Appraisal Report of the Benchmark Fair Market Rental Values for the State of Hawaii County of Kauai Airports

As of July 1, 2016

County of Kauai Airports APPRAISAL REPORT

TABLE OF CONTENTS

Page TRANSMITTAL LETTER

TABLE OF CONTENTS 1

I. CERTIFICATION 3

II. LIMITING CONDITIONS AND ASSUMPTIONS 5

III. ASSIGNMENT AND SUMMARY 8 Purpose of Appraisal 8 Function of Report 8 Interest Appraised 9 Intended Use and User of the Report 9 Scope of Work 9 Definitions 10 Airport Rental Categories 11 Rental Conclusions 12

IV. ECONOMIC ANALYSIS (State and County of Kauai) 16

V. BENCHMARK PROPERTY TYPES FOR ALL HAWAII STATE AIRPORTS 19 A. Spaces and Areas in Buildings 19 B. Industrial Lands 20 C. Parking Stalls 20 D. Aircraft Storage (Tie Downs) 21

VI. ASSUMPTIONS FOR ALL HAWAII STATE AIRPORTS 22 A. Utilities 22 B. Special Conditions - Buildings 22 C. Special Conditions - Lands 22

VII. VALUATION METHODOLOGY FOR ALL HAWAII STATE AIRPORTS 24

A. Building Spaces and Areas within the Airport or Adjacent to the Airport 26 1. Retail Rental Market Considerations 27 2. Office Rental Market Considerations 27 3. Industrial Rental Market Considerations 28 4. Calculation of Benchmark Rental Values for Retail, Office, and Industrial Spaces at Small Airports 28 5. Calculation of Rental Values for T-Hangars 29

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B. Undeveloped Lands 29 1. General 29 (a) Valuation of Improved Unpaved Industrial Land 30 (b) Calculation of Paving Cost Recovery 31 (c) Valuation of Unimproved Industrial Land 32 2. Estimating Fee Simple Land Value 32 3. Prevailing Rates of Return on Land 33 4. Final Value Adjustments by Use 34 5. Concluded Land Values for Secondary and Tertiary Airports 34

VIII. MARKET ANALYSIS – Island of Kauai 35

IX. MARKET RENTS – County of Kauai Automobile Parking & Tie Downs 38 A. Rental Rates for Automobile Parking Stalls 38 B. Rental Rates for Aircraft Storage (Tie-Downs) 43

X. MARKET RENTS – Lihue Airport 45 A. Airport Description 45 B. Environs 45 C. Rental Analysis 45 Retail Space Rents 48 Office Space Rents 49 Industrial Space Rents 50 Conclusion of Rents within Terminal Building 51 Conclusion of Rents within Commuter Terminal Building 52 Industrial Land Rents 52 Ramp Area Rents 56 Rental Rates for T-Hangars 56 Rental Rates for Automobile Parking 57 Rental Rates for Aircraft Storage (Tie-Down) Areas 58 Conclusions 58 Subject Photos 58

XI. MARKET RENTS – Port Allen Airfield 65 A. Airport Description 65 B. Environs 65 C. Rental Analysis 65 Industrial Land Rents 65 Rental Rates for Aircraft Storage (Tie-Down) Areas 65 Conclusions 66

Professional Qualifications

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I. CERTIFICATION

The undersigned hereby certify that, to the best of the appraisers’ knowledge and belief:

-- The statements of fact contained in this report are true and correct.

-- The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are the appraisers’ personal, impartial and unbiased professional analyses, opinions, and conclusions.

-- The appraisers have no present or prospective interest in the properties that are the subject of this report, and have no personal interest with respect to the parties involved.

-- The appraisers have no bias with respect to the properties that are the subject of this report or to the parties involved with this assignment.

-- The appraisers have not performed services, as appraisers or in any other capacity, regarding the properties that are the subject of this report within the three-year period immediately preceding acceptance of this assignment.

-- Engagement in this assignment was not contingent upon developing or reporting predetermined results.

-- Compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.

-- The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute.

-- Alan J. Conboy, MAI, SRA and Andrew B. Conboy have made an inspection of the properties that are the subject of this report.

-- Nobody provided real property appraisal assistance to the persons signing this certification.

-- As of the date of this report Alan J. Conboy, MAI, SRA has completed the continuing education program for Designated Members of the Appraisal Institute.

-- As of the date of this report, Andrew B. Conboy has completed the Standards and Ethics Education Requirement of the Appraisal Institute for Associate Members.

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II. LIMITING CONDITIONS AND ASSUMPTIONS

The conduct of any appraisal is necessarily guided by, and its results influenced by, the terms of the assignment and the assumptions which form the basis of the study. The following conditions and assumptions embodied in this report constitute the framework of the appraisers’ analysis and conclusions.

Special limiting Conditions and Assumptions

-- In accordance with an agreement between the appraisers and the client prior to the preparation of this appraisal, we have prepared an Appraisal Report. This Appraisal Report is intended to comply with the reporting requirements set forth under Standards Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice (USPAP) for an Appraisal Report. As such, it presents a discussion of the data, reasoning, and analyses that were used in the appraisal process to develop the appraisers’ opinions of value. The depth of discussion contained in this report is specific to the needs of the client and for the intended use as stated herein. The appraisers are not responsible for unauthorized use of this report.

-- The valuation is based on assumptions that have been formulated based on information and descriptions provided by the Department of Transportation, Airport Division. These assumptions are significant to the valuation or are key factors upon which the valuation depends.

-- The analysis presumes the properties will continue to be professionally and prudently managed and maintained. It is assumed that current market and economic conditions will remain relatively stable or improve over the ensuing long-term period following the date of appraisal.

-- The legality of the traditional gathering rights of native Hawaiians that could be exercised on the properties, or other native Hawaiian rights that could impact the properties, was not considered in this report. This report assumes that the “traditional gathering rights” or any other rights of “native Hawaiians” would not be exercised on the property or properties that are the subject of this report and on any comparable properties that are included in this report. If native Hawaiian rights exist on the property and not the comparable properties, it could have a negative effect on the value of the property.

General Limiting Conditions and Assumptions

-- This appraisal is based upon the present condition of the national economy and the present purchasing power of the dollar. Fuel and energy available are assumed to remain at the levels of July 2016.

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-- This report expresses the opinion of the signers on July 1, 2016, as to an effective date of value of July 1, 2016; in no way has it been contingent upon the reporting of specified values or findings.

-- The appraisers have extensive experience in the valuation of vacant and improved income-generating properties and consider themselves competent to estimate the value of the specified real property interest in the subject properties.

-- It is assumed that the subject properties are free and clear of any and all encumbrances other than those referred to herein, and no responsibility is assumed for matters of a legal nature. This report is not to be construed as rendering any opinion of title, which is assumed good and marketable. Responsible ownership and competent management of the subject properties are assumed, unless otherwise stated within the report.

-- Any maps or plot plans reproduced and included in this report are intended only for the purpose of showing spatial relationships. These maps do not necessarily represent measured surveys or measured maps, and the appraisers are not responsible for the possible existence of any topographic or surveying errors within such maps. No engineering tests were furnished, and therefore no liability is assumed for the soil conditions, bearing capacity of the subsoil or building engineering matters relating to the subject properties.

-- Information provided by informed local sources such as governmental agencies, financial institutions, realtors, buyers, sellers and others, was interpreted in the manner in which it was supplied and, whenever possible or practical, was checked and verified by secondary means. However, no responsibility is assumed for any possible misinformation contained in these sources of information.

-- The presence of hazardous wastes or toxic materials such as asbestos, urea- formaldehyde foam insulation or other potentially harmful substances may have an adverse affect on the value of a given property. The value estimates as reported herein are predicated on the assumption that there is no such hazardous material on or in the subject properties that would result in this type of loss in value. No responsibility is assumed for any potentially adverse environmental conditions or for the lack of any expertise or engineering knowledge required to discover such conditions.

-- The appraisers are not required to give testimony or appear in court because of having made this appraisal unless arrangements for the appearance and the fee for such appearance have been agreed upon by the person or corporation requiring such testimony.

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-- The Americans with Disabilities Act (ADA) became effective January 26, 1992. The appraisers have not completed a compliance survey or analysis of the subject properties to determine the properties’ conformity with the various ADA requirements. It is possible that a compliance survey of the properties, combined with a detailed analysis of the requirements of the ADA, may reveal the properties are not in compliance with one or more of the requirements of the Act. If the properties are not in compliance, there could be a negative impact on value. Since the appraisers have not received specific information with respect to this issue, they did not consider possible non-compliance with the requirements of ADA in estimating the values of the properties.

-- The appraisers will not disclose the contents of the appraisal report except as provided for in the Uniform Standards of Professional Appraisal Practice.

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III. ASSIGNMENT AND SUMMARY

The appraisers have completed an appraisal report estimating the benchmark fair market rental values for the County of Kauai airport facilities.

Purpose of Appraisal

The purpose of this appraisal is to set forth the appraisers’ opinion of the fair market rental value of various areas of classification in the County of Kauai airports, managed by the State of Hawaii Airports Division, located on the island of Kauai.

This report updates the rates included within the Airports Division “Schedule of Rates and Charges” Procedure No. 4.5, effective January 23, 2014.

Function of Report

The State of Hawaii, Department of Transportation, Airports Division, oversees the operations at 15 airports and other properties in the State of Hawaii. The 15 airports include: Airport Tax Map Plat City and County of Honolulu Honolulu International Airport (1) 1-1-02, 03, 72, 76 Kalaeloa Airport (1) 9-1-13 Kawaihapai Airfield (1) 6-8-14

County of Maui Kahului Airport (2) 3-8-01 Molokai Airport (2) 5-2-04 Lanai Airport (2) 4-9-02 Kapalua Airport (2) 4-3-01 Kalaupapa Airport (2) 6-1-01 Hana Airport (2) 1-3-03

County of Hawaii Kona International Airport at Keahole (3) 7-3-43 Hilo International Airport (3) 2-1-12 Waimea-Kohala Airport (3) 6-7-01 Upolu Airport (3) 5-5-06

County of Kauai Lihue Airport (4) 3-5-01 Port Allen Airfield (4) 1-8-08

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The function of this report is to assist the State of Hawaii, Airports Division, in establishing reasonable rates and charges for the use of facilities and services at the two County of Kauai airports.

The report will first address the various property types and assumptions common to all State of Hawaii airport facilities followed by an analysis on the fair market rent analysis for the two airports located within the County of Kauai. The concluded rates will be included within the State of Hawaii, Airports Division updated “Rates and Charges”.

Interest Appraised

Fee Simple Interest

Intended Use and User of the Report

The sole use of this appraisal is as an asset management tool for the State of Hawaii, Airports Division’s use in their determination of land and space rental rates in the two County of Kauai airports.

Scope of Work

For purposes of this assignment, the appraisers developed their opinions of value based on a complete appraisal of the identified subject real property interest and have communicated the results of this complete appraisal within an Appraisal Report. To the best of the appraisers’ knowledge and ability, this appraisal has been prepared in conformance with the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute.

By prior agreement with the client; this is an Appraisal Report intended to comply with the reporting requirements set forth under Standards Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice for an Appraisal Report. As such, it presents a discussion of the data, reasoning, and analyses that were considered in the appraisal process to develop the appraisers’ opinion of value. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated above. The appraisers are not responsible for unauthorized use of this report.

In the course of this assignment, the appraisers have undertaken a series of independent investigations and analyses in addition to relying upon selected information and data from existing office files that are updated on a recurring basis. A summary of the investigations conducted, the primary data sources utilized and the basic methodology employed in this analysis is presented in the following paragraphs.

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The description of the subject properties was based upon a physical inspection of the properties conducted as follows:

Date of Airports Division Inspection Airport or Area Representative

06/20/16 Lihue Airport Ms. Lisa Ellen Smith

06/20/16 Port Allen Airfield Ms. Lisa Ellen Smith

The appraisers analyzed all of the background information on each property and its environs as revealed by their research and investigation. The appraisers also conducted an analysis of local real estate market conditions affecting the subject properties, based upon interviews with local real estate professionals and information contained within journals published by the local board of realtors.

