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Kakaako Condo turned a profit of $46,592 when the company sold a high-rise unit after owning it for just a year.
The sale would be unremarkable except the unit was identified as “workforce housing” on state records, meaning it was expected to be owned by an individual or family with a moderate income to help ease Honolulu’s housing crisis.
Derek Lock, project manager for the development 801 South Street, said the original income-qualified buyer fell through before Kakaako Condo acquired the unit. The project permit only required the state to offer the unit to moderate-income buyers for the first 60 days on the market.
Two dozen units at 801 South Street Tower A have been resold over the past two years, and five more are on the market, according to data from Locations, a Hawaii real estate firm. On average, sellers have made more than $109,000, cashing in on the shortage of units and high demand for housing.
Seven of those resales, including the one by Kakaako Condo, involve units on a state list that were supposed to fulfill the project’s “workforce housing” quota. It’s unclear exactly how many units qualified because neither the state nor the developer kept track after the first two months.
The notion of reselling workforce housing units — and whether the profits should be shared with the state — is at the crux of an ongoing debate over a state proposal to change the affordable housing rules in Kakaako.
The urban area abutting downtown Honolulu has been gentrifying rapidly, aided by a state redevelopment agency that has permitted hundreds of luxury units. Most of the developments are required to set aside at least 20 percent of units — known as reserved housing — for people earning moderate incomes.
The workforce housing program is different. Established in 2011 by the Hawaii Community Development Authority, it allows participating developers to build at twice the normal density, and they don’t have to pay public facilities fees that can cost millions of dollars.
In exchange, they’re supposed to set aside 75 percent of units for people earning less than 140 percent of area median income. That number changes every year, but in 2017 it’s equal to no more than $84,900 for an individual or no more than $121,250 for a family of four.
The rule changes, which the HCDA may approve during a board meeting that starts Wednesday at 9 a.m., would further restrict the ability of owners to resell their units and require them to share any profits with the state to help pay for additional affordable housing.
801 South Street is the only project that’s been built under the workforce housing model so far. Developer Downtown Capital markets the project as “affordable workforce housing for Hawaii residents.” Lock said most of the project is owner-occupied and emphasized the simplicity of the units, especially in comparison to nearby luxury towers.
Lock also points out that the number of resales is small in comparison to the total units: 635 in 801 South Street Tower A, meaning 96 percent of them are still in the hands of the original purchasers.
801 South Street Tower B, which was built later, has 410 units. Lock said that 75 percent of that tower was also designated “workforce housing.” The permit for that phase of the project didn’t have the 60-day window for sales of workforce units, and none of the units have been resold yet, according to Locations.
801 South Street project has long been a flashpoint for criticism of Kakaako redevelopment. Sharon Moriwaki, a community activist with the group Kakaako United, says the units may be marketed as affordable but they aren’t actually within reach of most local families.
Many are owned by well-connected individuals. Honolulu Managing Director Roy Amemiya helped his son purchase an income-qualified condo. John Waiheʻe IV, an Office of Hawaiian Affairs trustee and son of former Gov. John Waiheʻe, also bought a workforce unit.
Gary Kurokawa, Honolulu Mayor Kirk Caldwell’s chief of staff, and Tracy Kubota, deputy director of the Department of Enterprise Services, together invested in a unit that didn’t have an income restriction. Another unit that didn’t have any restrictions went to Colbert Matsumoto, chairman of Tradewind Capital Group, one of the project’s funders.
“You shouldn’t be able to make money off of these units. Especially because the public, government, is contributing to make these units happen.” — Jesse Souki, executive director, HCDA
Among the buyers who recently resold their units is Bill Wilson, chairman of the board of Hawaiian Dredging Construction Company. He bought a non-restricted unit and resold it for a $92,400 gain, explaining that his family situation changed.
“It’s really bad the way the workforce housing rules were passed in the previous administration,” said Moriwaki, referring to former Gov. Neil Abercrombie’s management of Kakaako redevelopment. “It gives people the wrong impression that this workforce housing is really for workers. It’s really not.”
