SB3158

SECTION 1. An audit conducted by the state auditor at the direction of the legislature made critical findings regarding the special land and development fund within the department of land and natural resources. The auditor's findings and recommendations were contained in Audit Report No. 19-12. Subsequently, a house investigative committee (committee) was established on April 29, 2021 to review the audit.

The purpose of this Act is to require that lease extensions approved by the board of land and natural resources update the lease terms and conditions to reflect the most current standard lease form terms and conditions and ensure that in the event of a conflict or inconsistency between an updated lease term or condition authorized under chapter 171, Hawaii Revised Statutes, and a term or condition of the lease being extended, the updated lease term or condition authorized under chapter 171, Hawaii Revised Statutes, shall control. This Act is intended to address recommendations made by the committee to require, upon approval of an extension of a lease, an update to the terms and conditions of a lease, upon its extension, to reflect the most current lease form. This Act is intended to apply to all leases issued under chapter 171, Hawaii Revised Statutes, regardless of whether they were issued by public auction or direct negotiation. The legislature finds that the Hawaii Supreme Court's decision in State v. Kahua Ranch, Ltd., 47 Haw. 28, 384 P.2d 581 (1963), aff’d on reh’g, 47 Haw. 466, 390 P.2d 737, prohibited reforming leases in a way that would be inconsistent with the terms of the notice of sale, but that case does not apply to the terms and conditions in an extended lease. This Act makes clear that extended lease terms must be drafted using current, board-approved terms and conditions.

SECTION 2. Section 171-36, Hawaii Revised Statutes, is amended to read as follows:

"§171-36 Lease restrictions; generally. (a) Except as otherwise provided, the following restrictions shall apply to all leases:

(1) Options for renewal of terms are prohibited;

(2) No lease shall be for a longer term than sixty-five years, except in the case of a residential leasehold, which may provide for an initial term of fifty-five years with the privilege of extension to meet the requirements of the Federal Housing Administration, Federal National Mortgage Association, Federal Land Bank of Berkeley, Federal Intermediate Credit Bank of Berkeley, Berkeley Bank for Cooperatives, or Department of Veterans Affairs requirements; provided that the aggregate of the initial term and extension shall in no event exceed seventy-five years;

(3) No lease shall be made for any land under a lease that has more than two years to run;

(4) No lease shall be made to any person who is in arrears in the payment of taxes, rents, or other obligations owed to the State or any county;

(5) No lease shall be transferable or assignable, except by devise, bequest, or intestate succession; provided that with the approval of the board, the assignment and transfer of a lease or unit thereof may be made in accordance with current industry standards, as determined by the board; provided further that prior to the approval of any assignment of lease, the board shall have the right to review and approve the consideration to be paid by the assignee and may condition its consent to the assignment of the lease on payment by the lessee of a premium based on the amount by which the consideration for the assignment, whether by cash, credit, or otherwise, exceeds the depreciated cost of improvements and trade fixtures being transferred to the assignee; provided further that with respect to state agricultural leases, in the event of foreclosure or sale, the premium, if any, shall be assessed only after the encumbrances of record and any other advances made by the holder of a security interest are paid;

(6) The lessee shall not sublet the whole or any part of the demised premises, except with the approval of the board; provided that prior to the approval, the board shall have the right to review and approve the rent to be charged to the sublessee; provided further that in the case where the lessee is required to pay rent based on a percentage of its gross receipts, the receipts of the sublessee shall be included as part of the lessee's gross receipts; provided further that the board shall have the right to review and, if necessary, revise the rent of the demised premises based upon the rental rate charged to the sublessee, including the percentage rent, if applicable, and provided that the rent may not be revised downward;

(7) The lease shall be for a specific use or uses and shall not include waste lands, unless it is impractical to provide otherwise;

(8) Mineral and metallic rights and surface and ground water shall be reserved to the State; and

(9) No lease of public lands, including submerged lands, or any extension of any lease of public lands shall be issued by the State to any person to construct, use, or maintain a sunbathing or swimming pier or to use the lands for those purposes, unless the lease, or any extension thereof, contains provisions permitting the general public to use the pier facilities on the public lands and requiring that a sign or signs be placed on the pier, clearly visible to the public, that indicates the public's right to the use of the pier. The board, at the earliest practicable date, and where legally possible, shall cause all existing leases to be amended to conform to this paragraph. The term "lease", for the purposes of this paragraph, includes month-to-month rental agreements and similar tenancies.