Definitions

Fair Market Rental Value

The term fair market rental value, as used in this report, is synonymous with market rent, defined in The Dictionary of Real Estate Appraisal, Fifth Edition, Appraisal Institute as:

“the most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the specified lease agreement including term, rental adjustment and revaluation, permitted uses, use restrictions, and expense obligations; the lessee and lessor each acting prudently and knowledgeably, and assuming consummation of a lease contract as of a specified date and the passing of the leasehold from lessor to lessee under conditions whereby:

1. lessee and lessor are typically motivated; 2. both parties are well informed or well advised, and acting in what they consider their best interests; 3. a reasonable time is allowed for exposure in the open market; 4. the rent payment is made in terms of cash in United States dollars, and is expressed as an amount per time period consistent with the payment schedule of the lease contract; and 5. the rental amount represents the normal consideration for the property leased unaffected by special fees or concessions granted by anyone associated with the transaction.

Fee Simple Interests

Fee simple estate is defined as an absolute ownership unencumbered by any other interest or

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estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

Airport-Airline Lease

Lease means a lease executed by an operator of aircraft and the state Department of Transportation under which the aircraft operator is obligated to pay airport use charges.

Large aircraft (Air Carrier)

Means aircraft: (a) larger than aircraft in the large general aviation aircraft group category; and (b) aircraft operated by commercial passenger or cargo transport air carriers holding a certificate of public convenience and necessity.

Large aircraft (General Aviation)

Means an aircraft of more than 12,500 pounds maximum certificated landing weight with a fixed wing span greater than 42 feet but less than 60 feet, or rotor wing aircraft with a rotor blade diameter of 37 feet or larger but less than 49 feet. Any larger aircraft, even if operated under FAR Part 91 or Part 135 or following Part 119, shall fall into the air carrier category.

Small aircraft (General Aviation)

Means an aircraft of 12,500 pounds or less maximum certificated landing weight with a fixed span of 42 feet or less or rotor wing aircraft with a rotor blade diameter of less than 37 feet.

Aircraft parking and storage areas

Shall mean and include any portion of a public airport, designated temporarily or permanently by the state Director of Transportation, that may be used for the parking and storing of aircraft for the servicing of aircraft with fuel, lubricants and other supplies, and for the making of minor or emergency repairs to aircraft.

Airport Rental Categories

State of Hawaii airport rental categories are summarized in Table K-1, following.

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Table K-1 STATE OF HAWAII AIRPORT RENTAL CATEGORIES

CATEGORY DESCRIPTION

Terminal Floor Space Open finished floor space within the terminal.

Service Counter Finished counter space or passenger, tour, greeting, etc.

Concession - Retail Sales Areas utilized by retail vendors including Duty Free, newsstand, packaged foods, etc.

Concession - Food & Beverage Areas utilized for food concessions including restaurants, cocktail lounges, snacks, etc.

Office Office space, which include floor covering, painting or wall covering, ceiling, lighting, etc. Used for administrative purposes, ticketing, reservations, crew lounge, ramp services, etc.

VIP Lounge Lounge space similar to office finished spaces used by airlines.

Ramp Office Office space, which normally includes concrete flooring, lighting, electrical outlets and painted concrete or hollow tile walls.

Warehouse and Storage Unfinished rooms and/or remnant space used for storage.

Industrial/Agricultural Land Tenant of the property operates a business related to airport use. Land may have direct access or some aircraft access to ramp and service road.

Improved Land Graded with utilities and paved road within a reasonable distance of the property line.

Unimproved Land Not graded and lacks utilities and paved road access.

Aircraft Parking Fees Rates should vary with size, i.e. small (up to 42'); large (43' to 60'); and where noncommercial or commercial.

Rental Conclusions

Table K-2 following, summarizes the benchmark fair market rental conclusions for all the County of Kauai airport facilities, which includes the Lihue Airport and Port Allen Airfield.

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Table K-2 RENTAL CONCLUSIONS LIHUE AIRPORT Lihue, Kauai, Hawaii

Current (Per Sqft) Proposed (Per Sqft) Category Per Annum Per Month Per Annum Per Month

Main Terminal Building Terminal Floor Space (non-air carrier) $42.00 $3.50 $48.00 $4.00 Service Counters (non-air carrier) $42.00 $3.50 $48.00 $4.00 Concessionaire-Sales-Retail (F) $42.00 $3.50 $48.00 $4.00 Concessionaire-Food & Beverage (F) $37.80 $3.15 $43.20 $3.60 VIP Lounge (F) $25.50 $2.13 $27.75 $2.31 Office (F) (non-air carrier) $20.40 $1.70 $22.20 $1.85 Ramp Office (F) $20.40 $1.70 $22.20 $1.85 Storage $5.40 $0.45 $6.00 $0.50 Commuter Terminal Office (F) $18.40 $1.53 $20.00 $1.67 Ramp Office $18.40 $1.53 $20.00 $1.67 Storage $4.90 $0.41 $5.40 $0.45 Rental of Buildings other than Passenger Terminal Trailers $16.30 $1.36 $17.80 $1.48 Cargo (Building 135) $10.80 $0.90 $12.00 $1.00 Rental of Industrial Lands Improved Land-Unpaved $1.74 $0.15 $2.32 $0.19 Improved Land-Paved $2.24 $0.19 $3.00 $0.25 Unimproved Land-Unpaved $0.87 $0.07 $1.16 $0.10 Rental of Heliport Lands Improved Land-Unpaved $1.74 $0.15 $2.32 $0.19 Improved Land-Paved $2.24 $0.19 $3.00 $0.25 Ramp Area Covered Equipment Parking-Paved (non-air carrier) $3.36 $0.28 $4.50 $0.38 Covered Equipment Parking-Unpaved (non-air carrier) $2.61 $0.22 $3.48 $0.29 Open Equipment Parking-Paved $2.24 $0.19 $3.00 $0.25 Open Equipment Parking-Unpaved $1.74 $0.15 $2.32 $0.19 Open Equipment Maintenance-Paved $2.24 $0.19 $3.00 $0.25

T-Hangars Per Month Per Month Per Sqft/Mo Bldg. 410-101 to 106, T Hangar (Large) (1,614 sf) $815.00 $968.00 $0.60 Bldg. 410-107 and 108, T Hangar (Small) (1,044 sf) $486.00 $626.00 $0.60 Bldg. 411-101 to 108 & 411-109 & 110, T Hangar (Small)(1,044 sf) $486.00 $626.00 $0.60 Bldg. 410-107A and 108A, End Room (Large)(463 sf) $244.00 $278.00 $0.60 Bldg. 411-109A and 110A, End Room (Large)(463 sf) $244.00 $278.00 $0.60 Bldg. 410-101A and 106A, End Room (Small)(225 sf) $84.00 $135.00 $0.60 Bldg. 411-101A and 108A, End Room (Small)(225 sf) $84.00 $135.00 $0.60 T-Hangar Used as Commercial Space -- -- $1.00 Automobile Parking Covered-Paved Parking Per Month $80.00 Per Month $85.00 Uncovered-Paved Parking Per Month $52.00 Per Month $55.00 Aircraft Storage Charges Small general aviation aircraft (46' x 32' or smaller) Per Day $10.00 Per Day $10.00 Per Month $96.00 Per Month $144.00 Large general aviation aircraft (47' x 33' or larger) Per Day $20.00 Per Day $20.00 Per Month $136.00 Per Month $208.00

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Table K-2 Lihue Airport Special Properties Lihue, Kauai, Hawaii

Concluded Rent Map Bldg Tenant Area Use Condition Sqft/ Mo. Sqft/ Year A2 307 Car Rental 1,137 Office Good $1.85 $22.20 003-120A Old Air Kauai Hangar Good $1.00 $12.00 AOA4 516-144A Island Helicopters N/A Office Good $1.85 $22.20 516-144B Old Air Kauai N/A Office Good $1.85 $22.20 AOA4 146 Airborne Aviation N/A Hangar Good $1.00 $12.00

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Table K-2 RENTAL CONCLUSIONS PORT ALLEN AIRPORT Port Allen, Kauai, Hawaii

Current (Per Sqft) Proposed (Per Sqft) Category Per Annum Per Month Per Annum Per Month

Rental of Buildings other than Passenger Terminal Trailers Per Sq.Ft. $4.10 N/A $4.45 $0.37

Rental of Industrial Lands

Improved Land-Unpaved Per Sq.Ft. $0.44 $0.04 $0.58 $0.05 Improved Land-Paved Per Sq.Ft. $0.56 $0.05 $0.75 $0.06 Unimproved Land-Unpaved Per Sq.Ft. $0.22 $0.02 $0.29 $0.02

Aircraft Storage Charges (Tie Downs)

Small general aviation aircraft (46' x 32' or smaller) Per Day $5.00 Per Day $5.00 Per Month $24.00 Per Month $54.00

Large general aviation aircraft (47' x 33' or larger) Per Day $10.00 Per Day $10.00 Per Month $34.00 Per Month $78.00

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IV. ECONOMIC ANALYSIS – STATE AND COUNTY OF KAUAI

This section summarizes the macro-economic trends and forces affecting the State of Hawaii and the County of Kauai. Data was provided by the State of Hawaii Department of Business, Economic Development and Tourism (DBEDT), Hawaii Tourism Authority (HTA), Hospitality Advisors LLC and the Economic Research Organization at the University of Hawaii (UHERO). It addresses historical and projected trends in population, employment, and unemployment. Additionally, it describes historical trends of the state’s personal income, construction, tourism and its economic outlook. The following paragraphs briefly summarize the historical and projected trends.

Population -- According to the Economic Research Organization at the University of Hawaii (UHERO), the resident population of the State of Hawaii was 1,431,600 in 2015 and 1,420,300 in 2014. The County of Kauai resident population was 71,700 in 2015 and 70,700 in 2014. The State of Hawaii Department of Business, Economic Development and Tourism (DBEDT) is forecasting the resident population for the entire State to grow to 1,455,000 by 2017, 1,468,000 by 2018 and 1,481,000 by 2019.

Income -- The real personal income of the State for 2015 was $54,231,000,000 and $52,346,000,000 for 2014, an increase of 3.6 percent. Real personal income data reported for the County of Kauai for 2014 was $1,098,800,800. Real personal income growth for the State of Hawaii is projected to increase $55,857,000,000 in 2016, $57,610,000,000 in 2017, $59,367,000,000 and $61,124,000,000 in 2018.

Employment -- The civilian labor force for the State for 2015 was 676,300 and 30,000 for the County of Kauai. The entire state in 2015 had an unemployment rate of 3.7 percent, which is down from the rate of 4.4 percent compared to 2014. The County of Kauai in 2015 had an unemployment rate of 4.1 percent, which is down from the rate of 4.8 percent compared to 2014. The lower unemployment rates for both the State and the County of Kauai are primarily due to the increase in the tourism and construction industries. The unemployment rate for both the State and the County of Kauai, as of February 2016, was 3.1 and 3.6 (not seasonally adjusted) percent, respectively. These unemployment rates only count jobless individuals actively searching for work so it may overstate the actual health of the labor market.

Construction -- The construction industry for the entire state is greatly affected by the current global, national and local economic situation. The number of construction jobs, permits and value of permits has all declined since 2006 when the entire state in general and most of the counties including the City and County of Honolulu had the highest number of permits issued. Most of the increases were due in part to the robust residential market. When the economy began to weaken, potential projects from private developers and individuals were put on hiatus.

