HILO, Hawai'i — The leases for oceanfront land under the Hawai'i Naniloa Resort and the Banyan Drive golf course in Hilo were auctioned off by the state yesterday to a family-owned local company that also controls the Nani Mau Gardens and the Volcano House hotel.

As a condition of assuming the new 65-year lease for nearly 70 acres, Hawai'i Outdoor Tours Inc. will be required to pay the current Naniloa owners $6.1 million for the hotel and make at least $5 million in improvements to the property over the next five years.

Kenneth Fujiyama, president of Hawai'i Outdoor Tours, won yesterday's bidding in Hilo with an offer to pay base lease rent of $500,000 a year to the state plus 2 percent of gross revenue.

Current owner Hawai'i Naniloa Resort LLC has paid a base rent of about $73,000 a year for the six leases that now cover the property. Under the new arrangement, those leases would be consolidated into one lease with Hawai'i Outdoor Tours.

The unsuccessful bidders included Peter Savio, president of Hawaiian Island Homes Ltd., who had teamed up with the Outrigger Hotels & Resorts; and John Conway, member of CH & Associates LLC, who had planned to have Starwood Hotels & Resort Worldwide Inc. run the Naniloa operation.

Fujiyama said he plans to upgrade the Naniloa, but offered no specifics. "We'll just take it one day at a time," he said.

Fujiyama said he thinks that it's important for the property be under local management and that "we can offer more to the visitors here, make it really local-style."

Savio said Outrigger had been excited about the possibility of entering the Hilo market, but calculated the Naniloa would need $17 million to $20 million in renovations to meet Outrigger's standards.In anticipation of that expense, his group was unwilling to bid higher than $500,000 a year to control the leases, Savio said.

Conway said his group made a similar estimate of the required renovations. The hotel also needs an entirely new approach to marketing to make it profitable after the improvements have been completed, he said.

"What you have to do is convince the wholesalers that are out there selling rooms internationally that the Naniloa has changed, because it's gotten a reputation as being an old, aged hotel, and so those groups are not booking," Conway said.

Fujiyama said he already works with all of the major wholesalers, and they are looking for "higher standards" and better amenities that are not now available in Hilo.

Since the late 1980s, the Naniloa has been controlled by The Nakano Company Ltd., which is owned by Japanese national Joji Nakano.

In recent years the owners of the Naniloa and other Banyan Drive hotels sought lease extensions or new leases from the state. Most of the original leases in the area, including the Naniloa's, were set to expire in 2015. With so little time left, the hotel owners argued they could not obtain financing to make improvements.

The image and the appearance of the hotel have been slipping in recent years, and the Naniloa at one point owed the county more than $1.3 million in property taxes and sewer charges. The hotel has been on a payment plan to clear the debt.

Tourism in rainy Hilo has struggled over the years despite a steady stream of visitors to Kilauea volcano, although cruise ship traffic has provided an important impetus in recent years. Fujiyama said he believes the future of tourism in Hilo is "phenomenal."

"People want to come to something different; they're tired of coming to the same type of resorts and all that," he said. "Our biggest draw here is the volcano ... so the Naniloa was a natural, if it was brought up to par."

The rent that the state charges for the Naniloa property will increase in the 11th and 21st years of the lease, and will be renegotiated in rental reopenings after 30, 40 and 50 years.

Reach Kevin Dayton at kdayton@honoluluadvertiser.com.