(b) The board, from time to time, upon the issuance or during the term of any intensive agricultural, aquaculture, commercial, mariculture, special livestock, pasture, or industrial lease, may:

(1) Modify or eliminate any of the restrictions specified in subsection (a);

(2) Extend or modify the fixed rental period of the lease; provided that the aggregate of the initial term and any extension granted shall not exceed sixty-five years; or

(3) Extend the term of the lease,

to the extent necessary to qualify the lease for mortgage lending or guaranty purposes with any federal mortgage lending agency, to qualify the lessee for any state or private lending institution loan, private loan guaranteed by the State, or any loan in which the State and any private lender participates, or to amortize the cost of substantial improvements to the demised premises that are paid for by the lessee without institutional financing.

(c) Any extension authorized pursuant to subsection (b) shall be based on the economic life of the improvements as determined by the board or an independent appraiser; provided that the approval of any extension shall be subject to the following:

(1) The demised premises have been used substantially for the purpose for which they were originally leased;

(2) The aggregate of the initial term and any extension granted shall not be for more than sixty-five years;

(3) In the event of a reopening, the rental for any ensuing period shall be the fair market rental at the time of reopening;

(4) Any federal or private lending institution shall be qualified to do business in the State;

(5) Proceeds of any mortgage or loan shall be used solely for the operations or improvements on the demised premises; and

(6) Where improvements are financed by the lessee, the lessee shall submit receipts of expenditures within a time period specified by the board or else the lease extension shall be canceled[~~; and~~

~~(7)~~ ~~The rules of the board setting forth any additional terms and conditions, which shall ensure and promote the purposes of the demised lands~~].

(d) The board, at any time during the term of any intensive agricultural, aquaculture, or mariculture lease and when justified by sound economic practices or other circumstances, may permit an alternative agricultural, aquaculture, or mariculture use or uses for any portion or portions of the land demised. As a condition to permitting alternative uses, the board may require any other modifications, including rental adjustments or changes in the lease, as may be necessary to effect or accommodate the alternative use or uses. An alternative use or uses may be allowed by the board upon:

(1) The application of the lessee;

(2) Consent of each holder of record having a security interest in the leasehold; and

(3) A finding by the board that the alternative use or uses are in the public interest.

(e) The board, from time to time during the term of any agriculture, intensive agriculture, aquaculture, commercial, mariculture, special livestock, pasture, or industrial lease, may modify or eliminate any of the restrictions specified in subsection (a), extend or modify the fixed rental period of the lease, or extend the term of the lease upon a showing of significant economic hardship directly caused by:

(1) State disaster, pursuant to chapter 209, including seismic or tidal wave, tsunami, hurricane, volcanic eruption, typhoon, earthquake, flood, or severe drought; or

(2) A taking of a portion of the area of the lease by government action by eminent domain, withdrawal, or conservation easement; provided that the portion taken shall not be less than ten per cent of the entire leased area unless otherwise approved by the board; and provided that the board determines that the lessee will not be adequately compensated pursuant to the lease provisions.

(f) The approval of any extension granted pursuant to subsection (e) shall be subject to the following:

(1) The demised premises have been used substantially for the purposes for which they were originally leased;

(2) The aggregate of the initial term and any extension granted shall not be for more than fifty-five years;

(3) The rental shall not be less than the rental for the preceding term;

[~~(4)~~ ~~The rules of the board setting forth any additional terms and conditions, which shall ensure and promote the purposes of the demised lands;~~] and

[~~(5)~~] (4) The length of the extension shall not exceed a reasonable length of time for the purpose of providing relief and shall in no case exceed five years.

(g) Any lease extended pursuant to this section shall be drafted on the most current approved lease form, and may include the imposition of a removal bond, to ensure that the extension of any lease pursuant to this section, as with the issuance of a new lease, will be subject to the most current leasing practices and policies of the board, which shall be incorporated into the lease document prior to its execution.

(h) In the event the extension of a lease results in a conflict or inconsistency between an updated lease term or condition authorized under this chapter and an existing lease term or condition, the updated lease term or condition authorized under this chapter shall control."