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The State and all of the counties have recovered from a weak housing market which has weighed heavy on new home construction. The value of statewide private building permits increased 19.6 percent and increased 67.5 percent for residential building permits in 2015 over permits issued in 2014. UHERO’s most recent forecast for construction is projecting the construction sector to continue to improve for 2016 due to an improvement in the Oahu home resale market, low mortgage interest rates and limited supply of housing units. A weakening in government and military contracts and work will be offset by the proposed rail project which will add to the potential ramp up the sector. Recent announcements of high-rise condominiums in the Honolulu & Kakaako areas, increased movement in shopping center development in West Oahu and resort-related development statewide will help to increase real non-residential building permits through 2016 and for the next several years.

Tourism -- Tourism is the primary industry for the entire State of Hawaii, and the driving force for economic stability. The success of tourism stimulates the progress of all markets in all of the counties. Total visitor arrivals, hotel occupancy rates and average daily room rates (ADR) had all been on the decline for the most part since the latter part of 2006 for both the State and the County of Hawaii. The industry stabilized in 2009 and started to improve in 2010. UHERO is now reporting that the industry is posting impressive rates of growth in total visitor arrivals, visitor days, visitor expenditures and visitor accommodations.

The Hawaii Tourism Authority (HTA) is reporting that tourism achieved its fourth consecutive year of record for both visitor arrivals and expenditures in 2015. There were 8,649,357 visitors to the State in 2015 or 4.1 percent more than the 8,300,000 in 2014. Visitors spent a record $15.2 billion in 2015 which was an increase of 2.3 percent from $14.8 billion in 2014. Arrivals from the U.S. West increased 7.1 percent (3,518,472 visitors) from 2014 while U.S. East arrivals increased by 3.1 percent to 1,788,573 visitors from 2014. Japanese arrivals decreased 0.8 percent to 1,499,167 visitors in 2014. Canadian arrivals totaled 517,238 visitors, a decrease of 1.4 percent from 2014. In contrast, the HTA is reporting strong growth in arrivals from other small visitor markets including Australia and New Zealand (397,704 or + 7.2 percent), Korea and China (378,444 or +2.7 percent), Europe (143,435 or +3.0 percent). Latin America declined (27,806 or -7.6 percent). 2016 is starting off strong and the State of Hawaii DBEDT is projecting visitor arrivals to increase 1.7 percent in 2017 and 2018 and visitor expenditures to increase 4.1 percent for both 2017 and 2018.

The Hawaii Hotel Flash Report for Year-End 2015 indicated that the average room revenue (REVPAR) for the State increased to $192.22, or by 6.3 percent, in 2015 in comparison with $180.83 in 2014. The average daily room rate (ADR) in 2015 was $243.93 for the State, a 3.9 percent increase from $234.85 in 2014. The average room revenue (REVPAR) for Kauai increased to $172.68, or by 8.1% in 2015 in comparison with $159.67 in 2014. The average daily room rate (ADR) in 2015 for Kauai was $242.19, a 6.3% increase from $227.78 in 2014. The average room revenue (REVPAR)

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for the State increased to $218.33, or by 3.6 percent, in February 2016 in comparison with $210.70 in February 2015. The average room revenue (REVPAR) for Kauai increased to $214.97, or by 9.9 percent, in February 2016 in comparison with $195.49 in February 2015. The average daily room rate (ADR) in February 2016 was $261.16 for the State and $261.20 for Kauai, an increase of 2.9 and 8.2 percent, respectively, over February 2015. The 2015 occupancy for the State increased to 78.8 percent from 77.0 percent in 2014. The 2015 occupancy for Kauai increased to 71.3 percent from 70.1 percent in 2014. The monthly occupancy in February 2016 was 83.6 percent for the State and 82.3 percent for Kauai, an increase of 0.7 and 1.6 percent, respectively, over February 2015.

Residential Real Estate -- UHERO reported the median sales prices of single-family units on Kauai for 2015 was $626,300 compared to $542,600 for 2014. The median sales prices of condominium units on Kauai increased to $362,500 from $344,300 one year earlier. Single-family sales increased 4.3 percent from 467 units to 487 units and condominium sales were up by 10.4 percent from 327 units to 361 units.

Summary – UHERO latest State forecast (February 26, 2016) is reporting that the economic outlook for the State is positive especially in regards to tourism and construction. The current expansion remains strong as indicated by the strong labor market and increases in personal income. 2015 performed better than anticipated and the momentum will continue into 2016. Growth in tourism set records in 2015, even with a weak Japanese visitor market, with record occupancy rates on Oahu and above 70.0% on the neighbor islands (per Hospitality Advisors LLC). UHERO is projecting visitor arrivals to ease up a little in 2016 to a 1.5% growth following the 4.0% growth exhibited in 2015. The labor market is much healthier than it was a couple of years ago and is projected to grow approximately 1.5% per annum for the next couple of years and dropping to approximately 1.0% for the latter part of the decade. Construction activity is strong on all islands and is projected to expand for several more years with minimal growth in the latter part of the decade. Inflation remains low primarily due to declining oil prices however is projected to increase to 3% in 2017 as rising housing costs and wages begin to affect local prices.

External global challenges including, but not limited to, a surging dollar, China’s slowing economy, the effects of el nino on agriculture, the refugee crisis, terror attacks in the West and abroad and the Fed’s recent shift to higher interest rates are potential risks to both the national and State economies. These adverse developments have the potential to cause a sustained decline in consumer confidence erasing all of the growth experienced so far since 2012 and projected for the next several years.

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V. BENCHMARK PROPERTY TYPES FOR ALL HAWAII STATE AIRPORTS

The benchmark property types within the Hawaii State Airport facilities are categorized into four groups:

Spaces and Areas in Buildings Main Terminal Buildings Commuter Terminal Buildings Air Taxi Buildings Hangars Cargo

Lands within the Airport or Adjacent to the Airport Industrial Uses (Improved, Unimproved, Paved and Unpaved) Agricultural Uses

Parking (Open/Covered)

Aircraft Storage (Tie Downs)

General characteristics of the spaces and areas in each category are outlined under the following subheadings.

A. Spaces and Areas in Buildings

The buildings spaces and areas within the Hawaii State Airport facilities cover a wide range of uses that directly or indirectly support airport operations. They include:

Non-Air Carrier

Terminal Floor Space Service Counters VIP Lounge Office Storage

Air Carrier

Rates for rental of Terminal Space for Air Carriers are established according to the January 1, 2008 First Amendment Lease Extension to the “Airport-Airline Lease”.

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Other Spaces

Concession - Retail Sales Concession – Food and Beverage Sales Warehouse - Cargo (Open/Covered) Warehouse - Industrial Warehouse - Office Shed Reefer (Cold Storage) Revetment /Bunker Baseyard - Office, Service Bay, Maintenance Shop Hangar Shed Office Trailer Aviation Hangars T-Hangars

B. Industrial Lands

The majority of the undeveloped lands that are a part of the Hawaii State Airport Facilities are comprised of “improved” land for the following uses:

Industrial Agricultural (Where Applicable)

Undeveloped improved lands have direct access to the airport ramp. Improved lands are graded with utilities and paved road access within a reasonable distance of the property line. The undeveloped lands for each use type are differentiated based on whether they are paved or unpaved.

Some airports also have “unimproved” industrial land, which is land that is not graded and that lacks utilities and paved road access.

C. Parking Stalls

All airports, with the exception of the Upolu on the island of Hawaii and Port Allen Airfield on the island of Kauai, include parking stalls that are available for rent on a monthly basis. The parking stalls include:

Covered Uncovered, both paved and unpaved

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D. Aircraft Storage (Tie Downs)

General aviation aircraft storage includes uncovered tie-down areas for small and large aircraft. The small aircraft tie-down storage areas can accommodate aircraft with a wing-span up to 42 feet. By contrast, the large aircraft tie-down storage areas can accommodate aircraft with a wing-span from 43 feet to 60 feet.

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VI. ASSUMPTIONS COMMON TO ALL HAWAII STATE AIRPORT RENTS

The following conditions are deemed by the Department of Transportation, Airports Division to be common to all airports.

A. Utilities

Rents within all terminal buildings for all airports excluding Kalaeloa, Upolu and Port Allen are subject to the following:

(1) Janitorial services are not included in stated rental rates.

(2) Water for ordinary use is furnished.

(3) Electricity and air-conditioning services are extra.

B. Special Conditions - Buildings

Rents within all buildings other than terminal buildings for all airports excluding Kapalua, Hana, Upolu and Port Allen are subject to the following:

(1) Minimum rental shall be twenty-five dollars ($25.00) per month regardless of use, size or location of space rented.

(2) Special charges shall be assessed for special equipment or machinery in any building structure.

(3) Tenants shall pay for all utilities, utility services and other services which they may require, unless otherwise provided.

(4) Janitorial services are not included in rental rates. (Applicable to Honolulu International only)

C. Special Conditions - Lands

The following conditions are common to rentals on industrial lands.

(1) Minimal rental shall be $15.00 per month regardless of the use, size, or location of the area rented. (Rate for Honolulu International is $25.00)

(2) Improved land is graded and utilities and paved access road are within a reasonable distance from property line.

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(3) Unimproved land is not graded and lacks utilities and paved access road. For unimproved land at all airports, discount improved, unpaved rates by 25 to 50 percent depending on distance to utilities and paved access road.

(4) Utility connections and charges at tenant’s sole cost and expense.

(5) Adjustments for location, size and poor shape must be considered for specific sites at all airports.

(6) Size discounts for the rental of a contiguous parcel of industrial land included under a single contract upon its commencement may be applied towards the appropriate land rate in accordance with the schedule shown below. Leased premises that have been enlarged in land area due to subsequent amendments to the contract do not qualify the lessee for such discounts to be applied to the entire leased premises.

Size of Parcel Discount 2 to 2.999 acres 4.0% 3 to 3.999 acres 8.0 4 or more acres 12.0

(7) Size discounts for the rental of a contiguous parcel of agricultural land included under a single contract upon its commencement may be applied towards the appropriate land rate in accordance with the schedule shown below. Leased premises that have been enlarged in land area due to subsequent amendments to the contract do not qualify the lessee for such discounts to be applied to the entire leased premises.

Size of Parcel Discount 5 to 9.999 acres 2.0% 10 to 19.999 acres 4.0 20 or more acres 8.0

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VII. VALUATION METHODOLOGY FOR ALL HAWAII STATE AIRPORTS

This report addresses the fair market rental value of various classifications of space within County of Kauai airport facilities. The analysis is similar to the methodology utilized for all State of Hawaii airport facilities. The methodology utilized herein incorporates the Direct Comparison Approach.

Given the many differences when comparing one airport to another, the appraisers have concentrated their investigation into current Hawaii rental rates of “off airport” office, retail and industrial space within close proximity to the subject County of Kauai airports. This information was used to estimate rental rates for the various space classifications of the subject airports. Studies were made utilizing rental surveys of similar uses, i.e., retail, office and industrial, off the airport but within close proximity. While a comparison of this type provides support, its use as a primary method for a special purpose property might result in rental rates toward the low end of the property’s potential rent. It is difficult to quantify the adjustment between on and off airport property. The motivations of lessees and the characteristics of the properties are vastly different. Special purpose properties similar to the subject airports typically reflect a much higher overall construction cost. As such, using rental information reflected solely by off airport properties would probably result in a low side rental rate.

The following paragraphs represent a summary of the various valuation methods and terminology, which is common to the State of Hawaii airports. The County of Kauai airports will be analyzed in more detail later in Chapters IX (Lihue) and X (Port Allen, covering each airport.

Valuation Method

The fair market rental rates for the benchmark spaces and areas within the various Hawaii State airport facilities are estimated using recognized appraisal principles and based on analyses of the local “off airport” rental market for each airport.

The fair market rental value for each benchmark space is estimated using the direct market comparison approach. The market comparison approach assumes that the rent within an airport property relates directly to the rents of comparable, competitive “off airport” properties. The approach assumes that the rent of a property tends to be set by the rent that would be paid to acquire a substitute property of equal utility and desirability.

