 Welcome back to ThinkTech. I'm Jay Fidel. It's the 10 o'clock block on a given Thursday. And we have talking tax with Tom and our subject today is how your state lands are managed. With Tom is my major contributor here and Keith Chun. So the first question, Keith, is how did you get into the studio? I'm only kidding. Well, I think what we first ought to do is kind of let folks know who Keith Chun is. I, of course, am Tom Yamachika. I'm the president of the Tax Foundation of Hawaii. And I'm the usual fixture here in talking tax. But with us today is Keith Chun. He used to work at the Department of Land and Natural Resources in the land division. And he is an attorney like Jay and I are. And he's going to tell us because he's retired, he can tell us from an insider's perspective of what it was like and hopefully what we can do about it. So Keith, can you tell us a little bit about what the DLNR does and what the land division does? Yeah. You know, thanks for having me, guys, and Tom mentioned I am rich and so I can speak a little more freely. And I did dig this shirt out of my closet of retired clothes for you folks. Thank you. Thank you, Jay. But, you know, the land division manages, yeah, it was no small task, though, you know, the state manages up and I'm doing this by recollection. I was at the land division from 2001 to 2016. So things may have changed, but the general notion is they manage about 1.3 million acres of public lands. Most of these lands are seeded lands. And for those of you, you know, you've heard that term, but it comes from the Admission Act in Section 5B. You know, I think one of the very basic starting points is that in managing these public lands, these public lands are held in trust. And by virtue of the state constitution, the Admissions Act, and Hawaii Revised Statute, the state has a fiduciary duty to manage these lands for the benefit of the trust beneficiaries. It can be the general public, the Admissions Act goes even more specific. So you manage these seeded lands for purposes such as public education, the betterment of conditions of native Hawaiians, housing, public uses, et cetera. So the general premise is that, you know, when you make a decision regarding these lands, you need to reconcile it with how is this in the best interest of the public trust and its beneficiaries. Now, from what I've seen, you know, I can go along with countless examples of mismanagement, but, you know, I think a lot of those have already been detailed in the various Star Advertiser articles. I think there were three front page articles on it. In 2019, the State Auditor's Office came out with, you know, for lack of an overused term a scathing audit of their management. But it seems that, you know, in general, the decisions made or recommendations made coming out of Land Division either show a very poor lack of basic real estate knowledge or the decisions are motivated by something else. And I'll leave that to the speculators. But, you know, I was questioned by people in the business community, the legal community, the real estate community for decades of, what are you guys doing over there? You know, it got to be the point where sometimes you just don't want to work there. Well, what were you doing when you were working there? So when I was there, I was the planning and development manager. And in that respect, we were tasked with trying to put unutilized or underutilized lands to better use. You know, when I first got there, I think you'll find for most people, the first question you ask is for an inventory of the lands. And, you know, while the DLN Army claim we have an inventory, what you'll get is a booklet of lands listed by TMKs, tax map key numbers. But there's really not much else to it. There may be acreage. But, you know, some of the things that you use in decision-making is going to be land use commission designation, zoning, whether it's in the estimate, those type of things. So you can make decisions on which lands may have income potential, etc. That's never really been done. You know, so it begs the question of how does the land division make decisions without an inventory? Okay. So to kind of sum up, you were in the land division. The land division manages our state lands, the ones that the state itself has title to. And your specific job was to find higher and better uses for the lands that were in your inventory. Assuming you knew what your inventory was. Right. Well, yes, but here's the little twist to it, which led to a lot of the things that started to come up and which were swept under the table, I believe, is, you know, the state owns a lot of lands, but some of the lands are not under land division's jurisdiction. So for example, they will set aside lands to the department of transportation by executive order or, and, you know, the transportation department will do with what they want. So, you know, I think it's, it's reasonable to say land division is not left with the cream of the crop. Nevertheless, there still are vacant lands that have, I believe, excellent revenue potential. You know, some lands have been subdivided. There's zone for industrial use. There's infrastructure in place, and yet they remain vacant for 15 years. And it's your