Ka Wai Ola - Office of Hawaiian Affairs, Volume 31, Number 1, 1 Ianuali 2014 — Purchase of Gentry Pacific Design Center dominates hearing [ARTICLE+ILLUSTRATION]

Purchase of Gentry Pacific Design Center dominates hearing

By Garett Kamemoto The Office of Hawaiian Affairs' purchase of the Gentry Pacific Design Center is saving the agency a half-million dollars in annual rent, while building equity in real estate and collecting lease rent from tenants. OHA told lawmakers the deal has the potential to make millions for the benefit of Native Hawaiians. OHA highlighted its efforts to improve its Community Grants program and discussed its land policies before state legislators in late November. The joint House-Senate eommittee held a hearing to get a briefing from OHA on a state audit that said grant monitoring needed improvement and land policies should be strengthened. OHA has contended grant monitoring has since been improved and land policies are being reviewed. Mueh of the hearing was spent discussing the purchase of the design center. OHA followed up with a letter signed by Ka Pouhana, Chief Executive Officer Kamana'opono Crabbe and Chair Colette Machado. The text follows: Aloha Senator Shimabukuro, Representative Hanohano and Members: Mahalo for this opportunity to respond to questions asked of the Office of Hawaiian Affairs at yesterday's Joint Committee Informational Briefing on OHA's 2013 State Audit. Senator Clayton Hee's request for information included: ° Terms of the Bank of Hawai'i (BOH) loan financing for the purchase of the Gentry Pacific Design Center (GPDC) and ° Financial information for GPDC operations including interest payments. Please note that most of the information presented here was made available to the State Auditor's Office during our recent audit. OHA remains committed to being open and transparent and believes the release of this information to Legislators reflects this commitment. The following information is provided to respond directly to Senator Hee's requests: The purchase of the GPDC in August 2012 was the culmination of more than two years of thoughtful and careful due diligence to secure a commercial office property to serve as OHA's new headquarters. The property fits OHA's criteria including its available square footage and its proximity to the Honolulu Capital District. Due to the decline in Hawai'i real estate prices at the time,

OHA was able to purchase the building at an attractive cost that was within OHA's price range. In addition, the purchase further diversifies OHA's current real estate holdings and allows OHA to build equity in an owned asset as opposed to paying nearly $500,000 in annual rental expense for our Honolulu office operations. The following are specifications of the acquisition of the Gentry Pacific Design Center: Land: Approximately 217,012 square feet of fee simple land located at 560 N. Nimitz Highway, Honolulu, Hawai'i 96817, TMK Nos.: (1) 1-5-10, Parcels 3, 11, and 12. Improvements: Gentry Pacific Design Center, a eoncrete/ steel low rise building containing a gross building area of approximately 180,286 square feet, as well as approximately 3 14 stalls of onsite parking. Purchase Price: $21.37 million Financing of the Purchase: During the due diligence process, OHA carefully evaluated both a cash purchase option and a leveraged purchase option by analyzing the current interest rate environment, the expected cash llow fromlease rentals, and the expected appreciation in property value. Given that interest rates were near historic lows, OHA was able to employ positive leverage and borrow at a low interest rate to invest in a property that is expected to generate a rate of return that will exceed OHA's cost of capital. Key Terms of Loan Financing: Amount: $21.37 million Interest: 3.6% per annum (as amended) fixed for 10 years Term: 10 year total term, 3 years interest only Payments: Monthly payments, 25 year-amortiza-tion, halloon payment at end of year 10 Collateral: mortgage lien on property, assignment of tenant rents, and security interest in furniture, fixture and equipment (FFE). Audit. On an annual basis, OHA is required to conduct a ūnaneial and eomplianee audit by an independent auditor. The audit includes two major components: >• The first component is the audit of the ūnaneial statements of the Office whieh is conducted in accordance with auditing standards generally accepted in the United States of America and the standards applieahle to

ūnaneial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States. The standards require that the audit is planned and performed to obtain reasonable assurance about whether the ūnaneial statements are free of material misstatement. Historically, the auditors have spent a significant amount of time in performing audit procedures on the Puhlie Land Trust fund, as it represents the largest part of OHA's ūnaneial statements. For fiscal year ended June 30, 2013, the operating results for GPDC have been recorded under the Puhlie Land Trust fund and is subject to audit procedures performed. >• The second component of the audit relates to internal control over ūnaneial reporting and eomplianee and internal control over eomplianee of eaeh major program in accordance with OMB CircularA-133. Thispart of the audit is conducted in accordance with auditing standards generally accepted in the United States of America and the standards applieahle to ūnaneial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audit of States, Loeal Governments, and NonProfit Organizations. A significant portion of this audit includes testing of internal control and eomplianee over OHA's major federally funded program(s). For fiscal year ended June 30, 2013, the above mentioned audit is still in process and currently scheduled to be eompleted by January of 2014. When the resulting audit reports are published, an electronic version is posted and made available to the puhlie on our website. Although the operating results for GPDC will be reflected in our audit report under the Puhlie Land Trust fund, pursuant to Senator Hee's request, OHA is providing further detail of GPDC's operations for its fiscal year ended June 30, 2013 as follows: REVENUE Lease Revenue $1,374,549 Common Area Maintenance Recovery 1,028,190 Parking 140,648 Other Ineome 10,488 $2,553,875 EXPENSE Repair and Maintenance $397, 104 Contract Services 232,149 Utilities and Related 406,795 Overhead Expenses 294,212 $1 330 260 NET INCOME (LOSS) BEFORE INTEREST $0223^15 INTEREST $636,351 NET INCOME (LOSS) $587,264 On behalf of the Office of Hawaiian Affairs, we apologize for not providing this information during the briefing, and we mahalo you for this opportunity to share with you the details of this investment and our commitment to building a strong and diverse asset base for our lāhui. ■

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Kamana'opono Crabbe

Colette Machūdo

Cloyton Hee