A state agency yesterday terminated an agreement with a Texas developer to build condominiums and retail space on state land at Honolulu Harbor Piers 5 and 6, delivering another blow to the troubled project.

The decision by the Aloha Tower Development Corp. follows a demand made in October by Ken Hughes of Dallas-based Hughes Development LP to arbitrate disagreements over the $300 million project, after the agency in August rejected the developer's offer to lease the property diamondhead of Aloha Tower.

It is unclear how a potential arbitration decision could affect the now-canceled development agreement and project.

The agency previously decided to participate in arbitration and will continue with that pro-cess, but board members concluded that the two sides were too far apart on several issues including financial terms. So the board declared the project no longer feasible or desirable.

"We're at a crossroads where we simply can't go forward with a developer who's arbitrating with us," said Melissa Pavlicek, a local attorney and chairwoman of the agency overseeing redevelopment of state waterfront property in the area.

"I thought we were really trying hard to work something out," added agency member Neal Otani, president of produce wholesaler Y. Fukunaga Products Ltd. "I guess it is just undoable."

The agency cited several issues for terminating the project after five years of work — including when and how much Hughes would pay the state to lease the land for 65 years.

Hughes offered a one-time $10.5 million payment for the lease, while the agency determined the lease payment should be $58 million. The agency said it made a counteroffer but that Hughes did not budge.

Hughes could not be reached for comment yesterday.

Jason Okuhama, an agency member and principal of local commercial and residential loan brokerage firm Hawaii Lending Specialists, said the offer by Hughes wasn't fair to taxpayers.

Other issues cited by the agency included whether the project would provide parking for Aloha Tower Marketplace, a nearby retail complex built on state land with insufficient parking. The developer and the agency disagree on whether curing the parking shortage was part of their agreement.

The agency also questioned the accuracy of financial estimates made by Hughes for his project. Though terminated by the agency's action, the development project could move from arbitration to litigation as both the developer and the agency have retained private litigation attorneys.

Hughes, an accomplished developer in Texas, initially got involved at Piers 5 and 6 by responding to a request for proposals issued by the agency in 2002.

The state intended to find someone to complete part of a bigger revitalization plan for state land at Honolulu Harbor begun in the late 1980s that included a hotel, festival marketplace, condos, office building and ferry terminal from Piers 5 to 14.

Aloha Tower Marketplace at Piers 8 to 10 got built, but financial troubles derailed the rest of the private development plan in the early 1990s. The land fronting Piers 5 and 6 has since been a parking lot used by Aloha Tower Marketplace.

After much work with Hughes that involved numerous project revisions by the developer, the agency tentatively approved a conceptual plan for a 130-foot-high complex with 300 condos for residential, hotel and time-share use, plus retail and restaurant space, 850 parking stalls and a public pedestrian promenade around the water's edge.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.