The benchmark property types within the Hawaii State airport facilities are categorized into four groups:

 Spaces and areas in buildings within the Airport or adjacent to the Airport  Lands within the Airport or adjacent to the Airport

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 Parking stalls  Aircraft Storage

Additionally, for valuation purposes, the Hawaii State airport facilities were further categorized into three classifications as follows:

Primary Airports Honolulu International Airport Kahului Airport Kona International Airport at Keahole Hilo International Airport Lihue Airport

Secondary Airports Kapalua Molokai Lanai

Tertiary Airports Kalaeloa Airport Kawaihapai Airfield Kalaupapa Airport Hana Airport Waimea-Kohala Airport Upolu Airport Port Allen Airfield

The estimated values in the primary airport areas generally increase with airport activity. For example, the Honolulu International Airport has the highest level of passenger enplanements and cargo of the airports in the State. As expected, the respective values are also the highest. The relationship between passenger activity and cargo at the primary, secondary, and tertiary airport areas is shown in the following tabulation:

Activity Levels (2015) (1) Cargo Airport Passengers (U.S. Tons) Primary Honolulu 19,869,707 413,401 Kahului 6,678,772 31,217 Kona 3,070,772 19,564 Lihue 2,820,998 18,194 Hilo 1,324,596 20,222

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Secondary Molokai 242,157 1,055 Lanai 78,638 885 Kapalua 62,228 1,293

Tertiary Hana 3,826 0 Kalaupapa 12,297 111 Waimea-Kohala 10,255 0 Kawaihapai 0 0 Upolu 0 0 Port Allen 0 0 _____ (1) Department of Transportation - Airports Division Calendar Year January – December 2015.

The valuation methodology for each of the property types is further described in the following subsections.

A. Building Spaces and Areas within the Airport or Adjacent to the Airport

The benchmark building spaces and areas within the Hawaii State airport facilities can be categorized by the manner in which they are used.

The first category is comprised of those areas and spaces that are used by airport travelers. The second category includes those support areas which facilitate efficient airport operations that are used by airport personnel; this category includes both office and non-office uses. A third category includes warehouse and storage spaces.

Based on the similarities in use, the benchmark building spaces and areas are grouped according to the relevant “off airport” markets that provide the basis for establishing the fair rental values.

Retail Office Warehouse Rental Market Rental Market Rental Market Terminal floor space VIP Lounge Warehouse Area Concession space Office space Storage Hangars Cargo area Reefer, Shed

The fair market rental rates for the benchmark building spaces and areas within the airport facilities are estimated based on:

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 Recent rents for retail, office, and industrial spaces and other functionally similar uses within relevant “off airport” market areas around each airport.  Discussions with leasing agents.

1. Retail Rental Market Considerations

The rental rates for the typical benchmark finished retail-related spaces at the five major airports (Honolulu, Kahului, Hilo, Kona and Lihue) within the State are based on the current rent levels for retail space in the respective competitive “off airport” market areas throughout the State.

Additionally, retail-related spaces in the following areas are judged to be inferior in physical condition or accessibility to the typical retail-related spaces at the respective airports:

 Honolulu - Commuter Terminal  Kahului - Commuter Terminal  Hilo - Air Taxi Building  Kona - Air Taxi Building  Lihue - Commuter Terminal

2. Office Rental Market Considerations

The rental rates for the typical benchmark finished office spaces at the five major airports (Honolulu, Kahului, Hilo, Kona and Lihue) within the State are based on the current rent levels for the office space in the respective competitive “off airport” market areas throughout the State.

Additionally, office spaces in the following areas are inferior in physical condition or accessibility to the typical office spaces at the respective airports:

 Honolulu - Commuter Terminal  Kahului - Commuter Terminal  Hilo - Air Taxi Building  Kona - Air Taxi Building  Lihue - Commuter Terminal

Trailer rents in all airports are based on the indicated general office base rate discounted by 20 percent.

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3. Industrial Rental Market Considerations

The fair market rental rates for the typical benchmark warehouse and storage spaces at the five major airports (Honolulu, Kahului, Hilo, Kona and Lihue) and Kalaeloa are based on the current rent levels for industrial warehouse and storage space in the respective competitive “off airport” market areas in close proximity to the airports.

Rents for areas in sheds, quonsets, bunkers and remnant storage are generally estimated to be 50 percent of the associated warehouse rent in each airport area.

4. Calculation of Benchmark Rental Values For Retail, Office and Industrial Spaces at Secondary and Tertiary Airports

Sufficient market data is not available to accurately estimate the rents in the vicinity of the smaller airports by direct comparison. As a result, the benchmark rents for the retail, office and industrial type spaces at these airports are estimated by comparison to rates established for the five major primary airports.

The secondary and tertiary airports should have a defined correlation with the primary airports in order to have a consistent rental structure now and in future years. There is insufficient or inconclusive market data available in similar “off-airport” markets of secondary airports to establish rents for the office and retail-related spaces, or to estimate the market rates for the benchmark improved, unpaved industrial lands. Therefore, there should be consistent, established relationship between the primary airports and the smaller airports.

The following rate structure utilized in the analysis for the secondary and tertiary airports is based upon the rates and charges determined for the primary airports:

Primary Airports Base Secondary Airports 60% of Base Tertiary Airports 25% of Base

The intent of this rate structure is to address the following:

Secondary Airports - Services the outlying areas of the community or island and is an integral mode of transportation. It is used by both residents and visitors and is the principal means of travel between islands; however, airport

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infrastructure and population characteristics of the community or island present an obstacle to aircraft service.

Tertiary Airports - Services the outlying areas of the community or island and is not widely used due to limited facilities or service. The tertiary classification reflects (1) limited or non-existent terminal facilities; (2) limited or non-existent hangar facilities; (3) limited or non-existent terminal floor space for concessions/passenger service areas; (4) limited or non-existent infrastructure support facilities; and (5) limited use and demand.

5. Calculation of Rental Rates For T-Hangars

Hangar spaces (T-Hangars and End Rooms) are available for rent at the following airports:

 Honolulu International Airport  Kalaeloa Airport  Kawaihapai Airfield  Kahului Airport  Kona International Airport  Hilo International Airport  Lihue Airport

Historically, the rental rates for hangar space are estimated to be equivalent to the rental rates for warehouse space, with a downward adjustment associated with the characteristics and limited use of the space.

B. Undeveloped Lands

1. General

The majority of the undeveloped lands that are a part of the Hawaii State Airport facilities are comprised of “improved” land for industrial uses. These lands have direct access to the airport ramp.

These “improved” industrial lands are graded with utilities and paved road access within a reasonable distance of the property line. The lands are further differentiated based on whether they are paved or unpaved.

Some airports also have “unimproved” industrial land, which is not graded and lacks utilities and paved road access. Kalaeloa Airport and Kawaihapai Airfield on the island of Oahu and Kona International Airport on the island of Hawaii are the only airports with unimproved land for industrial use. Kahului

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Airport on the island of Maui is the only airport that has improved and unimproved land for Agricultural use.

(a) Valuation of Improved-Unpaved Industrial Land

The fair market rental rates for the industrial improved-unpaved lands are based on one of two methods (1) the product of the underlying fee simple land value and the prevailing land rate of return or (2) the direct comparison of market land rental rates. In the first method, the fee simple land value within each primary airport complex is estimated by comparison to sales of industrial sites in nearby “off airport” competitive neighborhoods. The land rate of return is estimated based on a review of rates of return from leases of industrial lands and interviews with major land owners. In the second method, actual industrial land rents based on the agreements of land owner and lessee are utilized.

Sufficient “off airport” market data exists to accurately establish the market rents of the fee simple interest of the industrial improved- unpaved lands in the following primary airport areas:

Primary Airport Areas:  Honolulu  Kahului  Kona  Hilo  Lihue

By contrast, there is limited or insufficient market data to accurately estimate the market rates for the benchmark improved-unpaved industrial/commercial lands in the secondary airports in the following areas:

Secondary Airport Areas  Kapalua  Molokai  Lanai

Tertiary Airports  Kalaeloa  Kawaihapi  Kalaupapa  Hana  Waimea-Kohala  Upolu

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 Port Allen

The approach to estimate the market rates for the benchmark improved, unpaved industrial lands at the primary airports is outlined as follows:

1. Research general neighborhoods of the benchmark properties for sales or leases of comparable “off airport” industrial properties.

2. Select the most comparable property transactions and confirm the transactions through interviews and recorded documents.

3. Estimate the most appropriate units of comparison after reviewing the various price indicators from the comparable transactions.

4. Analyze the comparable unit price indicators and adjust the unit price indicators to the selected benchmark properties for factors influencing land value.

5. Weight the adjusted unit price indicators based on their reliability.

6. Reconcile the weighted unit price indicators and estimate the land value or land rent of the selected benchmark industrial improved- unpaved lands at the primary airports.

The selected “off airport” transactions that have occurred recently on the various islands are considered similar in physical characteristics and share similar highest and best uses to the benchmark airport designated industrial/commercial properties. As a result, the transactions provide a reliable basis for estimating the market rents for the subject airport industrial classified properties.

The estimated land rents for the benchmark properties in the secondary and tertiary airport areas is based on the 60 percent and 25 percent relationship discussed earlier for retail, office, and industrial space rents.

(b) Calculation of Paving Cost Recovery

The fair market rent for the benchmark industrial improved-unpaved properties are estimated as the product of the fee simple land value and the current prevailing land rate of return or actual market rents per square foot data.

The fair market rents for the benchmark industrial improved-paved properties are based on the market rents for the improved-unpaved

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properties with an adjustment for the amortized cost of the paving over their remaining useful lives. Estimated costs for the paving typically found on the paved industrial properties vary by island location.

The base course is estimated to have an indefinite life. By contrast, the useful life of the asphalt-concrete paving is about 10 years. For the purposes of this analysis, the asphalt-concrete paving is estimated to have an effective age of 10.0 years.

Using a discount rate of 5.00 percent, about 150 basis points above the prime lending rate, the annual amount to amortize the paving cost over the remaining useful life is shown in K-3 following.

Table K-3 Paving Costs Useful Life (Yrs) Annual Recovery Paving Base Base Discount County 2" Asph 4" Base Total Paving Course Rate Paving Base Total Honolulu $3.22 $1.65 $4.87 10 30 5.00% $0.42 $0.11 $0.53 Maui $3.53 $1.81 $5.34 10 30 5.00% $0.46 $0.12 $0.58 Hawaii $3.76 $1.93 $5.69 10 30 5.00% $0.49 $0.13 $0.62 Kauai $4.15 $2.13 $6.28 10 30 5.00% $0.54 $0.14 $0.68

(c) Valuation of Unimproved Industrial Land

All airports also have “unimproved” industrial land, which is land that is not graded and that lacks utilities and paved road access. Rates for unimproved lands are discounted from improved, unpaved rates by 25 percent to 50 percent, depending on the distance to paved access and utilities.

2. Estimating Fee Simple Land Values

The same methodology is utilized in the analysis of each primary airport property within each county.

The sales comparison approach is the most common technique for valuing land and is the preferred method when comparable land transactions are available. It is generally considered to be the most reliable approach and was considered the primary method to value the airport lands. Based on the principle of substitution, this method estimates the land rent or value of the land according to prices generally obtained for “off airport” properties with similar locational characteristics and zoning classifications in the surrounding or neighboring areas

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The unit land value or unit land rent indications of selected “off airport” transactions is adjusted relative to the subject airport property to compensate for various comparative factors including, terms of sale, market conditions, location, access, physical characteristics and size in order to yield a fee simple unit land value indication or land rent for the subject airport sites.

Common to all land adjustments is the following exception.

(a) Size Adjustment -- A size adjustment is usually considered to compensate for the fact that larger parcels usually tend to reflect lower unit prices while smaller parcels usually reflect higher unit prices. A size curve was not used due to the undetermined size of the subject airport sites.

3. Prevailing Rates of Return on Land

The fair market rental rates of return for the industrial lands surrounding the various airports are based on the product of the underlying fee simple industrial land value and the prevailing land rate of return for “off airport” industrial land.