According to HCDA rules, there’s nothing wrong with Wilson, Kurokawa or Matsumoto making money off of units that don’t fall within the project’s “workforce housing” requirement. But part of the concern about 801 South Street Tower A is that the data isn’t clear on how many units actually meet that threshold.
“There are a lot of things that we don’t really know because there’s no owner-occupant requirement for workforce housing units,” said John Whalen, a former Honolulu planning director who leads the board of HCDA.
“We don’t really know how much of those are being held by investors,” Whalen said. “With workforce there’s really no regulation on any of that.”
After three years of deliberations, the HCDA board is on the verge of approving rule revisions that are intended to increase the amount of affordable housing in Kakaako and preserve it longer.
The proposed rules would require owners of workforce units to give the agency the first right to buy back the units if they’re put up for sale. Owners would also have to participate in a shared equity program, which means that the agency would benefit from appreciating values and could use the money to help produce more affordable units.
To qualify to buy workforce units, participants could not exceed new limits on their total financial assets, excluding retirement accounts.
Units built under the reserved housing rules already have shared equity and buyback provisions, but the agency only has the option to purchase the unit back during the first five years of ownership. The proposed rules would change that five-year provision to give HCDA the first right of refusal no matter when the unit owner decides to sell, and also expand the types of developments that must set aside 20 percent of units for reserved housing, among other changes.
The changes to the workforce housing rules have elicited the most opposition. Criticism has come from the development and construction industries, banks, large companies and 801 South Street residents. Downtown Capitol has met with Gov. David Ige to try to convince him the new rules are a bad idea. HCDA held extra public hearings to allow critics more time to testify.
Opponents say the proposed rules would discourage developers from building affordable units because it would be more difficult for them to finance such projects and find buyers.
Honolulu already suffers from a significant housing shortage, particularly for affordable units. A 2015 state study estimated nearly 65,000 homes are needed to meet demand between 2015 and 2025. The limited supply is driving up prices, making Honolulu one of the most expensive cities to buy a home in the nation.
National experts in housing policy say that imposing shared equity and buyback restrictions is an effective tool for preserving affordable housing when states and municipalities subsidize for-sale units.
“Only one workforce housing project has been developed in the district in recent years,” Wilson from Hawaiian Dredging wrote in public testimony. “Adding this now will stop future projects.”
But national experts in housing policy say that imposing shared equity and buyback restrictions is an effective tool for preserving affordable housing when states and municipalities subsidize for-sale units.
Downtown Capital privately financed 801 South Street, but benefited from about $5.9 million worth of fee waivers and taxpayer-funded infrastructure upgrades in Kakaako that totaled about $250 million districtwide.
A California-based consulting firm Strategic Economics estimated that a density bonus given to workforce housing projects like 801 South Street increases developers’ revenue by more than $110,000 per unit.
“There is a movement toward subsidy recapture or equity sharing, because housing is so expensive to produce,” said Brett Theodos, a senior research associate at the Urban Institute, a think tank in Washington, D.C. He’s spent 10 years researching shared equity in affordable housing and said it’s becoming a more common tool for policymakers, especially in high-cost markets.
“Especially if you’re at 140 percent of area median income, you’ve got a nice big pool of buyers,” said Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, a Washington, D.C.-based organization specializing in housing policy. “You should be able to find a way to share some appreciation so that it’s a community asset as well as an individual asset.”
The towers at 801 South Street were relatively quiet on a recent afternoon. A woman and her child carried groceries up to their unit, and another resident complained about elevators breaking down.
Unlike other recently built condo buildings in the neighborhood, there’s no movie theater, pool or fitness center. When the units in Tower A were offered for sale in 2013, prices ranged from $253,200 to $501,300, a steal in Kakaako.
Lock describes the residents as city and state office workers, and people who work at downtown offices and medical facilities.
