ANALYSIS: Naniloa – Local Crisis, Mainland Asset (Part 1 of 2)

Just east of the late-1700s residence of King Kamehameha, beside a row of majestic Banyan trees planted by the likes of Amelia Earhart and Louis Armstrong, Hilo’s largest hotel sits in a state of part-rebirth, part-ruin.

Upon entering a brightly renovated lobby, visitors are treated to a breathtaking view of Hilo Bay. Down on the oceanfront patio, a shimmering seaside pool beckons.

But after walking to the ocean’s edge and rounding a corner to the right, the resort’s hopeful first impressions fade. Perched along the south shore, the hotel’s once-bustling social venue known as the “Poly Room” (Polynesian) is in a state of deterioration.

Nearby, the hotel’s larger pool sits in an eerily quiet state surrounded by overgrowth, its green-hued water motionless. A bearded man in tattered clothes sits by the shoreline on a dining room chair he has claimed for himself, taking in the ocean view.

“This place used to be something” he says, recalling fonder memories. “Some great acts used to play here.” He tells stories of grand buffets and renowned musicians, eventually returning to the present by observing “well, here we are.”

Back in September of 2005, a public auction was held for the rights to lease the 385-room Naniloa Hotel and its adjacent 60-plus acre golf course.

The Naniloa Hotel’s oceanfront pool. Photo by Nate Gaddis.

At the auction, Hilo entrepreneur Ken Fujiyama stunned many by submitting a winning bid of $500,000 per year for the 65-year lease. Fujiyama’s company, “Hawaii`i Outdoor Tours” (HOT) managed to out-bid veteran competitors like Sheraton Resorts and Outrigger.

Securing the lease from the Department of Land and Natural Resources required Fujiyama’s company to commit to paying not only $500,000 per year in rent, but also an additional $6.1 million up-front to the hotel’s previous owner, the Nakayama Corp. of Japan. The lease terms also obligated HOT to complete $5 million worth of renovations within three years.

That $500,000 per year bid was, according to industry veterans and the DLNR, several times higher than the property’s value at the time. By comparison, Naniloa’s smaller neighbor, the Hilo Hawaiian Hotel (managed by Castle Hotels), carries a lease payment less than one fourth of that amount.

Concerns were also raised at the time that the $5 million of renovations DLNR required the winning bidder to complete was far too low to bring the large hotel and golf course back up to acceptable standards.

Then-mayor Harry Kim and Starwood Hotels Executive Keith Vieira both submitted letters to Gov. Linda Lingle questioning DLNR’s judgement, with Vieira insisting a reasonable investment “should be more along the lines of $15-20 million.”

During an interview with Big Island Now on Sept. 26, current DLNR Land Division head Russell Tsuji, who was not part of the 2005 auction process, acknowledged that when it came to the lease’s requirements, DLNR’s terms “may have been lax at the time.”

Tsuji speculated that the original lease-holder, the Nakayama Corp., may have been allowed too much input in setting the terms of the auction. According to Tsuji, Nakayama had “intended to bid at the auction themselves,” and had an incentive to make the lease terms as advantageous as possible.

The Naniloa Hotel’s main pool remains closed. Photo by Nate Gaddis.

As for DLNR’s position leading up to the auction, Tsuji explained that it was in the agency’s interest at the time to be accommodating to Nakayama’s requests. The Japanese firm had only 10 years left on their own lease of Naniloa prior to the auction, a time period widely seen as too short to secure financing for any major improvements to the property.

(The Legislature responded by passing a law allowing for the re-opening of the lease with a new 65-year term. The Hilo Hawaiian Hotel was recently also granted an extension on its lease under the same law.)

But whatever the circumstances were leading up the auction itself, Fujiyama did in fact manage to win the lease, and according to meeting minutes from DLNR, surpassed the $5 million renovation requirement “ahead of schedule.”

As housing prices in the US reached an all-time high in 2006, the Naniloa found itself under new management. Its owner was now a third-generation Japanese American who lived in Hilo, and had big plans for what many have described as the town’s underutilized “jewel.”

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Walking the halls, one can see where efforts at restoration have ground to a halt: partially repainted ceilings, shiny new elevator trim contrasted by floor numbers labeled with a Sharpie.

An entire wing of the resort remains closed off, and the adjacent golf clubhouse sits empty, its windows boarded up.

