In an effort to ease Oahu’s housing crunch, the city in May passed the Affordable Rental Housing Bill, which provides tax waivers and other incentives to property owners who agree to rent most of their units to median- and lower-income families at federally established guideline rates of no more than about $1,500-$2,000 a month for one- or two-bedroom units.

Six months later, developers of affordable housing and bankers are pushing for a bill that would remove the rent caps and instead let the market dictate how much they charge.

City Council members and Mayor Kirk Caldwell are contemplating whether eliminating the rent caps would give away too much for too little in return.

Bill 60 actually seeks several changes to the Affordable Rental Housing Bill, a five-year pilot program meant to stimulate the affordable rental units badly needed primarily in Honolulu’s urban core. The program is aimed at owners of lots of 20,000 square feet or less and provides them with a number of incentives including greater density, taller allowable heights, less setback, no required parking, waivers from building permit application and wastewater facilities charges, no park dedication fees and a 10-year tax waiver on property taxes. The incentives save a developer thousands of dollars per unit.

In exchange, the program requires a minimum of 80% of the units to be rented to those making 100% or less of area median income (AMI), as determined by the federal Department of Housing and Urban Development — and the amount charged must be at or below rental rate limits that are also established by HUD. HUD guidelines for 2019 calculate fair market rent for a one-bedroom unit at $1,563 and a two-bedroom unit at $2,067.

Since the new law went into effect in May, the city has received only two applications. One is for a 25-unit apartment building on Puuhue Place in Liliha, the other for a 20-unit apartment above a first-floor retail space on South King Street next to the McCully Bicycle and Sport Goods store. Both applications were submitted in October and are being processed, said Curtis Lum, city Department of Permitting and Planning spokesman.

Bill 60 was given an initial approval by the Council Zoning, Planning and Housing Committee at a meeting Thursday and now goes to the full Council for the second of three necessary approvals. But the part of the bill proposing to remove the rental caps remains an area of strong contention.

Businessmen Marshall Hung and Mel Kaneshige, who lobbied for the original rental housing law, told members of the committee Thursday that lifting the caps would make it easier for owners of smaller, “mom and pop” properties to buy into the program.

“What we’re finding is … the more hurdles that are in front of them, the less likely they’re going to move forward because they don’t do this for a living and it’s a complicated process,” Kaneshige said. “The way they look at it, there’s no governmental money being put into this. Granted, the incentives are there so they don’t have to pay some things like the permit fees, etc., but there’s no government financing — there’s no tax credit financing, there’s no bonds, there’s no special low-interest programs. These are all privately financed.”

Hung said developing smaller apartment buildings is a key component of solving Oahu’s housing crunch but that such projects are “the hardest housing product to build … because you can’t make a profit.”

Dean Hirabayashi, vice president in charge of commercial real estate lending for American Savings Bank, said he’s heard from about 60 property owners who have expressed interest in using the affordable rental program, but many are wary of rent caps. Like Hung and Kaneshige, Hirabayashi said he does not believe the rents from those in the program will reach as high as the housing caps because of competition from rentals in more desirable neighborhoods and might offer more amenities.

While no one at Thursday’s meeting testified against the bill, a veteran nonprofit affordable housing developer and the Building Industry Association of Hawaii submitted written testimony raising concerns against lifting the rent caps.

Kevin Carney, vice president of EAH Housing, said HUD rental rates are based on a household’s ability to pay as a percentage of area median income. “Stating that units must be rented to a certain AMI level or levels and not restricting the rent to those AMI levels is counterproductive toward producing more affordable rental housing. The elimination of the HUD rental maximums allows the property owner to charge rents that have no relationship to the income level that they are mandated to serve.”

Amendments proposed in Bill 60 “appear to create more incentives for land­owners to build more rental units, but not at affordable rates,” said Gladys Quinto-­Marrone, CEO of BIA Hawaii. “What is puzzling is a renter would still need to meet the 100% and below AMI requirement but would be in essence paying more than 30% of their gross income to rent depending on location because the rents are no longer tied to the HUD rental rates. The bill would appear to penalize renters and benefit landowners.”

Councilman Brandon Elefante said while there may be a risk to those who choose to participate in the program, the risks to the city are even far greater because of the incentives involved, including 10 years of no property taxes. Removal of the rental caps would lead to the units being rented at market rates, “and if we’re committed to building more affordable housing units, I’m not sure that’s the way to go forward.”

On Friday both Caldwell and Council Zoning Chairman Ron Menor said they are weighing both sides of the argument over eliminating the rental caps.

Caldwell, who championed the affordable rentals program, said he supports other sections of Bill 60 but wants to sit down with stakeholders about the rent caps “to make sure that we don’t end up with a problem down the road because … the buildings that are built will stand for 30 or 50 years. And so if you delete the required maximum rental amounts, what happens to those units down the road if we do away with the program because they may no longer remain affordable? If there’s high demand and there’s limited supply, the costs just go up and they just become market rentals.”