by Bruce D. Voss

The State’s new Facility Renovation Partnership Program could create attractive investment opportunities for savvy investor/developers who can efficiently manage repair and renovation work.

The new program created by the 2011 Hawaii State Legislature is an innovative approach to the State’s huge backlog of deferred maintenance on many of the State’s aging (and in some cases decrepit) office buildings. The State Department of Accounting and General Services will sell selected State office buildings to private investors, who will renovate or improve the building and lease it back to the State under a long-term lease. The land on which the building sits will not be sold to the private investor, but will be leased at a “nominal rate” that will allow the private investor to recoup its capital investment made to the building. The State would retain an option to buy back the building from the private investor at a price equal to the “remaining balance of the debt service costs incurred by the private investors”.

Some important legal issues still need to be worked out, including how the ground lease and buy-back option would be structured and how the private investors would be qualified and selected. The challenge will be to balance the State’s financial interests against the need to keep the program’s rate of return high enough to attract bona fide investors. The State will compile a list of facilities suitable for sale/lease-back, and will develop administrative rules to implement and regulate the program.