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Legal fight deepens in long-planned Aina Lea development

Updated: 
June 19, 2017 - 12:05am

KAILUA-KONA — Time could be running out for The Villages at Aina Lea.

After more than a quarter-century of false starts and litigation, all work at the South Kohala site has been ordered again stopped and Hawaii County has notified developer, Aina Lea Inc., it plans to start the county process of reverting the land’s zoning “to its original” (unplanned) or a “more appropriate designation.”

The action comes amid a flurry of litigation, including foreclosure proceedings. The company also disclosed in financial statements filed earlier this year that its sustained losses from the get-go and has doubts about its future.

However, the company’s chairman and CEO, Robert Wessels, says the development is moving forward and keeping its commitment to shareholders and the Big Island.

Hawaii County Planning Director Michael Yee recently notified Aina Lea Inc. to cease all work at the 3,000-acre South Kohala site after determining the developer is in violation of a 2013 3rd Circuit Court order and conditions the county imposed in rezoning the land to allow for The Villages at Aina Lea. The court ruling stated no work was to take place until a Supplemental Environmental Impact Statement, SEIS, is accepted by the county.

Aina Lea Inc., however, had already received permits to construct 12 townhouse units that were approved and consistent with land use approvals at the time of issuance. The county said it sent letters in 2014 and ‘15, after Aina Lea Inc. inquired about the permits, that it would honor those permits to proceed with infrastructure and related occupancy improvements related to the townhomes, with the understanding that the SEIS was being prepared.

A site inspection last August found work was taking place on the acreage.

County planners also recently confirmed that an SEIS is no longer being prepared prompting the county to notify in late May Aina Lea Inc. to cease work, said Department of Planning Deputy Director Daryn Arai.

No work appeared to be occurring this week when a West Hawaii Today photographer stopped at the site, which is inaccessible from Queen Kaahumanu Highway because of a locked gate.

Rezoning proceedings ahead

With no SEIS underway and other violations of conditions — including failure to get approval of plans for traffic improvements and signalization on Queen Kaahumanu Highway, creating park and burial plans, and making a fair share payment, among others — the notice states Yee plans to initiate a rezoning of the area.

Wessels, reached Friday, said he was limited in what he could say because of pending litigation and other issues but did provide a statement.

“We have definitely been moving forward to keep our commitments to the community and the Big Island and also to our shareholders and beyond that, with or without a settlement from the state,” he said.

Wessels asked for WHT’s questions to be sent to him and Aina Lea Inc.’s attorney, Richard Bernstein. Neither responded to those questions as of press time.

Arai, with the county Planning Department, said Thursday that no date had been set for the Leeward Planning Commission to take up rezoning the land. A final decision on any zoning change would go before the full County Council.

Currently, the 3,000-acre site is split between Aina Lea Inc. and Bridge Aina Lea. Bridge Aina Lea, based in Saipan, owns a 1,927-acre area classified agriculture and Aina Lea Inc., based in Waikoloa, owns 1,072 acres, of which about 1,060 acres is designated urban by the state. That urban classification was granted in 1989 when the development was first proposed and approved by the state Land Use Commission, LUC. It has been the subject of numerous legal disputes since.

A quarter century of hindered progress

What is known today as The Villages at Aina Lea has a history dating back to the last century when a developer proposed a grandiose residential community for the area, located mauka of Mauna Lani Bay Hotel & Bungalows.

In 1989, the state Land Use Commission reclassified about 1,060 of the 3,000-acre development from agricultural to urban to allow for Signal Puako Corp. to develop thousands of homes, with facilities and amenities, as part of a residential community. The reclassification was subject to various conditions, including that 60 percent of the 2,760 housing units be affordable.

From 1990 until 2008, the LUC amended and revised the order several times, working with various successor landowners, including reducing the minimum number of affordable units to 385 in 2005. In 1993, the county changed zoning over the area to allow for the development.

Bridge Aina Lea purchased the property in 1999 and in 2009 DW Aina Lea (predecessor to Aina Lea Inc.) entered the picture as a development partner.

In 2008, the LUC issued an order to show case as to why the land should not be reverted back to an agricultural classification because of the developers alleged failure to timely comply with certain conditions, including that by November 2010, 20 percent of the 385 units be complete. By that time, just 16 units were finished.

In January 2011, the commission ordered the 1,060 acres reverted to its original classification, agricultural. That same year, a 3rd Circuit Court judge reversed the commission’s order determining it had erred in its decision and had over-stepped its bounds. A subsequent review by the Supreme Court in 2014 would affirm the lower court’s finding that the commission did not comply with state law because the land owners had “substantially” commenced use of the land, having spent more than $20 million by 2010.

And the lawsuits continued from there with Bridge Aina Lea suing the state in 2011; Mauna Lani Resort Association succeeding in its lawsuit against the county, planning department director, DW Aina Lea and others to require a Supplemental Environmental Impact Statement, DW Aina Lea (now Aina Lea Inc.) suing the state unsuccessfully over the taking of land, and recent foreclosure proceedings, among others, including contractor’s seeking payment.

In addition, in 2016, on the recommendation of then-Planning Director Duane Kanuha, the Hawaii County Leeward Planning Commission revoked a use permit that would have allowed for six golf courses and related improvements.

Legal wrangling continues

The county order to cease work is among a handful of movements in recent weeks related to the long-stymied development that once proposed more than 2,700 homes in the area.

