Industrial

Court rejects commercial tenant rent law

A judge rules that the law giving commercial renters greater power is unconstitutional

A U.S. District Court Judge has struck down a Hawaii state law that gave commercial tenants greater leverage to negotiate rent with their Massachusetts-based landlord.

Chief Federal District Judge Susan Oki Mollway ruled that Act 189, which was enacted in 2009, violated the U.S. Constitution and could not be enforced. The law had been extended by Hawaii lawmakers to 2013, but still awaited Gov. Linda Lingle’s signature.

HRPT Properties Trust, which owns more than 200 acres of industrial and office space in Mapunapuna, Sand Island and Kalihi Kai, sued shortly after the law was enacted. The property owner challenged what it called an “unconstitutional amendment” to the 180 or so ground leases it had acquired for $480 million from Damon Estate in 2003.

The law required that the “fair and reasonable rent” clause in HRPT agreements must apply to the lessor and lessee. It also mandated that use should determine rent.

Mollway, who issued her ruling after a May 10 hearing, found that Act 189 targeted HRPT and did not supply a general public purpose. She also ruled that the Constitution’s contract clause prohibits states from changing historical rights.

“We disagree with Judge Mollway’s legal analysis and have made no decision yet on whether to appeal,” said State Attorney General Mark Bennett.

The not-for-profit Citizens for Fair Valuation Inc., which joined with about a dozen HRPT lessees to get Act 189 passed, said it will consider appealing.

Tenants, who typically face rental adjustments each decade, have complained that HRPT had sought to double and triple rent and institute annual increases of 3 to 4 percent, Steiner said.

Since most tenants have built out the land that they lease and are locked into long-term contracts, they cannot walk away without risk, Steiner said.

“Never before have over 20 properties been involved in arbitration proceedings at one time and this indicates that rent demands are not in line with market realities,” he said. “Damon was not an easy lessor either, but the business model was to work with tenants to avoid arbitration.”

Tenants like Servco Pacific Inc., Grace Pacific Corp., Plywood Hawaii Inc. and Bacon Universal Co. Inc. and others could be adversely affected by the ruling, Steiner said.

“The crux of what is happening here is a problem that will affect everyone of us because all the goods and services will go up dramatically to cover rent,” he said. “All the money they will be paying will be going off-island to a landlord who is not putting anything into the property.”

Source: SB

Industrial Vacancy Rate Highest Since 2002

The vacancy rate for industrial properties in Hawaii in the first quarter of 2010 rose to its highest level since early 2002, according to a new report.

Average asking base rents, meanwhile, declined over the past year to $1.02 per square foot per month, which is even with the asking rents at the end of 2005, according to the industrial market report from CB Richard Ellis. Sales of industrial properties were sluggish, the report said.

The statewide vacancy rate for industrial property was 4.4 percent during the first quarter, an increase of 1 percentage point from the year before, the report said.

That reflected 2.45 million square feet of vacant space out of a total of nearly 56 million square feet of net rentable industrial space on Oahu, the Big Island, Maui and Kauai.

The bulk of the vacant space was on Oahu, where there is 2.15 million square feet of vacant area, most of it in Kalihi, Waipio, Waipahu, Kapolei and Campbell Industrial Park.

Source: PBN

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

Iwilei warehouse will house bakery, restaurants, stores

A giant warehouse in Iwilei that produced cardboard boxes for about 50 years is about to become more inviting to consumers as the home of a few new restaurants and retail stores, adding another piece to what has been a gradual upgrade of the historically industrial area.

The renewal plan for the former Weyerhaeuser box production plant at the corner of Nimitz Highway and Alakawa Street just makai of Home Depot is being driven by Thanh Lam, owner of the local Ba-Le bakery and sandwich shop chain.

Lam bought the two-story, 165,900-square-foot building in May with two partners for $20 million, and is aiming to complete renovations costing a few million dollars more by March or April.

West Oahu building sells for $19M

A local family has purchased a 189,000-square-foot cold/freezer food distribution building in West Oahu’s Campbell Industrial Park.

The building at 91-315 Hanua St., which is occupied by a single tenant, C&S Wholesale Grocers, was purchased by KDI Investments Inc. for $19 million, according to Colliers Monroe Friedlander, which handled the sale along with the Los Angeles office of Colliers International. KDI Investments is owned by siblings Malcom Tom, Kenton Tom and Joanna Leong, who also own the Wailana Coffee House in Waikiki.

The seller was Tower Plaza Associates LP, which bought the building in 2006 for $18.75 million from Pacific Warehouse Inc., a related company of Foodland Super Market Ltd.

“The buyer stepped up and purchased the property at this opportune time because of the high rates of return with an in-place credit tenant,” said Mark Bratton, the senior vice president at Colliers Monroe Friedlander who represented the seller along with Executive Vice President Scott Mitchell. “Considering the eventual upswing in the market cycle, investors will not see this type of return three to five years from now. This is impeccable timing.”

Source: PBN

A&B Properties sells California warehouse

Honolulu-based A&B Properties, the real estate subsidiary of Alexander & Baldwin (NYSE: ALEX) announced Wednesday that it sold the 126,000-swuare-foot warehouse on San Jose Avenues in City of Industry, Calif.

Financial details were not disclosed.