Ryan Harada, who also works for Downtown Capital, said it’s frustrating to hear people call 801 South Street unaffordable when it’s a far cry from the luxury developments that have been built in Kakaako by other developers like the Howard Hughes Corp. The board of Tower A, Harada said, is made up of small business owners and executives of banks and insurance companies who tend to be in their 30s.
“These are not $2 million condos or anything, these are people who have saved up and been fortunate enough to maybe have help from parents to buy their first home,” Harada said.
In 801 South Street, the average age of a buyer is 42; 28 percent were previously renters; 42 percent were living in multigenerational homes; 27 percent previously owned a home and 3 percent were returning to Hawaii from the mainland, Lock and Harada said.
The process of getting into the development was competitive. Downtown Capital held a lottery because demand was so high.
“These are not $2 million condos or anything, these are people who have saved up and been fortunate enough to maybe have help from parents to buy their first home.” — Ryan Harada, Downtown Capital
But not everyone who got a winning lottery number ultimately got a unit. More than 100 of the workforce units went to people who didn’t join the lottery, like Amemiya, and qualified for the units after the original buyer dropped out.
That’s how Landon Nakata got his unit. Nakata, a project engineer at Nan Inc., a key contractor for Honolulu’s over-budget rail project, bought a two-bedroom income-qualified unit in July 2015 on the 40th floor for $490,600. He sold it just over a year later for $690,000, a nearly $200,000 gain, according to data from Locations. Nakata declined to comment on the resale.
It’s not clear how many units at 801 South Street Tower A actually went to qualified buyers (that is, people earning under 140 percent of AMI).
In testimony opposing the proposed rule changes, Downtown Capital said that 801 South Street Tower A provided 476 workforce units. That’s almost exactly 75 percent of the units in that high-rise, and matches the requirement that the development was required to aim for.
But HCDA data indicates just 397 units were sold to income-qualified buyers — 62 percent of the units.
Deepak Neupane, director of planning and development at HCDA, said that the list represents the number of units sold to qualified buyers within the first 60 days. After that, the developer was allowed to sell to anyone, although Lock said that moderate-income people still got a preference.
But while Neupane said he conducted random checks to verify the data, several names listed as owners of income-qualified units didn’t actually purchase the units, according to ownership data provided by Locations Hawaii.
For example, two units that are in the state’s records as having been sold to an income-qualified buyer were actually purchased by Kakaako Condo. A company called 801 South Street LLC bought a unit for $354,800 in June 2015. The unit was resold for $449,800 in January, a 25 percent increase.
Lock from Downtown Capital said that all of the units were sold at workforce prices — that is, below 140 percent of AMI — and that the developer complied with all of the requirements of the permit. But that didn’t mandate any tracking of the incomes of buyers after the first 60 days.
“We certainly could have reached the 75 percent goal,” Lock said.
After the 60-day window closed, Downtown Capital held another lottery, this time to sell units to friends and relatives of employees of companies that participated in the project. This is when Kurokawa, Caldwell’s chief of staff, bought a unit along with Kubota.
Kurokawa said he decided to buy into the project because it’s a good investment. Matsumoto had a similar reason, adding that he also bought a unit to support the project. Both said the units are being rented.
If the HCDA board approves the shared equity and buyback provisions, a lot of influential companies and people are going to be unhappy.
Developers like Stanford Carr Development and Avalon Development oppose the rules, and others include Kakaako landowners like Hawaii Gas and Waterhouse Inc. The rule changes wouldn’t affect the Howard Hughes development company and Kamehameha Schools Bishop Estate, which already have gotten master plans for developing land in Kakaako approved by the state. Smaller landowners like Servo are worried that their land would be less valuable if the rule changes get approved.
Major Hawaii banks have also spoken out against the rule changes. Bank of Hawaii noted that some of its employees had purchased units in 801 South Street and argued that changing the rules would make it hard to sell mortgages on the secondary market.
