Commercial Real Estate, Industrial

Servco Pacific wins arbitration on HRPT rent

Servco Pacific recently won an arbitration over the rent it pays for its Mapunapuna auto dealership, and the decision may set a new standard favorable to tenants of Hawaii’s largest industrial landlord.

The downturn in the economy may end up helping even more of the tenants as the sluggish commercial real estate market pushes land values down.

Servco’s arbitration with Newton, Mass.-based HRPT Properties Trust for its 9.6-acre lot on Pukoloa Street in Mapunapuna was confirmed in court this month for $5.26 per square foot annual rent, or $2.2 million per year, for 10 years.

Servco, the state’s largest auto dealer, had been paying $2.95 a square foot. HRPT wanted Servco to pay $7 plus 4 percent increases each year for 10 years, putting Servco’s annual rent at $4.2 million by the end of the lease.

Citizens for Fair Valuation — a group of about 20 Mapunapuna businesses, including Servco, that formed several years ago to oppose HRPT’s effort to dramatically raise rents — sees the award as a victory, since the amount was far less than what the landlord originally sought.

But HRPT spokesman Tim Bonang noted that Servco’s new rent reflects a 78 percent increase over what it had been paying.

“I think the fact that the Servco arbitration still came out at close to an 80 percent increase is where the market is right now,” Bonang said. “At the end of the day, absent any legislative interference, our rental rates have been driven by the market. For better or worse that’s the way the agreements have been set up.”

Servco, whose executives declined an interview request from PBN, was the first tenant to complete arbitration with HRPT. The process can take as long as six months, depending on the availability of arbitrators and other experts.

At least one other company, Hawaii Select Investments, has gone through arbitration hearings and is waiting for the final ruling from a three-appraiser panel after receiving rent estimates from both sides’ appraisers.

Several other tenants, whose leases expired more than a year ago, are also seeking arbitration but their cases haven’t yet begun.

Hawaii Select, which leases about an acre and a half on Sand Island from HRPT, was initially offered rent of $7 per square foot with 3 percent annual step-ups, according to the company’s attorney, Bill Byrns.

Hawaii Select’s appraiser determined the annual rent should be $4.45 per square foot, he said.

“The offer they made to my client without step-ups was $10.25,” said Byrns, who represents three other HRPT tenants waiting to go through arbitration. “Then their appraiser comes in at $6.48, way below what their offers were.”

The market may end up pushing rents down further.

A recent ground rent renegotiation in the Bougainville area of Honolulu, which is zoned for industrial mixed-use, valued the land at $66 per square foot.

That, coupled with the award for the Servco land, which is zoned business-community — which allows for a number of different business activities — points to values for the industrial-zoned land in metro Honolulu of $45 to $50 per square foot, said Mark Ambard, president of Ambard & Co.

HRPT paid $50 per square foot for 220 acres of Damon Estate land in Mapunapuna and Sand Island in 2005. It also owns about 200 acres at Campbell Industrial Park.

Ambard expects prices for the industrial market on Oahu to drift downward over the next year and then remain flat for another three to four years.

“It’s purely a reflection of the economy,” Ambard said. “I don’t see any turnaround until 2014 at the soonest.”

More than a dozen businesses going through arbitration had rent resets due on Jan. 1, 2009, or Jan. 1, 2010. A majority of the leases in Mapunapuna come up for reset in 2012.

Source: PBN