condominiums and offices," said former Gov. Ben Cayetano, who was skeptical of the redevelopment notion nearly 30 years ago as a state senator, and later led the state during some of the ATDC's most promising and troublesome years.

State officials at times have pinned big hopes on the area's redevelopment — from making Hawai'i the international business hub of the Pacific to pumping $4 billion into state coffers.

None of those grandiose expectations, however, have come to fruition.

AFTER THREE DECADES

Three decades since some of the earliest visions were floated to replace state warehouses on the waterfront with higher commercial uses, there is only a financially struggling retail marketplace, a paved parking area and old dock buildings from piers 5 to 14.

To be sure, many of the development failures were due to missteps by developers or economic pressures. But much blame — fairly or unfairly — also has been directed at the ATDC.

Last month, more than a dozen state senators called for a legislative audit of the ATDC, citing past troubles between developers and the agency.

Part of Senate Concurrent Resolution 54 reads: "In its 27-year history, the Aloha Tower Development Corporation has only entered into (development agreements) that have stalled, vitiated, or otherwise eviscerated development plans for the area."

Since the ATDC's inception, legislators and others have criticized the agency as being a poor mechanism for fostering private development of state land.

Part of the difficulty, according to critics, is rooted in the ATDC's seven-member board representing the mayor and heads of the state Department of Transportation, state Board of Land and Natural Resources, and state Department of Business, Economic Development and Tourism. Three private-sector members also serve on the board.

The agency was an outgrowth of an idea by Gov. George Ariyoshi, who in 1979 unveiled conceptual plans to revitalize land around the famed Aloha Tower landmark that at one time was the tallest building in Hawai'i.

Ariyoshi's idea was part of a popular movement in many cities at the time to turn parts of urban industrial harborfronts into vibrant commercial attractions for residents and visitors.

Ariyoshi commissioned a detailed scale model for his so-called Aloha Tower Complex with shops, restaurants and park space around a centerpiece international trade center. The governor proposed spending $8.5 million to start what he envisioned as a mostly privately financed project.

Skeptics at the time questioned whether developers would be interested, how maritime needs might clash with the plan and whether the plan was based on sound financial assumptions.

THE ATDC IS BORN

A 1979 legislative audit evaluated Ariyoshi's project and called it financially flawed. The audit also warned such a project could become a money pit for the state.

After lawmakers rejected Ariyoshi's spending proposal in 1979, the ATDC was formed to advance the redevelopment concept.

The agency solicited bids in 1983 based on development framework revised by the Ariyoshi administration that called for a business hotel and office space. From two bids, the ATDC selected a $100 million plan by San Francisco-based Southern Pacific Development Co. for a 411-room hotel, office space, retail, cruise ship terminal facilities and a pedestrian overpass over Nimitz Highway.

But a year later following a corporate merger, Southern Pacific pulled out, citing concern over its projected payoff relative to risk.

New interest by developers was received by the ATDC, which in 1985 tentatively agreed to pursue a $200 million project led by Cordish Embry & Associates, a Baltimore-based firm involved in that city's successful harbor redevelopment.

In 1987, after the Legislature was asked to approve a $200 million bond authorization to finance Cordish Embry's plan, a legislative auditor recommended that the project — and the ATDC — be scrapped. The audit said project financing was "unrealistic and unworkable" and that the plan conflicted with maritime needs.

Gov. John Waihee at the time supported redevelopment around Aloha Tower, but suggested the ATDC be folded into a similar agency fostering redevelopment in Kaka'ako.

The ATDC continued to operate, but couldn't finalize terms with Cordish Embry. The agency ended up suing the developer to terminate its preliminary agreement, and was successful after a failed appeal by Cordish Embry.

Despite the rough going, interest in the project from developers continued to grow, and four parties submitted plans in response to a 1989 bid offering.

Aloha Tower Associates led by local developer U.J. "Rick" Rainalter Jr. was selected and its $750 million plan promised a blockbuster return to the state estimated at $4 billion in ground rent payments over a 65-year lease for 17 acres between piers 5 and 14.

But pieces of the developer's proposal began to unravel after a final development agreement was signed in 1990.

The plan called for a retail marketplace, two condo towers, an office tower, a 109-room business hotel, a cruise terminal, 2,000 underground parking stalls and a Nimitz pedestrian overpass.

The developer said its lenders in Japan cut back financing due to Japan's financial crisis and effects from the Gulf War on Hawai'i's economy that included a weakened condo market.

The financing pullback forced the developer to proceed only with a retail phase adjacent to Aloha Tower, and renege on a promise to pay the state a $60 million lease down payment.

Then the developer said its planned underground parking garage wasn't feasible because of cost and engineering issues. The developer also said a soft harbor bottom at piers 5 and 6 made its plan for cruise terminal facilities and an office tower questionable.

PARKING WOES

Construction of a scaled-back Aloha Tower Marketplace went ahead, and the $100 million retail complex opened in 1994. But because it was built with inadequate parking, many retailers and restaurants have avoided leasing space at the center, while others have closed or struggled.

