Developer wants to transfer Big Isle project to local team

A planned affordable- housing project on Hawaii island that is more than four years behind schedule is close to breaking ground on its first homes, but the master developer of the envisioned community with 2,330 residences on state land wants out.

The local subsidiary of Ohio-based development firm Forest City Realty Trust informed the state this month that it wants to withdraw from the project, which has taken far longer and been more expensive than expected.

However, the company proposes that its local management team take over the project called Kamakana Villages at Keahuolu and see it to fruition.

“We’re not abandoning this project,” said Jon Wallenstrom, president of Forest City Hawaii. “We’re moving the project forward. We’re not dropping any balls.”

Wallenstrom said Forest City, which has been trying to reduce its debt load, doesn’t want debt from the project on its books. So the company is proposing that a team led by Wallenstrom take over independent of Forest City.

Forest City was selected for the estimated $734 million project in 2008 by the Hawaii Housing Finance and Development Corp., a state agency that facilitates affordable-housing development.

Kamakana was envisioned by HHFDC on 272 acres near Kailua-Kona to help meet an acute need for affordable housing in West Hawaii and reduce regional highway traffic that’s congested in part because many workers at nearby hotels commute from far away.

The master-planned community is programmed with two school sites, 28 acres of park space, 27 acres of open space and about 200,000 square feet of commercial buildings. Half the homes must be reserved at rental or sale prices affordable for low- to moderate-income residents.

The land was given to the state by major landowner Queen Liliuokalani Trust as part of an agreement to provide land for affordable housing, and HHFDC issued a request for proposals from private companies to develop the site.

After selecting Forest City, HHFDC gave the developer a $25 million interest-free loan for preliminary work such as permitting, infrastructure installation and land subdivision. Following the pre-development work, Forest City can acquire parcels to build on and sell as fee-simple homes or lease the land for rental residences. As the project’s master developer, Forest City also anticipated selling or leasing parcels to other developers interested in building pieces of the community.

Under the arrangement with HHFDC, Forest City was to split revenue from lot sales with the agency and is entitled to a management fee and a set return on money it invested.

Building the community, however, hasn’t proceeded according to plan.

An initial phase with 435 homes was projected to be delivered starting in 2012 and completed by 2014. But infrastructure work progressed slower than anticipated and at higher costs.

“We got hit with some costs that were unexpected,” Wallenstrom said. “It’s been very expensive.”

One obstacle was the U.S. Fish and Wildlife Service designating 18,000 acres on the Big Island, including the whole Kamakana site, as critical habitat for three plant species in 2012. This led to a recent agreement to establish two plant preserves within the planned community.

A more costly challenge has been connecting sewer, water and road infrastructure to the remote site, especially extending one mauka-makai road, Manawalea Street, through the site. Hawaii County insisted that the estimated $6.9 million extension start by the end of this year over objections of Forest City, which completed infrastructure work for the first phase in 2013.

In March HHFDC approved adding $5 million to Forest City’s loan for Manawalea work.

Previously, 1.7-mile Ane Keohokalole Highway had been built using $35 million in federal funds to access the Kamakana site and serve other planned projects in the region.

Under Forest City’s development agreement with HHFDC, either party can terminate the agreement if Forest City hadn’t acquired land for the first phase of housing by March 31, which marked seven years after the company and the agency signed the agreement in 2009.

If the agreement was terminated, Forest City would lose out on $3.7 million of management fees that it earned through 2015 but can’t collect until the project generates income.

Wallenstrom said Forest City doesn’t want to terminate the agreement, but would like to renegotiate some terms because of the unexpected costs and the desire of Forest City to get the project’s debt off its books.

Meanwhile, Forest City has arranged for New Jersey-based affordable-housing developer Michaels Development Co. to build up to five affordable rental projects at Kamakana. Michaels has obtained about $19 million in financing through HHFDC to help develop the first two projects — 85 homes for families and 85 homes for seniors — on about 6 acres at a cost of about $52 million.

Apartments with one and two bedrooms in the Michaels projects would rent for $326 to $819 a month and be reserved for households earning 30 to 60 percent of Hawaii County’s median income. The income limit equates to $14,340 for a single person and $20,460 for a family of four at the 30 percent level and twice as much at the 60 percent level.

In April, Michaels informed HHFDC that its two projects were each over budget by $1 million and that the company would be seeking additional financing. Also, Michaels was supposed to pay Forest City a $1.9 million infrastructure fee, of which $1 million would pass to HHFDC.

Forest City proposed cutting the infrastructure fee to $1 million and splitting that evenly with HHFDC.

Earlier this month HHFDC’s board approved of the new split on the infrastructure fee and deferring the $900,000 balance to three subsequent Michaels projects.

The development deal with Michaels is expected to close in June, allowing construction to begin by the end of this year and be finished by the end of next year.

HHFDC has yet to decide on Forest City’s proposal to hand off its role as master developer of Kamakana to its local management team.