New DPL regs for land leases

The Department of Public Lands has adopted revised regulations governing public land leases that will soon expire.

According to a DPL statement yesterday, these regulation changes comply with Public Law 20-84 that was signed into law by then-acting governor Victor Hocog last Dec. 31, 2018.

The new lease agreement terms for basic rent will be based on two new appraisals and require capital improvements or development on the property to be leased.

The new regulations were first proposed on Dec. 13, 2019, and aligns with P.L. 20-84, which was created to increase the term of public land leases from 25 years to 40 years with the opportunity to extend up to 15 years for a total of 55 years.

It also allows DPL to negotiate a new lease with certain existing lessees that will soon be reaching the end of their 40 years or will exhaust their extension period, where they would become “matured leases.” These leases must meet the criteria of Section 4 of P.L. 20-84, which includes that the public land lease has an existing school, religious organization, hotel, or golf resort on the property with five years left before the expiration of the lease term. Section 5 requires DPL to make a leasing decision prior to the end of the lease and create a public notice of intent to renew providing for public comment and hearings.

The goal of P.L. 20-84 was to stimulate economic growth and development by providing a longer lease term with a possible extension and incentivizes longstanding investors to continue their lease by being able to negotiate a new lease before their current lease expires and encourages new upgrades to the facility before expiration without having to bid their proposal against other companies under a request for proposal.

DPL proposed the amendments to the regulations to address the concerns of hoteliers who will soon face the reality of their matured leases criteria under P.L. 20-84. The upcoming 40-year leases that will expire are Fiesta Resort & Spa Saipan in June 2021 and Hyatt Regency Saipan in December 2021. Both have expressed an interest in continuing as lessees.

DPL collects two types of rent for all leases annually:

1. Basic Rent: A flat-rate rent based on a percentage of the Fair Market Value for the fee simple appraisal of the raw land with improvements; and

2. Business Gross Receipts: A fluctuating value based on a percentage of revenue that is made on public land.

DPL’s regulation for basic rent states, “Basic rent shall be based on the value of the fee simple title to the property. It is the policy of DPL to collect at least 5% of a property’s value each year for the term of the lease as base rent.” The issue is that all current lessees’ basic rent values were determined decades prior based on their original appraisal of raw land. Now these same leases are expected to pay the rate of 5% of FMV on the current appraised land with 40 years or more of improvements.

After P.L. 20-84 was passed and DPL became capable of negotiating five years early, the Hotel Association of the Northern Mariana Islands wrote to Gov. Ralph DLG Torres on March 12, 2019, on behalf of these hotels to discuss options to reduce the 5% of FMV to calculate basic rent for matured leases. They said it was not fiscally viable for either Hyatt or Fiesta to pay 5% of FMV with improvements annually with BGR and execute much needed improvements.

In order to analyze their claims and determine a feasible basic rent value to charge for matured leases, DPL conducted an internal study of rent analysis led by the DPL internal auditor and supported by DPL’s financial management adviser, compliance director, and real estate director. The study was conducted to review DPL’s current regulations on determining rent, to analyze the hotel occupancy rates, and contrast with historical financial statements and budget as well as audited financial statutes from Hyatt and Fiesta from the last 15 years. DPL used market scenarios from neighboring islands such as Guam, Palau, and Hawaii and recognized that leases in the CNMI must comply with Article 11 of the CNMI Constitution.

As indicated in the study, DPL currently collects a flat rate of $25,000 a year in basic rent from Hyatt, based on its initial fee simple appraisal and collects approximately $300,000 a year in total when BGR is included. Basic rent alone for Fiesta is currently at $10,000. These values were embedded since the beginning of their 40-year agreements and cannot be changed for the remainder of the lease terms. However, based on the current appraisals assessed for its matured lease, basic rent alone based on 5% of FMV would cost Hyatt $250,000 a month. Although there is a substantial need to increase collection, the current regulation would upsurge rent from $25,000 a year for the past 40 years to $250,000 a month the following year. This does not include BGR or cost of improvements. Without an amendment, this trend will continue for all public land leases reaching maturity, including schools and religious organizations and will deter the interest of established investors from creating new leases.

