Key members of the Honolulu City Council say the intricate and ambitious nature of a private partnership’s plan to buy 12 of the city’s rental housing complexes is likely the reason the $142 million deal failed Thursday.
Council Budget Chairwoman Ann Kobayashi said she wasn’t surprised. "There have been critics of this who have always said that the developer that won the bid had offered too much money, that it would be too difficult to do," she said.
Councilman Ron Menor, chairman of the Council Executive Matters and Legal Affairs Committee, agreed: "Ultimately, what doomed the project was that it appears that the proposed sale was very complex. It had a lot of different parts to it, and at the end of the day, they were unable to obtain the necessary financing to fund all the components of this complex transaction."
Mayor Kirk Caldwell’s administration was informed by a representative of Honolulu Affordable Housing Partners LLC on Thursday that the group would not be able to meet the city’s demand for $35 million of nonrefundable cash by a scheduled March 31 deadline. The declaration, in effect, led to termination of what Honolulu Managing Director Ember Shinn described one of the largest and most complex transactions ever attempted at Honolulu Hale.
On Wednesday, even before the deal’s collapse was announced, Council Chairman Ernie Martin said, "There are still some lingering concerns amongst the members that the buyer had the wherewithal from the very beginning, and nothing’s occurred since then that has changed that."
Shinn, however, said city officials received no indication that the partners were experiencing any financial difficulties until Martin introduced resolutions in December urging the administration to delay or cancel the project in response to objections to the method city officials used to select the programs and agencies that would benefit from the sale’s proceeds.
HAHP officials responded by declaring that the introduction of the resolutions constituted a contractual breach because it eroded investor confidence in the project’s viability. They then refused to reopen negotiations until city officials agreed to consider seller financing.
"The only thing I know is that we were percolating along without thinking that there was anything that was amiss until Chair Martin’s resolutions hit, and that’s when everything started to fall apart," Shinn said. "Whether or not something was going on before then, who knows?"
Martin reiterated earlier this week that the resolutions were introduced because he and other Council members were looking out for the best interest of their constituents. "My two resolutions had nothing to do with the Council’s support for affordable housing."
The deal’s cancellation is causing a $20 million shortfall in the city’s current $2 billion operating budget. It also wipes out $7 million for Caldwell’s Housing First initiative.
In addition, the cancellation means the city will still be paying $8 million annually in maintenance costs and the repayment of bonds used to finance either the purchase or construction of the complexes over the years.
Exactly how much more, if anything, the deal’s collapse will cost the city is unclear and likely will stay that way until negotiations, or litigation, resolve the financial disputes.
The city has agreed to return a $5 million deposit made by the partners, Shinn said.
HAHP, in its letter to the city Thursday, also pointed out that it has invested about $4 million in work to date. The group "remains open to discussions with the City and County about possible arrangements for an orderly disposition of these matters in connection with the termination of the transaction," said William Rice, representative for HAHP managing partner Highland Property Development.
Rice declined to comment to the Honolulu Star-Advertiser on the failed deal Friday, stating in an email, "We are still trying to resolve contractual issues with the city."
Kobayashi said she also wants to know who will pay for the work done by CBRE Inc., the real estate consultant hired to help establish the criteria used to selected a purchaser.
Rice’s termination letter said the partners determined there is "no reasonable possibility" to come up with $35 million in nonrefundable cash by March 31.
Shinn said the amount was based on how much the city would have been obligated to pay bondholders within 90 days of the transfer of the properties to the partners.
"There was just no way to pay for that out of our budget," she said. "We were stuck."
As for what happens next, the administration earlier this week proposed Bill 6, giving city officials the authority to restart the "request for proposals" process to sell off the long-term leases for the 12 complexes. The measure will be up for the first of three required full Council approvals Wednesday.
