The state auditor issued a critical report saying the state Board of Land and Natural Resources failed to collect a potential $1.6 million from revenue-generating leases.

The failure to collect the money has far-reaching consequences, according to the audit, since lease revenues support the Department of Land and Natural Resources’ Special Land and Development Fund, which is used for natural disaster response and hazard mitigation efforts, conservation programs and endangered and invasive species initiatives.

Rent from more than 1,300 ground leases and 340 revocable permits issued by DLNR’s Land Division account for the majority of Special Land and Development Fund revenues. The fund also covers the Land Division’s entire budget, according to the audit.

The audit’s release follows a special report by the Honolulu Star-Advertiser in November that found that businesses for years used state land for free at Honokohau Small Boat Harbor on Hawaii island; that DLNR was unable to capitalize on its holdings despite a hot real estate market; and that agency staff had alerted top managers within the Land Division that its month-to-month property rental program needed major fixes.

The state audit, released Thursday, also found that the absence of long-range planning left Land Division staff without the expertise, resources and options to actively and effectively manage its land portfolio.

“Without such plans, the Land Division’s management of its leases and revocable permits must resort to simply maintaining the status quo,” wrote state Auditor Les Kondo. “We identified specific examples where this has resulted in the loss of higher revenues and limited the opportunities for others to lease those properties.”

The audit also found 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 little choice but to extend the leases and, by our calculations, forgo $1.6 million in potential revenue.”

In a statement, DLNR said it is “proud to note that the financial management of the Special Land and Development Fund has been sound.”

“The auditor disregards the fact that Land Division’s revenue generation from public land dispositions has grown steadily over recent years from $6.3 million in 2010 to over $20 million in 2018,” according to the statement. “DLNR will evaluate the recommendations to determine which might be implemented in full or partially. Some of the recommendations are already among standard operating procedures, including the inspection and cleanup of property after lease expirations.”

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, the audit said, because the BLNR can approve additional one-year extensions, most of the revocable permits have been held for decades and have seen few, if any, rent increases.

“In 2017, CBRE Inc. appraised about one-third (113) of the Land Division’s revocable permits and determined the annual rents for those select properties were $838,000 below market values,” according to the audit. “While the Land Board approved rent increases for revocable permits in 2019, the Land Division capped the increases at 10 percent a year, despite some rents being undervalued by as much as 1,000 percent.”

The audit said the Land Division administrator and some BLNR members wanted to retain “good tenants,” which drove some of the decisions to extend leases and permits.

“To the contrary, we believe 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,” according to the audit.

Kondo ended the audit by saying, “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.”