Hawaii developers are struggling to sell affordable housing units, despite being given plots of state land to build on for free.

In the past five years, at least two major developers set out to offer homes to low- or moderate-income families. Developers Castle & Cooke and CMKLV Inc. each received free land from the state under the premise that they would sell the homes they built only to families that couldn’t afford Oahu’s $570,000 median home price.

But despite the perk, the projects haven’t been financially sustainable. The deals soured, the companies say, due to the state of the economy and affordable housing applicants’ credit issues.

As a result, Honolulu will have fewer affordable housing units as developers change course and obtain permission from the state to allow wealthier applicants to scoop the homes up.

By reneging on their earlier promises, are these developers essentially being bailed out by state government?

“I don’t know if you would use that term (bailout) necessarily, but it certainly is a change in the contract,” said University of Hawaii Associate Professor of Economics Theresa Greaney. “My guess would be that there should have been some kind of contingency in the contract initially for this type of situation.”

Nohona II Villages at Kapolei

The most recent example is Castle & Cooke‘s Nohona II Villages at Kapolei. The company was granted permission on Feb. 10 to sell a portion of the project at market prices.

In 2005, the developer struck a deal with the state government, receiving 20 acres of land to build a mix of 492 affordable and market-priced townhomes for rent and sale on three different parcels of land, known as villages 2, 5 and 6. Nohona II covers about 5.4 acres of the 20 acres and has 93 units, which were intended exclusively for low-income families.

As a condition of the subsidy, C&C targeted the Nohona homes to those people with incomes at 140 percent or below the area’s medium income level. (Honolulu’s current median income for a family is $81,700. Families of four that make $114,380 or less would qualify for the affordable home rates.)

The Nohona homes currently sell for between $333,000 to $402,000. Fifty-four units are unsold, 18 are still under construction and only 21 have been sold.

The Hawaii Housing Finance and Development Corporation board on Feb. 10 ruled unanimously that Castle & Cooke may sell 25 percent of units at the Nohona II Villages at Kapolei at market price.

After the board’s decision, 23 of Nohona’s 93 units will be re-listed at market price. They will be open to all buyers within the next month, once the board drafts an official ruling on the issue.

Castle & Cooke’s executive vice president for residential operations, Bruce Barrett, told the Housing Finance and Development committee the homes would sell for $5,000 to $10,000 more than they are currently listed.

He said the change in the sales tactics was necessary after the unexpected collapse of the housing market and the national recession that followed.

“I think it’s perspective,” Barrett told Civil Beat. “At the time when we were awarded this, we hadn’t had the big turnaround in the real estate market we currently are experiencing and we hadn’t had the financial meltdown that has affected the financial markets and the ability to get mortgages.

“So our pricing assumptions and our assumptions on our cost to sell these units changed dramatically. So we’re just reacting to the marketplace because our projections in what we thought we could do are quite different than what’s happening now,” Barrett said.

Barrett told Civil Beat all affordable housing candidates will still have a chance to buy homes at the lower rate before market buyers are sought.

“It’s by phase,” Barret said. “So normally, we release anywhere from two to three buildings at a time. A building is typically seven units, so that could be 14 to 21 units. We would post that information being available on our website. We would have a unit selection process that is actually administered in terms of priorities through this particular agency (HHFDC). And we would go through that and exhaust all of those applicants before we would ever offer to market.”

“Our goal is to sell as many affordables as possible,” Barrett said. “Not the opposite.”

Director Betty Lou Larson, a member of the Housing Finance and Development committee, concurred that credit is an issue affecting prospective buyers. She believes there is a big enough affordable housing market in Hawaii to sell the homes, but that those that qualify in terms of income don’t have the credit to get good loans.

“What I heard at the meeting from Castle and Cooke is that a lot of people are coming in affordable but they have credit issues,” Larson told Civil Beat.

Larson says that if C&C sells to a higher income bracket, the potential buyers “might be more credit ready.”

Nohona isn’t the only subsidized housing project that has struggled in Hawaii.

Plantation Town Apartments

In 2006, Developer Michael Kimura, president of CMKLV Inc., was the overall managing partner of the Plantation Town Apartments in Waipahu.

Like Castle and Cooke, Kimura received the land (2.8 acres) in Waipahu free of charge from the state. The estimated cost of the project was $61.8 million for 330 units in two, 12-story buildings with prices ranging from $131,500 to $302,000. (The ultimate cost for the project was actually closer to $71 million.)

By 2009, only about 180 of the 330 units were sold. Eventually, the apartments were opened to investors instead of affordable income residents.

Once the restrictions were lifted, more units began to sell.

What happened with the two attempts to build affordable housing begs the question: Do these renegotiations amount to a bailout by state government for private businesses?

Bailout?

Asked about the general process of providing land to private businesses to encourage affordable housing growth — and the recent failures of the practice — Professor Greaney told Civil Beat: “I would, I guess, question the efficacy of the program if it’s not doing what it set out to do and you’re providing state money to meet a certain need among a low- and moderate-income group. You’re not achieving the goal of the policy, it seems, if you’re having to renegotiate.”

But, she acknowledged the current recession is unprecedented. “It’s hard to predict that severe a downturn in the economy,” Greaney said.

In an e-mail to Civil Beat, HFDC spokesman Kent Miyasaki said if not for the land subsidies, there would be even less opportunity for affordable housing in Hawaii.

“Because the largest barrier to affordable housing in Hawaii is land, by reducing the acquisition and entitlement process, the cost savings on the project can be passed through to the homeowners and still be feasible for the developer,” Miyasaki wrote.

He doesn’t believe the change in contract would amount to a bailout.

“A common misconception is that a developer benefits hugely from the conveyance of state land for a workforce/affordable project when it’s really the homeowners who receive the benefit,” Miyasaki wrote.

But then again, for the homeowners to receive the benefit, there actually have to be individuals who can qualify to be homeowners.

And as it stands, at least in some cases, that appears to be a problem in Hawaii.

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