State, County Oppose Naniloa Lease Request

***Updated 3:48 p.m. Tuesday, Oct. 8.***

Both the state and county of Hawaii on Monday are opposing a request from the bankruptcy trustee for the Naniloa Volcanoes Resort to take control of the lease for the hotel and golf course.

The calls came in filings late Monday with the US Bankruptcy Court in Honolulu.

Hawaii County’s filing went even further, urging the bankruptcy court to allow the cancellation of the lease outright.

State officials have also previously said they would be inclined to cancel the lease but are prevented from doing so while the resort is in bankruptcy.

The trustee, Honolulu attorney David Farmer, was appointed by the court to oversee the Naniloa’s operations while it is in bankruptcy, and to look out for the welfare of the hotel in general which includes the bank holding its mortgage.

A bankruptcy court hearing has been scheduled for Oct. 21 on Farmer’s request to take over the lease. If the judge denies his request, and no bidders on the hotel property come forward by an Oct. 18 deadline, that could force the bank’s hand on whether it will make a bid itself.

Even if the bankruptcy court rules against Farmer’s request, cancellation of the lease would still require the bankruptcy court’s approval, said Damien Elefante, a state lawyer working on the case.

Naniloa owner Ken Fuyiyama’s filing for bankruptcy protection in November 2012 not only put a halt to a foreclosure action by the bank that holds the resort’s mortgage, it also placed the fate of the hotel – particularly its lease, which is crucial to the resort’s operation – under the control of the federal bankruptcy court.

The Naniloa’s problems began, the state noted Monday, during the 2005 lease bidding process when Ken Fujiyama raised the bidding for the resort’s annual rent to $500,000, at least three times what independent appraisals found it was worth.

“There is no question that the debtor (Fujiyama) overbid the Naniloa lease,” the state said Monday.

Monday’s filing said if the state were to cancel the lease and put it back up to auction at “respectable market prices, there may be an interested party who can fulfill the terms of the lease satisfactorily.”

Meanwhile, the county’s court filing goes into detail about dozens of violations of building, electrical and plumbing codes, including a variety of work down without permits.

The county’s court filing included a 22-page letter from David Yamamoto, head of the county’s Building Division, outlining various code violations found during recent inspections.

As an example, during an Oct. 1 inspection, county inspectors found that there was no permanent electrical source to the hotel’s main lobby which was being powered by a portable generator.

After a problem was found with a cooking range hood, the Naniloa began cooking outdoors in this structure — which the county found was using unpermitted and nonconforming plumbing and electrical connections. USBC filing.

The county said the violations of building and fire codes — portions of the hotel do not have working fire alarm or fire sprinkler systems — presents a hazard to public safety.

Mayor Billy Kenoi has said those deficiencies may require the county to close down the hotel.

County attorneys said Monday because bankruptcy trustee Farmer cannot guarantee that the Naniloa’s problems can be resolved, “the DNLR lease must be deemed rejected and cancelled.”

The state is disputing Farmer’s recent contention that he would be able to – in a timely manner – take care of the numerous problems the Naniloa is facing that are already legal grounds for revoking the lease.

According to the state, those problems include:

• Missed lease payments, including one semi-annual payment of $250,000 due Aug. 1
• Failure to maintain a $1 million performance bond designed to cover missed lease payments, which is currently $500,000 short
• Failure to complete $5 million improvements to the resort as required by the 2006 lease
• Failure to maintain construction bonds guaranteeing those improvements will be done
• Failure to pay the state excise taxes and room taxes since July 2011 which now amount to $504,000, as well as county property taxes
• Failure to pay delinquent utility bills to the county of about $245,000
• Failure to resolve violations of building and fire codes issued by the county

“The Naniloa hotel can only be described as in a deplorable state of renovation and disrepair,” state attorneys said, noting that only half of the hotel’s rooms are available for guests.

It notes that the Naniloa has missed numerous lease payments in the past which were eventually covered by either a performance bond or the bank holding the mortgage on the property.

The state said that the Naniloa has not been profitable for at least two years, and since that time has continued to accumulate greater debt.

According to state attorneys, Farmer “acknowledges that the hotel does not have the wherewithal to pay lease payments, let alone renovation of the hotel itself.”

They note that the trustee has asked First Citizens Bank, which is owed nearly $11 million on the mortgage Fujiyama took out on the Naniloa in 2006, for $100,000 in “bridge financing” to tide the hotel’s operations over until the Oct. 21 bankruptcy court hearing.

State attorneys noted that First Citizens has not committed to any additional financing, including covering the current overdue lease payment.

The problems caused by Fujiyama’s handling of the Naniloa were partly summarized by the state:

“The debtor and the trustee has cost the state a significant amount of lost revenue, unwanted publicity and criticism for the deteriorating condition of the hotel premises, incurred building violations due to lack of upkeep, maintenance and improvements, to name a few.”