division's responsibility to rent those lands out and get income from them or from them? I believe it is, you know, that's part of our fiduciary duty. Now, on top of that, though, what we discovered is that there's unutilized lands, but they're also underutilized lands. And this is where I, you know, you start to realize that, you know, real estate cyclical and during a down cycle, you know, some of the stuff might not be in demand or, you know, if, if there's available fee simple land, the land division only offers leasehold. You know, so people may favor fee simple. However, what we discovered is lands that were already under lease or under the infamous revocable permit system were generating far less than market rent. So in other words, you know, we could increase the revenues to the state by bringing those to market, you know, while also going after trying to lease out, you know, vacant. Okay. Well, so, so how did you come to that realization? How did, how did you figure out that the, the lands in your portfolio were not being rented at market value? Well, you know, you really have to, you really have to come up with some kind of comprehensive strategy. And, you know, prior to, to, um, going into real estate practice, you know, I worked in the financial industry and was a credit analyst on the mainland, et cetera. So you look at the financials of the department and what your various sources of revenue are and track them for the trends and what have you. But, you know, you look at certain sources and, and if you just look at the numbers, it may seem okay until you dig deeper. So if you, for example, if you realize your revocable permits are bringing in X amount of dollars, you might think, Hey, that's great. Till you start to delve into it and start to look at specific ones. And that's what we did. That's what we and two others at the land division did. We created our inventory of revocable permits. So you were not satisfied with the way things were being managed? Did you speak truth to power? Well, yeah. So this is one of the, one of the points I wanted to make is we, we took a inventory of the revocable permits. We retained a commercial appraiser, independent appraiser with an MIA designation, one of the IS ones to look and give us an idea where we are. And in our preliminary discussions with them, you know, I would say almost all of them are below market, but some of them were, you know, 500 to a thousand percent below market. Now, this was back in 2012, 2015. We raised this with the administrators. Now, the administrators at land division are Russell Suji, Kevin Moore, and to a certain extent, Ian Verakawa. This was raised with them. At that time, we were told to stop working on it. And they let the appraisal contract lapse, you know. So they essentially saying we don't need this or stop working on it. That was our, was our instructions. It wasn't until 2016 when the Star Advertiser came up with this article on the revocable permits. And then that led to the formation of the revocable permit task force. You know, so it's all after the fact. It's not something that that that land division, the heads of land division were not aware of. They were aware of. No, we were, we asked why we should stop on and no, no reason was given. Now, another interesting part in that was in the interim, I got reassigned to DLNR's voting division. So I undertook the task of revamping the voting divisions revocable permits, which their administrator, Edward Underwood, was fine with. So we did it. We, we appraised it. We implemented interim rent increases until the appraisal was done. We updated, this is a key to, we updated the revocable permit form because, you know, every time you reset things in the real estate practice, try to date your forms. And I told Ed, you know, you, you have permits along waterfront property without adequate insurance, hazardous material provisions, et cetera, et cetera. You know, so a lot of this stuff was implemented. Now land division chose not to follow voting's lead until this sorry, advertiser report him out. And now the governor forms a task force and they end up kind of trying to copy what we did at voting. But nobody's ever asked the administrators why back in 2013. This thing wasn't a good enough idea, you know. OK, and then one of the things that you found in the in the land division was that you had like a certain property that was bringing in, you know, $300,000 in sub-brands and you were renting it for $100,000. Yeah, this is that this is the whole lease extension issue, you know, where the ground leases come up after their term of 55 years or 65 years. And the leases are set to expire. And as most people pretty much everyone in the real estate industry knows that when the lease expires, any improvements revert to the less sore. So my thought on some of these that were going were being presented to the landlord to to extend the leases because statutory the landlord has the discretion to extend leases if the lessing needs additional time to make improvements to the property. And but that's a discretionary right. It's not mandatory. And that's that's what I tried to impress on the land division is you need to look at each lease individually. Some of them may