Denial by the state Land Board on Friday on a request to grant another delay in the due date of a $250,000 lease payment for the financially troubled Naniloa Volcanoes Resort in Hilo prompted the hotel’s bankruptcy trustee to begin plans for the potential shutdown of the hotel and layoff of about 56 employees.

“It’s a sad day for Hilo. It’s a sad day for the state,” said David Farmer, the bankruptcy trustee for Hawaii Outdoor Tours Inc., which holds the state lease and operates the hotel.

The firm, in bankruptcy proceedings after defaulting on a $10 million construction loan, has 58 years left of its 65-year lease. The 71-acre property includes a golf course and a 329-room hotel.

Farmer asked the Board of Land and Natural Resources on Friday for relief, including a delay from
Sept. 16 until the end of the year on meeting a $250,000 payment on the $500,000 annual lease of the state’s property. The hotel had previously received an extension on the payment from Aug. 1 to Sept. 16.

Farmer, serving as Chapter 11 trustee in the bankruptcy, had selected Colliers International to market and sell the resort.

Farmer said two potential buyers have given letters of intent to buy the hotel, but haven’t put any money down. One offer is for $12 million while the other is for $14 million.

He issued a statement Friday night that whether the hotel would shut down had not been decided.

Hawaii Outdoor Tours’ lender, First Citizens Bank & Trust of North Carolina, will determine the future of the resort, Farmer said after the hearing with the Land Board.

Ken Fujiyama bought the hotel lease at auction in 2006, using the $10 million construction loan to help buy the hotel.

Fujiyama said he helps manage the hotel but doesn’t handle its finances. He is trying to put together an offer to maintain ownership, he said.

Russell Tsuji, land division administrator for the state Department of Land and Natural Resources, said an appraisal shows the lease is worth about $150,000 per year, but the $500,000-per-year price can’t be adjusted because it was set at auction.

In making the decision Friday, Land Board members said they were governed by bankruptcy rules and that in the long term they felt shutting down the current business was the best decision.

“This is really difficult,” board member David Goode said.

“We looked at … what’s best for Hilo in the long term.”

Board member Samuel Gon said his decision was made in part by the recommendations of Hawaii County Mayor Billy Kenoi.

Kenoi, who testified Friday in Honolulu, said the state had failed to ensure the property was properly managed for the benefit of the state and community and he was deeply concerned with deteriorating conditions at the resort.

The result of Hawaii Outdoor Tours operating the resort for seven years has been a “disaster” for east Hawaii, he said.

“The property is in shambles,” Kenoi said in his prepared speech.

“Our greatest concern is the manner in which this lessee allowed the historic Naniloa property to dramatically deteriorate despite clear language in the lease that requires the lessee to ‘keep, repair and maintain all buildings and improvements … on the premises in good order, condition and repair,’” he said.

Kenoi said the Kilauea Tower section of the hotel has been gutted and empty for years, and valuable
retail space on the resort’s grounds that could be contributing to the local economy is vacant and closed.

“Only a fraction of the rooms in the Naniloa have been renovated,” he said.

The Hilo Downtown Improvement Association along with a number of merchants asked the board to turn down the request by the trustee of Hawaii Outdoor Tours to delay payments until the end of the year.

“We are frequently confronted with truly sad stories from visitors who have stayed in the Naniloa,” association president Jeffrey Melrose said.

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The Associated Press contributed to this report.

CORRECTION: The Naniloa Hotel has about 56 employees. An earlier version of this story said it has 536 employees.