A state-owned blight in Hilo’s oceanfront resort district might not disappear as soon as hoped despite the Legislature appropriating funds for the job in May.

Lawmakers agreed to include $13.5 million in the state budget to demolish the long-decaying, vandalized and partially burned-out former Uncle Billy’s Hilo Bay Hotel on Banyan Drive where taxpayers have been paying about $14,000 a month to keep out squatters.

The demolition money, however, was designated to come from a special state Department of Land and Natural Resources fund the agency uses to pay basic land management expenses and other operating needs, including conservation programs and payroll.

DLNR officials said no “extra” money was added to its Special Land and Development Fund to demolish Uncle Billy’s, and that the fund cannot support the demolition expense.

As a result, the agency plans to ask lawmakers next year to provide $12.5 million for demolition, and in the interim intends to spend $1 million from its fund to hire a consultant to begin planning and permitting work and, if needed, produce an environmental assessment before demolition can begin.

If the Legislature provides $12.5 million next year to demolish Uncle Billy’s, DLNR would proceed to issue a request for proposals to find a contractor to do the work four years after lawmakers rejected a request to pay for the same thing at a much lower price.

However, it’s uncertain when demolition might begin if the funding change is made. “There is no definitive timeline for demolition work at this time,” DLNR’s Land Division said in a statement.

The funding hitch represents the latest in a string of difficulties the agency has struggled with to improve the property itself or have a private developer do so under a new long-term land lease over the past seven years since the original lease for the hotel reached the end of its term.

Icon to eyesore

The 146-room hotel was built by William J. “Uncle Billy” Kimi Jr. in phases from 1966 to 1970, after a tsunami devastated Hilo in 1960, on state land under two leases dating to 1948 and 1962.

For several decades the hotel was a popular attraction for tourists and kamaaina, though in more recent years the property devolved from a family-operated icon to a publicly owned eyesore.

The land leases for Uncle Billy’s were set to expire in 2015, and got extended one year. About a month before the new expiration date, and three weeks before Kimi died at age 93, the family of the hotel’s founder closed the business instead of continuing operations under a month-to-month arrangement, displacing 37 employees.

Since then, DLNR has attempted to return the land to a highest and best use. But the agency has been bedeviled by the absence of a common provision in many Hawaii land leases that require lessees to remove built structures before lease expiration.

A 2016 analysis for DLNR by Erskine Architects Inc. concluded that given the hotel’s bad condition, it should be demolished along with the neighboring former Country Club hotel, which had become a run-down short-term apartment and hotel operation after its land lease expired in 2015.

Local developer Peter Savio stepped in to keep Uncle Billy’s going in 2016 under the Pagoda name, but that ended in 2017 after Hawaii County officials encouraged a shutdown due to fire safety and other public health concerns after inspections.

In 2018, engineering firm R.M. Towill Corp. estimated demolition costs would be $8.3 million for the shuttered Uncle Billy’s hotel and $6.2 million for the Country Club structure still in use.

DLNR sought $6 million from the Legislature in 2019 to demolish Uncle Billy’s, but lawmakers weren’t receptive to the request despite encouragement from DLNR and Hawaii County’s then-Mayor Harry Kim.

“The Department acknowledges that this is not an ideal use of limited public funds,” Suzanne Case, DLNR director, said in written testimony on the 2019 funding measure, Senate Bill 1142. “However, it is likely the only viable solution to the situation.”

Case told lawmakers that DLNR tried to interest private developers in 2018 to redevelop the property but received only one response from a developer who said the state would have to share demolition and debris removal costs to make such a project feasible.

The bill stalled after passing one Senate committee.

Money troubles

DLNR made a new attempt in 2020 to solicit private interest in repairing or redeveloping the Uncle Billy’s property, and the same developer responded with a bid that also included leasing the former Country Club parcel.

The bid from Tower Development Inc. led by Ed Bushor was recommended for DLNR board approval by an evaluation committee that included representatives of DLNR, Hawaii County’s Banyan Drive Hawaii Redevelopment Agency and the state Department of Business, Economic Development and Tourism.

Tower planned to rehabilitate the two hotels at a cost estimated between $53 million and $58 million, and said it could alternatively operate the properties as rental apartments if DLNR preferred housing instead of hotel rooms.

DLNR sought board approval of the plan, but the matter was withdrawn at a Sept. 24, 2021, board meeting after issues arose with Tower’s financial capabilities and litigation between partners of an affiliate that revitalized the neighboring Grand Naniloa Resort in 2016 under a new DLNR land lease. Earlier this year, the agency’s board terminated the initiative to find a new lessee for the two properties.

On March 4, a fire broke out in the Uncle Billy’s building occupied by vagrants after a DLNR security contract for the property costing about $13,000 per month had lapsed in December. The blaze caused an estimated $2 million in damage to the four-story hotel primarily made of wood.

As of mid-April, DLNR resumed paying for private security to keep people out of the building at a cost of about $13,000 a month. A current contract costing about $15,000 a month began about a week ago and ends in April. The agency also agreed in July to pay a contractor $11,250 to secure doors and windows on the property.

Less than three weeks after the fire, Gov. David Ige sent lawmakers a supplemental budget request for the approaching fiscal year that began July 1 with several DLNR capital improvement projects, including $13.5 million in general obligation bond financing to demolish Uncle Billy’s.

The Senate Ways and Means Committee added the $13.5 million in bond funding to the budget bill in early April after a House committee passed an earlier draft with its own amendments. But a final budget passed by a conference committee of House and Senate leadership in May switched the method of funding to DLNR’s land and development fund.

Use of this fund, along with DLNR land lease management, was the subject of a critical 2019 audit produced by the state auditor as the result of a request by lawmakers in 2017.

State Sen. Lorraine Inouye (D, Kaupulehu-Waimea-North Hilo) said the funding situation to demolish Uncle Billy’s is unfortunate but at least DLNR is spending some money to get planning and permitting work started after years of difficulty.

“There have been too many delays,” she said.

Inouye, who backed the 2019 bill to fund Uncle Billy’s demolition and worked in the hotel industry on Banyan Drive before first being elected to the Legislature in 1998, said the hotel that some long regarded as an iconic property is a significant liability to the state and a health and safety risk to the Hilo community.

“It’s a bad situation,” she said. “It’s an eyesore.”

If DLNR succeeds in obtaining $12.5 million next year to demolish Uncle Billy’s, the agency would then explore future use of the 1.8-acre property. Prior ideas have included a new hotel, apartments, open space and parking.