A deal for the city to sell the long-term leases on 12 rental housing complexes for $142 million to a private group was terminated by the prospective buyers, city officials announced Thursday night.
William Rice, an official with the managing partner of Honolulu Affordable Housing Partners LLC, said in a letter to city Budget Director Nelson Koyanagi that the group would not be able to come up with $35 million demanded by the city by March 31, the deadline for closing specified in an August 2012 sale agreement.
The city made the demand as a counterproposal last week after the partners said they would return to the negotiating table only if the city would agree to a deferral of payment so they would have more time to get financing in order.
The city will now go back to square one in its efforts to sell off its rental projects, a goal that dates back more than a decade and spans several mayors.
In anticipation that a deal could not be reached, the Caldwell administration this week got Council Chairman Ernie Martin to introduce Bill 6, giving the administration permission to restart the formal "request for proposals" process for the 12 complexes. The measure is expected to be up for the first of three required full Council approvals on Wednesday.
The cancellation of the deal is causing a $20 million shortfall in the city’s current $2 billion operating budget, although the loss was already a foregone conclusion after the partnership asked for more time to pay.
The administration needed to program the revenue into this year’s budget in order to spend it, said city Managing Director Ember Shinn.
Koyanagi said the city will cut services only as a last resort to fix the shortfall, and will instead look at holding off scheduled payments to "provisional" or rainy day accounts first.
Meanwhile, the city is spending about $8 million to maintain the complexes and pay for the debt incurred by financing needed to develop or purchase the complexes. Also gone is about $36 million in anticipated revenue that was being eyed as funding for low-income projects, including money for Mayor Kirk Caldwell’s Housing First initiative.
"We are extremely disappointed that Honolulu Affordable Housing Partners LLC was unable to satisfy the city’s requirement for the seller-financing requested by HAHP LLC, and to develop a workable solution in order to close by the deadline," Shinn said in a news release.
Rice, in his response to the city, said "we have determined that there simply is no reasonable possibility that HAHP LLC can secure commitments from any investors, lenders, or other capital sources between now and March 31 that would enable HAHP LLC to make a non-refundable and forfeitable payment in the amount of $35 million to the City and County by March 31."
Even if given more time, Rice added, "we do not believe it is possible to find an investor willing to put $35 million at risk prior to the ‘Permanent Financing Closing’" sought by the city.
The HAHP partners’ proposal was chosen by the former Carlisle administration from among seven submittals in June 2012. A selection committee gave HAHP LLC the highest grade, and city officials have consistently pointed to the partners’ promise to provide $50 million in improvements at the 12 complexes as a key reason the plan was considered superior.
The HAHP proposal had its critics, however, including other bidders, tenants and some Council members who said they worried that the deal relied too much on low-income housing credits for financing that required the tenant mix to eventually phase out tenants with "gap-group" income, those making 80 percent to 120 percent of Oahu’s median income.
Signs that the deal was in trouble surfaced in December when Council members introduced a resolution calling for the cancellation of the deal because of displeasure with the way the administration had chosen to use the expected revenue.
But HAHP officials responded by charging that the Council’s action resulted in a breach of its agreement and caused the agreement to be in default.
The partners returned to the negotiating table only after the administration agreed to consider a "seller financing" provision that essentially amounted to a delay of payment to the city.
Required under the original sale agreement to transfer the entire $142 million when the sale closed, the partners proposed deferring making any payment until between six to 12 months after the scheduled March 31 closing date, at which point it would pay the city "the bulk" of the $142 million purchase price. City officials estimate that payment would be $132 million to $137 million, Shinn told the Council Executive Matters and Legal Affairs Committee last week. The partners wanted up to 20 years to pay the remaining amount, she said.
When the city would be paid, and how much, including any interest from the deferral of payments, constituted the major sticking point between the parties, Shinn told the committee.
The city’s counterproposal, requiring $35 million upfront, essentially a down payment, was spelled out in a Jan. 16 letter to the partners.
"This payment is necessary because of tax consequences arising from the defeasance of the city’s bond debt, which will be triggered by the property closing and which is required to be paid by the city within 90 days after the property closing," Koyanagi wrote.
Additionally, the city’s counterproposal asked for the partners to pay "a reasonable rate of interest" for the delay, an amount that was left open to negotiation before March 31.
