The Hawaii State Auditor released a report that states the Department of Land and Natural Resources, DLNR, holds proceeds from more than 1,600 revenue-generating leases and revocable permits in its Special Land and Development Fund, or SLDF.

Rent from more than 1,300 ground leases and 340 revocable permits issued by DLNR’s Land Division account for the majority of SLDF revenues.

 In turn, the SLDF funds the Land Division’s entire budget, according to the State Auditor's office.

The Hawaii State Auditor says that although the SLDF has become an increasingly important source of funding, the Land Division does not deem it necessary to develop a long-term strategic plan or asset management plan to guide the administration of the public lands in its portfolio.  “Without such plans, the Land Division’s management of its leases and revocable permits must resort to simply maintaining the status quo. We identified specific examples where this has resulted in the loss of higher revenues and limited the opportunities for others to lease those properties,” said State Auditor Les Kondo.

The Land Division did not have the staff, expertise, and resources to do anything other than continue business as usual, according to the State Auditor. It says this left the Board of Land and Natural Resources little choice but to extend the leases and, by their calculations, forego $1.6 million in potential revenue.

An example was provided when leases in the Kanoelehua Industrial Area near Hilo began expiring in 2014, the Land Division could have re-consolidated and re-subdivided the properties to better meet market demand, or generated higher rents by converting ground leases to space leases and putting them up for auction.  

However, the State Auditor says the Land Division did not have the staff, expertise, and resources to do anything other than continue business as usual, leaving the Board of Land and Natural Resources (Land Board) little choice but to extend the leases and, by our calculations, forego $1.6 million in potential revenue from just the first 16 of the 70 leases in the area that were ultimately extended.

The audit report goes on to say that the Land Division also collects rent from more than 340 revocable permits, which are issued on a temporary basis not meant to exceed one year.  However, because the Land Board can approve additional one-year extensions, most of the revocable permits have been held for decades and have seen few, if any, rent increases. 

According to the Land Division Administrator and some Land Board members, the desire to retain “good tenants” drove some of the decisions to extend leases and permits.  Rather, the State Auditor believes that retaining tenants at below-market rents without offering other members of the public the opportunity to bid for the leases is inconsistent with DLNR and the Land Board’s public trust obligations.

“As a state agency, DLNR must be accountable for its decisions involving public moneys. These are public lands that should be managed for the benefit of the public, not a select few," Les Kondo, the State Auditor, said. 

The Department of Land and Natural Resources issued the following statement in response the the auditor's report:

The Department of Land and Natural Resources (DLNR) appreciates the auditor’s review of the operations of our Land Division and are proud to note that the financial management of the Special Land and Development Fund has been sound. The auditor’s report includes useful recommendations in some instances about Land Division’s operations, but also reaches a number of subjective conclusions based on the auditor’s interpretation of the public trust doctrine.  We discussed our concerns with the auditor’s report in our letter to the auditor of June 13, 2019.

The Land Division’s revenue generation from public land leases has grown steadily over recent years from $6.3 million in 2010 to over $20 million in 2018.

Where the law requires that DLNR charge market rent for leases, Land Division ensures that market rents are paid to the State by procuring independent appraisers to determine these rents.  Some of the auditor’s recommendations are already among standard operating procedures, including the inspection and clean-up of property after lease expiration.