Run-down. Terrible. Total dump.
Those are guest descriptions of the Hawaiian Ebbtide Hotel. Recently a state court jury gave its own assessment, in another step in a battle over ownership that could influence other leasehold property owners in the state.
The jury’s February decision found that conditions were bad enough that the four-story hotel, which has offered $80 nightly specials and is on the fringe of Waikiki’s glitzier core, should be taken away from its owners.
The verdict found that the owners of the hotel, several small investors including a mom-and-pop barbershop and a former state Department of Education administrator, violated their land lease by not keeping the property in good shape. So the landowner, a scion of a wealthy kamaaina family, gets to cancel the lease and assume ownership of the hotel.
Legal observers say the case is a cautionary tale about leasehold landownership. Thousands of leasehold properties exist in the state, including co-operative ownership buildings like the Ebbtide.
Barry Sullivan, a local attorney doing ground lease work, said such leases typically require that structures on the land be in good condition. “It’s a standard covenant,” he said.
Sullivan, who’s not involved in the Ebbtide case, said many lessees don’t pay attention to such clauses, but he’s not aware of another case where a Hawaii landowner sued to acquire a building over the maintenance issue.
Ken Marcus, another longtime Hawaii commercial real estate attorney, also said the Ebbtide case is unusual. “I can see this kind of thing happening again, but it’s fairly unusual for tenants to let (property conditions) slide,” he said.
Marcus, who also isn’t involved in the case, added that lessees have a diminishing incentive to invest in a building as a ground lease nears expiration, while landowners don’t want to receive a run-down building at the end of the lease term.
John Wollstein, one of the Ebbtide’s owners, contends that the landowner, Marcus Fullard-Leo, is using subjective lease terms to wrest control of the property on Kaiulani Avenue behind King’s Village to position it for valuable redevelopment.
“There is $1 billion worth of construction within 100 yards,” he said, referring to redevelopment plans for the Princess Kaiulani hotel, King’s Village and Food Pantry sites. “Fullard-Leo is taking advantage of (the lease).”
Fullard-Leo said he intends to improve the Ebbtide but has no redevelopment plans.
Despite the jury’s decision, the fight for the Ebbtide isn’t over. Hawaiian Ebbtide Hotel Inc., the company led by Wollstein that leases the land under the hotel, filed for bankruptcy Feb. 25, three days after the court ruling. The filing at least delays Fullard-Leo from assuming control of the hotel.
Wollstein also vows to appeal the case to the U.S. Supreme Court if necessary, and contends that the condition of the 60-year-old building is decent enough.
Tide rolls in
The hotel was part of a chain established in 1959 by a group of local businessmen who planned 40 hotels with the Ebbtide name throughout the state. The hotels were sold as co-ops described as a “new form of investment” that predated condominium hotels where individual investors buy one or more units.
“This gave the people of Hawaii, the small investors, an opportunity to put their money into the rapidly appreciating real estate investment field and into our fastest growing industry, TOURISM,” read one newspaper ad from 1960.
The fledgling chain, however, faltered by 1962 after building six low-rise Ebbtides in Waikiki that struggled against bigger hotels. Some Ebbtides were converted to rental apartments, and others became condos.
Wollstein began investing in the 40-unit Hawaiian Ebbtide in the mid-1990s. The former DOE foreign-language program administrator bought several units for $2,000 to $150,000 each, according to property records. Since then Wollstein acquired more and today owns 27. Four others own the rest.
Some units are rented for hotel use, while others are longer-term rentals. Several businesses also rent units, including Tami-a Nails, Euro Hut, Smokey’s House of Smoking Gear, Suite Dreamz Tattoo Studio and Precious Island Gifts & Jewelry.
Originally, the land lease was to expire in 2010, but in 2000 it was extended to 2025. Annual ground rent is $300,000.
In 2001 brothers Dudley and Ainsley Fullard-Leo bought the land under the hotel. Members of the Fullard-Leo family, who bought the South Pacific island of Palmyra in 1922, were longtime investors in Waikiki real estate. In 2012 a Fullard-Leo company sold the land under King’s Village for $41 million.
Ainsley’s son, Marcus, took control of the Ebbtide land and two adjacent parcels held by his family several years ago. He filed the lawsuit against the Ebbtide’s owners in 2012.
The lawsuit contended that the building had numerous deficiencies including air conditioner drainpipes routed into showers or hallway buckets, rusting balcony railings, a leaky roof, mold, broken walkway tiles, parking lot cracks and missing smoke detectors.
Damning assessment
The damage assessment was based on a seven-hour inspection by Patrick Shaw of Honolulu-based KC Group in 2011. The inspection report, which identified 24 issues including improperly functioning balcony doors and exposed electrical wires, called the property “deplorable” and estimated proper repair costs at $750,000 to nearly $1.5 million.
In a 2012 follow-up report, Shaw said some poor-quality improvements were made but that most issues remained.
Wollstein claims he spent $250,000 on improvements since the lawsuit was filed, and that outstanding items including broken tiles, rust and air-conditioner condensation dripping onto buckets should not be grounds for terminating the land lease.
“There is nothing there that is physically dangerous,” he said. “I stand to lose millions of dollars if this jury decision is sustained.”
Wollstein, who said the building without the land is appraised at $6 million to $9 million, added that another owner, Mary Simpson, owns six units that aren’t managed well because she has dementia.
Daniel Law, who owns an Ebbtide unit where he operates Anna’s Beauty & Barber with his wife, Joanna, said their livelihood has been in the hotel for more than 20 years.
“We don’t make a lot of money,” he said. “It’s just to make a living. I feel if they break the lease before the lease expires, it’s not fair for us.”
