A state agency gave Kamehameha Schools approval Wednesday to convert part of the Pagoda Hotel in Pawaa into residential condominiums, partially satisfying a requirement to produce affordable housing in nearby Kakaako.

One of the Pagoda’s two buildings, a 162-unit low-rise called the Pagoda Terrace, will be modified into fee-simple condos priced from $118,000 to $263,950 and renamed Rycroft Terrace.

The Hawaii Community Development Authority, the agency governing development in Kakaako, granted a request by the trust to count the Pagoda units toward an affordable housing requirement under a master plan allowing development of up to 2,750 homes largely in seven high-rises on 29 acres in Kakaako.

Kamehameha Schools is required to make 20 percent of the homes, or 550 units, affordable for moderate-income residents.

Rules in effect when HCDA approved the trust’s master plan in 2009 require that all affordable units be in Kakaako, a 450-acre area running between Ala Moana and King, Piikoi and Punchbowl streets.

The approval Wednesday, which was made after two public hearings, allows the 162 Pagoda units to satisfy 100 units of the trust’s affordable housing requirement, in effect providing a bonus of 62 units.

Bill Meheula, an attorney representing Kamehameha Schools, said the arrangement will supply more units sooner and at lower prices in a part of town that is close to — though not in — Kakaako.

The Pagoda is about a half-mile from Kakaako’s mauka edge.

Anthony Ching, HCDA executive director, said the Pagoda condos will have lower prices and unit sizes similar to existing affordable housing projects in Kakaako.

"This is a rare homeownership opportunity for families of moderate means," he said.

The median price for all previously owned Oahu condos sold this year through July is $320,000. Ching said new condos in Kakaako typically cost $350,000, which puts the Pagoda units well below market and within reach of buyers earning 40 percent to 80 percent of Honolulu’s annual median income.

HCDA rules allow affordable units to be for residents earning up to 140 percent of the median income, which equates to $92,620 for a couple or $115,780 for a family of four. The Pagoda units will be offered first to buyers earning no more than 100 percent of the median income.

Most of them are of comparable size to other Kakaako condos such as the affordable housing project 1133 Waimanu and affordable units at Pacifica. But some Pagoda units are dramatically smaller and 40 units won’t come with parking.

Of the 162 Pagoda units, 66 studios have between 304 square feet and 321 square feet of living space. There are 76 one-bedroom units between 495 square feet and 616 square feet. Another 20 units have two bedrooms and 649 square feet to 737 square feet of living space.

No one testified against the plan Wednesday or at a June 13 public hearing. But there was some discussion by HCDA board members as to whether Kamehameha Schools should be allowed to shift any more affordable housing outside Kakaako under its master plan.

Board member Miles Kamimura, president of Pacific Property Group Inc., proposed that all future affordable housing under Kamehameha School’s master plan be new construction in Kakaako. Another member, Brian Lee, research and communications director for the International Brotherhood of Electrical Workers Local 1186 union, supported Kamimura’s proposal, but it was voted down 5-2.

Meheula said it would be unfair to preclude Kamehameha Schools from asking to alter its master plan again in terms of how it might supply affordable housing. He also noted that HCDA retains the power to approve or deny any future requests.

Louis Salaveria, HCDA board member and deputy director of the state Department of Budget and Finance, voiced some support to having future affordable units under the trust’s master plan be within Kakaako, but didn’t agree with Kamimura’s proposal to tie that to the Pagoda vote.

The HCDA board voted 6-1 to approve the Pagoda plan with Kamimura dissenting.

Kamehameha Schools has agreed to sell the land under the Pagoda Terrace to local developer Peter Savio, who will handle the condo conversion that includes making nearly $2 million in repairs and renovations.

Savio bought the hotel on leasehold land from the hotel’s original developer in December 2010. Savio would sell the units as condos and receive credits for affordable housing that he can transfer to Kamehameha Schools.

Such a credit transfer was among several unique provisions Kamehameha Schools negotiated to include in its master plan.

The Pagoda’s main 12-story building with 197 hotel rooms and famed floating restaurant, which Savio also bought, is not part of the condo conversion.

Savio said he expects condo sales could begin as early as October. "We anticipate a really, really strong response," he said. "For Oahu, this is unusual to get (condos priced) that low."

The HCDA amended the affordable housing rules for Kakaako last year to let developers propose affordable units outside Kakaako but within urban Honolulu. Those changes did not apply to Kamehameha Schools’ master plan because the master plan was approved before the changes.

Under the revised rules, HCDA may require additional affordable units if they are outside Kakaako.