A state agency is moving ahead with a plan to recover what it can on an unpaid $9.8 million loan to the developer of a nearly 3-year-old Kakaako affordable condominium complex where many units remain unsold.

The board of the Hawaii Housing Finance and Development Corp. on Thursday approved using up to $500,000 to recover the bad debt through options that include taking over the midrise project, called The Block 803 Waimanu, through foreclosure or in lieu of foreclosure.

However, the board didn’t approve a request by HHFDC staff to convert up to 25 unsold units with below-market prices and buyer conditions to unrestricted market-priced units in an effort to spur sales and generate revenue for the developer to repay two bad loans on the project, including the one from HHFDC.

Such buyer conditions include household income limits, a right for HHFDC to buy back the unit if sold within 10 years and a requirement to share appreciation with the agency.

Of the 153 units at The Block, 61 remain unsold since the project opened in December 2021 despite prices as low as $276,102 for some studios.

In some instances, removing buyer restrictions and raising prices to market levels can attract more buyers. But some HHFDC board members were uncertain whether that would help increase sales at The Block. Of the 61 unsold units, 44 have below-market prices with restrictions, and 17 are at market prices without buyer restrictions.

A perhaps bigger issue with sales is a lack of parking for many units.

There are 82 parking spaces in the eight-story building, mainly in a mechanized parking system that stores vehicles vertically. Of the 61 unsold units, 42 don’t have parking, according to HHFDC.

One of the selling points for The Block when it was conceived by Franco Mola of MJF Development Corp. was that the city’s rail line from East Kapolei to Ala Moana Center would be running through the area by 2019, with a station half a block away from the project site.

Mola received a development permit for The Block in 2014 and expected project completion in 2017, but encountered delays tied to sales and financing. Rail construction suffered even greater delays, and got truncated to end near The Block instead of continuing to Ala Moana. The city currently projects that Skyline will begin its last leg of service reaching Kakaako in 2031.

Dean Minakami, HHFDC’s executive director, told the agency’s board at Thursday’s meeting that the idea of developing a residential building with limited parking seemed all right given the circumstances a decade ago.

“Of course, it’s a different story today,” he said. “Rail is not here. Units without parking are very challenging to sell. So if we could go back in time, I think we’d have treated this project very differently. But we are where we are right now.”

Mola’s company recently informed HHFDC that it can’t continue to cover expenses for the unsold units, which total about $500,000 a year and include property taxes and condo association fees, according to the agency.

At the same time, the developer hasn’t made any principal or interest payments on HHFDC’s $9.8 million loan, violating loan requirements. The loan matures Sept. 30 and has accrued $641,164 in interest, making the total obligation almost $10.5 million.

HHFDC has offered to extend its loan for another year and suggested replacing the project’s sales broker, which is affiliated with Mola, but noted that this might not solve the developer’s financial problem or result in the agency having its loan paid in full.

The agency, which primarily helps finance affordable housing, also has noted that taking ownership of the unsold units may not be its best option, given carrying costs and additional work for staff.

In addition to not making principal or interest payments on HHFDC’s loan, Mola rented out 10 unsold units to help cover his expenses, which HHFDC said violated loan terms. This rental income, according to the agency, totaled about $24,000 a month, and should have gone to pay the outstanding loans.

A senior loan for the project was made by Ponos Lending LLC and the AFL-CIO Housing Investment Trust, according to HHFDC, and has an outstanding balance of $9.1 million that matures Sept. 30.

To generate enough revenue to pay off the two outstanding loans totaling $19.6 million, the 61 unsold units at The Block would have to sell for about $321,000 on average. Units currently listed for sale range from $276,102 for a studio without parking to $650,000 for a two-bedroom unit with one parking space. The large majority of units in The Block are studios.

HHFDC is concerned that it could take several more years to sell all 61 units based on three sales in 2023 and seven this year to date. Interest on the senior loan is accruing at 10% a year, which could reduce what HHFDC can recover on its bad loan with Mola.

Originally, Mola had arranged a $26 million senior loan with American Savings Bank, but a precondition of that loan included having binding purchase contracts for all 62 studios without parking, and at least 65% of all units, or 99 out of 153.

“As is always the case with all loans, there is a always a risk of not recovering the full amount,” Albert Palmer, HHFDC’s development section chief, told the board Thursday. “However, HHFDC will work to recover the full amount to the greatest extent possible.”

Gary Mackler, HHFDC board chair, encouraged staff to engage with Mola about replacing the project’s brokerage firm, Real Estate Strategies LLC, led by Vincenzo Mola, as part of the effort to increase sales.

Mola did not participate in Thursday’s meeting.

Mackler also expressed willingness to revisit the idea of lifting prices and buyer restrictions on up to 25 unsold The Block units. If that is done, 60% of all units, or 92 of 153, would still be affordable to moderate- income buyers or owners and meet HHFDC’s standard for such projects.

Originally, all but 19 units in The Block were reserved for households with moderate incomes and priced to be affordable for such households. Later, the number of market-priced units was increased to 36 from 19 to help bolster sales.