Major construction industry organizations have also come out against the changes. Opponents include Hawaii Construction Alliance and Pacific Resource Partnership, the politically active carpenters’ union that helped to sway the 2012 mayoral election.
Neupane from HCDA said that developers in other cities are able to comply with shared equity and buyback provisions, noting that Boston has a 99-year buyback and shared equity requirement for affordable housing.
“Hawaii and Boston are just very different markets,” Lock said. “It’s not as easy as Deepak makes it out to be.”
While Downtown Capitol has major concerns about the ability to build another project if the new rules are approved, opponents are also concerned about buyers who say that they wouldn’t have purchased a unit if the buyback and shared equity provisions had been in place.
Jeremy Shorenstein is one of them. An associate at Tradewind Capital, one of the investors in 801 South Street, Shorenstein qualified for one of the workforce units.
The 28-year-old moved to Hawaii from San Diego and had been paying $1,200 per month for a unit in a three-story walk-up in Kaimuki. Now he’s paying $2,350 to cover mortgage payments, utilities and maintenance fees, but says it’s worth it to be a homeowner in Hawaii.
If the shared equity and buyback restrictions were in place, Shorenstein said he wouldn’t have taken the plunge. While he likes living close to downtown, he probably would have bought into an older building a little farther away instead, he said.
“If I’m going to risk all the money that I have… if that equity growth is going to be stunted but I’m taking the same amount of risk if I bought a unit somewhere else, that doesn’t make sense to me,” Shorenstein said.
But Theodos from the Urban Institute said it’s OK if the provisions discourage some buyers, as long as there’s still enough demand for the units.
And Neupane said he’s never heard of developers in Kakaako having any problems selling “reserved housing” units, which currently require shared equity and give HCDA the chance to buy back the unit if it goes on sale during the first five years.
Strategic Economics analyzed the proposed amendments and concluded that projects would still be financially feasible under the new rules. Washington, D.C., New York City, Seattle and San Francisco also have similar long-term affordability requirements and HCDA’s “proposed resale and equity sharing provisions offer greater potential for buyers to build equity,” the study found.
The debate over whether to impose the buyback and shared equity restrictions comes down to whether or not more government intervention is needed to provide more affordable housing.
“If more inventory of all housing types is brought to the market, higher income households can move up the housing ladder, and the older homes they formerly occupied can become available to households with more modest incomes,” Downtown Capital’s media packet says. “Once the housing market achieves a healthy level of housing inventory, the relaxation of home prices and rents can occur as supply catches up to demand.”
Jesse Souki, executive director of HCDA, takes the opposite view.
“We cannot build our way out of the affordable housing crisis. We cannot just say the market will solve the crisis,” said Souki, citing a study that concluded making it easier to build housing in San Diego didn’t increase the number of affordable units. “There is a market failure and we are not going to get to 65,000 units by not creating policies that keep these units affordable for a period of time.”
Handelman from the National Housing Conference said ideally states and municipalities need to strike a balance between deregulation that encourages housing production and policies that preserve affordable units.
“We need to make it significantly easier to create new housing,” he said, noting that anti-development sentiment and density restrictions are both barriers to more housing. “I think there’s a good case to be made for sensibly easing restrictions on development.”
Still, Handelman said HCDA’s proposed rule changes sound reasonable.
Theodos said it’s not surprising that developers would disagree with HCDA board members because they have different incentives.
“Developers make money by building homes,” he said. “When units are made permanently affordable there’s no need to build another affordable unit, it’s already built.”
Still, the development industry warns that it’s a gamble to impose more restrictions that could discourage development when Hawaii’s affordable housing shortage is so dire.
“It’s a problem on the front end of the development in terms of getting your construction loan and your financing from a bank and it’s a problem on the back end of development because it ultimately hurts the end user,” Lock said. “In this case it’s the local buyer.”
The criticism doesn’t seem to faze Souki.
“You shouldn’t be able to make money off of these units,” Souki said. “Especially because the public, government, is contributing to make these units happen.”