An opportunity drops into OHA’s lap.
excerpts from Hawaii State Auditor’s March, 2023, Audit of the Office of Hawaiian Affairs, pgs 31-38
According to the CEO, the opportunity to purchase 500 N. Nimitz and units in the Iwilei Business Center had “dropped into our lap,” brought to the attention of OHA administration by Colliers International, which was both OHA’s contracted property manager of Nā Lama Kukui as well as a listing agent for the properties. In addition to being somewhat serendipitous, the investment opportunity also appears to have had a sense of urgency to it. According to OHA’s COO, the seller had received seven offers to purchase the properties in a three-week span.
In total, the acquisition was discussed 14 times, including 3 times during Committee on Resource Management meetings and 11 times at board meetings. Most discussions occurred in executive sessions between May 2021 and September 2021. In March 2022, we requested minutes from relevant board meetings, 10 months after the first meeting and six months after the acquisition was completed; at the time, OHA had yet to approve the executive session minutes for all 14 meetings. OHA finally did provide us with those executive session minutes – many of which were heavily redacted – in June 2022, nine months after OHA took title and possession of the properties. From June through September 2021, OHA staff, administration, and outside legal counsel provided updates to the board, including three due diligence reports, none of which OHA made available for our review.
While OHA declined to provide us with the specific information that it considered and the board’s deliberations in deciding to spend $47 million of trust assets, it did provide us with a copy of the “Iwilei Commercial Property Investment Memorandum.” While the document is undated and its authorship unattributed, it corresponds with the minutes from the board’s September 14, 2021 meeting when the board discussed the final approval of the purchase. To ascertain how, without guiding policies and criteria in place, OHA’s Board of Trustees arrived at its decision in 2021 to purchase 500 N. Nimitz and Iwilei Business Center, we reviewed the memo as well as various unredacted minutes.
OHA administration makes two offers for the properties, then informs the board.
At the May 20, 2021 board meeting, OHA administration initially briefed the board on the potential acquisition of the properties in executive session. The COO disclosed that the administration – without the board’s approval or prior knowledge – had made a $40 million offer for the properties. He explained that, of the seven offers to purchase the properties, OHA’s was the lowest. He said that the administration had since increased its offer to $47 million – again without the board’s approval or prior knowledge – to “keep [OHA] in play.” During the meeting, one trustee disclosed that she had learned that a $52 million offer for the properties had been withdrawn because the potential buyer had learned about the possibility of soil contamination, which the trustee expected would come out in due diligence. In addition, the trustee said that she had spoken with two developers who warned the trustee about the scope of the environmental contamination. “They don’t know how to get it out or how deep it goes,” the trustee said.
The trustee also pointed out that the landowner of the 500 N. Nimitz property leased spaces to certain national retail tenants. Another trustee asked for verification that the land was fee-simple and not leasehold, and if OHA acquired the property, it would “own the dirt.” OHA’s real estate broker (who was also the seller’s broker) confirmed that the acquisition would be a fee-simple purchase. However, OHA completely redacted the trustee’s follow-up question and the response from the Board Counsel. We do know that shortly thereafter, the board unanimously and retroactively approved the administration’s recommendation to make a non-binding offer of $47 million to purchase 500 N. Nimitz and partial interest in the Iwilei Business Center….
“Rules Were Meant to be Broken”
The committee unanimously approved the changes to Section 18 with no discussion, passing it on to the board, which, as previously noted, approved the changes at its August 12, 2021 meeting. The vote was again unanimous and held without discussion. We asked a trustee how OHA is able to ensure its activities are “in line” (i.e., aligned with its investment strategy and overall goals) if it changes policy to accommodate an acquisition, rather than having the acquisition comport with existing policies. When discussing the purchase of the 500 N. Nimitz and Iwilei Business Center properties, the trustee referenced the Hawai‘i Direct Investment Policy which required changes in order to make the acquisition. The trustee said that OHA must be able to adjust – “Rules were meant to be broken,” the trustee said. “We do that all the time.”…
In “Key Considerations,” a section that discusses possible red flags for the properties, the memo highlights potential environmental issues, pointing out that the historic use of the Iwilei area included petroleum bulk terminals, maritime transportation, and manufacturing, which may have resulted in petroleum hydrocarbons and other related contaminants being in the soil.
As previously noted, this issue was raised by a trustee in May 2021. Subsequent to that discussion, OHA commissioned Phase I Environmental Site Assessments, which validated those concerns. The assessment for the Iwilei Business Center property identified a 75,000-gallon fuel oil underground storage tank and petroleum impacted soil and groundwater near the property. In addition, a records search done for 500 N. Nimitz found numerous properties with subsurface contamination within a mile radius of the site. (See “Buyer Beware?” on page 39.) Both assessments recommended that if, and when, the properties are redeveloped, soil and groundwater investigation should be conducted.
The memo acknowledges the assessments’ initial findings and recommendations but simply points out that, when OHA redevelops the property, it would have to absorb the extra expense of excavating, disposing, or encapsulating contaminated soil and water. Left unaddressed are the likelihood of contamination and, more importantly, the potential cost of such remediation efforts.
In addition, according to the memo, redevelopment is also complicated by the fact that the three tenants at 500 N. Nimitz have lease options until 2040, which means “immediate redevelopment” is not practical unless OHA has withdrawal rights, renegotiates the leases, or the tenants choose not to extend their lease.
Although not mentioned in the memo, redevelopment is also problematic for the Iwilei Business Center property, where approval by 75 percent of the industrial condominium apartments is required to perform any physical alteration of or additions to the property. OHA purchased a 26.6 percent ownership stake in the Iwilei Business Center, so redevelopment is an option that is not solely in OHA’s control. (See “Buyer Beware?” on page 39.) When we asked the Land Director if the Iwilei Business Center’s other tenants would be amenable to possible redevelopment of the property, he told us that he did not know and did not feel it was fair to speculate. Since the property’s potential for redevelopment weighed heavily on the decision to purchase, it seems that OHA should have made such an inquiry, as well as explore the potential cost to acquire a sufficient interest in the Iwilei Business Center to pursue redevelopment….
read … Full Report
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OHA statement on the State Auditor’s report 23-04
News Release from OHA
HONOLULU (March 14, 2023) – Today, almost 20 months since the July 2021 initiation, the State Auditor finally issued its statutory performance audit report focusing on the Office of Hawaiian Affairs’ (OHA) Land Division from calendar year 2019 to 2021 (Audit Period).
OHA is extremely disappointed that the report does not acknowledge that during the Audit Period, the Board approved its Governance (2019) and Policy (2021) Frameworks, providing a basis for updating, consolidating and aligning all policies going forward.
The report also does not acknowledge the work of the organization during and post the Audit Period, regarding policies, advocacy, legacy land and commercial property planning and activation. The report fixates on outdated land policies yet does not acknowledge, OHA’s sound due diligence business practices; nor does it acknowledge the activities that occurred between the end of the audit period and the report issuance date, a common audit practice. Finally, the State Auditor’s recommendations relating to policy and planning are being addressed as a part of already in-progress organizational work. Additional recommendations for the Board related to operational, procedural and process oriented items will also be addressed in the normal course of operations by Administration. OHA continues its commitment to be organizationally and fiscally sound and prudently stewarding trust resources, so that we better the conditions of Native Hawaiians.