A survey undertaken of major land owners in Hawaii as well as property managers of major trusts, disclosed that renegotiated ground lease rents have typically been based on fee simple land values consistent with the underlying zoning and highest and best use of the site multiplied by the prevailing market rate of return or contract rate. Rates generally range between 1.0 to 2.0 percent per annum for agricultural uses and up to 4.0 percent for residential uses. Rates for industrial and commercial properties generally range between 6.0 to 8.0 percent per annum. The rates at the lower end of the range typically reflect contract rates contained in older leases. The majority of newer lease rents for industrial and commercial properties are based on a rate of return of 8.0 percent per annum.

Based on the available information, the prospective annual fair market rent for the primary airports, except Hilo, is calculated by applying an 8.0 percent rate of return to the estimated value indication.

Based on the results of research and interviews, it is the appraisers’ opinion that an appropriate annual market rate of return on land for Hilo properties is 6.0 percent of the unencumbered fee simple land value.

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4. Final Value Adjustments by Use

Rates for unimproved lands within the primary airport areas are discounted from improved, unpaved rates by 25 percent to 50 percent, depending on the distance to paved access and utilities.

5. Concluded Land Values for Secondary and Tertiary Airports

Rental for lands within secondary and tertiary airports was based on the 60 percent and 25 percent relationship of the airport to the primary base airport with the exception of the Kawaihapai Airfield which is 50 percent of Kalaeloa Airport. The relationship of the secondary and tertiary land values to their respective base land value is as follows.

Kalaeloa (Base) Kawaihapai (50%)

Kahului (Base) Molokai (60%) Lanai (60%) Kapalua (60%) Hana (25%)

Kona (Base) Waimea-Kohala (25%) Upolu (25%)

Lihue (Base) Port Allen (25%)

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VIII. MARKET ANALYSIS-ISLAND OF KAUAI

This section of the report presents a brief overview of the industrial, office and retail markets for Kauai. The primary intent of this market analysis is to provide a general assessment of prevailing rental rates, operating expenses and vacancy levels within the local marketplace.

The CoStar 1st Quarter 2016 Industrial, Office and Retail Reports were utilized in the market analysis. The Industrial Report includes all industrial building types including warehouse, flex, distribution, manufacturing, showroom and service buildings, in both single-tenant and multi-tenant buildings, including owner-occupied buildings. The Office Report includes all office building types (Class A, B & C) including office, office condominium, office loft, medical, all classes and all sizes, both multi-tenant and single- tenant buildings, including owner-occupied buildings. The Retail Report includes malls, power centers, shopping centers and specialty centers.

As demonstrated in the 1st Quarter 2016 Industrial Report prepared by the CoStar Group, 1,248,166 square feet of industrial space is located on Kauai consisting of 1,194,452 square feet of warehouse space and 53,714 square feet of flex space. Flex space is a blended space with at least half of the space consisting of office space and maybe some showroom space. The survey indicated that the entire Kauai industrial market posted 9,437 square feet of positive absorption with all of the gain consisting of warehouse space. The average net asking rent for warehouse space was $1.02 per square foot per month and $1.60 per square foot per month for the flex market. Average vacancy rates for the Kauai industrial market were 1.2 percent for the warehouse market no vacancies for the flex market.

Flex Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 3 53,714 0 0 0.0% 0 0 0 $0.00 Totals 3 53,714 0 0 0.0% 0 0 0 $1.60 Warehouse Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 103 1,194,452 14,639 14,639 1.2% 9,437 0 6,752 $1.02 Totals 103 1,194,452 14,639 14,639 1.2% 9,437 0 6,752 $1.02 Total Industrial Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 106 1,248,166 14,639 14,639 1.2% 9,437 0 6,752 $1.02 Totals 106 1,248,166 14,639 14,639 1.2% 9,437 0 6,752 $1.02

As demonstrated in the 1st Quarter 2016 Office Report prepared by the CoStar Group, there is 486,541 square feet of office space on Kauai consisting of 314,870 square feet of Class B office space and 171,671 square feet of Class C office space. The survey indicated that the entire Kauai office market posted 8,554 square feet of positive absorption with

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most of the positive absorption consisting of Class B office space with Class C office buildings posting positive absorption.

Class B Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 20 314,870 9,127 9,127 2.9% 8,054 0 0 $2.00 Totals 20 314,870 9,127 9,127 2.9% 8,054 0 0 $2.00 Class C Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 30 171,671 2,414 2,414 1.4% 500 0 0 $1.79 Totals 30 171,671 2,414 2,414 1.4% 500 0 0 $1.79 Total Office Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total RBA Direct SF Total SF Vac % AbsorptionDeliveriesConst SF Rates Kauai 50 486,541 11,541 11,541 2.4% 8,554 0 0 $1.96 Totals 50 486,541 11,541 11,541 2.4% 8,554 0 0 $1.96

The average gross asking rent for office space was $2.00 per square foot per month for Class B office space and $1.79 per square foot per month for Class C office space. Average vacancy rates for the Kauai office market were 2.9 and 1.4 percent for Class B and C office spaces, respectively.

As demonstrated in the 1st Quarter 2016 Retail Report prepared by the CoStar Group, 2,665,682 square feet of retail space is located on Kauai consisting of 1,231,517 square feet of general retail space, 592,622 square feet of mall space and 841,543 square feet of shopping center space. The survey indicated that the entire Kauai retail market posted 35,029 square feet of positive absorption with most of the absorption consisting of mall space at 20,618 square feet. The average net asking rent for general retail space was $1.71 per square foot per month and $2.98 per square foot per month for shopping center space. The total retail market indicated an average net asking rent of $2.46 per square foot per month. Average vacancy rates for the Kauai retail market were 2.0 percent for the general retail market, 3.3 percent for the mall space market and 8.3 percent for the shopping center market. The total retail market indicated an average vacancy rate of 4.2 percent.

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General Retail Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total GLA Direct SF Total SF Vac % Absorption Deliveries Const SF Rates Kauai 125 1,231,517 24,084 24,084 2.0% 1,231 0 0 $1.71 Totals 125 1,231,517 24,084 24,084 2.0% 1,231 0 0 $1.71 Mall Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Ctrs Total GLA Direct SF Total SF Vac % Absorption Deliveries Const SF Rates Kauai 1 592,622 19,621 19,621 3.3% 20,618 0 0 $0.00 Totals 1 592,622 19,621 19,621 3.3% 20,618 0 0 $0.00 Shopping Center Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Ctrs Total GLA Direct SF Total SF Vac % Absorption Deliveries Const SF Rates Kauai 16 841,543 69,496 69,496 8.3% 13,180 33,780 4,813 $2.98 Totals 16 841,543 69,496 69,496 8.3% 13,180 33,780 4,813 $2.98 Total Retail Submarket Statistics First Quarter 2016 Existing Inventory Vacancy YTD Net YTD Under Quoted Market # Blds Total GLA Direct SF Total SF Vac % Absorption Deliveries Const SF Rates Kauai 150 2,665,682 113,201 113,201 4.2% 35,029 33,780 4,813 $2.46 Totals 142 2,665,682 113,201 113,201 4.2% 35,029 33,780 4,813 $2.46

Current Industrial, Office and Retail Markets

The CoStar survey indicated that the Kauai industrial market currently has 14,639 square of available space or an average vacancy rate of 1. 2 percent for both warehouse and flex space. The average net asking rent for warehouse space is $1.02 per square foot per month.

The Kauai office submarket contains 11,541 square feet or 2.4 percent of vacant space. The average gross asking rent for office space is $1.79 per square foot per month.

The Kauai retail submarket contains 113,201 square feet or 4.2 percent of vacant space. The average net asking rent for retail space is $2.46 per square foot per.

CoStar is projecting that market rents for industrial space will increase and decline for both office space and retail space. Vacancy rates for the industrial, office and retail markets for Kauai are projected to decrease.

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IX. MARKET RENTS – County of Kauai Automobile Parking & Tie Downs

The following provides an analysis of the County of Kauai Automobile parking rates and aircraft storage (Tie-Down) rates

A. Rental Rates for Automobile Parking Stalls

All of the Hawaii airports, with the exception of the Upolu Airport and Port Allen Airfield, include parking stalls that are available for rent on a monthly basis. The parking stalls include:

 Covered  Uncovered, both paved and unpaved

Monthly rates for parking stalls vary by demand. The demand for monthly parking within the Hawaii State Airport facilities is estimated to be higher at those airports with higher levels of activity and lower at those airports with lower levels of activity.

The Honolulu International Airport is considered a high level activity airport. Other airports with mid-levels of activity (medium demand areas) measured in terms of passenger enplanements and cargo levels, include:

 Kahului Airport  Hilo International Airport  Kona International Airport  Lihue Airport

The level of activity at these airports is judged to support a similar level of demand for monthly parking as that found in high demand areas but at a reduced rate.

By contrast, low activity levels are judged to result in low demand areas for monthly parking at the following airports:

 Kalaeloa Airport  Kawaihapai Aifield  Kapalua Airport  Hana Airport  Molokai Airport  Lanai Airport  Waimea-Kohala Airport

Current monthly parking rates in competitive “off airport” market areas in the City and County of Honolulu, County of Maui and County of Hawaii are included in Table K-4.

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Table K-4 COMPARABLE PARKING RENT SURVEY Oahu and Neighbor Islands

Monthly Rate Building Location/Address Unreserved Reserved City and County of Honolulu Covered Parking Downtown Central Business District Bishop Square 1003 Bishop Street $260.00 $415.00 Pacific Guardian Center 733/737 Bishop Street 227.00 457.00 City Financial Tower 201 Merchant Street 235.00 345.00 TOPA Financial Center 700 Bishop Street 210.00 320.00 Executive Center 1088 Bishop Street 240.00 360.00 Bishop Place 1132 Bishop Street 230.00 395.00 Harbor Square 700 Richards Street 250.00 425.00

Outside Fringe Area 215 N. King Street 215 N. King Street 110.00 155.00 Dole Office Building 680 Iwilei Road 150.00 -- former Gentry Pacific Center 560 N. Nimitz Highway 100.00 -- Liliha Professional Building 1520 Liliha Street 120.00 225.00 Airport Trade Center 550 Paiea Street 105.00 --

Uncovered Paved Parking Open Lot 181 Aloha Tower Drive 125.00 175.00 Open Lot 600 Queen Street 170.00 -- Open Lot 888 Nuuanu Avenue 220.00 340.00 County of Maui Covered Parking One Main Plaza 2200 Main Street 70.00 Maui Realty Suites 1885 Main Street 50.00

Uncovered Paved Parking Wells Professional Center 2127 Wells Street 50.00 Diamond Parking - Kihei 2575 S. Kihei Road 50.00 Diamond Parking - Paia 120 Hana Highway 100.00 Diamond Parking - Lahaina Various 50.00 to 80.00 County of Hawaii KONA Uncovered Paved Parking Diamond Parking 75-148 Alii Drive 85.00 Diamond Parking 75-5719 Alii Drive 65.00 Diamond Parking 75-5770 Alii Drive 100.00 Diamond Parking 75-5669 Alii Drive 65.00

HILO Uncovered Paved Parking Open Lot Aupuni Street 51.04 New Kaikoo Building 100 Pauahi Street 25.00 Open Lot Waianuenue Avenue 25.00

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The current rental structure within the State of Hawaii airport facilities are summarized in Table K-5.