“We continue to realize favorable pricing for quality, stable properties,” said Norbert M. Buelsing, president of A&B Properties, in a statement. “A recent lease extension agreement with the tenant occupying this warehouse, coupled with its central location in a prominent industrial and commercial submarket of Los Angeles, positioned us well for the disposition. We continue apace with A&B’s core investment strategy of tax-effectively redeploying real estate sales proceeds into new commercial property investments with favorable growth prospects.”

A&B Properties’ commercial property/investment portfolio now consists of 8.5 million square feet of retail, office and industrial space in Hawaii and eight U.S. Mainland states.

Source: PBN

A & B buys two California warehouses

Alexander & Baldwin Inc. has purchased two distribution warehouses in Fullerton, Calif., for an undisclosed price.

The company, through subsidiary A&B Properties Inc., said the buildings with a combined 119,400 square feet of leasable area in the Northpoint Commerce Center industrial park are fully occupied by a records management company and food service distributor.

The purchase is A&B’s seventh industrial real estate acquisition in the last two years, bringing the firm’s commercial property investment portfolio to 8.5 million square feet of retail, office and industrial space in Hawai’i and eight Mainland states.

Source: HNA

HRPT says Government interference in commercial leases not constitutional

The largest private owner of industrial land in Hawai’i, HRPT Properties Trust, yesterday sued the state, alleging a one-month-old law intended to give its tenants more leverage in renegotiating rents is unconstitutional.

In the suit filed in federal court in Honolulu, HRPT said the law interferes with its rental contracts in violation of the U.S. Constitution, and if enforced would allow tenants to pay less rent than they do currently.

The law affects some of the more than 180 businesses that lease land from HRPT in Mapunapuna and Kalihi Kai on O’ahu.

Under the law, an unusual phrase 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.

The law also mandates that the type and intensity of use on the property be considered when determining what’s fair and reasonable.

“The (law) … mandates that HRPT’s contractual right to collect fair market rents is replaced by a rent renegotiation regime that is aimed at depressing rent rates,” the company said in its suit.

HRPT said earlier this week in a conference call with stock analysts that some tenants have begun using the law as a “hammer” in rent negotiations.

Most commercial land leases in Hawai’i tie rental rates to the fee- simple value of the land using a specified or prevailing rate of return, and rent is determined by an arbitration panel of appraisers if the landlord and tenant can’t agree on the amount.

Massachusetts-based HRPT said in the suit that arbitration, which is part of its leases, provides a fair and impartial means to resolve rental rate disagreements, and added that a “large majority” of rent negotiations over the past six years were concluded without arbitration.

The suit was filed against Gov. Linda Lingle, who let a bill passed by the Legislature in May become the rent law last month without her signature.

Lingle spokesman Russell Pang said the governor is reserving comment because of the litigation.

In an earlier message to the Senate explaining her reason for letting the bill become law, Lingle expressed mixed feelings about the measure.

“The ability to freely negotiate contracts without government intrusion is essential to a fair and open marketplace and a principle that I support,” she wrote. “However, this bill addresses a case where the free market between lessor and lessee is not functioning.”

The state attorney general testified that the bill might be found unconstitutional because it alters terms of a lease without a broad public purpose, though an expert retained by the tenant argued that the law is constitutional.

The public purpose stated in the bill is to help stabilize the economy by helping small businesses negotiate affordable rent on HRPT land.

HRPT leases were inherited from prior landowner Damon Estate when the firm bought 10 million square feet of land in Mapunapuna and Kalihi Kai plus a few other parcels from Damon in 2003 for $480 million.

Damon had maintained its lease language stating “rent shall be such fair and reasonable annual rent for the demised land” means fair market rent for the property. But arbitrators have long argued over the meaning of the phrase.

HRPT sought to raise rents to what it viewed as market rates as lease renegotiation periods came up for tenants after the boom in local real estate values from 2000 to 2007.

Many tenants bristled at the attempt to raise rents by as much as three times, and some formed a coalition that drafted a bill. The coalition, dubbed Citizens For Fair Valuation, was started by several companies, including Servco, Plywood Hawai’i and Grace Pacific.

Source: HNA

A&B buys Oahu industrial property

A&B Properties Inc. has purchased the Waipio Gentry industrial properties in Central Oahu and also a warehouse and distribution facility near San Diego, the company said Wednesday.

Honolulu-based A&B Properties, the real estate subsidiary of Alexander & Baldwin Inc. (NYSE: AXB), acquired both properties using 1031 tax-deferred proceeds from earlier commercial property sales.

The Gentry portfolio consisted of five buildings totaling 158,000 square feet. The Activity Distribution Center in Miramar, Calif., consisted of four buildings totaling 252,000 square feet, the company said in a news release.

“The acquisitions of Activity and Waipio further support our real estate investment strategy to own and operate logistics-oriented warehouse facilities in key distribution markets,” said Norbert M. Buelsing, president of A&B Properties.

The Activity industrial park, located in one of San Diego County’s strongest submarkets, is fully leased with a mixed tenant base of both U.S. and international businesses.

The Waipio Gentry properties are located in the 125-acre Gentry Business Park and are 98 percent leased to wholesale, retail and manufacturing clients.

A&B Properties now owns 8.6 million square feet of retail, office and industrial space in Hawaii and eight other states.

Source: PBN