A request by the owners of the Grand Naniloa Hotel to take out a second mortgage to pay for their first one has been denied.
The Board of Land and Natural Resources determined with some reluctance Thursday that granting a request to WHR LLC, the owner of the Naniloa, to take out a $62 million mortgage to cover its current $50 million mortgage with another lender would not be in the best interests of the state.
According to documents filed to the BLNR, WHR is facing foreclosure action from Wilmington Trust, the current holder of its $50 million loan for the state-leased property.
In order to stave off that action and eventual bankruptcy proceedings, WHR sought approval from the Department of Land and Natural Resources — the lessor of the Naniloa lands — to take out a second, more volatile mortgage from another lender.
The BLNR had previously met on May 31 to discuss the matter, but deferred it until its next meeting after Ed Bushor — president of Tower Development, the principal partner in WHR — promised to provide additional financial documents to the board to prove WHR’s capability to support the second loan.
However, Land Division Administrator Russell Tsuji said Thursday that there are still unanswered questions about WHR’s situation. And with Bushor absent during the Thursday meeting, Tsuji concluded that the board had little choice but to deny the request.
Tsuji said that, since the May meeting, he had determined that Wilmington Trust had applied for and been granted a court-appointed receiver — Honolulu attorney George Van Buren — to take control of the property, although Tsuji added that Van Buren had told him that he would not be involved in the property’s mortgage issues.
More pressingly, Tsuji learned that an auditor hired by Wilmington Trust had determined that WHR had made only four mortgage payments since March 2020 that totaled $1.35 million.
“The (Hilton) DoubleTree franchise agreement was in default to the tune of $800,000,” Tsuji said. “Utilities were not being paid, and there was a threat of shutdown at the hotel. And the auditor also found out that real estate property taxes, they were either not paying it or escrowing it into an account, which is also a violation of the loan. … And while all these payments were not being made, they discovered that the borrower’s affiliates were paid money to the tune of $430,000.”
Tsuji added that he received a “supposed” spreadsheet detailing the Naniloa’s finances between 2021 and 2022 that indicated WHR was timely paying for utilities and property taxes, which contradicts court filings made in the Wilmington Trust case.
In addition, Tsuji calculated that the $62 million loan would accrue $7.4 million of interest per year, on top of being a volatile loan with interest rates adjustable month-to-month. He estimated that, based on WHR’s financial statements, the company is not capable of supporting that loan.
Meanwhile, the proposed new loan would be coming from “Hilo Hotel Funding LLC,” an entity whose background is unclear, said board member Vernon Char, although he added that it may be a syndication of several unknown lenders.
Char said the terms of WHR’s lease with the state requires that any mortgagee be authorized to make mortgage loans in Hawaii, and it’s unclear whether Hilo Hotel Funding can do that.
Char also said the $50 million loan was transferred to Wilmington Trust from the original lender, Wells Fargo, without the board’s consent. Char ultimately questioned the legitimacy of that transfer, the qualifications of Hilo Hotel Funding, and even the current makeup of WHR. Bushor claimed in the May meeting that Tower and the Edmund C. Olson Trust are on the verge of signing an agreement that would remove the Olson Trust as a partner in WHR, but Char said it is unclear whether that has happened.
“They want us to sign a consent to mortgage … but I think it would be improper for us to sign a consent which would say that the state accepted that entire first transaction and that we are now condoning and accepting this second transaction from people who are not an authorized lending institution under the lease,” Char said. “There are more questions than answers so I think, if they are not present today, I don’t see how we can approve of the consent to mortgage in the form they have provided.”
The rest of the board agreed with Char, although member Chris Yuen said he did so with “great reluctance,” given WHR’s previous history in improving the Naniloa.
“I’ve no doubt that COVID caused all their problems, and I think we can all understand how the stoppage of virtually all tourism for months would have a disastrous effect on the finances of a hotel,” Yuen said. “However, I think that … we both have the legal grounds not to consent to this mortgage, and that it is not a good idea for the state.”
All five board members present voted to deny the request for the secondary mortgage.
The board also voted to rescind the DLNR’s request for redevelopment proposals for the former Uncle Billy’s Hilo Bay Hotel and the former Country Club Condominium Hotel on Banyan Drive.
Tower Development had submitted redevelopment proposals for both of those properties, which led the Olson Trust to file a lawsuit against Bushor and Tower CEO Stuart Miller for breaching their contract with WHR. The Olson Trust claimed that their agreement forbade Tower from investing in any properties that could compete with the Naniloa.
Because of that lawsuit and WHR’s various other woes, the board decided with little discussion to drop the request for redevelopment proposals, although Yuen said the board has an obligation to find funding to eventually demolish the decrepit Uncle Billy’s.
Neither Bushor, Van Buren or any representative for the Olson Trust responded to requests for comment.
Email Michael Brestovansky at mbrestovansky@hawaiitribune-herald.com.