Dan Orodenker, the ATDC's executive director who sealed the Aloha Tower Associates agreement, said global influences derailed what appeared to be a home-run for the state.

"The original concept in 1989-'90 was a good one," he said. "Unfortunately, the economics went the wrong way."

Orodenker, who left the ATDC in 1995 but rejoined the agency from 2001 to 2005, said the partially completed development plan has made development of surrounding parcels intensely complicated.

"The parking is the albatross around everybody's neck right now," he said.

The marketplace was forced into bankruptcy in 1997, and a year later new investors acquired the project and surrounding development rights with an aim to complete the area's long-envisioned revitalization.

But the buyer, a partnership involving Trinity Investment Trust LLP, didn't fare much better than the original developer.

Over several years, Trinity proposed five parking solutions to the ATDC, including a floating garage, but was rejected each time for reasons over obstructing things like views, Irwin Park and maritime operations.

One ATDC board member at the time, who asked not to be named for fear of reprisals, summed up several years of service on the board as a waste of time.

"Every time we got close to a parking resolution, we would get stymied, in particular due to having too many lawyers involved," the board member said.

The Trinity partnership in 2001 sued the ATDC to recover more than $10 million in alleged losses that it claimed were caused by the agency's unwillingness to allow the addition of parking that the developer is actually required to add under its lease with the state.

Negotiations to resolve the suit are still ongoing. Complicating matters was the Trinity partnership filing for Chapter 11 bankruptcy reorganization in 2002 with other investors later replacing Trinity.

The former Trinity partnership, now referred to as AHI Aloha, lost the development rights for undeveloped land flanking Aloha Tower Marketplace in 2000.

The ATDC reclaimed the development rights, but the move obligated the agency to pay the state Department of Transportation around $1.5 million a year to make up for revenue lost by the department by committing its land to redevelopment.

Through June 2005, the ATDC owed the DOT $8.3 million. After years of trying to renegotiate its obligation, the ATDC reached an agreement to pay DOT $225,000 in annual rent plus half of any net income from existing or future development deals.

DEBT AT $7.7 MILLION

As of June 2007, the ATDC had reduced its DOT debt to $7.7 million. According to the ATDC's latest annual report for the fiscal year ending June 2006, the agency took in revenue of $1.4 million mostly from Aloha Tower Marketplace rent, and spent almost $1.2 million.

Sandy Pfund, who has served as ATDC's executive director since 2005, said the agency has had an unfortunate history that makes it unfair to criticize present staff and board members for their effort to advance a mission that has become mired in issues linked to the past such as the lawsuit, parking dilemma and DOT debt.

Pfund said part of the agency's troubles at times stemmed from a lack of staffing or poor morale brought on by proposals to do away with the agency.

For instance, when Pfund joined the ATDC in 2004, Orodenker was the sole staff member and had trouble composing minutes of public meetings. Today the agency has a staff of four, including two project managers and a secretary.

"We're just trying to move forward," Pfund said. "There's a lot that could be done if done right."

Hughes was seen by many as the ticket to redemption for the Aloha Tower Complex vision. The accomplished developer was one of two bidders in 2003 responding to an offer to develop piers 5 and 6.

Hughes proposed developing areas beyond ATDC's request, including replacing an adjacent Hawaiian Electric Co. power plant with a park, and building a 2-mile Downtown streetcar system. The developer also proposed a Downtown bypass tunnel under Nimitz, and transforming piers 10 and 11 into a new cruise ship terminal topped by a hotel.

After being scaled back to piers 5 and 6, the tentative plan by Hughes unraveled over an expectation by the ATDC for him to provide parking for Aloha Tower Marketplace and a $47.5 million difference between what Hughes and the agency proposed as ground rent for piers 5 and 6 land.

The developer sought to resolve differences through arbitration, which is proceeding, though the agency board last month voted to terminate its work with Hughes.

Jeff Portnoy, a local attorney representing Hughes, said the developer intends to seek damages for money Hughes spent and stood to gain by the project. Portnoy added that even if Hughes is later allowed to proceed with Pacific Quay, it may no longer be feasible given the delay and a loss of financing.

"The (agency) is a failure," he said. "I think that the way they treated Ken Hughes is an outrage. ... It has added a tremendous black eye to an already bruised face of doing business in Hawai'i."

ATDC directors said Hughes was asking for unreasonable terms that would be unfair to taxpayers. "We feel that the deal he's proposed now is a bad deal," Pfund said.

Board members have formed a subcommittee to explore new development opportunities.

• • •

A TIMELINE OF ALOHA TOWER, ITS REDEVELOPMENT EFFORTS

1926: Aloha Tower built. It's the tallest building in Hawai'i and a welcoming landmark for passenger ship arrivals.

1973: A local developer floats an idea to redevelop state waterfront warehouses around Aloha Tower into a foreign trade center.

1979: Gov. George Ariyoshi announces plan for a World Trade Center around Aloha Tower at piers 8 to 11, and seeks $8.5 million in state money to start what is envisioned as a mostly privately financed project. Legislature disapproves funding.

