Developer backs out of Big Isle’s Kamakana Villages

An Ohio company that won a state award to develop a $734 million Hawaii island affordable-housing project has pulled out of the deal, leaving the mostly unbuilt community’s future in limbo after more than $20 million invested by the state.

However, a local developer is working to take over the 2,330-home project called Kamakana Villages at Keahuolu.

Kamakana’s master developer, an affiliate of Ohio-based Forest City Realty Trust Inc., negotiated its exit with the Hawaii Housing Finance and Development Corp., a state agency that helps finance affordable housing and selected Forest City for Kamakana in 2008.

The agency’s board approved the withdrawal last month with a related provision that a separate company established by a Hawaii team of Forest City officials will finish an $8.4 million road extension.

Meanwhile, local developer Stanford Carr is trying to negotiate new terms with HHFDC to assume the project, which covers 272 acres of state land above Kailua-Kona and also is supposed to include two schools and about 200,000 square feet of commercial space.

“We believe in the need of developing workforce rentals and entry-level primary housing,” Carr said.

Carr added that he has been building homes on Hawaii island for 19 years and has 25 years of experience with master-planned community projects including the state-initiated Villages of Kapolei on Oahu and Kehalani on Maui. “It’s right up our alley,” he said.

Forest City also was an experienced development firm, but last year it became a real estate investment trust. The change, HHFDC said, meant the company had to comply with IRS rules that limit development activities of REITs, which receive tax advantages.

In June 2016 the president of Forest City’s Hawaii affiliate, Jon Wallenstrom, said the company wasn’t abandoning Kamakana because he would head up a new company, Alakai Development Kona LLC, to continue as master developer. But now Alakai will only assume Forest City’s development agreement to finish a road serving an initial phase of homes. Alakai’s development agreement automatically terminates within three years.

Cayenne Pe‘a, an Alakai principal and Forest City’s former finance director in Hawaii, said in a statement last week that Forest City and Alakai did a lot of work on Kamakana that included getting land rezoned, subdivided and prepared for home construction. Yet Alakai is reassessing whether it is the right company to see the project through to its full potential, she said.

Building Kamakana was devised as a public-private project to deliver badly needed affordable homes and relieve regional highway congestion that exists in part because many workers at nearby hotels commute from far away.

HHFDC developed conceptual plans in 2007, then issued a request for proposals and selected Forest City in 2008 as master developer for the project, where half the homes need to be reserved at rental or sale prices affordable for low- to moderate-income residents.

Under the arrangement, the agency fronted money for infrastructure, would pay the developer a fee and would share in profits from home sales.

As master developer, Forest City would do planning work, obtain permits and install road, sewer, water and power infrastructure before developing homes. The company also could sell or lease parcels to other developers.

Initial home deliveries were expected as early as 2012, but difficulties and delays arose.

Generally, infrastructure work at the remote site predominantly covered by old lava flows was more expensive than anticipated. Another obstacle was the U.S. Fish and Wildlife Service designating the whole Kamakana site as critical habitat for three plant species in 2012, which was resolved in 2015 with two plant preserve areas being designated.

To finance infrastructure work, Forest City obtained a $25 million interest-free loan from HHFDC. Infrastructure for an initial phase was finished in 2013, but Hawaii County insisted that another road be built with the first phase. That road, Manawalea Street, is being built using the last $3.4 million of the initial loan plus an additional $5 million from HHFDC.

Last year, construction on the first homes — 170 rentals for families and seniors with low incomes — was started last year by another developer, Michaels Development Co. The homes, with monthly rents from $384 to $921, represent two of five rental complexes Forest City arranged for Michaels to develop.

Because Forest City has now bowed out, HHFDC is keeping $4.5 million in fees the company earned. The agency said the state hasn’t lost out, because the value of land improvements and other things produced by Forest City, such as planning and regulatory work, is more than what the state invested.

Transferring the project to Carr will be subject to negotiating terms, including a change in the profit-sharing arrangement sought by Carr, and approval by HHFDC’s board.