1 suit over alleged land taking dismissed, another still alive

On Tuesday, a U.S. District Court judge in Honolulu dismissed a lawsuit filed earlier this year by DW Aina Lea against the state claiming the LUC’s 2010 reversion of zoning on the urban tract was a constitutional taking of DW’s property without compensation. Both the Hawaii and U.S. constitutions protect the taking of private property for public use without just compensation.

Judge Susan Oki Mollway determined the suit was brought too late.

“The attorneys in my office take very seriously all claims against the state and will fight to not pay anything to claimants who are not entitled to payment or who fail to follow the rules. This owner came to court too late and will leave with nothing,” Attorney General Doug Chin said in a statement.

In a separate but related case, a settlement agreed upon between Bridge Aina Lea and the state over a similar claim is no more. Instead, it will head to trial after Gov. David Ige signed an appropriations bill to pay out claims against the state in which the final version didn’t include the $1 million that would have settled the 2011 lawsuit that claimed the state LUC’s decision to revert zoning on the 1,060-acre urban tract was also a constitutional taking of Bridge’s property without just compensation.

Unlike the case dismissed Tuesday, however, Bridge Aina Lea’s filing met the two-year statute of limitations. And, without the settlement funded, the federal case resumed on June 2. Trial is slated for March 2018 in U.S. District Court in Honolulu.

The suit says Bridge Aina Lea’s damages incurred by the commission’s decision were not less than $37.5 million. In addition to the multimillion-dollar figure named in the court filing, Bridge Aina Lea also wants four additional orders: a temporary restraining order preventing the commission from taking additional action regarding the land, a permanent injunction from reclassifying the land, an order declaring the commission’s decision to reclassify the land was “egregious, illegal, invalid, unconstitutional, arbitrary, capricious” and an order stopping the commission from interfering with “Bridge’s rights to develop the property.”

Attorney Bruce Voss, who represents Bridge Aina Lea, declined comment on the pending litigation.

In a prepared statement, Attorney General Doug Chin Bridge told West Hawaii Today his office is preparing for the 2018 trial.

Defaults on loans lead to foreclosure proceedings

Also Tuesday, 3rd Circuit Court Judge Ronald Ibarra granted a foreclosure on 23.559 acres area after Aina Lea Inc. failed to make good on a $6 million two-year loan from Libo Zhang, a Chinese national, payable in November. Aina Lea Inc. did not contest the proceedings and the judge ruled the land to be sold at auction. Zhang is permitted to bid for the land.

Zhang’s financing covered part of the $24 million that Aina Lea Inc. said it spent to acquire 1,011 acres from Bridge Aina Lea in 2015. Aina Lea Inc. also took out a three-year, $14 million land loan from Bridge Aina Lea in November 2015 for the purchase. After making the first seven payments, according to court documents, Aina Lea Inc. defaulted in July, August and September 2016. An agreement was reached relieving monthly payments through March; no payment was made.

Bridge Aina Lea subsequently filed a suit against Aina Lea Inc. in April seeking to foreclose on the 1,011 acres referenced above and sell it to cover the $18.37 million its now owed by Aina Lea Inc. A hearing on Bridge’s motion for summary judgment is to be heard later this month.

Voss also declined comment on the pending litigation.

A third foreclosure lawsuit is also pending in 3rd Circuit Court. Canada-based Romspen Investment Corp. filed lawsuit in May seeking to foreclose on 37.863 acres that was a guarantee to a $12 million 2015 loan Aina Lea Inc. defaulted on. The loan was to be used to develop, design, construct, furnish, market and sell 40 townhomes. The 37.863-acre parcel they are seeking to foreclose on has townhomes and other related improvements underway.

A bleak outlook?

In Aina Lea Inc.’s most recent quarterly report to the U.S. Securities and Exchange Commission filed in February, the company said its initial project, phase I of The Villages at Aina Lea, includes plans to construct 384 townhomes (to be called Lulana Gardens) and 48 villas (to be called Whale’s Point) and develop 70 single-family residential lots (to be called Hoolei Village). The company said that it had already developed substantial infrastructure and commenced construction on 64 townhomes and was working with a leading golf course architect.

It further states that marketing of the Lulana Gardens town homes and Hoolei Villages lots can begin once Aina Lea Inc. obtains the required approval of its homeowners’ association, updates to its DCCA public filings and meets development obligations with Hawaii County, which recently issued the cease work order for noncompliance.

But that same report also shows that as of the end of 2016, Aina Lea Inc. and its wholly-owned subsidiaries Lulana Gardens LLC and Island Vista LLC had total unaudited assets of $70.9 million and unaudited liabilities of $84.2 million.

“We have sustained losses and experienced negative cash flows from operations since inception, and have an accumulated deficit of $45,356,712 at Dec. 31, 2016, in addition to a significant amount of debt that is currently in default. These factors raise substantial doubt about our ability to continue to operate in the normal course of business as a going concern,” the filing reads.

It goes on to state that the company will need continuing substantial funds to continue development of the project, despite securing about $44 million between 2009 and 2016 to finance the development of the first phase from the sale of “undivided land fractions” to more than 1,000 investors from Singapore, Malaysia, Hong Kong, Japan, Australia, and Indonesia.

The filing further notes that Aina Lea Inc. plans to explore “alternative financing to refinance debt that are currently in default.”

“While we believe that we will be successful in obtaining the necessary financing to fund our operations, there is no assurance that such additional funding will be achieved or that we will succeed in our future operations,” the filing states.

The future of Bridge Aina Lea, owner of the agricultural-classified land, is less clear. In March 2016, when the county revoked a use permit for six golf courses, county Planner Planner Maija Cottle said Bridge Aina Lea had no plans for its acreage in the “near future.”

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