Teachers and police officers are vital representatives of Hono­lulu’s workforce. But can they afford to become homeowners in a planned second phase of Kaka­ako’s first "workforce housing" condominium tower project?

A contentious debate has arisen over the issue of affordability at the project called 801 South St. envisioned by local affordable housing developer Marshall Hung, who heads Downtown Capital LLC.

Critics have referred to 801 South’s second phase, known as Tower B, as a "workforce housing fraud."

With preliminary prices topping out at $692,300 for the biggest unit on the highest floor of the proposed 46-story building, it’s easy to see why.

But really, how affordable or unaffordable is Tower B, where prices start at $329,400 for a one-bedroom unit on the bottom floor?

Downtown Capital and the state agency considering the plans say Tower B complies with agency rules under which the tower is being proposed.

801 South, which comprises a 635-unit first tower and a 410-unit second tower, is the first project proposed under "workforce housing" rules adopted by the Hawaii Community Development Authority two years ago.

Tower A was approved last December, and HCDA’s board is scheduled to decide on Tower B today.

The agency’s workforce housing rules allow twice as much density for tower projects that receive no government financial assistance and make at least 75 percent of units affordable to households earning between 100 percent and 140 percent of Hono­lulu’s annual median income.

The income ceiling adjusts by household size and equates to $84,574 for a single person, $96,656 for a couple or $120,820 for a family of four.

Under the workforce housing rules, limits are placed on condo prices. Preference is given to buyers with qualifying incomes. It’s possible for people with higher incomes to buy workforce units if there aren’t enough income-restricted buyers.

At 801 South’s first tower, Tower A, only about 65 percent of units — roughly 400 out of 635 — were sold to buyers under the income ceiling, according to Ryan Harada, a Downtown Capital principal.

Tower A prices ranged from about $250,000 to $500,000 for studios, one-bedroom and two-bedroom units.

Tower B units are bigger, with one to three bedrooms, and are tentatively priced from $329,400 to $692,300. The higher prices have led to criticism that many or most units won’t be bought by residents in the target income range.

A critical factor in affordability is mortgage interest rates. HCDA rules use a six-month average from local lenders minus a half-percentage point to calculate how high workforce condo unit prices can be.

A lower interest rate raises the maximum price as well as what a buyer can afford.

For instance, HCDA calculates a two-bedroom workforce condo price at $727,262 at a 3 percent interest rate or $485,101 at 6.5 percent.

When HCDA accepted the development permit application for Tower B in August, the developer was able to use a 2.9 percent recent average interest rate to calculate the maximum price, which came out to $715,213 for a two-bedroom unit after accounting for factors including estimated maintenance fees, property taxes and mortgage insurance.

Two-bedroom units are predominant in Tower B, representing about 275 of the 410 units, and have preliminary prices from $448,400 to $555,800. The average is $506,000.

That’s far below the maximum, and the developer has touted in ads that Tower B will be for the working class that includes teachers and police officers.

"Our mission is to build condominium homes and price them so regular people can afford them," the developer said in one recent ad.

But project critics, dominantly residents of the neighboring Royal Capitol Plaza condo tower who would have views blocked severely by 801 South, contend that even two-bedroom-unit prices in Tower B are out of reach for many buyers in the target income range.

"There is no way a teacher is going to afford Tower B," Royal Capitol resident Ariel Salinas said in an email. "The entire project is a ‘workforce housing’ fraud."

Salinas also accuses Downtown Capital of underestimating other affordability factors such as maintenance fees, property taxes and mortgage insurance, though HCDA said updated good-faith estimates are required prior to signing a development agreement if the project is approved.

Jesse Ryan Allen, a spokesman for opposition group Kakaako Cares, contends that using "real world math" including loans with interest rates that lenders are willing to provide shows that few families meeting HCDA income limits can afford Tower B units.

Harada, the Downtown Capital principal, said Tower B units can generally be affordable to households meeting the income limits, such as a teacher and a police officer who are married and earning close to $50,000 apiece.

HCDA rules for workforce housing also don’t restrict buyers from obtaining financial help from family to qualify or making oversize down payments to reduce the amount borrowed, Harada added.

He said the project will satisfy HCDA’s requirement that 75 percent of units meet price limits even at current interest rates.

Average mortgage interest rates in recent weeks have been around 4.25 percent, according to Freddie Mac. At that rate the maximum price for three-bedroom units would be $683,316. All but five units in Tower B are below that price.

Still, interest rates actually offered by lenders largely determine who can and can’t afford to buy a home.

For Tower A, local lenders qualified buyers with a 5.5 percent interest rate that was roughly 2 percentage points higher than the going rate at the time, Harada said. That’s because lenders want to hedge against interest rates rising and buyers not being able to complete their purchase when the tower is finished following two years of construction.

That put affordability out of reach for some moderate-income buyers.

HCDA’s workforce housing rules require only that 75 percent of units be "set aside for purchase" by families within the income range. The agency deems that to mean a first preference be given to such buyers.

Downtown Capital offered Tower A units exclusively to buyers meeting the income limits for an initial 60-day period. After that, units were made available to buyers regardless of income.

The developer contends that that doesn’t necessarily defeat the mission of providing housing for moderate-income families because some units bought by investors could become rentals for workforce tenants at rates limited by a competitive marketplace.

Limited amenities at 801 South — which has no pool and no assigned parking — limit the appeal to higher-income buyers who can afford to pay more for something better, according to the developer.

Similar-size units in other Kakaako condo towers do sell for considerably more.

At Pacifica Honolulu, where amenities include a pool, sauna and exercise room, roughly 900-square-foot two-bedroom units sold recently for around $700,000 compared with Tower B’s $506,000 average. At Moana Pacific, where amenities include a pool, tennis court and putting green, recent sales for similarly sized units were for around $600,000.

Another restriction on workforce housing under HCDA rules is unit size. Tower B meets the size limit for all but 49 units, including all 45 three-bedroom units that exceed a 1,200-square-foot limit by 131 square feet.

Jason Nishikawa, an agent with real estate broker Marcus & Associates who was involved with Tower A sales, said in written testimony to HCDA that the size and amenity offerings "virtually guarantees that the units will be occupied by the very demo­graphic that HCDA is targeting."

Salinas disagrees and suggests that projects aimed at providing homeownership for moderate-income households should be allowed only if they actually deliver.

"For a workforce housing development where affordability is critical, a building should not be approved and constructed unless it is certifiably affordable," he said in a statement. "The 801 South St. project does not meet the affordability needs of the community."