Developer Avalon Group plans to convert more than 200 rental units in Hawaii Kai into condominiums, surprising tenants and underscoring the challenges of developing market-rate apartment complexes in Hawaii.

7000 Hawaii Kai opened to fanfare just two years ago. Honolulu Mayor Kirk Caldwell and Councilman Trevor Ozawa attended the grand opening in June 2016. Christine Camp, the chief executive officer of Avalon Group, was named Developer of the Year in 2016 by the NAIOP Commercial Real Estate Development Association Hawaii Chapter.

The 269-unit complex currently includes 54 units of affordable rental housing with rents ranging from $1,443 to $2,478, Camp says. The rest are market-rate, with rents of $2,500 to $3,800. When it opened, KHON reported the development was the first privately owned rental complex to be built on Oahu in more than a decade.

But Camp told Civil Beat on Friday that the market-rate rentals are not fully subsidizing the low-income rentals.

More than 200 units in 7000 Hawaii Kai Drive will be converted from rentals to for-sale units. Anita Hofschneider/Civil Beat/2018

“There’s refinancing coming up and interest rates have gone up significantly,” she said, adding only the market-rate units will be converted and 100 are already empty. Tenants will be allowed to stay for the remainder of their leases, she said, and will also have the option to buy their units.

“The last thing we want to do is tell them, ‘Hey, you’re evicted,'” Camp said.

That still leaves 115 occupied units and some unhappy residents. The news was frustrating to resident Michelle Ichikawa, an executive manager who said she and many of her neighbors are upset.

Ichikawa moved into the complex last November so that her 15-year-old son Austin could attend a better school. The unit isn’t cheap — she spends at least $4,000 per month on rent, three parking spaces and a storage unit — but she said it’s worth it in part because it’s pet-friendly.

It’s tough to find landlords in Hawaii who allow pets and she doesn’t want to make her son switch high schools again. If she had known her unit would be sold, she said she would not have moved there.

“Trying to find a place in the school (enrollment area) that’s pet-friendly — they screwed us,” Ichikawa said. “There’s nothing.”

What Will Happen To The Tenants?

Camp said that after tenants’ leases expire, they can switch to month-to-month leases. But they’ll be subject to 45-day notices to vacate if their units are sold, unless the unit is purchased by an investor who wants to keep them as renters.

Camp says Avalon will maintain 56 rental units, 54 of which are set aside for people with lower incomes.

Michelle Ichikawa faces the challenge of finding another rental in the area that’s pet-friendly. Anita Hofschneider/Civil Beat

Condo sale prices are still not set, but may range from $479,000 for a two-bedroom unit to $750,000 for a three- or four-bedroom unit, Camp said. Renters who buy their units would get a credit for 15 percent of the total rent they’ve paid.

In accordance with state law, the development will target 50 percent of units to owner-occupants for the first 30 days of sales. After that, units can be sold to investors who may be interested in continuing to rent to existing tenants. In the meantime, the company will continue to rent out units to new tenants.

Making Rentals Work In Honolulu

The condo conversion is indicative of the challenges some developers have making market-rate apartments work financially in Hawaii. Harry Saunders, president of the developer Castle & Cooke, says that he has never undertaken a market-rate rental project because it just doesn’t pencil out.

“It’s more difficult to do rentals than to do for-sale,” Saunders said, explaining that with for-sale units you make your money back more quickly and you don’t have to pay for maintenance costs. “It’s less risky to build and sell.”

High construction costs, lengthy permitting processes and limited land drive up the costs of developments and make for-sale projects safer. That leaves a huge unmet demand for rentals, largely for units affordable to low-income people.

Gov. David Ige signed a bill Friday that provides hundreds of millions of dollars in subsidies for rentals and a tax break for apartments in which 20 percent are set aside for low-income people. Critics have questioned a tax break for projects that are largely market-rate, but proponents say more supply will help ease Hawaii’s housing prices.

Saunders supports the measure but says there’s still a long way to go – the city needs to improve sewer capacity and upgrade other infrastructure if it wants to make a serious dent in the housing demand, he says.

In the meantime, many renters at 7000 Hawaii Kai Drive are trying to figure out their next steps.

“I really love living here,” said resident Gregg Gruwell. “There are so few rentals available on the island and this is like an oasis.”

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