merit it, but, you know, the land the landowner, the state should look at if we have a higher or better use for the property. Is the tenant a good tenant? You know, they're extending leases just because somebody put a new roof on it. And well, they're extending leases because of political considerations. Is there an insider process happening here? I can only speculate, you know. But here's the simple the simple example I gave to to to the administrators was look, for example, in this one case, the building is worth eight hundred thousand dollars. Now, I didn't appraise it. And that's been their reply is the person that recommended is not a licensed appraiser. I go, I understand that. But by even the tax value, that's a set of values, eight hundred thousand. And what you're telling me, Mr. Administrator, is that in three months, that building is going to belong to me. And you say you don't want it. So if you really want to extend, at least I'm not opposed to it, but the state should be compensated for what I call the reversionary interest in the improvements, what we would have gotten. You know, you can do it multiple ways. You can have the guy pay for it. We can charge him lease rent for the land and improvements, but we don't extend it as a ground lease and just continue to charge them ground lease. Now, in another example, sure enough, as Tom mentioned, we're we're collecting ground rent, maybe 80,000, 100,000. Sounds good on paper. But the tenant, I don't know if the tenant even occupied the land or maybe occupied one, you know, one office in it. But he sublet the rest of it. And he was making upwards of 300,000 based on based on what space lease rents were at the time. So what you're telling me is that in three months, that building can be mine. And I can step into that shoes and collect the 300,000. Why would we not want to? You know, that one of the answers I got was, well, we don't want to take it back because we, you know, we have a tenant on it. We don't want to risk not having a tenant. I go, they're all they're all sublesses. They don't care who they write the check to. You know, you know, in the in the ground leases from commemoration schools, there's a formula. And even even 20, 30 years ago, there was a formula. And the formula would be based on, you know, appraisal considerations. These leases have the formula. Where is it breaking down on the on the either the lease or the formula? The the the leases have an assigned provision. So if you assign it during the term, the state may share it. The the landlord has adopted a sub lease policy where they would participate. And then that policy was modified several times to acknowledge that, you know, if I if I take the ground lease and I build a building and I issue sub leases, the state shouldn't participate in that because it's the less these money that built the building. And they took the risk that, you know, they may not get ten. And so that's it. But when you come to the exploration of the lease, that that's something different. We're talking about, you know, a reversionary interest that that's going to be my building. How does that mean? How does that satisfy the best interests of the public trust and the trust beneficiaries, the beneficiaries and the trust could be making 300,000 a year and instead is going to now be. Saddled with 10 more years of whatever ground lease rent. You know, so what they normally did was they just extended the ground lease in place. Yeah. And they they you know, and here's the problem is a lot of the replies given are they sound good, but they're really talking points. You need to dig into substance to it. So the reply you would get and I saw in the media is that, well, but we when we extend the lease, we'll get an appraisal. And so it's going to be market rent. And I go, no, you're appraising the wrong real real property interests. You know, you're just you're you're getting an appraisal for ground lease rent. But we're essentially giving them back the building. But isn't that a question of what's in the lease? You could write that up in the lease and you can say that in so many words and then you get paid. No, there's many ways of addressing it. But the answer really. There wasn't even up for discussion with what I say. You know, I had made recommendations on this and part of it on the staff submittals. I also made the recommendation going back to the basic premise. Maybe we need to start with the base and explain our fiduciary duty and your recommendation, how it meets the fiduciary duty. Because if you can't answer that question, you better go back to the drawing board. And my sources tell me, essentially, the staff was said, don't ask for Keith's comments. It does smell political, although, you know, I mean, it's hard to actually show that. But one question that comes to mind is this. One of the trust purposes you mentioned in the first few minutes of the show was for the benefit of the native Hawaiian people. Right. And, you know, it's important that we, you know, take care of them. It's important that we give them a benefit, I think, as a matter of if you dig deep that state policy somewhere somehow in so many ways, not necessarily articulated. So at some point it could be that DL&R