When the state offered 40 acres in Kapolei for private development of affordable housing several years ago, the plan was to produce 751 homes for sale or rent to occupants who met tight income restrictions.

But the result has fallen short of those ambitions.

The number of homes being built was reduced by more than 100 while many of the planned rentals were converted to for-sale housing and the income restrictions were lifted on about 20 percent of the homes.

The state’s Hawaii Housing Finance and Development Corp. and its private development partner on the project, Castle & Cooke Homes, say the shortcomings were driven largely by the economic downturn, and nonetheless regard the altered outcome a success.

“For a long-term community being built like this, I think we’ve done very well keeping the vision to what it was,” said Karen Seddon, executive director of the Housing Finance agency.

Castle & Cooke received the land from the state free of charge and is selling the roughly 500 townhomes and single-family homes it is building on a fee-simple basis. Castle & Cooke said it had to cut back on the original plans because demand from affordable buyers had fallen while development expenses rose. The company declined to say how much profit it expects from the project.

Castle & Cooke, one of the state’s biggest housing developers, produced the master-planned community of Mililani. The company also built much of Royal Kunia, plans a 5,000-home community called Koa Ridge in Central Oahu and recently sold the island of Lanai for hundreds of millions of dollars.

As completion of Mililani neared, the developer won two competitive bids in 2005 and 2007 to produce 739 homes on six state-owned parcels in Kapolei. The parcels are part of the Villages of Kapolei, a master-planned community of affordable housing the state began in the late 1980s.

Housing Finance, which facilitates affordable housing development, selected Castle & Cooke through a competitive bid process based on providing the maximum number of affordable units at the lowest expense to the state, which provided the land and some infrastructure for the project.

But Castle & Cooke has since sought and received several approvals from the agency to alter its original plan, including changes to the type and number of homes, prices and buyer qualifications. The timetable for completing construction also has grown by roughly three years.

Initially the timing appeared right for affordable-housing production. Oahu home prices were soaring out of reach for many moderate-income residents in the mid-2000s just as the Castle & Cooke venture was launching.

In 2005 when the first proposal was accepted for 478 homes, the median price for previously owned single-family homes on Oahu was $590,000.

When the first phase of the Castle & Cooke project — 118 townhomes called Nohona in Village 5 — hit the market in 2007 targeting moderate-income buyers with prices from $320,000 to $390,000, Oahu’s median home price was peaking at $643,500. The median condo price peaked at $325,000 the same year.

Demand was so strong for Nohona units that more than 125 people lined up outside the sales office the first day it opened, even though the opportunity to buy a unit was decided by lottery, giving the same chance to people who didn’t line up.

Castle & Cooke expected to finish Nohona by mid-2008, but effects from a real estate market slowdown and an unfolding recession and financial market crash sapped the ability for moderate-income residents to buy Nohona units.

The developer responded by creating incentives that included suspending maintenance fees for a year, discounting the mortgage interest rate, not charging points or closing costs on loans and providing up to $3,000 in design option credits.

Because of sluggish sales, Castle & Cooke also obtained state approval in April 2008 to eliminate a buyer income limit for 20 percent of Nohona’s units, a change that was expanded to 50 percent in December 2008.

Ultimately the developer sold 25 percent, or about 30 Nohona units, to buyers regardless of their income. Those market buyers were not eligible for incentives and typically paid $10,000 more. The market buyers also were not subject to two restrictions applying to affordable buyers: splitting any gain on a sale with the state and giving the state the first right to buy the unit if it is sold within 10 years. Market buyers are required to live in the units like affordable buyers, but only for one year.

Castle & Cooke made even bigger changes to subsequent pieces of its plan, which overall cut the number of homes to 645 from 751.

One parcel in Village 6 was planned for 102 units for rent at rates affordable to tenants earning no more than Oahu’s median income. Another 114 units were supposed to be for sale at prices affordable to buyers earning no more than 120 percent of the median income. But the developer got approval in December 2008 to instead build 140 units for sale, with half the units for buyers earning up to 140 percent of the median income and half for buyers regardless of their income.

On a parcel in Village 4, Castle & Cooke was allowed to eliminate 63 low-income rentals — 56 units at rates affordable to tenants earning up to 60 percent of the median income, and seven units at rates affordable to tenants earning up to 30 percent of the median income — and replace them with 35 homes for sale to buyers earning up to 140 percent of the median income.

Bruce Barrett, a Castle & Cooke executive vice president, said several factors prompted the changes.

For the low-income rentals in Village 4, he said critical tax credits and other financing became uncertain and could have taken many years to obtain, so instead of delaying production the state agreed to allow moderate-price homes for sale that are easier to finance.

For the moderate-income rentals in Village 6, Castle & Cooke told Housing Finance that the four-story buildings the company designed were too expensive. The developer also said the weak market ruined its plan to subsidize the rentals with profits from other phases of the broader project.

“That just became difficult for us to make work from a financial point of view,” Barrett said.

The sales incentives Castle & Cooke offered and the drawn-out development timetable elevated costs to the point where relief was sought from Housing Finance, the developer said.

Castle & Cooke did not disclose its income and expenses for the project to state officials, but Seddon of Housing Finance said all of the change requests were reasonable.

Seddon said the developer’s original proposal was ambitious and would have been tough to execute in a good economy, so it behooved Housing Finance to accommodate Castle & Cooke’s requests.

“They’ve been a very good private partner with us,” she said. “Developers won’t be partners with us if they don’t make some money. We don’t want them to go broke.”

Seddon added that there was the possibility that Castle & Cooke would have abandoned the project at a difficult time. “I have to give Castle & Cooke a lot of credit because they just didn’t pull the plug,” she said.

Seddon gave Castle & Cooke particular credit for delivering two low-income rentals: the 72-unit Villas at A‘eloa in Village 2 in 2009, and the 72-unit Villas at Malu‘ohai in Village 6 last year.

Those two projects were developed with the nonprofit Pacific Housing Assistance Corp. using substantial government subsidies, which for A‘eloa included $2 million in state and federal tax credits and a $2.8 million loan from the city’s Hono­lulu HOME Program.

Chuck Wathen, an affordable-housing advocate who served as a board director for Housing Finance when Castle & Cooke was competing for the project, said he considers the end result a partial success and agreed that the changes were understandable.

Wathen said building rental homes in Hawaii for tenants earning up to the median income is a money-losing proposition even with the state providing the land. Affordable for-sale homes with the shared-appreciation and buy-back provisions are also difficult because demand remains soft and property values are still down from several years ago, he said.

“You got to make a profit at one end to subsidize the other end,” Wathen said. “It’s a balancing act.”

Castle & Cooke said it’s still hard to attract qualified affordable buyers even as the economy and real estate market are improving.

In April the developer sought approval to make an additional 28 units at the 140-unit moderate-income condo in Village 6 available to buyers regardless of income. Previously, 68 units were sold to market buyers and 22 units were sold to affordable buyers despite giving affordable buyers priority. Castle & Cooke said no sales to affordable buyers have occurred since September.

Seddon said Housing Finance by mandate allows a minimum 50 percent affordable housing at its projects. The Castle & Cooke project, if completed without more changes, would comprise 77 percent affordable units.

Castle & Cooke has completed 465 of 645 homes to date. Barrett expects that the balance will be completed by the end of next year.