State selling 1,221 affordable rentals

The state has been Carol Cannon’s landlord for 23 years. But in April, that’s expected to change as part of a Thursday decision to sell 1,221 state-owned affordable rentals to a private partnership for $170 million.

Cannon, 63, lives in the Kauhale Kakaako high-rise and worries about what is to come as local developer Stanford Carr Development and Los Angeles-based Standard Property Co. step in for the state.

“I don’t know how much longer I can afford to live here,” she said.

Her friend and neighbor, Connie Joseph, 68, fears the worst: “We’ll all be homeless.”

The seller of Kauhale Kakaako and five other apartment complexes that mostly serve low-income residents is the Hawaii Housing Finance and Development Corp., which said the deal is in the state’s best interest.

The state agency said it’s protecting existing tenants by limiting annual rent increases for the next 35 years and increasing rental subsidies many of them receive.

At the same time, the new owner has committed to renovate the properties at a cost of $53.9 million, or $44,000 per unit on average, within three years.

HHFDC, which primarily helps private developers finance affordable housing, also said it could use $81 million in net proceeds from the sale to increase the affordable-housing supply while saving $6.3 million a year it pays on debt issued to build the six properties. The agency also said maintaining the apartments was difficult because of state procurement rules that are cumbersome and produce low-grade results.

Still, the transaction over the long term will result in a shift from mostly low-income tenants to moderate-income tenants in the apartments being sold.

Besides Kauhale Kakaako, the sale involves Kamakee Vista and Pohulani Elderly, also in Kakaako; Kekuilani Courts in Kapolei; Lailani Apartments in Kona; and Honokowai Kauhale in Lahaina.

Monthly rent ranges from $942 to $1,268 for studios up to three-bedroom units.

After the sale, annual rent increases for current tenants will be capped at 2 percent for the first five years and then at 5 percent for another 30 years, except at Pohulani where the 2 percent cap would continue for current tenants as long as they stay.

HHFDC has been contemplating selling its portfolio for about five years, and had sold three other affordable rental properties since 2011.

The new sale is a leasehold transaction whereby the state is giving the buyer land leases for $1 a year. After the leases expire, building ownership reverts to the state except for Kamakee Vista, where the land is owned by a foundation and leased for 39 more years. For the five other properties, the buyer has 75-year leases.

The agency solicited bids in July, and 19 prospective buyers responded. Later, six top bidders were invited to submit best-and-final offers. Then after another adjustment, agency staff and Executive Director Craig Hirai deemed the Carr-Standard Property bid the best.

HHFDC’s board unanimously approved the deal Thursday.

Carr, a local housing developer, and rental housing investment firm Standard Property are expected to sign a written agreement in January and complete their purchase in mid-April. Current property manager Hawaii Affordable Properties Inc. will stay on the job.

As part of the deal, HHFDC will continue to provide — and increase — rent assistance for many needy tenants. About 580 tenants receive assistance up to $250 a month.

At Pohulani, which serves seniors, maximum assistance will rise from $250 to $300 and continue for 20 years. At Kekuilani Courts, where HHFDC doesn’t provide assistance, up to $500 a month will be available for five years starting in 2023 when an initial term of rental rate limits expires. At the other four properties, maximum assistance will increase from $175 to $225 for five years and then to $500 for another five years.

HHFDC estimates this assistance will cost $23.3 million, and will come from gross sale proceeds, leaving an $81 million gain for the agency after it accounts for other expenses and pays off bonds it used to build the six properties, which are 26 years old on average.

The 35-year rent hike limit and additional rent assistance were the result of HHFDC decisions after a September Star-Advertiser story that aired criticisms about the sale plan’s impact on tenants.

If current tenants move out, the new landlord can raise rents to different maximums tied to federal standards that would keep all the units affordable, but for tenants with more moderate incomes.

Currently most tenants in the six properties earn no more than 60 percent of Honolulu’s median income, equating to $43,980 for a single person or $62,760 for a family of four. Rent for new tenants would be tied to incomes up to 80 percent of the median for all units at Pohulani and Kekuilani, and to 60 percent for units at other properties. Maximum rents for remaining units would be affordable to residents earning up to the median income.

At the 80 percent of median income level, maximum rent this year is $1,466 for a studio and $1,884 for a two-bedroom unit. At the median income, those figures are $1,832 and $2,355 respectively.

Even with all the limits, some tenants fear they may not be able to afford future rent.

“What happens to us on Social Security and one income?” asked Kauhale Kakaako resident Pat Davis. “We’re all going to join the Kakaako gang and build tents.”

A 2 percent annual increase on $942 takes monthly rent to $1,040 after five years. A 5 percent annual increase after that would put rent at $1,327 in the 10th year.

“I am concerned about it,” Davis said. “We don’t know if we’re going to still stay here.”