Chapter 11 for 1250 Oceanside
Hawaii County taxpayers aren’t likely to lose money because of bankruptcy filings this week by three developers of the upscale Hokulia project on the Kona Coast, county Corporation Counsel Lincoln Ashida said Friday.
Developer 1250 Oceanside and its two affiliated developers, Front Nine LLC and Pacific Star, all Lyle Andersen companies, are seeking Chapter 11 bankruptcy protection while they try to restructure $680 million in debt, most of which is held by new lender Sun Kona Finance LLC.
Ashida said Corporation Counsel attorneys attended the initial court hearing Thursday in U.S. Bankruptcy Court in Honolulu, and his office will keep close tabs on proceedings as they occur.
Still, he said, county taxpayers have already been protected to some extent because the county received $12.5 million in cash from Oceanside several years ago as part of its development agreement with the county.
“That money is ours, right now,” Ashida said.
In addition, Ashida said, the county is a secured creditor for $20 million and it is on the top of the creditor list, with 80 Keopuka lots, valued at more than $20 million, as collateral.
“We are first in line,” Ashida said.
The three companies “intend to restructure and resolve their secured and unsecured debt … so that development of the Hokulia project can proceed to completion and to enable the future development of the Keopuka property,” Red Hill 1250 Inc. President and General Manager Craig Pickett said in his declaration, filed Wednesday.
Red Hill 1250 was the general partner with Oceanside, holding 99 percent of the company.
Sun Kona, an affiliate of SunChase Holdings, acquired a $626 million loan from the Bank of Scotland Dec. 28. In January, Sun Kona put Pickett in charge of all three Hawaii companies now filing bankruptcy.
Oceanside listed assets of about $44.5 million. The total listed value of Front Nine’s property is about $18.3 million, and Pacific Star has about $5.3 million in assets.
Anderson planned to develop Hokulia in three phases on approximately 1,400 acres. Full build out was to include about 730 residential lots, a 27-hole golf course and clubhouse, a members’ lodge and spa, a beach activity center, tennis courts and a shoreline park. He began with a $200 million loan from the Bank of Scotland in 2000. By December 2003, the outstanding balance on the amended loan was $517 million. The aggregate amount owed in 2008, when Oceanside joined as a borrower, was more than $900 million.
By the end of 2008, the Bank of Scotland declared the project to be in default and exercised its option to remove the directors, including Anderson.
The golf course and a clubhouse were built, but many of the other amenities were not, nor were they turned over to The Club at Hokulia and the Hokulia Community Association as initially planned, Pickett said.
Last year, Oceanside did turn over the completed amenities, as well as the lots for future amenities, to The Club and the community association. Last month, an affiliate of Sun Kona Finance agreed to fund amenities, as well as pay an unrevealed amount of cash to The Club to complete the long-awaited infrastructure and amenities.
Pickett’s 50-page declaration outlines the major setbacks to the project from a September 2000 rainstorm that triggered silt runoff into the ocean and the subsequent legal proceedings against Oceanside and the state, referred to as the Kelly litigation, to the September 2003 finding that the county violated state land use law when it approved the project. Parties in the Kelly litigation reached a settlement in 2006, and the 3rd Circuit Court the next year lifted an order that had blocked land sales for four years.
Oceanside was able to sell some lots, court documents said, but worsening economic conditions prompted the primary lender to declare a default in January 2008, which halted sales again.
In October 2000, Hawaii County filed a condemnation action for land for a proposed bypass road. That kicked off a decade of litigation, producing three published Hawaii Supreme Court opinions. A third major legal action, this one against the bond company that secured funding for the remainder of the bypass road, took several years to resolve. Finally, Pickett said, a number of individual lot owners have also sued Oceanside. The bankruptcy proceedings will stay those lawsuits, he said.
The years of problems led the county to treat the project extra carefully, Ashida said.
“Frankly, some good decisions were made early on in anticipation of problems like this,” he said.
A number of other conditions of the original development agreement, such as the bypass road through the property, have not been completed.
Ashida characterized the road as “a separate issue,” and said it is on schedule to be constructed by the county.
Public Works Director Warren Lee said the county is currently working on engineering and plans to put it out to bid later this year.
“The administration made that commitment to the community, and it will be built,” Ashida said.