The right to operate an outdated Hilo waterfront hotel is headed for public auction early next year in the wake of disagreements over a land lease and misuse of the property that became the Pagoda Hilo Bay Hotel in February.

The state Department of Land and Natural Resources, which owns the 2-acre site on Banyan Drive, intends to auction a short-term lease or month-to-month revocable permit to use the property.

The agency, which outlined its plan in a report to its board last week, doesn’t want to offer a long lease until a recently formed Banyan Drive Hawaii Redevelopment Agency overseen by Hawaii County develops a long-term conceptual plan for the broader area that is home to other deteriorating hotels on state land.

Offering new short-term use of the Pagoda site is expected to re-engage two developers who earlier this year vied to take over the property that long operated as Uncle Billy’s Hilo Bay Hotel.

The company operating Uncle Billy’s, Hilo Bay Hotel Inc., announced plans in January to close the 145-room hotel by February but then accepted an offer from local developer Peter Savio to assume its land lease with DLNR and keep the hotel open. The lease, however, was set to expire in March. So the deal to keep the hotel operating with its employees was contingent on Savio receiving a month-to-month revocable permit from the agency.

At the time, a rival developer who was renovating the neighboring run-down Naniloa Volcanoes Hotel asked to be considered in place of Savio to take over Uncle Billy’s, which was built in 1966 by William J. “Uncle Billy” Kimi Jr.

The rival developer, Ed Bushor of WHR LLC and Tower Development Inc., was unsuccessful in his bid largely because the lease assignment was Uncle Billy’s to give, and Uncle Billy’s wasn’t willing to assign its lease to Bushor. So Savio, who paid the hotel’s former owner $150,000 for furniture and fixtures, took over Uncle Billy’s initially under the lease and then a revocable permit. His land rent to DLNR is $35,800 a year.

Since then a law firm representing Bushor has complained to DLNR that the Pagoda is hurting the Naniloa, which Bushor turned into the Grand Naniloa Hotel Hilo under Hilton’s DoubleTree brand.

Michael Lam, an attorney with Case Lombardi &Pettit representing Bushor, sent DLNR a letter in August requesting that the agency let Bushor pay one year of his $580,270 annual lease rent in installments over five years because of issues that included “the loss of revenues to the Naniloa resulting from the operation of Uncle Billy’s Hotel (the Pagoda) as a below market rate ‘budget’ property.”

In October, Lam sent another letter asking DLNR to investigate Savio’s use of the Pagoda for University of Hawaii-Hilo student housing in violation of a requirement to operate as a hotel. The letter asked that Sa-vio’s revocable permit be terminated if alleged improper use was confirmed.

Savio was renting rooms to students, and advertised rates for the upcoming semester at $2,900 for a studio or $1,760 to share larger rooms.

In an interview, Savio said he was just extending a service that Uncle Billy’s had offered for decades, and that rent from student housing on a nightly basis ($23 for a studio or $30 for a double) was far less than the hotel’s $80 to $90 nightly hotel rate. “We were doing it to help the university,” he said.

Uncle Billy’s didn’t violate its land lease, according to Savio, because students used the hotel for long-term housing but were offered monthly stays. He said students weren’t willing to rent from him by the month because he only had a month-to-month DLNR permit that, if canceled, would put students in a bind to find affordable replacement housing.

So Savio offered semester-long rents. “Technically, I broke the rule a little bit,” he said. “But I think I was trying to be fair.”

After the complaint to DLNR in October, Savio said he discontinued the dorm operation, which he said involved 10 to 15 rooms, though a website his company operates, hawaiistudentsuites.com, still promotes the Hilo Pagoda for student housing.

Bushor, through his attorney, reminded DLNR in a November letter that he wants to compete for the Pagoda site and said a proposal he made to the agency in February remains on the table.

Bushor’s proposal offered to keep Uncle Billy’s open with its roughly 30 employees, maintain the hotel’s 2015 rates and provide free unlimited golf to Uncle Billy’s guests. The written proposal also said Bushor would present a plan to redevelop the hotel into a Hilton Garden Inn or some other use preferred by the county and DLNR.

Bushor could not be reached for comment Friday.

Savio, who wants to keep running the Pagoda, said it’s not possible to build a new hotel of significant size on the site because of parking requirements and shoreline setbacks that weren’t in effect when Uncle Billy’s was built. He anticipates that the county redevelopment agency will want to replace the hotel with a restaurant or green space.

Savio and DLNR agree that the hotel, which has roof leaks, an outdated electrical system, plumbing issues and termite problems, needs to be torn down within five or 10 years and that it is preferable for the property to stay open until demolition.