Table K-5 CURRENT 2014 AIRPORT PARKING RENTAL RATES State of Hawaii Airports

Monthly Parking Rate Type of Uncovered Demand Covered Paved Unpaved City & County of Honolulu Honolulu International Airport High $150.00 $98.00 $88.00 Kalaeloa Airport Low $39.00 Kawaihapai Airfield Low $39.00

County of Maui Kahului Airport Medium $80.00 $52.00 Kapalua Airport Low $39.00 $35.00 Lanai Airport Low $39.00 $35.00 Molokai Airport Low $39.00 $35.00 Hana Airport Low $39.00 County of Hawaii Hilo International Airport Medium $80.00 $52.00 Kona International Airport Medium $80.00 $52.00 Waimea-Kohala Airport Low $39.00 Upolu Airport N/A County of Kauai Lihue Airport Medium $80.00 $52.00 Port Allen Airfield N/A

(1) Benchmark Rental Rates for Automobile Parking Stalls in the State of Hawaii Airports

Monthly rates for unreserved covered parking stalls in downtown Honolulu cluster between $210.00 and $260.00. Parking rates outside the fringe area, which is on the periphery of downtown Honolulu, range from $105.00 to $120.00 per month.

The Honolulu International Airport is considered to be a high-demand area for parking. However, the demand level is judged to be lower than found in downtown Honolulu. As a result, the parking rate is considered to be at the lower end of the observed rental range.

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Based on the comparable data, the monthly rental rate for a paved, covered parking stall at the Honolulu International Airport, a high-demand area, is estimated at about $170.00.

Current 2014 parking rates for uncovered parking stalls at the Honolulu International Airport are 35 percent lower than the rate for covered stalls. Utilizing the current differential results in a monthly rental rate for a paved uncovered parking stall about $110.00.

Rental Rate for Paved-Uncovered Parking Stalls Paved-Covered Stall $170.00 Adjustment to Uncovered x .65 Paved-Uncovered Stall $110.00

Rental rates for unpaved-uncovered parking facilities were not available. To the parking stall user, the disutility associated with a parking stall in an unpaved lot is judged to be relatively low compared to the same stall in a paved lot. For this analysis, the adjustment from a paved parking rate to an unpaved parking rate is estimated at -10 percent. As a result, the monthly rental rate for an unpaved-uncovered parking stall is estimated to be about $99.00.

Rental Rate for Unpaved, Uncovered Parking Stalls Paved-Uncovered Stall $110.00 Adjustment to Unpaved -10 % Unpaved-Uncovered Stall $99.00

Rental rates for uncovered parking stalls in low demand areas on Oahu are estimated at a reduced rate of 40 percent from the medium demand areas.

Rental Rate for Paved, Uncovered Parking Stalls Paved-Uncovered Stall $110.00 Adjustment to Unpaved -40 % Unpaved-Uncovered Stall $66.00

(2) Rental Rates for Parking Stalls on the Neighbor Islands

Medium Demand Airports

As seen in Table K-4, the monthly covered parking rates in medium-demand areas on the neighbor islands range from about $50.00 to $100.00 per stall. Based on the comparable data, the monthly rental rate for a covered parking stall in medium-demand areas within the Hawaii State Airport facilities on the

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neighbor islands is estimated at about $85.00. From the market data, uncovered paved parking is estimated at $55.00.

Low Demand Airports

Rental rates for covered parking stalls in low demand areas were estimated at a reduced rate of 25 percent from the medium demand areas.

Rental Rate for Paved-Uncovered Parking Stalls

Paved-Uncovered Stall (Medium Demand) $55.00 Adjustment to Low Demand -25 % Paved-Uncovered Stall (Low Demand) $41.00

The adjustment from a paved-uncovered parking rate to an unpaved- uncovered parking rate is estimated at -10 percent. As a result, the monthly rental rate for an unpaved-uncovered parking stall is estimated to be about $37.00.

Rental Rate for an Unpaved-Uncovered Parking Stall Paved-Uncovered Stall $41.00 Adjustment to Unpaved -10 % Unpaved-Uncovered Stall $37.00

(3) Concluded Automobile Parking Rates (County of Kauai)

Based on the preceding analysis, the estimated fair market rental rates for the benchmark parking stalls within the County of Kauai airport facilities as of July 1, 2016 are presented in Table K-6.

Table K-6 PROPOSED AIRPORT PARKING RENTAL RATES County of Kauai Airports Monthly Parking Rate Type of Uncovered Demand Covered Paved Unpaved

Lihue Airport Medium $85.00 $55.00 Port Allen Airfield N/A

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B. Estimated Rental Rates for Aircraft Storage (Tie-Down)

Rental rates for aircraft storage areas (Tie Down) are estimated separately from the individual Hawaii airports analysis since the basic market data is extracted from areas outside of the State of Hawaii. It is felt that the data is basically common to all Hawaii airports and not related to the specific airports environs.

General aviation aircraft storage includes uncovered tie-down areas for small (single & twin engine) and large aircraft. The small aircraft tie-down storage areas can accommodate aircraft with a wing-span of up to 42 feet. By contrast, the large aircraft tie-down storage areas can accommodate aircraft with a wing-span from 43 feet to 60 feet.

As seen in Table K-7 monthly rates for small aircraft storage at eleven general aviation smaller “secondary” airports on the mainland United States ranged from $50 to $140 and averaged about $90. Similarly, monthly rates for large aircraft at some of these airports ranged from $108 to $225. Excluding the extremes, the comparable mainland data supports a monthly rent for small aircraft of about $90.00 and for large aircraft storage of about $130.00.

Table K-7 COMPARABLE AIRCRAFT (TIE DOWN) STORAGE RATES Various Mainland Airports

Small Aircraft Large Aircraft Airport (Daily) Monthly (Daily) Monthly California Airports Santa Monica Municipal, Santa Monica $16.68 $113.41 $33.36 $170.12 Redding Municipal, Redding 71.00 112.00 Santa Barbara Airport 116.00 Lompoc Airfield, Lompoc 85.00 Hayward Executive, East Bay-SFO 8.00 75.00 12-22 108-216 John Wayne Airport, Irvine 140.00 169.00 Napa County Airport, Napa 15.00 100.00 15.00+ 225.00+ Torrance Airport, Torrance 15.00 105.44 Washington Airports Harvey Field, Snohomish 5.00 60.00 Olympia Airport, Olympia 10.00 85.70 Bellingham Airport, Bellingham 50.00 100.00

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Based on the observed data, the monthly rental rates for small and large aircraft storage at the smaller secondary Hawaii airports (Kapalua, Molokai, Lanai) are estimated to be $90.00 and $130.00, respectively.

Considering the current relationship, the monthly rental rate at the Hawaii major airports is estimated to be 60 percent higher than those rates at the smaller secondary airports. As a result, monthly rental rates for small and large aircraft storage at the Hawaii major airports is estimated to be $144.00 and $208.00, respectively.

Similarly, the current relationship of monthly rental rates at the Hawaii tertiary airports are estimated to be 40 percent lower than those rates at the smaller secondary airports. As a result, monthly rental rates for small and large aircraft storage at the Hawaii tertiary airports are estimated to be $54.00 and $78.00, respectively.

The transient overnight daily rental rates at the selected mainland general aviation airports ranged between $5.00 and $15.00 for small aircraft and $10.00 to $20.00 for large aircraft. The transient overnight daily rates for Hawaii airports are forecast at $10.00 and $20.00 for small and large aircraft, respectively, at the major airports. The transient overnight daily rates for Hawaii airports are forecast at $5.00 and $10.00 for small and large aircraft, respectively, at the secondary and tertiary airports.

Based on these considerations, the current and proposed fair market rental rates for the aircraft storage areas within the County of Kauai airport facilities are shown in Table K-8.

Table K-8 PROPOSED AIRCRAFT STORAGE RATES County of Kauai Airports CURRENT 2014 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly Lihue Airport $10.00 $96.00 $20.00 $136.00 Port Allen Airstrip $5.00 $24.00 $10.00 $34.00 PROPOSED 2016 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly Lihue Airport $10.00 $144.00 $20.00 $208.00 Port Allen Airport $5.00 $54.00 $10.00 $78.00

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X. LIHUE AIRPORT (LIH)

A. Airport Description

Lihue Airport occupies 891 acres about 1.5 miles east of Lihue, on the southeast coast of the island of Kauai. The airport provides passenger and aircraft facilities for domestic overseas carriers, interisland carriers, commuter/air taxi, air cargo, and general aviation activities. Airfield facilities include two runways (6,500’ x 150’), taxiways, aprons, eight (8) gates, navigational aids (ILS, VORTAC, DME and PAPI/VASI), airport traffic control tower, and helipads. Vehicular access to the airport is provided by Ahukini Road, which extend from Kapule Highway. The passenger terminal is served by a one-way loop roadway branching off Ahukini Road and encircling a public parking lot.

B. Environs

The Lihue Airport is located at the end of Ahukini Road just outside the town of Lihue on the Island of Kauai. The development of the town of Lihue can be traced back to its importance as a port city and primary transportation link to the other Hawaiian Islands. The development and subsequent expansion of facilities at Nawiliwili Harbor and Lihue Airport were the major factors contributing to the establishment of Lihue as a center for commerce, business and population settlement.

The Lihue Airport is located just outside the heart of Lihue, a short distance from shopping and employment areas. Although much of the more recent population and commercial growth has occurred away from the center of town, the health of Kauai's overall economy remains the ultimate determinant of the strength of future real estate market conditions within the greater Lihue area.

The subject airport is located within the established, Kailua-to-Keahole urban area, approximately eight miles north of Kailua-Kona.

C. Rental Analysis

(1) Space Rents

The fair market rental rates for the typical benchmark retail, finished office and warehouse related spaces at the Lihue Airport are based on the current “off airport” rent levels for retail, office and warehouse space in the Lihue competitive market area.

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(a) Retail Space Rents

The results of our market rent survey for “off airport” retail rents are presented within Table K-9.

As demonstrated in this schedule, actual net retail space rents range from $3.00 to $3.82 per square foot per month. Net asking rents range between $3.00 and $5.50 per square foot per month with gross asking rents ranging between $3.55 and $7.60 per square foot per month. Based on conversations with various brokers and leasing agents, base rents can vary depending on the size of space, quality and location. Currently monthly common area maintenance (CAM) expenses on a square foot basis generally range from $0.55 to $2.10 depending on the expense items paid individually by each tenant. The upper end rents represent spaces within the more major shopping center facilities. Leasing concessions were found to be negotiable depending on the strength and desirability of the tenant and term of the negotiated lease.

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Based on the market data, the appraisers estimate a benchmark retail market rent for “off airport” retail type space of $4.00 per square foot per month.

(b) Office Space Rents

The results of our market rent survey for “off airport” office rents are presented within Table K-10.

Table K-10 COMPARABLE OFFICE SPACE RENT SURVEY Island of Kauai, Hawaii

Lease Lease Floor Area in Monthly Rent Per SqFt Start Term Location Level Sq. Ft. Net CAM Gross Date (Years) The Haleko Building 2nd 3,100 $1.62 $0.81 $2.43 Oct-15 - 2970 Haleko Road 1st 1,024 $1.90 $0.81 $2.71 Asking - Dynasty Court 1st 527 - - $2.55 Nov-15 - 4473 Pahe'e Street 1st 1,203 $1.70 $0.90 $2.60 Nov-14 3 1st 673 $1.75 $0.90 $2.65 Asking - Kukui Grove Executive Center I 1st 1,213 $1.85 $1.46 $3.31 Jun-15 3 4370 Kukui Grove Street 1st 848-2,493 $2.00 $1.46 $3.46 Asking - Kukui Grove Executive Center II 1st 1,012-1,300 $2.00 $1.46 $3.46 Asking - 4370 Kukui Grove Street KIUC Building 2nd 1,510 $2.20 - - Aug-15 5 4463 Pahee Street Lihue Plantation Building 1st 244 $1.80 $1.05 $2.85 Jun-14 3 2970 Kele Street 1st 715 $1.70 $1.05 $2.75 Mar-14 2 2nd 259 $1.65-$1.80 $1.05 $2.70-$2.85 Asking - 1st 131 $1.90 $1.05 $2.95 Asking - Watamull Plaza 1st 760 $1.90 $0.83 $2.73 Asking - 4334 Rice Street

As demonstrated in this schedule, actual net office space rents range from $1.62 to $2.20 per square foot per month with gross rents ranging between $2.43 and $3.31 per square foot per month. Asking net rents range between $1.65 and $2.00 per square foot per month with asking gross rents ranging from $2.65 and $3.46 per square foot per month. Based on conversations with various brokers and leasing agents, base rents can vary depending on the size of space, quality and location. Currently monthly common area maintenance (CAM) expenses on a square foot basis generally range from $0.81 to $1.46 depending on the expense items paid individually by each tenant. There does not seem to be much of a

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difference for upper floor rents as compared to ground floor rents. Leasing concessions were found to be negotiable depending on the strength and desirability of the tenant and term of the negotiated lease.

