HRPT rent law may be extended
by Andrew Gomes
Advertiser Staff Writer
The state Legislature is considering extending a controversial law it passed last year that gave tenants of the largest private owner of industrial land in Hawai'i more leverage to negotiate property rental rates.
The law, Act 189, is slated to expire June 30.
Two bills advancing in the Legislature propose extending the law to June 30, 2015. No changes to the substance of the law are proposed in the bills, Senate Bill 2020 and House Bill 2284.
The law is being challenged in federal court by the industrial property owner, Massachusetts-based HRPT Properties Trust, which calls it an unconstitutional amendment to leases it acquired from longtime local landowner Damon Estate in 2003. The lawsuit is pending.
Roughly a dozen HRPT tenants testified in favor of the bills, saying that HRPT is still seeking what they view as excessive or aggressive rental rate increases despite the law.
The law requires that language known only to exist in HRPT Hawai'i leases referring to "fair and reasonable" rent must be construed as being fair and reasonable to the lessor and the lessee.
Act 189 also mandates that the type and intensity of use on the property be considered when determining what's fair and reasonable.
More than 180 businesses lease land from HRPT in Mäpunapuna and Kalihi Kai on O'ahu.
Typically the tenants face adjustments to rent every 10 years, and many have complained that HRPT has sought to double or triple rental rates based on land values that rose steeply for the better part of the past decade. HRPT has also sought automatic annual rent increases of 3 percent to 4 percent.
Some tenants say that recent decreases in land values and one arbitrated rent decision haven't prompted HRPT to propose more reasonable rents.
"The issues brought before the Legislature during the last session have only worsened," Bonnie Cooper, co-owner of HRPT tenant Big Rock Manufacturing Inc., said in written testimony. "I know 'life is not fair,' but considering the state of the economy one would think they would have at least a little compassion for the Hawaiian businesses."
Connie Smales, president of Plywood Hawaii, said HRPT in January offered her company a new lease rate of $7 per square foot for the next five years, up from the present $3.87 a foot, plus a 3 percent annual increase. That would take Plywood Hawaii's annual base rent from $120,000 to $216,713 in the first year and to $244,000 in the fifth year.
"I urge the approval of this bill to provide assistance to small businesses that face a very difficult rent renegotiation in very unsettling times," Smales said in written testimony.
Jan Yokota, regional vice president in Hawai'i with HRPT's management affiliate, urged lawmakers to defer the bill. She reiterated HRPT's view that Act 189 is unconstitutional because it specifically targets only HRPT and substantially impairs an existing contract without a legitimate public purpose.
HRPT has claimed that the old Damon lease term "fair and reasonable" refers to fair market rent for the property driven by land value. The language in the lease reads, "rent shall be such fair and reasonable annual rent for the demised land." However, the meaning of the phrase has been argued by tenants even when Damon owned the land.
The Senate Commerce and Consumer Protection Committee recently passed SB 2020, which is now headed for consideration by the Judiciary and Government Operations Committee.
In the House, HB 2284 was passed by the Economic Revitalization, Business and Military Affairs Committee, and is headed for consideration by the Judiciary Committee.
Dates have yet to be set by either committee to hear the bills.
Meanwhile, the lawsuit filed in August by HRPT against the state was allowed to proceed in December, and parties in the suit are preparing their cases.
It remains unclear what effect, if any, the law has had so far on HRPT or its tenants. A tenants' group called Citizens for Fair Valuation claims that HRPT is ignoring the law. HRPT declined to comment on the law's impact, but said the law stands to reduce rents.
Yokota in her testimony on HB2284 said HRPT has reached rent agreements with nine tenants in the past few months.
In one case that began before Act 189 took effect, no agreement could be reached with automobile dealer Servco Pacific. As provided for in HRPT leases, arbitration was pursued by Servco, and resulted in rent being set below what HRPT had sought but above what a Servco expert had said was fair.
According to Yokota's testimony, an appraiser hired by Servco proposed rent be $3.65 per square foot compared with $6.38 proposed by an HRPT appraiser. A third appraiser working with the two other appraisers decided on rent of $5.26.
"The process worked," Yokota testified.
Citizens for Fair Valuation said arbitration can be prohibitively expensive for small businesses. The group also noted that HRPT had initially asked Servco to pay $7 per square foot plus annual increases of 4 percent, which would have equated to $8.40 per square foot at the end of the rental period. Previously, Servco had been paying $2.95 per square foot.