SECTION 3. Section 171-36.5, Hawaii Revised Statutes, is amended to read as follows:

"[[]§171-36.5[]] Commercial, industrial, resort, mixed-use, or government leases; extension of term. (a) Notwithstanding section 171-36, for leases that have not been assigned or transferred within ten years prior to receipt of an application for a lease extension submitted pursuant to this section, the board may extend the rental period of a lease of public lands for commercial use, industrial use, resort use, mixed-use, or government use upon the board's approval of a development agreement proposed by the lessee or by the lessee and developer to make substantial improvements to the existing improvements. For the purposes of this subsection, "assigned or transferred" shall not include:

(1) A sale or change in ownership of a lessee that is a company or entity; or

(2) A collateral assignment of lease or other security granted to a leasehold mortgagee in connection with leasehold financing by a lessee.

(b) Before entering into a development agreement, the lessee or the lessee and developer shall submit to the board the plans and specifications for the total development proposed. The board shall review the plans and specifications and determine:

(1) Whether the development proposed in the development agreement is of sufficient worth and value to justify the extension of the lease;

(2) The estimated period of time necessary to complete the improvements and expected date of completion of the improvements; and

(3) The minimum revised annual rent based on the fair market value of the [~~lands to be developed,~~] land and existing improvements, as determined by an appraiser for the board and, if deemed appropriate by an appraiser, the appropriate percentage of rent where gross receipts exceed a specified amount.

No lease extension shall be approved until the board and the lessee or the lessee and developer mutually agree to the terms and conditions of the development agreement.

(c) No construction shall commence until the lessee or the lessee and developer have filed with the board a sufficient bond conditioned upon the full and faithful performance of all the terms and conditions of the development agreement.

(d) Any extension of a lease pursuant to this section shall be based upon the substantial improvements to be made and shall be for a period no longer than forty years. No lease shall be transferable or assignable throughout the first ten years of the extended term, except by devise, bequest, intestate succession, a collateral assignment of lease or other security granted to a leasehold mortgagee in connection with leasehold financing by a lessee, a change in direct ownership of less than fifty per cent of a lessee that is a company or entity, a change in indirect ownership of a lessee that is a company or entity, or by operation of law. The prohibition on assignments and transfer of leases shall include a prohibition on conveyances of leases. During subsequent periods of the extended term of the lease, the lease may be assigned or transferred, subject to approval by the board.

(e) The applicant for a lease extension shall pay all costs and expenses incurred by the department in connection with processing, analyzing, or negotiating any lease extension request, lease document, or development agreement under this section.

(f) Any lease extended pursuant to this section shall be drafted on the most current approved lease form, and may include the imposition of a removal bond, to ensure that the extension of any lease pursuant to this section, as with the issuance of a new lease, will be subject to the most current leasing practices and policies of the board, which shall be incorporated into the lease document prior to its execution.

[~~(f)~~] (g) As used in this section:

"Government use" means a development undertaken under a lease held by any agency or department of the State or its political subdivisions other than the University of Hawaii or any department, agency, or administratively attached entity of the University of Hawaii system.

"Mixed-use" means a development that combines two or more of the following uses in a single project: commercial use, resort use, multifamily residential use, or government use.

"Resort use" means a development that:

(1) Provides transient accommodations as defined in section 237D-1 and related services, which may include a front desk, housekeeping, food and beverage, room service, and other services customarily associated with transient accommodations; and

(2) Where at least seventy-five per cent of the living or sleeping quarters are used solely for transient accommodations for the term of any lease extension.

"Substantial improvements" means any renovation, rehabilitation, reconstruction, or construction of existing improvements, including minimum requirements for off-site and on-site improvements, the cost of which equals or exceeds thirty per cent of the market value of the existing improvements, that the lessee or the lessee and developer installs, constructs, and completes by the date of completion of the total development.