was leasing these premises to people. It felt we're worthy recipients of a discount, namely native Hawaiians for native Hawaiian businesses, what have you, agriculture, what have you. And as a result, it sort of got baked in that these leases because it was state land, because there were a certain number of native Hawaiians involved, would be below market. Is there any, that's a wild guess I make, but I wonder if there's any truth to that. I don't think there's any merit to that, Jake. In other words, like I said, you know, the basic question you need to ask yourself is how is this in the best interest of the trust? How does it fulfill my fiduciary duty? If that, in fact, was true, then the recommendation should say that. You know, we're fulfilling our duty because native Hawaiians are one of the trust beneficiaries, and the tenant is a native Hawaiian, and therefore, blah, blah, blah, that's never been articulated. The rationale has always been the less he needs it because they're putting in improvements and the legislature determined that if you put in improvements, you can get an extension. To me, again, that's a discretionary thing, you know, but it could have been articulated as the reason it never has. I'm going to give you an oblique thought on this, Keith, and that is that, you know, in an island state, we only have a limited amount of land. And the limitation affects everything and everybody. As a result, too many people pay too much for the cost of occupancy. The appraisal community is largely owned by the owners. And so, you know, the prices go up and up and up and up and up. And of course, you know, this, this has an effect on everything. And the state never really, you know, it's never generous in terms of giving state land for valid state purpose. For example, if I'm in an industry that should be preferred, say technology for diversification. And I want to I want to lease some land for some state facility, some technology facilities somewhere. The state is really not in the market, I don't think, to provide me with a lease that can help me somehow achieve this diversification. Or is it? I'm guessing. But I've always I've always heard and felt that the state could do more for, you know, to to incentivize sectors and businesses that should be incentivized. What do you think? Well, I mean, let me let me kind of start off on that. And that is that you when you're talking about policy decisions like that, those those really come from the legislature and then the legislature has, you know, formed bodies like High Technology Development Corporation, for example, to deal with that kind of thing. I mean, it's it's it's not necessarily land divisions, Kuliana to go and deal with those kind of policy imperatives. And unless there's, you know, some law that says you got it, they got to do it, right? I mean, Keith, what do you think? Well, again, this this is my opinion. And, you know, if I may slide off the subject just for a bit, this goes back to one of the the findings or recommendations in the audit, which is that land division lacks a strategic plan, you know. And this is, again, one of those things that you need to ask why, because this audit came out in 2019. In 2015, I had prepared an asset management strategy and I had prepared it for the for the state, along with an asset portfolio, which was a booklet of Dylan ours, leasing practices and examples of properties we had available to either be leased or to use property management services. So, you know, it was pretty quite a bit of work went into it. And there was a preliminary analysis of my findings. And I was instructed by Dylan ours administrators that we do not need this stop working on it. Again, no no reason or rationale. But now along comes the 2019 audit pointing it out. And now they're scrambling to put together an asset management plan. And my understanding is they recently took it to the board to give an update. And when I looked at it, it was it was a piecemeal thing. And it almost showed that you don't have a comprehensive asset management plan. And I believe Mr. Hirokawa, who presented it, says we're going to hire a consultant to do a help us, and he wanted to hire an economist. I find that kind of ludicrous. But again, it goes back to the issue of why were we instructed to stop working on this back in 2015? I told Tom before, with this asset portfolio, it could be used to present in presentations of the landlord to the legislature. And more importantly, to real estate brokers could help us market the property. And I, in fact, began setting up meetings with brokerage firms. The president of Collier's agreed to meet with me and you'll hear some excuses. Like we couldn't hire brokers because of the procurement code. And I just agree with that. I've looked at the code and there's various ways we could. And Collier's, she was willing to say, we'll figure something. Let's just come in and talk. So then I got the instructions to stop working on it with no explanation. Because, mind you, Land Division's marketing policy is to put a notice in the paper saying land is available for auction and pound a for lease signed sale on the property. That's it. Then you sit at the phone and wait for it to ring. You know, what