The city plans to sell its portfolio of affordable housing. A similar effort is being explored by the state’s largest owner, the Hawaii Public Housing Authority. Now a third local government entity is preparing to exit the arena.

Kama’aina Hale, a 128-unit affordable rental complex on Hawaii island, is about to be offered for sale by the Hawaii Housing Finance and Development Corp.

The project is envisioned to be the first of the agency’s nine properties with 1,437 units offered to private entities.

Agency officials say privatizing public housing will lead to better-maintained properties serving more residents while eliminating expenses for the state during a tough budget time.

"Our legislative mandate and mission is to increase the supply of work-force and affordable housing, and public-private partnerships are a more sustainable business model for the HHFDC than the state maintaining ownership of a property such as Kama’aina Hale," Karen Seddon, agency executive director, said.

But there are concerns that affordable rents might disappear under private ownership.

"Hawaii can’t afford to lose any more affordability," said Drew Astolfi, director for tenants’ rights group Faith Action for Community Equity. "We just don’t have that much."

Affordable-housing advocates including Astolfi are closely following state and city plans to privatize their large inventories of apartments rented to low- and moderate-income residents.

Astolfi is supportive of the idea, though he said properties need to be conveyed with protections that maintain affordability.

"In general this is a positive trend, but great care has to be taken to make sure we don’t lose our scarce affordable-housing resources," he said.

The high-profile example being watched is the conversion of the state’s largest public housing project — Kuhio Park Terrace and Kuhio Homes in Kalihi — to a privately owned and managed mixed-income complex.

The Housing Authority sold the 748-unit project to Michaels Development Co. and Vitus Group earlier this year in a deal calling for the developers to renovate the 46-year-old property and to add 276 new market-level and affordable rentals over 10 years at an estimated cost of $316 million.

Under the arrangement, the state retains ownership of the land under the buildings, and the number of affordable units may not decrease. An initial phase of work began in May.

The Housing Authority manages 6,200 federally and state-funded public housing apartments. The authority is in the midst of analyzing its portfolio for other privatization opportunities.

The city has 12 affordable-housing projects with 1,257 units and intends to sell the whole lot.

City officials say $3 million a year is lost managing the rentals and that a private owner could more efficiently take care of maintenance while keeping rents affordable under restrictions conditioning sales.

Astolfi, whose group was involved with troubled state maintenance at Kalihi Valley Homes, said bureaucracy, including procurement rules, makes the government a poor operator of affordable housing, and that the private sector can deliver a better product for less.

Astolfi also said nonprofits specializing in affordable housing are best suited to take over public housing, though there also are some good for-profit companies that have served the public purpose.

It’s clear that HHFDC has not been a good landlord with regard to Kama’aina Hale. The Kailua-Kona property is more than half empty because rehabilitation work planned in 2003 that included removing floor and ceiling coverings containing asbestos was completed on only 60 of the project’s 128 units at a cost of $600,000.

Presently, 68 units are empty. To rehabilitate these for occupancy would cost an estimated $1.7 million, according to the agency.

HHFDC has raised monthly rent from a below-market rate of $340 in 2003 to between $885 and $1,178 today for one and two-bedroom units. Still, project expenses exceed revenues by about $290,000 a year, up from about $50,000 in 2003.

One big expense has been a lease for the land owned by Kamehameha Schools. Annual lease payments that had been $57,600 jumped to $350,000 in 2006 and will reach $420,000 in five years, at which time new rates would be negotiated.

Because the ground lease expires in about 20 years, agency officials say they expect any interested buyers to fix up vacant units and maximize occupancy as opposed to redeveloping the property or converting units to condominiums for sale.

But there is no requirement to keep rents affordable or rent only to residents with low or moderate incomes. HHFDC will give some weight to that issue by considering affordability as part of its criteria for selecting a buyer. Still, the potential for a new owner to increase rents to return a profit is a concern.

HHFDC made a presentation about the sale effort to Kama’aina Hale residents last week. About 25 residents attended and raised some concerns about new owners honoring existing agreements, according to agency spokesman Kent Miyasaki. Residents did not respond to a request for comment left with a property manager.

The agency plans to solicit buyers for Kama’aina Hale soon through a request for proposals. There is no timetable for other sales.

Two other HHFDC properties have significant vacancy rates: Honokowai Kauhale, a 184-unit project on Maui with 69 vacant units, and Lailani, a 200-unit project on Hawaii island with 22 vacant units.

The agency, which contracts private property managers to operate its projects, has been criticized for lax oversight. Astolfi said Honokowai Kauhale is a "wreck."

HHFDC Director Seddon said finding a private entity to assume ownership and management responsibilities will allow the agency to concentrate on its core mission, helping private developers finance and build affordable housing with assistance that includes loans, tax credits and state land.

The agency does not develop affordable housing, but acquired ownership of nine properties once owned by predecessor agencies that had focuses redefined through a series of government agency restructurings in prior administrations.

Most state public housing is owned by the Housing Authority, but HHFDC was given nine properties because those projects received financing through programs administered by HHFDC.

Kama’aina Hale was built in 1976 as a condo called Kona Gardens by private developer HAO Corp., led by Frank Hata, Richard Arakaki and Okada Trucking Co. A depressed real estate market hurt the project, and it was converted to rentals and sold to the state in 1978 for $3.7 million.

SELLING AFFORDABLE UNITS