6.1 Economic Development

The Makai Area of Kakaako has the potential to generate tremendous public benefits for the community.  The land is largely owned by the State, it contains substantial ocean frontage, and is centrally located between downtown Honolulu and Waikiki.  While the overriding vision is to create an active, people-oriented place with generous public amenities, it is also important to recognize the potential of the Makai Area to contribute to economic development by facilitating the growth of new businesses and jobs.

The Makai Area must be seen as an opportunity to lead the State in new economic directions.  A total of 5.7 of the 7.5 million square feet of building area allowed in the Makai Area is allocated to State-owned lands.  This represents a considerable amount of building space to be absorbed.  Development of these lands will require a public/private partnership that combines the resources, creativity, and expertise of both to determine the appropriate new uses for the available building density and to optimize economic development.

In order to implement the Makai Area Plan and to attract the requisite private development, substantial initial expenditures will need to be made by the public sector.  The expenditures will be for infrastructure and public facilities that make it possible for private development to follow.  Development of new roads and utilities at the interior of the Makai Area will allow land use densities to be increased; development of public facilities, such as parks and waterfront promenades, will attract private development to adjacent parcels.  The result will be increased economic activity, increased rent revenues to the State, and increased tax revenues to both the State and county.

6.2 Public Costs

Considerable public expenditure has already occurred in the Makai Area, principally for park construction.  Over the next 10-year period, the Makai Area Plan envisions further expenditures, principally for infrastructure development.  A summary of past and projected construction expenditures by HCDA are presented below:
 
                                                                                    $ Millions
Past Costs:
Kewalo Basin Park & Facilities                                        $  3.0
Kakaako Waterfront Park                                                  22.0
Incinerator Remediation                                                        2.2
     Subtotal                                                                      $27.2

Projected Costs:
Ward, South, Punchbowl, Ilalo Improvements                   $36.3
Koula, Coral, Keawe                                                          18.0
Ahui Street                                                                            5.1
Kakaako Makai Gateway Park                                             6.7
     Subtotal                                                                      $66.1

     TOTAL CONSTRUCTION COSTS                        $93.3
 

6.3 Public Returns

The direct return to the State on public expenditures in the Makai Area includes increased ground rents, development fees, and excise taxes.  There are also considerable indirect returns that are more difficult to measure, such as job creation, public amenities, and recreation opportunities.  Unlike traditional development projects, it is difficult to weigh public investment against returns or investment.  Nevertheless, it may be helpful to review the relationship of public construction costs and increased ground rent.

Ground rents can be anticipated from retail, restaurants, commercial, entertainment, and office space.  The major public attractions, however, are expected to pay only nominal rents, and the park and public parking garages are not expected to generate any revenue.  DOT-Harbors will continue to receive rents from piers, wharves, and the Fort Armstrong area in exchange for managing the maritime activities in those areas.  Based on conventional leasing assumptions, the potential annual ground rental income stream from the privately developed, publicly owned lands within the Makai Area is estimated at $8.0 million annually (in 1998 dollars).

6.4 Public Financing Alternatives

To the extent that HCDA may not be able to capture and pledge a predictable and established revenue flow for a bond issue, or use special assessment bonds, it must rely on State general obligation bond funding, pay-as-you-go financing from project area revenue flows, and/or private funds to pay for public improvements.  To reduce dependency on general obligation bond financing, several options are possible:

� Coordinating with the City and County with respect to sharing the "windfall" of increased property tax revenues from the planning area.
� Utilizing ground lease rentals for the following purposes: pay-as-you-go financing (thereby reducing future bonding requirements); broadening the revenue base of a public agency with existing bonding capabilities; or reimbursing a revolving fund, if one is established.

� Adopting legislation to increase the flexibility of levying special assessments or special taxes on the basis of more general benefit.

Pursuing the alternatives listed above will not completely eliminate the need for general obligation bond financing.  However, HCDA may eventually be able to limit the use of general obligation bonds to those facilities which provide a more regional benefit, such as parks, or which have no other financing alternative.

6.5 Cost/Benefit

In spite of the fact that new development in the Makai Area requires relocation and upfront costs, such as infrastructure improvements, the long term benefits are substantial.  Construction expenditures for infrastructure, commercial development and public amenities translate into significant construction jobs.  The shift from large, land-intensive uses to more productive development brings with it a dramatic increase in permanent jobs supported by the land.