other landowner do you know markets their own property? You know, so when I was told to stop working on this, I asked if what we're is, are we just going to use the our standard pound a for lease sign on the property, a marketing plan and Kevin Moore said, yes, that's what we're going to do now. Okay. So that's I think that then the most recent development on this score is that there's an investigative committee that has been formed by the state house. So why don't you tell us a little bit about that and what they're sorry, Tom. The reason I diverted was that I was going to answer Jay's question prior to, you know, using, go ahead. And that comes along with this comprehensive asset management strategy. You know, you have certain lands, but what you what as a trust, I believe most major trustee is they set aside and identify certain lands solely for income producing purposes. For example, KSP does not use every landed homes for school. So if we designate certain assets to be income producing, then we definitely should be seeking fair market rent for that and not discounted rent because the sole purpose of those lands is to generate income. However, aside from those lands, if there are other lands that could sue other uses and Jay mentioned high tech, but another purpose would be ag and again, those are policies set out by the legislature. But as a fiduciary, you could easily go to the land board and say, I want to lease this land to this high tech company or to this ag. And we're willing to take below market because it's consistent with the legislative policy of promoting agriculture, promoting high tech. I think that's then you have some valid justification that it still falls within their fiduciary duty. You know, DLNR has come back to the audit and saying, we can't manage our lands like a private entity because we're not here to maximize every dollar of every piece of land. And that's true. But when you designate certain parcels to be income producing, you shouldn't be discounting those rents. So that's how I think you could address the needs that Jay had mentioned about other public interest type of uses. Does that necessarily require legislative action? Or could that be done in-house as a matter of the plan? I think it could be done in-house. You know, again, like if you designate lands for income, then make income. But other lands, if your high tech company wants to lease it and it's not there, you know, designated for income producing, we can definitely say it's consistent with the state's policy of promoting high tech. Now, it's the land board's decision, but I would certainly be able to make that pitch and feel comfortable that I am fulfilling my fiduciary duty. I don't have to get every top dollar for every parcel of land. Tom, you were asking about an investigative committee. Yep. So Keith, why don't you tell us about that? Well, you know, I found out this, you know, some people that still keep in touch with me have told me that in response to the audit, the legislature formed an investigative committee to look into two audits. One is of ABC, the Agriculture Development Corp, and the other is the DLNR Special Land Fund. So my understanding is the committee has met once or twice already and is going to be looking into this. Now, whether it's a political thing to look good versus whether they're serious, I can't speak. I believe they're supposed to come up with a list of witnesses that they want to call. You know, my suggestion would be that they call former Land Division employees that can shed light on what they've seen. Also, that can be used to rebuy any for excuses made by the Land Division, you know, I should, I should let Jay know that after making all of these recommendations, Land Division decided to let me go. So I lost my job in 2016 and I was on an annual contract. So it was, it had been reviewed 15 years in a row. There are 12 type of 12 employees or so in Land Division that are under this annual contract thing. All of them have always had their contracts renewed, but the explanation given to me was their job is temporary in nature, so we're not going to renew it. But I think what the effect it had throughout Land Division was you better learn from this because if you want to try and oppose the administrators, their contract won't be renewed, you know. So you made an example. Yeah, I believe so, you know, because before speaking about from the same administrators, I had always received excellent employee reviews and then I stopped getting annual reviews and, you know, I don't think it's that far-reached to figure out what happened. Was this just a policy disagreement or is there something under the hood here? Well, you know, it would be nice if they ever sat down and explained the rationale for their decision, but there is there just wasn't. So, you know, silence speaks pretty loudly. Yes, it does. So what would you like to see the investigative committee find and do and recommend to the legislature? You know, I think. I don't think you're going to see any significant improvement unless you change the administrators. These guys have been there forever. They've ignored recommendations. They're not going to get if it's because of of lack of acumen at this