SECTION 4. Section 171-192, Hawaii Revised Statutes, is amended to read as follows:

"[[]§171-192[]] Lease restrictions. (a) The board, from time to time, upon the issuance or during the term of any intensive agricultural, aquaculture, commercial, mariculture, special livestock, pasture, hotel, resort, or industrial lease of public lands within the Hilo community economic district, may:

(1) Modify or eliminate any of the restrictions specified in section 171-36(a);

(2) Extend or modify the fixed rental period or the term of the lease upon approval by the board of a development agreement proposed by the lessee to make substantial improvements to the existing improvements or to construct new substantial improvements so long as the length of any extension granted does not extend the original lease term by more than forty years; or

(3) Extend the term and modify any provisions of the lease,

to the extent necessary to qualify the lease for mortgage lending or guaranty purposes with any federal mortgage lending agency; to qualify the lessee for any state or private lending institution loan, private loan guaranteed by the State, or any loan in which the State and any private lender participates; or to amortize the cost of substantial improvements to the demised premises that are paid for by the lessee without institutional financing.

(b) Prior to entering into a development agreement, the lessee or the lessee and developer shall submit to the board the plans and specifications for the total development being proposed. The board shall review the plans and specifications and, in determining whether to approve the development agreement pursuant to subsection (a)(2), consider:

(1) Whether the development proposed in the development agreement is of sufficient worth and value to justify the extension of the lease;

(2) The estimated period of time to complete the improvements and expected date of completion of the improvements; and

(3) The minimum revised annual rent based on the fair market value of the lands to be developed, as determined by an appraiser for the board, and the percentage of rent where gross receipts exceed a specified amount.

(c) An extension of the fixed rental period or term of the lease shall be based on the economic life of the substantial improvements as determined by the board or an independent appraiser; provided that the approval of any extension shall be subject to the following:

(1) The demised premises have been used substantially for the purpose for which they were originally leased;

(2) The length of any extension granted for the fixed rental period of the lease shall not extend the fixed rental period of the original lease by more than forty years;

(3) The length of any extension granted for the term of the lease shall not extend the original lease term by more than forty years;

(4) If a reopening occurs, the rental for any ensuing period shall be the fair market rental as determined under section 171-17(d) at the time of reopening;

(5) Any federal or private lending institution shall be qualified to do business in the State;

(6) Proceeds of any mortgage or loan shall be used solely for the operations or substantial improvements on the demised premises; and

(7) Where substantial improvements are financed by the lessee, the lessee shall submit receipts of expenditures within a time period specified by the board, otherwise the lease extension shall be canceled[~~; and~~

~~(8)~~ ~~The rules of the board, setting forth any additional terms and conditions, which shall ensure and promote the purposes of the demised lands~~].

(d) The board, from time to time, during the term of any agriculture, intensive agriculture, aquaculture, commercial, mariculture, special livestock, pasture, hotel, resort, or industrial lease of public lands within the Hilo community economic district, may modify or eliminate any of the restrictions specified in section 171-36(a), extend or modify the fixed rental period of the lease, or extend the term of the lease upon a showing of significant economic hardship directly caused by:

(1) State disaster, pursuant to chapter 209, including seismic or tidal wave, tsunami, hurricane, volcanic eruption, typhoon, earthquake, flood, or severe drought; or

(2) A taking of a portion of the area of the lease by government action by eminent domain, withdrawal, or conservation easement; provided that the portion taken shall not be less than ten per cent of the entire leased area unless otherwise approved by the board; provided that the board determines that the lessee will not be adequately compensated pursuant to the lease provisions.

(e) The approval of any extension granted pursuant to subsection (d) shall be subject to the following:

(1) The demised premises has been used substantially for the purposes for which they were originally leased;

(2) The rental shall not be less than the rental for the preceding term;

[~~(3)~~ ~~The rules of the board, setting forth any additional terms and conditions which shall ensure and promote the purposes of the demised lands;~~] and

[~~(4)~~] (3) The length of the extension shall not exceed a reasonable length of time for the purpose of providing relief and shall in no case extend the original lease's fixed rental period by more than forty years.

(f) The applicant for any lease extension pursuant to this section shall pay all costs and expenses incurred by the department in connection with the processing, analyzing, and negotiating of any lease extension request and document and of the development agreement under subsections (a) and (b).

SECTION 5. This Act does not affect rights and duties that matured or leases or extensions of leases that are fully executed before its effective date.

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect upon its approval.

INTRODUCED BY:

_____________________________

BY REQUEST

THE SENATE	S.B. NO.	3158
THIRTY-SECOND LEGISLATURE, 2024
STATE OF HAWAII