honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Thursday, May 7, 2009

LEASE RENT DISPUTE
Tenants get Senate support

By Andrew Gomes
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Bill attempts to address issue of 'fair' business rent

spacer spacer
Hawaii news photo - The Honolulu Advertiser

Michael Steiner

spacer spacer

A well-organized group of industrial businesses that lease land in urban Honolulu has received help from the Legislature in its fight against a Mainland landowner trying to dramatically raise rents.

However, it's questionable how much benefit the bill passed Tuesday will provide the businesses, and whether Senate Bill 764 — which drew concerns from the state attorney general — will become law.

The bill affects the largest private owner of industrial land in the state, Massachusetts-based HRPT Properties Trust, which owns 10 million square feet of land in Mapunapuna and Kalihi Kai with more than 200 tenants from equipment repair firms to distribution companies.

The bill's stated intent is to address burdensome or vague provisions in certain urban-area industrial property leases in an effort to help stabilize Hawai'i's economy, given that businesses located in the urban core help keep costs down for goods and services.

The bill doesn't target HRPT by name, but applies only to leases containing a clause more or less exclusive to HRPT leases that say rent shall be "fair and reasonable" for the leased land.

Mark Ambard, a real estate broker who has been critical of HRPT, said even if the bill becomes law it may be of little consequence.

"This whole idea of legislating (the definition of) 'fair and reasonable' is almost as stupid as legislating good conduct," he said. "It's window dressing. I don't think it's going to make a whole lot of difference."

Michael Steiner, who led the push for legislation as the executive director of the HRPT tenant alliance Citizens for Fair Valuation, said the bill should help level the playing field for lease negotiations.

HIGHER RENTS

HRPT tenants argue that the real estate investment trust has been heavy handed in negotiations, offering new rental rates that are double or triple existing rates. Many tenants say they can't afford the proposed rates, which also include automatic annual increases of 3.5 percent to 4.5 percent, and that they would have to move or shut down.

HRPT, which acquired its Mapunapuna and Kalihi Kai land and leases in a 2003 purchase from the local Damon Estate, said it is merely adjusting rents to market value.

The company said tenants, which typically have 50-year leases that require the rent be re-set every 10 years, have enjoyed low rent for the past ten years, and that it is trying to maximize its income by raising rents based on property values that have more than doubled this decade.

The opposing landlord-tenant views are no stranger to Hawai'i or its Legislature. Soaring ground rents threatening business tenants is a resurgent issue in a state where huge concentrations of commercial property are owned by a few entities such as HRPT, Kamehameha Schools, Queen Emma Foundation and others that lease their land subject to periodic renegotiated rent.

After the Japanese investment bubble helped drive Hawai'i real estate prices through the roof in the late 1980s, similar instances of rent hikes exacerbated by an economic downturn drove lessees out of business or out of their buildings.

Lessees have petitioned the Legislature before for help, but only in rare cases have obtained meaningful results.

HRPT tenants, which have banded together before against Damon, claimed that HRPT was particularly monopolistic in its negotiations by refusing to negotiate unless tenants agreed not to discuss terms with others. HRPT said it has since abandoned that practice.

TENANT TESTIMONY

About 15 tenants submitted testimony supporting SB 764, including Servco Pacific, Plywood Hawaii, Grace Pacific, Ben Franklin Crafts, Inter-Island Solar Supply and 'Olelo Community Television.

Testifying against the bill were Queen Emma Foundation, the Hawaii Association of Realtors, the Building Industry Association of Hawaii and the Land Use Research Foundation.

The Land Use Research Foundation, an organization representing large landowners and developers, called the bill anti-business and bad public policy. The group said disputes over lease terms should be resolved through mediation, arbitration or the courts, and warned that altering conditions of a lease to favor lessees is unconstitutional.

Jon Van Dyke, a University of Hawai'i William S. Richardson School of Law professor retained by Citizens for Fair Valuation, testified that the bill isn't unconstitutional.

Van Dyke said the bill provides a logical interpretation of an existing term in the leases. He added that if a court viewed the change as a significant impairment to the contract, then the bill still would be constitutional because it serves a significant and legitimate public purpose.

The state attorney general, however, testified that the bill's stated purpose of stabilizing the economy isn't well supported, and cautioned that the bill may be found unconstitutional.

'FAIR AND REASONABLE'

Scott Mitchell, an executive vice president with commercial real estate brokerage firm Colliers Monroe Friedlander, said the constitutional issue likely would be challenged in court if the bill becomes law.

The key clause in the bill and the HRPT leases is "fair and reasonable." The definition of the term previously has been argued by panels of appraisers arbitrating disputes between Damon Estate and lessees.

Most commercial land leases in Hawai'i tie rental rates to the fee-simple value of the land using a specified or prevailing rate of return in cases where agreement on rent can't be reached.

Damon had maintained that its leases stating that "rent shall be such fair and reasonable annual rent for the demised land" means fair-market rent for the property.

HRPT in testimony pointed out that one arbitrator in a Damon lease dispute in the 1990s said it would be ridiculous for lessees to claim that the words "fair and reasonable" entitle them to below-market rents.

In SB 764, another provision requires that the rental rate account for the type and intensity of use on the property.

One provision in the bill that was removed by a conference committee would have required that a lessee's gross income be taken into account for determining rent.

Another change made to the bill by the conference committee added a repeal date for the measure of June 30, 2010.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.