point, you're not going to get any smarter, you know. You're not going to be a squeezed blood out of a stone. If it's something else, that's even more reason to. But, you know, every action they seem to have been taken is only in reaction to being publicly embarrassed. You know, I'm going to deal with RPs because it splashed the front page of the Star Advertiser. I'm going to come up with the asset management plan because the audit said I need to. But nobody has. And the reason I appreciate the invite is that nobody knows the background. You were made aware of this years before it happened and you just silenced it. Why? So, Keith, you know, suppose I am Joe Blow walking down the street. I know nothing about state lands. OK, then you can run that land division. My question to you is why should Joe Blow care about this? Well, number one is Joe Blow is a definite beneficiary of the public land trust. It speaks to that in, I believe, the state constitution. Number two is if, for example, on your industrial lease, we're collecting 100,000, but we should be collecting 300,000. Mr. Taxpayer subsidizing that lessy to the 200,000. It's no different than charging that lessy fair market rent and the state handing them a check for 200,000. We wouldn't have to increase our taxes or cut back our services if we were really managing these lands properly. Same thing. Again, I tried to put it as simple as possible for people in the department to understand is if you have an apartment building that's owned by your family trust and your friend wants to rent two units for a dollar a piece. Well, that's great for the tenant. But don't you think Uncle Auntie and your cousins are going to be pissed off? Yeah. And so the simple answer is, yeah, Mr. Joe Blow on the street. You're one of the owners of this land and you're getting screwed. Yeah. You know, again, these seeded lands, you know, again, some of the specified purposes in the admissions act is public education, betterment of native land condition. You know, these, the legislature is scrambling for money. You know, now I will bring this one other point up that that that for you to chew on. Several years ago, Russell Suji went to the land board and asked for authority to be granted to him to transfer revenues from seeded lands, from any seeded lands into the special land fund. So what would normally go to the general fund if he chooses to on his own? He doesn't need to go back to the land board. He could take the lease rents from the leases of those seeded lands and put it into deal in our special land fund. Now, that has been done to the tune of several million a year. But the troubling part is, theoretically, under that broad delegation of authority, he could transfer every single penny of seeded land revenues to the special land fund, after which it could only be used for the purposes and the statute, which don't really reconcile with the admissions. I think that, you know, that kind of power shouldn't even be granted to the DLNR chairperson, let alone a civil servant administrator. Tom, can you put this in a larger perspective and summarize, you know, what it means to the state economy, what it means to state policy and priorities in general? Well, I mean, let's kind of put it this way. You have this agency that's supposed to be safeguarding our assets, and these are our assets, because as taxpayers of the state of Hawaii, we own them. They have a duty to make sure that those lands are being used properly. Some of them are, some of them are not. There are demonstrable examples of how some of these lands are either underutilized or they bring in much less than fair market rent when we should be getting fair market rent, of bringing in percentage revenue when the department has no way to even check the percentage or even has any institutional system for making sure that we, the people, aren't getting scammed out of this. And like Keith said, to the extent that we're not making our proper return from this land portfolio and government's there and is costing money, guess who has to pick up the difference? You, me, and Joe Blow taxpayer. That's why we should all be concerned. Hopefully the legislative select committee that's looking into this is going to come down and come down hard and require that positive changes be made. So, and those will be for everybody's benefit. Well, thank you, Keith, for discussing and giving us your candor on this. I hope that we all follow. I suspect you will follow the work of this committee and I hope we can get together again and take a look at that work and those recommendations, you know, when they come out. I really appreciate your sense of community about this and good for you. You're a true man. Hey, one last thing. If you run across that guy walking on the street with no sense of real estate knowledge or anything, make sure he applies if this landed as division administrator job comes over, you know? Is that a way of helping him, helping us or punishing him? I want you to know that I know other people who have been with DLNR. Well, thank you, Keith Chun and Tom Yamachika. It's great to talk to you about this. Thanks for having me. And we look forward to our next conversation about it. Thank you. Aloha. Okay, bye.