But in contrast to its exterior flaws, the areas which received the most attention can be downright stunning. With picturesque ocean views and sleek modern furnishings, the hotel’s best rooms give a tantalizing glimpse of what the facility could look like, given enough investment.

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“I don’t normally talk like this, but the public deserves to know,” Ken Fujiyama told Big Island Now on Sept. 27.

The president of Hawai`i Outdoor Tours described in detail what his original intent was in purchasing the Naniloa, and how the hotel ran into financial difficulties.

Fujiyama explained that in order to finance the purchase and initial remodeling of the Naniloa, he obtained a $10 million dollar, five-year construction loan from First Regional Bank.

That, along with several million dollars from his subsidiary companies, was used to pay $6.1 million to the previous lease-holder, and to finance the $5 million in improvements required by the state.

According to Fujiyama, he has done more than what was required of him, claiming, “as of last year we had put in a total of over $15 million between the loan and our own [subsidiary’s] cash.”

Fujiyama acknowledged he was fully aware at the time he won the auction that the $5 million requirement would not get the hotel anywhere close to being fully restored, and explained why he chose to focus on upgrading a limited number of rooms.

This collage shows some of the interior improvements done on the Naniloa Hotel since 2006. Image courtesy Ken Fujiyama.

“The proposal with the bank was to do a limited remodeling, but we decided to go from skimpy rooms to high quality rooms with high quality materials. Instead of doing a lot of rooms we limited it to fewer [higher quality] rooms and they agreed…”

The Hawai`i Outdoor Tours president said he felt that decision has now come back to haunt him, as the press and various politicians pound away at the hotel’s external appearance.

“We never painted the outside. We should have done that first,” said Fujiyama, explaining that his focus initially was on repairing electrical and plumbing infrastructure, and on upgrading the hotel’s interiors “where the guests would be.”

As of 2012, a total of 165 rooms were listed as “renovated” on the hotel’s website.

According to Fujiyama, his original plan was to re-finance the construction loan into a more traditional, long-term loan, and to invest several million more dollars through the sale of properties held elsewhere on the Big Island by subsidiary companies.

The financial crisis of 2007-2008, Fujiyama explained, killed off hopes of refinancing, and scared away buyers in the property market as real estate values plummeted. That, combined with a deteriorating tourism market, put the hotel in a state of financial difficulty, Fujiyama said.

To buy time, Fujiyama attempted to extend the terms of his construction loan (which was due in 2011), but the bank which issued the loan faced collapse, and was taken over by the Federal Deposit Insurance Corporation on Jan. 29, 2010.

By Feb. 1, 2010, First Regional had been acquired at auction by First Citizens Bank and Trust of North Carolina. First Citizens, which had more than 380 branches at the time, had already taken over two other troubled institutions in the wake of the financial crisis.

In October of 2012, First Citizens foreclosed on the Naniloa.

The bank’s attorney, Honolulu-based Ted Pettit, at the time told Big Island Now  “It has been over 18 months since any payments have been made to the bank.”

By that time, the Naniloa Volcanoes Resort faced financial troubles on multiple fronts, owing DLNR $760,000 in lease payments, along with nearly $400,000 to Hawaii County for property taxes, and over $500,000 to the state in GE and hotel room-related taxes.

In November of 2012, the Naniloa’s parent company, Hawaii Outdoor Tours, declared bankruptcy.

Over the next 9 months, arguments ensued both in courtrooms and legislative chambers over everything from the hotel’s condition and Fujiyama’s performance, to whether Hawai`i County should take over control of Banyan Drive’s leases from DLNR.

But for all the finger pointing going on in government, there is a cold and simple fact that is often missed: in the eyes of First Citizens Bank, the Naniloa may represent little more than a financial security, on which they are obligated to earn the highest return possible for their investors.

Whatever the outcome for Fujiyama, the state, or even the people working at the Naniloa Volcanoes Resort, the shareholders of First Citizens Bank may find the following statement by the bank in 2010 to be reassuring:

“The loans and other real estate owned by First Regional Bank and purchased by First Citizens are covered by a loss-share agreement between the FDIC and First Citizens which provides protection against losses to First Citizens Bank.”

Check back for part two of this story, which will focus on the fate of the hotel, and the future of Banyan Drive.