Based on the market data, the appraisers estimate “off airport” benchmark office space at $1.85 per square foot per month for office space.

(c) Industrial Space Rents

Table K-11 presents a summary of the results of our “off airport” market rent survey of the Lihue Industrial Park and Puhi Industrial Park.

Table K-11 COMPARABLE INDUSTRIAL SPACE RENT SURVEY Island of Kauai, Hawaii Lease Lease Area in Monthly Rent Start Term Location Sq. Ft. Net CAM Gross Date (Years) 1865 Haleukana Street 3,960 $1.00 - - Jul-15 4 Starr Business Center 1,540 $0.90 $0.35 $1.25 Nov-14 1 2976 Aukele Street 1,306-1,882 $0.95 $0.35 $1.30 Asking - Pali Kai Building 1,740 $0.90 - - Jun-14 2 2955 Aukele Street 1,861 $0.90 - - Asking - 1596 Haleukana Street 2,922 $0.95 - - Jun-14 1 1756 Haleukana Street 1,087 $1.10 - - Apr-14 3 Puhi Pioneer Building 960 $1.00 - - Feb-14 3 1544 Haleukana Street 1611 Haleukana Street 6,752 $1.29 $0.25 $1.54 Asking 3-5

Based on our research, monthly warehouse asking rents close in to the Lihue Airport generally ranged from $0.90 to $1.29 per square foot per month on a net basis with gross rents ranging from $1.25 to $1.54 per square foot per month. Additional monthly rent was in the form of CAM recoveries ranging from $0.25 to $0.35 per square foot per month. Tenant lease terms typically range from three to five years in duration with provisions for step-up increases.

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Based on the market data, the appraisers estimate “off airport” benchmark industrial space at $1.00 per square foot per month.

(d) Conclusion of Rents within Terminal Building

Numerous projects were surveyed in order to ascertain the “off airport” market rent for areas classified under the category of retail, office and industrial space in the Lihue area. In each case, each of the property types surveyed is located within close proximity to the Lihue Airport. The retail and office product is primarily situated within the Lihue area. The industrial properties presented for comparison purposes are generally located in the Lihue and Puhi areas, nearby the airport.

For the most part, the retail projects tend to support a range in retail rent from $3.00 to $5.50 per square foot per month, net, or $36.00 to $66.00 per square foot per year. Similarly, office projects tend to support a range of $1.60 to $2.20 per square foot per month or $19.20 to $26.40 per square foot per annum.

A variety of industrial properties were presented for direct comparison purposes. The most representative range approximates $0.90 to $1.10 per square foot per month, or $10.80 to $13.20 per square foot per year. In the case of industrial properties, size seems to have less influence on the ultimate rental rate. Moreover, office build-out appears to have little impact on overall rent as well. Lease terms generally range from three to five years. Most agreements provide for rent adjustments during the term, either annual CPI or periodic fixed increases. Tenant improvements are marginal.

In terms of comparison, the subject’s terminal and office type space compares favorably with the Lihue retail and office properties presented when analyzing quality and location. Given the special purpose nature of the subject property, coupled with its inherent amenities, higher rental rates would not be judged unreasonable, in our opinion.

With respect to industrial space the comparisons are judged a reasonable indication of potential rent. However, properties in and around an airport that are suitable for airfreight use typically generate slightly higher rental rates when compared to standard industrial space. As such, it is reasonable to assume that such space on the airport might generate a slight premium in comparison.

Therefore, in light of the foregoing, the appraisers estimate the following triple net rental rates for each classification of subject space via direct

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comparison with off-airport properties of somewhat similar use characteristics. Rent/ Rent/ Category of Space Mo./S.F. Year/S.F. Retail $4.00 $48.00 Office 1.85 22.20 Warehouse 1.00 12.00

Given the difficulty in comparing off-airport property to on-airport property, this direct comparison approach will probably reveal the low end of the potential range in rent for the subject terminal since a return on cost of construction would probably result in higher required rents. While it should be supported in the marketplace that on-airport property generates higher rents when compared to similar property off-airport, the actual adjustment is not always clear.

From the indicated “benchmark” indications for the three basic space categories additional judgmental adjustments were made to reflect airport passenger use. A downward adjustment of 10 percent for concessionaire – food and beverage space as compared to concessionaire - retail sales space was applied. An upward adjustment of 25 percent was made for VIP Lounge space as compared to general office space.

(e) Conclusion of Rents within Commuter Terminal Building

Rents within the Commuter Terminal Building were considered similar by category as the Main Terminal Building but reflecting a ten percent discount for quality of construction.

(2) Industrial Land Rents

The fair market rental rates for the various industrial lands within the airport are based on off-airport land data. The analysis first estimates the land rent for a benchmark improved-unpaved land by direct comparison with the off- airport data. The fair market rents for improved-paved and unimproved are calculated as percentages of the benchmark improved-unpaved conclusion.

(a) Calculation of Industrial Improved-Unpaved Land Rent

This section of the report presents a brief overview of the Lihue industrial “off airport” land market which includes the Puhi Industrial Subdivision. The market data was employed as a basis for estimating industrial land rents for the Lihue Airport.

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Market Data

Of the transactions disclosed by our investigation, four transactions were selected for critical analysis to establish a value index for the subject. These transactions are analyzed in summary form in Table K-12.

Table K-12 COMPARABLE LAND TRANSACTIONS ADJUSTMENT SCHEDULE Lihue Airport Lihue, Kauai, Hawaii Transaction Number Subject 1 2 3 4 Fourth Division, Tax Map Key 3-3-12-36 3-3-13-45 3-3-12-15 3-3-13-48 Location Lihie Airport Puhi Industrial Puhi Industrial Puhi Industrial Puhi Industrial Land Area (Square Feet) 16,411 24,125 13,285 15,675 County Zoning I-L I-L I-L I-L

Transaction Date 06/11/14 6/26/2015 11/23/15 04/05/16 Instrument/Financing (Cash Equivalency) Deed/Cash Deed/Cash Deed/Cash Deed/Cash Sales Price/Indicated Fee Value $435,000 $630,000 $395,000 $459,000

Indicated Fee Value/Price Per Square Foot $26.51 $26.11 $29.73 $29.28 Terms of Sale Adjustment 1.00 1.00 1.00 1.00 Adjusted Value/Price $26.51 $26.11 $29.73 $29.28 Market Conditions Adjustment 1.06 1.03 1.02 1.01 Market Conditions Adjusted Unit Value $28.00 $27.00 $30.00 $30.00 Adjustments (%) Location 0 0 0 0 Physical Characteristics 0 0 0 0 Net Adjustments (%) 0 0 0 0 Adjusted Unit Value $28.00 $27.00 $30.00 $30.00 Weighting Factor 0.20 0.20 0.30 0.30 Product $5.60 $5.40 $9.00 $9.00

Range of Values $27.00 to $30.00 per SqFt. Mean Unit Value $28.75 per SqFt. Weighted Unit Value $29.00 per SqFt. Concluded Unit Value $29.00 per SqFt.

Transaction Number 1 is the June 11, 2014 purchase of a rectangular shaped parcel with a gross land area of 16,411 square feet, identified as TMK (4) 3-3-12, Parcel 36, located in the Puhi Industrial Park. The transaction was recorded June 16, 2014 in Document 8932056. The site is an interior lot and has a level topography. The purchase price was $435,000 which equates to an unadjusted unit value of $26.51 per square foot of gross land area.

Transaction Number 2 is the June 26, 2015 purchase of a rectangular shaped parcel with a gross land area of 24,125 square feet, identified as TMK (4) 3-3-13, Parcel 45, located in the Puhi Industrial Park. The transaction was recorded July 1, 2015 in Document 9312118. The site is an interior lot and has a level topography. The purchase price was

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$630,000 which equates to an unadjusted unit value of $26.11 per square foot of gross land area.

Transaction Number 3 is the November 23, 2015 purchase of a rectangular shaped parcel with a gross land area of 13,285 square feet, identified as TMK (4) 3-3-12, Parcel 15, located in the Puhi Industrial Park. The transaction was recorded November 30, 2015 in Document 9464101. The site is an interior lot and has a level topography. The purchase price was $395,000 which equates to an unadjusted unit value of $29.73 per square foot of gross land area.

Transaction Number 4 is the April 5, 2016 purchase of a rectangular shaped parcel with a gross land area of 15,675 square feet, identified as TMK (4) 3-3-13, Parcel 48, located in the Puhi Industrial Park. The transaction was recorded April 11, 2016 in Document 9597128. The site is an interior lot and has a level topography. The purchase price was $459,000 which equates to an unadjusted unit value of $29.28 per square foot of gross land area.

Adjustments

As shown in Table K-12, the unit land value indications of each selected transaction was adjusted relative to Lihue Airport sites to compensate for various comparative factors including, terms of sale, market conditions, location and physical characteristics in order to yield a fee simple unit land value indication for the subject airport lands. A final adjustment for size differential was not required.

Terms of Sale -- Comparable “off airport” transactions were analyzed as to economic and financing conditions (terms of sale) to reflect the impact of non-institutional methods of financing or the advent of low financing costs due to favorable exchange rates and foreign financing. Down payment, interest rates and loan terms were considered in the cash equivalency analysis. Each comparable transaction was a cash equivalent transaction thus no adjustments for terms of sale were considered necessary.

Market Conditions -- The adjustment for market conditions (time) considers changes in the real estate market price levels between the date of sale of each comparable transaction and the effective date of the appraisal. For the period 2001 through 2006, the overall real estate market throughout most of the State of Hawaii appeared strong reflecting upward trends in pricing. Beginning in 2007, the markets exhibited more stabilization with relatively flat pricing levels throughout the market.

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From around the end of 2007, prevailing market conditions turned negative, culminating with the financial crisis of 2008. Considering the Hawaii real estate market, a negative annual adjustment from January 1, 2008 to January 1, 2010 would be considered reasonable. For the period 2010 to the effective date of value of July 2016 a rate of increase of 3.0 percent would be considered reasonable, reflecting the stabilization and current increases in industrial and commercial land values.

Location -- The location adjustment considered the relative location of the comparables to the subject as to potential development desirability and exposure. All transactions are considered relatively equal to the subject airport lands and therefore require no adjustments.

Physical Characteristics -- The physical characteristics adjustment considered the shape, topography and utility factors of the comparables in terms of development potential as compared to the subject. All the comparable transactions were considered similar to the subject airport lands requiring no adjustment.

Conclusion Fee Simple Improved-Unpaved Land Value -- The adjusted unit values ranged from $27.00 to $30.00 per square foot with a mean unit value of $28.75 per square foot. Based on the market data in Table K-12 the appraisers conclude a market land value for a comparable area within the Lihue Airport of $29.00 per square foot.

Rent Conclusion Improved-Unpaved Land -- Applying an 8.0 percent market rate of return indicates an indicated fair market annual rent for industrial improved-unpaved land of $2.32 per square foot.

Fee Simple Improved-Unpaved Land Value $29.00 Market Rate of Return x .08 Annual Rent Improved-Unpaved Land $ 2.32

(b) Calculation of Industrial Improved-Paved Land Rents

The market rents for the benchmark industrial improved-paved land are based on the market rents for the improved-unpaved industrial properties with an adjustment for the amortized cost of the paving over their remaining useful lives.

