Vote could terminate Aloha Tower deal

A project for Piers 5 and 6 is in jeopardy as the developer seeks arbitration

The agency that oversees state lands surrounding Aloha Tower is considering terminating the deal under which Dallas-based Hughes Development LP plans to build a mixed-use waterfront project at Piers 5 and 6.

The Aloha Tower Development Corp. board has scheduled a vote for Wednesday on whether to end the contract for the $300 million Pacific Quay project, whose developer is demanding arbitration in a dispute over lease terms.

Hughes Development is threatening to sue the agency if it does not agree to arbitration in the dispute. The agency's executive director says it already has "bent over backwards to work with the developer."

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The state Aloha Tower Development Corp. is slated to vote next week on whether to terminate the planned $300 million Pacific Quay project at Piers 5 and 6.

The agency's board put the matter on its Wednesday agenda at the request of its lawyer, said Sandra Pfund, Aloha Tower's chief executive officer, in response to Texas developer Kenneth Hughes' October demand for arbitration in a dispute concerning the lease terms.

"We felt we were working in good faith on negotiations to proceed with the project, and the developer somewhat abruptly hired an attorney to proceed with arbitration," Pfund said. "We will now consider terminating the contract on the advice of our attorney, so that we can move forward."

Hughes' attorney, Jeffrey S. Portnoy of Cades Schutte LLP, said yesterday that next week's contract cancellation vote was initiated by the state. He called the move an attempt to circumvent the arbitration, which is scheduled to begin May 12.

The ATDC, which oversees the redevelopment of state property around Aloha Tower, had approved plans for the project's first phase in July 2006 and approved a zone change early last year.

Hughes Development LP planned a mixed-use waterfront project featuring a 130-foot tower with as many as 300 time-share and conventional condominium units, a parking garage and 80,000 square feet of retail space.

But Hughes and Aloha Tower could not agree on terms of the project's 65-year ground lease. Last July, Hughes offered $10.5 million as his best and final offer, and the ATDC board countered with $58 million.

"This is some of our most valuable state land," Pfund said. "We need to make sure that the state is fairly compensated for the use of this cherished waterfront property."

Hughes filed an arbitration claim in October seeking a ground lease, with delay costs deducted from the rent, and attorney's fees and costs, or damages.

"They might claim that we are canceling the contract and that the arbitration is no longer valid. Frankly, we are happy to sue," Portnoy said yesterday.

The project should have been ready to break ground in early 2007, said Hughes' arbitration claim, which added that delays had cost an extra $40 million. Portnoy said at least $2 million was spent out of pocket for engineers and consultants.

"We feel very strongly that we've bent over backwards to work with the developer to move things forward," Pfund said yesterday. "The key to us would be a fair compensation for the state land, and we also had issues related to parking. If the developer's project is not profitable based on a fair value for these significant state lands, it's not the right project for this location."

There was also disagreement between the state and Hughes concerning parking obligations. In Hughes' claim he alleged further that other terms of the development agreement deal, entered in 2004, also had changed substantially, making the project no longer economically feasible.

"We don't have final numbers yet, but there are many hundreds of thousands of dollars in actual hard costs that (Hughes) lost," Portnoy said. "We're also trying to determine what his anticipated profits would have been if the state had not prevented this project from going forward."