Legal challenges against the state by a Hilo business owner whose lease agreement is in jeopardy could heat up after a hearing Friday.
Through a 2018 law, Act 149, lessees of land within the Kanoelehua Industrial Area in Hilo have been allowed to apply with the Department of Land and Natural Resources to have their leases extended by up to 40 years as long as they make certain improvements to the property, in an effort to combat decrepitude in the area.
Although that application process has been lengthy and cumbersome, a handful of lessees have been granted extensions.
One of those lessees was 69 Railroad LLC, which operates warehouses on a parcel on Railroad Avenue and whose lease the Board of Natural Resources extended by 30 years in February 2022. But even after the lease agreement was signed by both Railroad’s partners and the state attorney general’s office, the DLNR decided later that summer that the lease agreement would be revised.
“What they want is to modernize the lease,” said Michael Shewmaker, one of 69 Railroad’s partners. “The lease was first issued in 1961, so it doesn’t have a lot of the language they have in modern leases.”
But Shewmaker added that the planned revisions are unacceptable. For one, Act 149 requires that leases be extended as written, not as revised, he said — in fact, when the BLNR initially approved the lease extension in February, it determined that it did not have statutory authority to update the terms.
More importantly, however, is the DLNR’s inclusion of “rent participation” in the revised lease agreement, which Shewmaker said would require Railroad to pay a cut of sublease rent generated by the property. There are 11 subleases on the property, and DLNR’s Land Division proposed in the revised agreement to take a cut of up to 40% of that sublease rent, on top of the site’s annual rent.
But with ballooning rents — Shewmaker said lease on the rent is expected to be $192,000 by 2026, an increase of more than 250% from 2006 — Shewmaker said rent participation would be ruinous.
In September 2022, the BLNR approved the amended lease agreement, leading 69 Railroad to file a petition for a contested case in the matter. The BLNR on Friday will discuss a motion by the DLNR to dismiss that petition.
The DLNR’s motion to dismiss argues that the state is not required to grant a contested case in this instance because 69 Railroad does not have a “constitutionally protected property interest” — that is, it does not have a legitimate claim to be entitled to a lease extension without revisions.
Shewmaker said that, on one hand, he is “kind of glad they’re hearing us at all,” adding that there has been very little communication between 69 Railroad and the DLNR since September. But he also said he is disappointed that it seems that a settlement won’t be forthcoming.
“As I understand it, the point of the contested case is to prevent the need for the average guy to have to turn to litigation,” Shewmaker said.
“I had hoped somebody would come to us and say that this doesn’t need to go to a courtroom, because I think the judge probably won’t be happy to see this on the agenda.”
Ron Kim, an attorney representing 69 Railroad, said he has filed complaints in the state Third Circuit Court and the U.S. District Court. The complaints name the BLNR, the DLNR, Land Division Administrator Russell Tsuji, and then-BLNR Chair Suzanne Case as defendants.
Those complaints call the state’s actions “arbitrary, capricious, unreasonable and irrational and with no … rational relationship to a government interest” and urge their respective courts to determine the BLNR’s September decision unlawful and to file an injunction against the defendants preventing them from interfering with the execution of the unamended lease extension that was approved in February 2022.
“In a perfect world, they’d just follow the law, and we wouldn’t have to go through this,” Kim said.
The state submitted rebuttals to both complaints refuting 69 Railroad’s claims and reiterating it lacks standing to be granted a contested case.
Kim said the Third Circuit Court still needs to hold a scheduling hearing for the state case, while the federal case has a conference hearing scheduled for April 3.
“We’ll continue this until our case is heard,” Shewmaker said. “We’re willing to settle, really, but the state doesn’t seem to want to.”
Email Michael Brestovansky at mbrestovansky@hawaiitribune-herald.com.