Adding $0.68 for the estimated annual recovery for paving estimated earlier in Table K-3 results in an annual rent for industrial improved-paved land of $2.84.

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Annual Rent Improved-Unpaved Land $2.32 Add Annual Rent for Paving .68 Annual Rent Improved-Paved Land $3.00

(c) Calculation of Industrial Unimproved Land Rents

The Lihue Airport also has industrial unimproved land, which is land that is not graded and lacks utilities and paved road access. Rates for unimproved industrial lands are discounted from improved, unpaved rates by 25 percent to 50 percent, depending on the distance to paved access and utilities.

Considering the distance from utilities and paved road access and the associated cost, the fair market rental rate for the industrial unimproved- unpaved lands are estimated discounted 50 percent from the industrial improved-unpaved land rate.

Annual Rent Improved-Unpaved Land $2.32 Discount Factor x .50 Annual Rent Unimproved-Unpaved Land $1.16

(d) Ramp Area Rents

The fair market rental rates for the benchmark open (uncovered) ramp equipment parking areas are estimated to be similar to the annual rent estimated for the industrial paved and unpaved improved lands.

Based on the relationship between covered and uncovered parking stalls, the fair market rental rates for the covered ramp equipment parking areas are estimated to be 50 percent higher than the rental rates for the paved open areas.

(3) Rental Rates for T-Hangar Spaces

Hangar spaces (T-Hangars and End Rooms) are available for rent at the following airports within the County of Kauai:

 Lihue Airport

Historically, the rental rates for hangar space are estimated to be equivalent to the rental rates for warehouse space, with a downward adjustment associated with the characteristics and limited use of the space.

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As detailed earlier, the concluded 2016 benchmark rents for warehouse space was estimated based on an analysis of current industrial warehouse rents as follows:

Current Whse Rent Per SqFt Airport Monthly Annually Lihue $1.00 $12.00

Based on the characteristics and limited use of the space, a discount rate of 40 percent was considered reasonable. Application of the 40 percent discount rate results in the following benchmark hangar rate.

Monthly Monthly Warehouse Hangar Airport Rate Discount Rate Lihue $1.00 40% $0.60

Table K-13 summarizes existing 2014 Hawaii Airport T-Hangar and End room rents compared to our projected 2016 rental rates.

Table K-13 PROPOSED RENTAL RATES FOR HANGAR SPACES T-Hangars and End Rooms County of Kauai Airports

2014 2016 2016 Actual 2014 2016 Estimated Projected Rent Monthly Whse Area Warehouse Use Per Monthly Type of Space Rent Rent (Sqft) Rent Adjust. SqFt Total Lihue Airport T-Hangars (Large) $815.00 $0.90 1,614 $1.00 -40% $0.60 $968.00 T-Hangars (Small) $486.00 $0.90 1,044 $1.00 -40% $0.60 $626.00 End Rooms (Large) $244.00 $0.90 463 $1.00 -40% $0.60 $278.00 End Rooms (Small) $84.00 $0.90 225 $1.00 -40% $0.60 $135.00

Commercial use of the space, other than plane storage and maintenance, is at the non-discounted rate of $1.00 per square foot.

(4) Concluded Automobile Parking Rates

Parking rates were estimated earlier in Chapter IX (Tables K-4, K-5 and K-6). The conclusions in Table K-6 are as follows.

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PROPOSED AIRPORT PARKING RENTAL RATES

Monthly Parking Rate Type of Uncovered Demand Covered Paved Unpaved Lihue Airport Medium $85.00 $55.00

(5) Concluded Rates for Aircraft Storage (Tie Down) Areas

Tie-down rents were estimated earlier in Chapter IX (Tables K-7 and K-8). The conclusions in Table K-8 are as follows.

PROPOSED AIRCRAFT STORAGE RATES CURRENT 2014 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly Lihue Airport $10.00 $96.00 $20.00 $136.00 PROPOSED 2016 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly Lihue Airport $10.00 $144.00 $20.00 $208.00

6) Rental Conclusions for Lehue Airport

Table K-14 summarizes rent projections for the designated terminal buildings, industrial lands, ramp areas, plane hangars, automobile parking and aircraft storage within the Lihue Airport facility.

7) Rental Conclusions for Special Properties - Lehue Airport

Table K-15 summarizes the rent projections for the designated Lihue Special Properties.

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Table K-14 RENTAL CONCLUSIONS LIHUE AIRPORT Lihue, Kauai, Hawaii

Current (Per Sqft) Proposed (Per Sqft) Category Per Annum Per Month Per Annum Per Month

Main Terminal Building Terminal Floor Space (non-air carrier) $42.00 $3.50 $48.00 $4.00 Service Counters (non-air carrier) $42.00 $3.50 $48.00 $4.00 Concessionaire-Sales-Retail (F) $42.00 $3.50 $48.00 $4.00 Concessionaire-Food & Beverage (F) $37.80 $3.15 $43.20 $3.60 VIP Lounge (F) $25.50 $2.13 $27.75 $2.31 Office (F) (non-air carrier) $20.40 $1.70 $22.20 $1.85 Ramp Office (F) $20.40 $1.70 $22.20 $1.85 Storage $5.40 $0.45 $6.00 $0.50 Commuter Terminal Office (F) $18.40 $1.53 $20.00 $1.67 Ramp Office $18.40 $1.53 $20.00 $1.67 Storage $4.90 $0.41 $5.40 $0.45 Rental of Buildings other than Passenger Terminal Trailers $16.30 $1.36 $17.80 $1.48 Cargo (Building 135) $10.80 $0.90 $12.00 $1.00 Rental of Industrial Lands Improved Land-Unpaved $1.74 $0.15 $2.32 $0.19 Improved Land-Paved $2.24 $0.19 $3.00 $0.25 Unimproved Land-Unpaved $0.87 $0.07 $1.16 $0.10 Rental of Heliport Lands Improved Land-Unpaved $1.74 $0.15 $2.32 $0.19 Improved Land-Paved $2.24 $0.19 $3.00 $0.25 Ramp Area Covered Equipment Parking-Paved (non-air carrier) $3.36 $0.28 $4.50 $0.38 Covered Equipment Parking-Unpaved (non-air carrier) $2.61 $0.22 $3.48 $0.29 Open Equipment Parking-Paved $2.24 $0.19 $3.00 $0.25 Open Equipment Parking-Unpaved $1.74 $0.15 $2.32 $0.19 Open Equipment Maintenance-Paved $2.24 $0.19 $3.00 $0.25

T-Hangars Per Month Per Month Per Sqft/Mo Bldg. 410-101 to 106, T Hangar (Large) (1,614 sf) $815.00 $968.00 $0.60 Bldg. 410-107 and 108, T Hangar (Small) (1,044 sf) $486.00 $626.00 $0.60 Bldg. 411-101 to 108 & 411-109 & 110, T Hangar (Small)(1,044 sf) $486.00 $626.00 $0.60 Bldg. 410-107A and 108A, End Room (Large)(463 sf) $244.00 $278.00 $0.60 Bldg. 411-109A and 110A, End Room (Large)(463 sf) $244.00 $278.00 $0.60 Bldg. 410-101A and 106A, End Room (Small)(225 sf) $84.00 $135.00 $0.60 Bldg. 411-101A and 108A, End Room (Small)(225 sf) $84.00 $135.00 $0.60 T-Hangar Used as Commercial Space -- -- $1.00 Automobile Parking Covered-Paved Parking Per Month $80.00 Per Month $85.00 Uncovered-Paved Parking Per Month $52.00 Per Month $55.00 Aircraft Storage Charges Small general aviation aircraft (46' x 32' or smaller) Per Day $10.00 Per Day $10.00 Per Month $96.00 Per Month $144.00 Large general aviation aircraft (47' x 33' or larger) Per Day $20.00 Per Day $20.00 Per Month $136.00 Per Month $208.00

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Table K-15 Lihue Airport Special Properties Lihue, Kauai, Hawaii

Concluded Rent Map Bldg Tenant Area Use Condition Sqft/ Mo. Sqft/ Year A2 307 Car Rental 1,137 Office Good $1.85 $22.20 003-120A Old Air Kauai Hangar Good $1.00 $12.00 AOA4 516-144A Island Helicopters N/A Office Good $1.85 $22.20 516-144B Old Air Kauai N/A Office Good $1.85 $22.20 AOA4 146 Airborne Aviation N/A Hangar Good $1.00 $12.00

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Lihue - Service Counters

Lihue - Concessionaire Retail

Lihue - Concessionaire Food & Beverage

Lihue - VIP Lounge

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Lihue - Building 307 Car Rental Building

Lihue - Building 003120A Air Kauai

Lihue - Building 146 Hangar - Airborne Aviation

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Lihue - T-Hangars

Lihue - Commuter Terminal

Lihue - Building 135 Cargo Building

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Lihue - Bldgs 516144B and 516144A

Lihue - Commuter Terminal

Port Allen Trailer

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XI. PORT ALLEN AIRFIELD (PAK)

A. Airport Description

Port Allen Airport occupies 184 acres, one mile southwest of the town on Hanapepe on the south shore of Kauai. This general aviation airport has a single runway, separate parking areas for fixed wing aircraft and helicopters, and public parking area. There are no other public facilities at the airport. Access to the airport is provided by Kaalani Road, which connects the airport with Lolokai Road and Highway 50.

B. Environs

The subject airport is located at Port Allen Harbor on the Island of Kauai. The Port Allen area is characterized as a light and heavy industrial area. Chevron and the U.S. Navy represent two of the major users of the harbor facilities, with numerous charter tour boat operators representing a more recent base of clientele. The tour boat operators have been displaced from the North Shore/Hanalei area of Kauai and have relocated to Port Allen. The major land owner at Port Allen is A & B Properties, Inc. Residential communities and support services located in proximity to Port Allen include Eleele and Hanapepe.

C. Rental Analysis

Trailer rents were based on 25 percent of the base rents estimated for the Lihue Airport trailer rents.

Concluded Industrial Land Rents

Rents for industrial lands classified as “Improved-Unpaved,” “Improved-Paved,” “Unimproved” were based on 25 percent of the base rents estimated for the Lihue Airport.

Concluded Aircraft Storage (Tie Down)

Tie-down rents were estimated earlier in Chapter IX (Tables K-7 and K-8). The conclusions in Table K-8 are as follows.

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PROPOSED AIRCRAFT STORAGE RATES CURRENT 2014 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly

Port Allen Airstrip $5.00 $24.00 $10.00 $34.00 PROPOSED 2016 AIRCRAFT STORAGE RATES Small Aircraft Storage Large Aircraft Storage Airport Daily Monthly Daily Monthly Port Allen Airstrip $5.00 $54.00 $10.00 $78.00

Rental Conclusions for Port Allen Airfield

Table K16 summarizes rent projections for the designated trailer, industrial lands, and aircraft storage within the Port Allen Airfield facility.

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Table K-16 RENTAL CONCLUSIONS PORT ALLEN AIRPORT Port Allen, Kauai, Hawaii

Current (Per Sqft) Proposed (Per Sqft) Category Per Annum Per Month Per Annum Per Month

Rental of Buildings other than Passenger Terminal Trailers Per Sq.Ft. $4.10 N/A $4.45 $0.37

Rental of Industrial Lands

Improved Land-Unpaved Per Sq.Ft. $0.44 $0.04 $0.58 $0.05 Improved Land-Paved Per Sq.Ft. $0.56 $0.05 $0.75 $0.06 Unimproved Land-Unpaved Per Sq.Ft. $0.22 $0.02 $0.29 $0.02

Aircraft Storage Charges (Tie Downs)

Small general aviation aircraft (46' x 32' or smaller) Per Day $5.00 Per Day $5.00 Per Month $24.00 Per Month $54.00

Large general aviation aircraft (47' x 33' or larger) Per Day $10.00 Per Day $10.00 Per Month $34.00 Per Month $78.00

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PROFESSIONAL QUALIFICATIONS

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