The study was conducted over seven weeks and resulted in projections and analysis for different rental rates and different BGRs. DPL met with the Northern Marianas Descent Corp. on Sept. 4, 2019, to discuss DPL matters, including the hotel leases and explained that DPL will be commissioning an internal study to review current rental rates, previous hotel occupancy rates and past rental to make an informed decision. DPL met with Lt. Gov. Arnold I. Palacios on Oct. 17, 2019, to discuss HANMI’s letter and the internal study’s scenarios. DPL met with HANMI on Oct. 24, 2019, to discuss the regulations and the plans for the internal study. DPL also worked with an internal panel on Nov. 21, 2019. The proposed study and the criteria to be analyzed was presented to the DPL Public Lands Advisory Board on Nov. 26, 2019, and the PLAB approved the study. DPL also informed several members of the Legislature about the findings and different basic rent options before publishing the proposal on the Commonwealth Register.

The DPL proposed amendments and the DPL internal study for rent analysis were published in the December 2019 Commonwealth Register. The amendment proposes a reduction of percentage of FMV from “5%” to “up to 3%” to account for the necessity of capital improvements needed for structures 40 years or older and to account that the fee simple appraisal on raw land with improvements. All CNMI public land leases are appraised on a fee simple title to the property because the value does not diminish over time, ensuring that DPL stands to consistently collect the best possible value from the leases for NMDs for years to come. Some legislators questioned DPL’s position of fee simple; however, we hold firm that it is the highest consistent value compared to a leasehold value.

DPL received three letters on the proposed regulations during the 30-day comment period established by the CNMI Revision Commission, two in support and one opposed. Taking the written comments and other feedback into account, DPL has made some changes to the proposal to clarify terms and to include a formula that explains not only the reduction to “up to 3%” but exemplifies how we would determine the FMV percentage by calculating a lessee’s investment of capital improvements and the cost to replace or upgrade existing improvements. The considerations of levels of improvements allow for more informed lease negotiations and a sustainable basic rent so that these improvements can take place. Under NMIAC § 145-70-301 article, the percentage of FMV can increase over time if established in the initial lease agreement, but it cannot decrease during the lease agreement term. Article 6 also indicates that if the FMV is lower than the previous five years, DPL will use the higher rate.

It is important to note that, although DPL is allowed to enter into negotiations with lessees prior to the maturity of their leases, the lessee is still required to submit a proposal based on two appraisals. Once the appraisals have been submitted, reviewed and approved, DPL is still required under P.L. 15-2 to post a Notice of Intent to Lease. This notice is published in all required public spaces and advertised for all other interested investors to see, similar to RPFs. Under a Notice of Intent, all other interested investors are not only given the opportunity to submit their own proposal for the property but are able to see the full proposal of the current lessee. Interested investors can compare their proposal to all of the current lessee’s financial history, their appraisals, and their plans for improvement. This does not happen during an RFP. If another investor submits their own proposal, under the P.L. 15-2, DPL must cease all negotiation with the current lessee and review the new proposal to decide what is the best and most profitable offer.

For clarity and contrary to a recent public meeting, DPL has not finalized lease negotiations with either Fiesta or Hyatt and has not published an intent to lease for either hotel. As of Feb. 25, 2020, Fiesta Resort officially submitted a proposal to DPL and the proposal is currently under review. To date, Hyatt Regency has not officially turned in a proposal.

The adoption for matured leases was submitted to the Office of the Attorney General and was adopted on Feb. 18, 2020. The approved adoption is available in the February 2020 Commonwealth Register. The DPL Real Estate Division is also undergoing a full assessment of all DPL regulations concerning leases and lease agreements including, but not limited to, personal guarantor requirements, general commercial liability and public benefits to be proposed at a later date.

DPL continues to comply with all constitutional mandates, including remitting the highest amount of funds to the Marianas Public Land Trust in its history. Article 11 of the CNMI Constitution mandates that all revenue from public land leases are remitted to MPLT minus operational expenditures. For more information regarding matured leases or our internal study of rent analysis, DPL can also be reached at (670) 234-3751 and is located on the second floor of the Joeten Dandan Commercial Building. You may also visit www.dpl.gov.mp or its Facebook page at www.facebook,com/DPLCNMI. For a copy of all of DPL’s public land list of lessees, the DPL annual report can be found at https://www.dpl.gov.mp/wp-content/uploads/2020/01/Department-of-Public-Lands-Annual-Report-2019-1.pdf. (PR)