The future of the Grand Naniloa Hotel is up in the air as the Board of Land and Natural Resources considers whether to permit the hotel’s owners to take out a second mortgage to pay off its first one.
At a Tuesday meeting, the BLNR discussed the current predicament of Tower Development Inc., a developer that is the main partner in WHR LLC, which owns the Naniloa, and is currently in dire financial straits.
According to documents filed to the BLNR, WHR, through Tower, is seeking approval from the Board to take out a $62 million loan and mortgage in order to pay off a different $50 million loan WHR took out from a different lender in 2018.
The documents state that WHR hoped to secure approval for the second loan by Tuesday in order to stave off foreclosure and, ultimately, bankruptcy proceedings. Wilmington Trust, currently the holder of WHR’s $50 million loan, filed a foreclosure action in December of 2021, and there is currently a pending motion for receivership that would appoint a receiver to operate the hotel under court supervision.
In addition, the Board also discussed a pair of proposals by Tower to redevelop both the former Uncle Billy’s Hilo Bay Hotel and the former Country Club Condominium Hotel on Banyan Drive.
An evaluation committee had recommended Tower’s proposals for both properties in 2021, but action on those proposals was postponed indefinitely after The Edmund C. Olson Trust, a fellow partner in WHR LLC, sued Ed Bushor and Stuart Miller, respectively Tower’s CEO and president, for breach of contract for submitting those proposals in the first place. Since then, the Department of Land and Natural Resources’ Land Division has had difficulty extracting from Bushor information that proved Tower has the financial capabilities to follow through on its development proposals.
All these factors converged Tuesday as Land Division representatives delivered their recommendation to the Board: Deny Tower’s request for the second loan and rescind the DLNR’s request for development proposals on the two Banyan Drive properties.
Land Division Administrator Russell Tsuji said Tower has historically had difficulties maintaining rent payments to the state for the Naniloa. Last May, WHR was found to owe the state more than $600,000 in back rent, although it was able to repay that back rent in full after the Board granted a brief extension.
“But apparently … at least from what I can see, they did not pay attention to the mortgage, which later ended up in the current foreclosure proceeding,” Tsuji said.
Tsuji went on to say that the terms of the secondary loan that WHR is seeking are less favorable than those of the current loan. The loan is a “bailout-type” loan, he said, with a term of only two years and highly adjustable interest rates in a market where interest rates are climbing, for a property being actively foreclosed upon.
“From a lender’s standpoint — and I used to be a lender in a prior life — we called this ‘pyramiding,’ and it’s a big red flag in the lending industry,” Tsuji said. “It’s borrowing from Peter to pay Paul. Other people’s money.”
Tsuji concluded that denying the second loan to Tower will better protect the state’s interests than permitting it.
“Whether we’re in foreclosure or bankruptcy, it’s worse to be in a situation with a state asset with $62 million encumbering it versus $50 million,” Tsuji said.
Bushor defended Tower, insisting that its current predicament is because of the financial strain imposed by the COVID-19 pandemic. He added that he chose to keep the Naniloa operating throughout the pandemic — at great financial loss — in order to protect the jobs of his employees.
“What was the right thing to do was stay open, incur more losses, keep the employees hired, pay them, and never let any of them go, and we did not,” Bushor said. “COVID is to blame for my new need for a new loan, not me, I didn’t do anything wrong. I just kept everybody hired, and incurred significant losses.”
Bushor added that Hilo Hotel Funding LLC — the proposed lender for the $62 million loan — is willing to lend to Tower because of the Naniloa’s current financial success.
“Before COVID hit … generally speaking, the most we ever did was $4.8 million in (net) revenues,” Bushor said. “And the last 12 months, we’ve done almost $6.5 million.”
Furthermore, Bushor claimed that Tower and the Olson Trust are on the verge of signing a settlement agreement that will ultimately remove the Olson Trust as a partner in WHR.
However, Bushor suggested that he will not sign the agreement unless Olson Trust President Ed Olson retracts the argument in the lawsuit that Tower’s involvement in the Banyan Drive development proposals violated Tower’s contract with WHR.
“The operating agreement expressly allows it,” Bushor said. “It says very clearly that if we want to develop Uncle Billy’s, we have a right to do so.”
According to the lawsuit filed by the Olson Trust last September, the agreement prohibits Tower and its affiliates from from “acquiring, developing, or owning any potentially competitive properties, such as Uncle Billy’s and the Condo Hotel unless doing so would be advantageous to WHR,” and that, because Uncle Billy’s and the Country Club are potentially competitive against the Naniloa, Tower’s management of those properties would not be advantageous to WHR.
Regarding the Banyan Drive properties, Land Division Assistant Administrator Kevin Moore said the Land Division’s recommendation to rescind the request for development proposals would, because of technicalities in how the request was written, also render moot two other proposals for the Country Club property submitted by other developers, although he added that the developers could re-apply if DLNR chooses to issue a second request for proposal.
After a lengthy discussion both in and out of executive session, board member Chris Yuen proposed to defer action on all actions — regarding both the secondary loan and the Banyan Drive development proposals — for at least two weeks until Tower can furnish the board with evidence that WHR is financially capable of supporting the secondary loan.
The board voted unanimously in favor of Yuen’s motion, and Bushor assured the board that he will supply such financial information as required.
Email Michael Brestovansky at mbrestovansky@hawaiitribune-herald.com.