1981: Ariyoshi administration proposes forming a quasi-public agency to solicit private bids to redevelop the 13-acre area. Legislature approves idea, and creates the Aloha Tower Development Corp., or ATDC. Agency approves a preliminary plan for a 500-room business hotel, office building and retail space.

1982: A team of private design and financial consultants is hired to help produce a bid package.

1983: ATDC solicits bids. San Francisco-based Southern Pacific Development Co. is selected over one other bid from local partnership Aloha Tower Associates anchored by a large retail complex. Southern Pacific's $100 million plan calls for a 411-room hotel, office space, retail, cruise ship terminal and a pedestrian overpass over Nimitz Highway.

1984: Southern Pacific, following a corporate merger, withdraws from the project citing concern over its projected payoff relative to risk.

1985: Runner-up bidder Aloha Tower Associates is passed over by ATDC, which picks a $200 million plan from a team involving Baltimore-based Cordish Embry & Associates and San Francisco-based operator of local cruise ships American Hawaii Cruises.

1986: American Hawaii Cruises pulls out of the project. ATDC decides to proceed with lead developer Cordish Embry.

1987: A legislative auditor recommends that the project and the ATDC be scrapped. Gov. John Waihee supports commercial redevelopment around Aloha Tower, but suggests abolishing ATDC and transferring its role to another agency fostering redevelopment in Kaka'ako. ATDC sues to void development agreement with Cordish Embry, which countersues to keep the project alive.

1988: ATDC prevails in court against Cordish Embry on grounds it could not agree on a detailed development plan.

1989: ATDC solicits a new round of bids. Four parties submit bids, including Aloha Tower Associates, local developer Jack Myers and local resort developer Chris Hemmeter. ATDC selects $750 million Aloha Tower Associates plan for a retail marketplace, two condominium towers, an office tower, 109-room business hotel, cruise terminal, underground parking and a Nimitz pedestrian overpass.

1990: Developer reaches deal to pay the state an estimated $4 billion in ground rent over 65 years. Development area expanded to 17 acres from piers 5 to 14.

1992: Aloha Tower Associates, led by local developer U.J. "Rick" Rainalter Jr., says limited financing and a weak condo market allow proceeding only with the retail marketplace part of its plan. The ATDC also allows the developer to delay a $60 million lease down payment.

1993: Developer says its planned 1,800-stall underground parking garage isn't feasible. ATDC suggests the state finance a $40 million parking structure on Irwin Park. Construction begins on retail complex Aloha Tower Marketplace.

1994: The $100 million Aloha Tower Marketplace opens.

1995: Developer falls behind paying ground rent to the ATDC for undeveloped land around Aloha Tower Marketplace.

1996: Project lender Mitsui Trust & Banking Co. Ltd. forecloses on Aloha Tower Marketplace.

1997: Aloha Tower Associates is forced into bankruptcy by creditors.

1998: Investment firm Trinity Investment Trust LLP acquires the marketplace and surrounding development rights out of bankruptcy after buying the project's $60 million mortgage at a discount. Gov. Ben Cayetano proposes consolidating the ATDC with a similar Kaka'ako development agency and state harbor agencies into one maritime authority.

2000: ATDC reclaims development rights for land around Aloha Tower and begins updating a master plan to guide development.

2001: Aloha Tower Marketplace owner Trinity sues ATDC to recover more than $10 million in alleged losses that it claims were caused by the agency's rejection of five plans to build additional parking, which ATDC requires Trinity to build under its lease.

2002: Aloha Tower Marketplace, though a Trinity affiliate, files for Chapter 11 bankruptcy. ATDC solicits development proposals for piers 5 and 6.

2003: Gov. Linda Lingle proposes merging ATDC and the state agency charged with redeveloping Kaka'ako. ATDC decides to work with Dallas developer Ken Hughes, one of two bidders responding to its offer. Hughes proposes a hotel, residential rental lofts, an office tower and ferry terminal.

2004: ATDC backs Hughes' plan after the developer revises his project to include fee-simple condos, a 2-mile downtown streetcar system and a park in place of an adjacent Hawaiian Electric Co. power plant. The plan proposes sharing costs and profit with the state. Optional elements include a downtown bypass tunnel under Nimitz and transforming piers 10 and 11 into a new cruise ship terminal.

2005: State legislators balk at proposals to sell state land for the Hughes condo project and spend about $37 million to pay for traffic improvements and relocating the power plant.

2006: Hughes revises his plan to win another preliminary approval from ATDC. Plan involves leasehold condos, including some for hotel and possibly timeshare use, plus retail and restaurant space.

2007: ATDC and Hughes reach a loggerhead over ground lease value. Hughes offered a one-time $10.5 million payment. ATDC seeks $58 million. The developer and agency also disagree on whether Hughes must provide parking for Aloha Tower Marketplace. Hughes initiates arbitration to settle the dispute.

2008: ATDC board votes to terminate development agreement with Hughes.

1981

1989

1989

2003

2006

Aloha Tower Marketplace opened in 1994. The $100 million complex was previously planned with underground parking and condos.

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Reach Andrew Gomes at agomes@honoluluadvertiser.com.