Editorial: Project problems show TOD pitfalls

The road to redevelopment is a rocky one, and it does appear that a significant element in the remaking of the Kapiolani Boulevard corridor has hit a nasty bump.

Hawaii City Plaza and Hawaii Ocean Plaza were to be developed by limited partnerships of the same name, headed by developer Johnson Fang. Construction on the towers has been delayed because the developer, based in China but with projects in Hawaii and California, faces lawsuits by more than two dozen foreign investors.

How exactly this will shake out is still foggy, but at the very least they will not be yielding the benefits of redevelopment, including the hoped-for boost in city property tax revenues, for some time. Already, city rec­ords show that taxes due Oct. 31 for the Hawaii Ocean Plaza site are delinquent in the amount of $131,130.

It’s a cautionary tale for city officials that modernizing Honolulu, even in the area of transit-oriented development (TOD), is as risky as it is potentially lucrative. Future proposals will require the most careful scrutiny the Honolulu City Council can muster.

The two planned condo towers are located near Ala Moana Center, within the special TOD district where the city loosens building requirements in return for affordable housing units.

Whether the public interest is being served sufficiently in return for the developer benefits certainly is debatable.

For example, TOD rules allow for increased density. In exchange, at the Hawaii City Plaza site, only 37 of the 184 units were to be reserved as affordable.

Groundbreaking was held a year ago. But construction didn’t get very far before the first of the lawsuits alleging the misuse of investment money started coming in October. Most of the financing came from investors in China; each plaintiff claims to have put in a minimum of $500,000.

The investments were made as part of the federal investment immigration (EB-5) program. This initiative is meant to incentivize development in “targeted employment areas,” which are typically economically disadvantaged districts.

The incentive is the opportunity to secure permanent residency (a “green card”) in return. According to some of the court complaints, the length of time it takes to receive the green card was mischaracterized by the developer’s representatives.

More broadly, the EB-5 program has come under criticism for being too lax, meaning that the public asset of a green card did not garner enough of a benefit from investments. That’s why in rulemaking that was finalized in July, changes included raising the minimum investment levels and revising the standards for designating any targeted employment area.

In Hawaii, the program is administered by the state Department of Business, Economic Development and Tourism. New rules, in conjunction with the state’s lower unemployment rate, meant areas within urban Honolulu no longer qualified for the program, said Eugene Tian of the DBEDT Research and Economic Analysis Division.

The Council, meanwhile, is feeling some angst over whether this bargain will pay off. Councilwoman Ann Kobayashi, who represents the district, said she had hoped that the projects would “help clean up those areas, but it seems the projects failed.”

Council Chairman Ikaika Anderson, a critic of the proposals, said his doubts about the projects and their potential yield of local jobs have been borne out.

Regardless of whether the deals with this developer are irrevocably broken, the takeaway lesson here is that reaping the promise of enhanced tax revenues — funds that are essential for rail operations and other city needs — comes only after navigating a landscape strewn with pitfalls. Elected leaders must proceed with care.