Isle agency looks to sell low-income apartments

A state agency is renewing an effort to sell more than 1,000 low-income rental apartments with a goal of keeping the properties on three islands affordable under private ownership but with moderately higher rents for many future tenants.

The Hawaii Housing Finance and Development Corp. has been discussing the potential for selling its collection of six rental housing projects in recent months, and has tentatively selected a commercial real estate brokerage firm to seek interested buyers for the portfolio with 1,221 homes including some reserved for seniors.

The initiative follows the sale of three HHFDC affordable rental housing properties since 2011. Like before, there are concerns about rents becoming less affordable under private ownership.

HHFDC staff has encouraged its board to proceed with soliciting buyers on the rationale that a private owner can maintain the properties better and free HHFDC to concentrate more on its core mission: helping private developers finance construction of affordable housing.

Any sale would convey long-term leasehold interests in the real estate as opposed to fee-simple ownership.

One agency board director has questioned whether a sale makes financial sense for the state because HHFDC earns income from the properties. But other directors seem to agree more with the staff suggestion to sell.

“Continuing to hold, manage and operate this portfolio is an option,” Chris Woodard, the agency’s property management coordinator, told the board at an August meeting. “However, I would propose that it is not the best option available to us.”

Most state-owned affordable-housing projects are held by the Hawaii Public Housing Authority, but HHFDC owns six that were financed through programs the agency administers. All six are managed by private firms retained by HHFDC.

Of the six properties, three are in Kakaako: Kamakee Vista with 226 units, Kauhale Kakaako with 268 units and Pohulani Elderly with 263 units for seniors. A fourth on Oahu, Kekuilani Courts with 80 units, is in Kapolei. The two others are Honokowai Kauhale with 184 units on Maui and Lailani Apartments with 200 units on Hawaii island.

In June the agency’s board formed a subcommittee to begin exploring a possible group sale. Initial findings and recommendations were made in a July report. The report didn’t specifically recommend moving ahead with a sale offering, but did mention several factors supporting a sale.

These factors include reducing state debt by paying off bonds tied to the properties, dedicating more HHFDC staff to the agency’s core mission and improving the apartments.

Selling the portfolio would allow HHFDC to pay off $78 million in bonds, which would save $6.3 million in annual principal and interest payments. The agency also would avoid spending an estimated $13 million in basic improvements the six properties need now and more on future upkeep.

“The subcommittee believes that the private sector may realize operating efficiencies that are not achievable under state ownership,” the report said.

The report also noted that a leasehold sale could be made with restrictions that limit rents from rising more than 2 percent annually for all seniors now living at Pohulani, and having the same limit last five years for existing tenants at other properties.

For future tenants, HHFDC is proposing that a restriction limiting apartments to low-income households be raised along with corresponding affordable rents.

This change would make the majority of units available to households earning no more than 80 percent of the median income for the county where the property is located. And at four of the six projects, 40 percent of units would be reserved for households earning up to the median income.

Currently, most tenants in the six projects earn no more than 60 percent of the median income, which equates to $42,240 for a single person or $60,300 for a family of four on Oahu.

HHFDC said having at least 60 percent of units at all six properties reserved for households earning up to 80 percent of the median income would align the properties with a policy that was tied to the bonds when they were issued to develop the projects.

Woodard said the contemplated sale would result in existing tenants being protected while upgrading the homes in which future residents would pay more rent yet still remain at affordable levels.

“They’re going to see improved housing conditions,” he said. “It’s really a win-win.”

One other benefit from a sale would be proceeds for HHFDC, which the agency intends to put toward an existing program that provides rental assistance to tenants at the six properties.

Currently, HHFDC gives $1.4 million a year to tenants who then pay the money back to the agency as part of their rent.

Rental assistance payments can be up to $250 a month. Average monthly rents for existing tenants range from $942 to $1,268 at the six properties.

Helping tenants pay rent is an extra expense but doesn’t cause HHFDC to lose money on its affordable-housing portfolio, which led one agency board member to question the prudence of selling something that makes the state money.

“I’m just bewildered,” Audrey Abe said at the agency’s August meeting. “Why the leasehold sale?”

Abe noted that HHFDC expects to have about $2 million to $3 million in annual net operating income from Pohulani alone. “That’s a lot of money,” she said.

The projected income is reduced by about $600,000 in rental assistance and further by principal and interest payments on the bonds amounting to $6.3 million for all six properties. Still, HHFDC would rather sell the portfolio in part because it expects the properties will need much bigger investments in maintenance as they get older.

The six projects are between 20 and 28 years old, making them ripe for major system upgrades that HHFDC said it is not equipped to provide efficiently.

Woodard said the agency might have to hire additional staff to handle the improvements, and that the state’s procurement process is slow and will likely result in the cheapest upgrades, which won’t last as long.

“The procurement code is just unbearable,” he said, noting that one property in need of a new boiler for hot water has been waiting about a year while the procurement process unfolds.

If HHFDC proceeds with a sale, a buyer would be offered 75-year ground leases for each property. Other terms would be included in a request for proposals that the agency’s board would need to approve.

The agency tentatively retained brokerage firm CBRE in July to help formulate financial models and other preparation work for a $40,000 fee, though a contract has yet to be finalized. The company also would earn a 1 percent commission on a sale. A board decision on proceeding with a sale could happen in the coming months.