The company that agreed to buy 12 city-owned housing projects warned Tuesday that Honolulu likely will have to forfeit at least $2.5 million in damages for jeopardizing the deal’s financing.

The "notice of default" from Honolulu Affordable Housing Partners LLC claims the City Council’s proposal to rescind the sale contract has already undermined the company’s financing for the $143 million deal.

"We’re very disappointed," Mayor Kirk Caldwell said. "Our worst fears have been realized."

The Council, unhappy with the way the administration put together the deal, introduced a proposal last week to rescind the sale and will consider it again at a meeting today — five days ahead of a deadline in which the city must present its plans to the U.S. Department of Housing and Urban Development.

The Council previously approved the sale, which is part of the mayor’s Housing First initiative, but concerns have arisen regarding the fairness of the bidding process as well as problems with the way social service agencies were chosen to receive funding from the deal’s proceeds.

What’s more, according to a Council resolution, the administration admitted that federal housing guidelines will be nearly impossible to meet, which could result in the reduction of future Community Development Block Grant housing allocations.

Council Chairman Ernest Martin said members support the Caldwell’s Housing First program to combat the city’s chronic homeless problem — "but the sale must take place under the structure of a sound plan for using the proceeds," Martin said in a statement. "Until such time, it would be irresponsible for the Council to put public funds at risk."

Caldwell on Monday said the city stands to lose out on $121 million worth of expenses and potential financial windfalls from the deal, which was initiated by his predecessor, Peter Carlisle.

Among the losses would be $3.4 million already committed to the project, which includes the damages pointed out by Honolulu Affordable Housing Partners in its default notice. The city would also lose $50 million in capital improvements for housing.

According to the company’s notice, the city has 10 days before it is legally in default.

Caldwell said that he is hoping to persuade a Council member to introduce a counterresolution to reaffirm the deal in an effort to avoid losing the sale.

"I’m going to try to do everything I can to save the deal," he said.