A state agency that helps finance affordable-housing development in Hawaii faces having its funding award criteria dictated by the Legislature to favor state and county projects.

The pending legislation would put planned private low-income rental projects, including ones by nonprofit developers, at a disadvantage to state- or county-­owned projects in an annual competition for Hawaii Housing Finance and Development Corp. funding.

HHFDC has expressed concerns with House Bill 1763, and a couple of developers have been more critical, while two other state agencies trying to produce new low-income housing on their land want lawmakers to pass the bill.

The strongest support for HB 1763 has come from the Hawaii Public Housing Authority, which is trying to redevelop many of its decaying public housing projects under a partnership with private developers.

HPHA’s plan is to develop 10,880 new affordable rental apartments and renovate 1,187 existing but functionally obsolete units at a roughly estimated cost of $6.6 billion over a decade.

But there is concern that giving HPHA projects a priority for HHFDC funding — which can include low-­interest loans, grants and highly coveted federal and state tax credits — could dry up funding for other projects that might have more merit under existing HHFDC criteria.

“HHFDC’s goal is to maximize the effectiveness of its financing programs through a competitive application process to ensure that the State’s resources are efficiently used, and therefore HHFDC disfavors prioritizing groups of applicants,” the agency said in written testimony. “This proposal prioritizes groups of applicants without regard to the merits, financial feasibility, or (most importantly) readiness of the projects proposed by the applicants.”

This year, developers of 25 proposed low-income rental projects with 3,230 apartments have applied to HHFDC to receive $180 million in federal and state tax credits that the developers can sell to investors. Some credits are good for five years and some for 10 years, making their value closer to $1 billion.

These same projects also are seeking $610 million in low-interest loans or grants from the agency’s rental housing revolving fund.

Demand for HHFDC financing far outstrips supply.

Of all the applications, one from HPHA seeks the most funding — $184 million to produce 307 new affordable apartments at its Mayor Wright Homes property in Kalihi. HPHA’s application seeks $20 million in tax credits that could be sold for closer to $150 million, $57 million from the rental housing fund and $107 million in bonds.

Another HPHA project application seeks about $68 million in combined financing to redevelop Kapaa Homes on Kauai with 123 new units.

HHFDC provides tax credits on a competitive basis that awards points in 20 categories including project readiness, reasonableness of development costs and tenant services and amenities. State and local government support also is a category.

The original intent of HB 1763 was to assign new priorities for HHFDC tax credit and rental housing fund awards, topped by state- or county-owned projects followed by projects in which the state or a county is an equity partner.

Four other new priorities in the bill are for projects that are to be conveyed to the state or a county at a definite time, and projects with a perpetual affordability commitment.

In written testimony, HPHA characterized the proposed changes as essential to expedite delivery of much-needed affordable housing, and facilitate huge strides by the agency to address Hawaii’s affordable-­housing crisis.

“By providing projects that are or will be State-owned with greater priority in the award of (rental housing fund) and (tax credit financing), the Legislature can help to ensure that local housing development is less profit-motivated and more focused on providing Hawaii’s residents with a greater number of affordable housing options,” Hakim Ouansafi, HPHA’s executive director, said in written testimony.

The state Department of Hawaiian Home Lands also supports the bill. It has previously competed for and obtained tax credit financing from HHFDC, and has two pending applications.

One of DHHL’s applications would help the agency buy the 82-unit Courtyards at Waipouli condominium complex on Kauai and turn it into rental units for low-­income beneficiaries under a 15-year rent-to-own program. DHHL is seeking $7 million in tax credits, $22 million from the rental fund and $35 million in bonds from HHFDC for the project.

DHHL said in written testimony on HB 1763 that every priority the agency can benefit from to obtain highly competitive tax credits helps it deliver affordable housing for beneficiaries.

Kevin Carney, a former Hawaii nonprofit affordable-­housing development company executive, told lawmakers in written testimony that the HHFDC’s award process isn’t perfect but is objective and better than what HB 1763 proposes.

“Approving this bill will mean competition for funds will reduce, independent developers will cease to build the products that currently qualify for this funding and government will become the primary producer for the foreseeable future,” said Carney, now president of Affordable Housing Connections LLC. “Perhaps that is the intent, to rely on government as our housing provider?”

Local developer Stanford Carr, who has produced low-income rental projects using tax-credit financing, also criticized the bill.

“We strongly object to the idea of legislating the content of (HHFDC’s qualified allocation plan),” he said in written testimony.

HB 1763 was introduced by Rep. Luke Evslin (D, Wailua-Lihue). The House Committee on Housing, chaired by Evslin, advanced the measure in a 7-0 vote Feb. 9.

After the bill was further advanced in unanimous votes by the House Finance Committee and the full Senate, the Senate Committee on Housing amended the bill so that the state and county project priority would apply only to rental fund awards for projects that received tax-credit awards under HHFDC’s current criteria. The amended draft also would only apply to applications after June 30, thus not affecting this year’s application pool.

HB 1763 now awaits a possible hearing by the Senate Ways and Means Committee. The full Senate also would have to pass the bill for it to have a chance at becoming law.