Leasehold Sale of Rental Housing Portfolio Expected to Close in 2019
The Hawaiʻi Housing Finance and Development Corporation Board of Directors has approved modifications to the Award of Request for Proposals for the Affordable Rental Housing Portfolio Restructuring and Preservation to Komohale LP, a partnership between local developer Stanford Carr Development, LLC and Los Angeles-based Standard Communities clearing the way for the sale to proceed. The transaction is expected to close in early 2019.
The leasehold sale achieves the dual goals of rehabilitating the properties for long-term preservation and fulfilling the State’s promise to minimize displacement of existing tenants. The terms of the leasehold sale ensure the properties’ long term-affordability while enabling substantial renovations to be completed faster than possible under the State’s ownership.
Divesting itself of the rental housing portfolio also frees up HHFDC resources to focus on its primary goal of increasing the supply of new affordable housing.
The Portfolio consists of the following six affordable rental housing and mixed-use properties with 1,221 residential units and approximately 86,000 square feet of commercial space:
Property Location Type Units
Pohulani Elderly Kakaʻako, Oʻahu Elderly 263
Kauhale Kakaʻako Kakaʻako, Oʻahu Family 268
Kamakee Vista Kakaʻako, Oʻahu Family 226
Kekuilani Courts Kapolei, Oʻahu Family 80
Honokōwai Kauhale Lahaina, Maui Family 184
Lailani Apartments Kailua-Kona, Hawaiʻi Family 200
On December 14, 2017, HHFDC Board of Directors approved the leasehold sale of the Portfolio to Komohale for $170 million, with the buyer committing to undertake a major renovation program at an estimated cost of $53.9 million to be completed within three years. A Due Diligence and Confidentiality Agreement was executed on February 9, 2018 to allow Komohale to conduct due diligence in advance of signing the Purchase and Sale Agreement (PSA), which was under negotiation at the time. The PSA was executed on June 13, 2018, upon which day the formal due diligence period commenced.
On July 20, 2018, Komohale submitted to HHFDC an updated renovation plan and budget based on its due diligence findings, which indicated that an increased scope of work was required—in part due to deferred maintenance that was not disclosed in historical Property Condition Assessment reports—and that construction costs were higher than originally anticipated. The resulting renovation program budget was materially in excess of the original budget, and HHFDC and Komohale negotiated modifications to the RFP award over several months.
Key modifications to the RFP are: 1) a purchase price of $130 million; and 2) a renovation program budget of $85.1 million. All required renovation funds will be set aside at the transaction closing, and Komohale will reinvest any cost savings in additional property improvements.
“Even with the adjusted sales price, when combined with the increased renovation program budget the buyer’s total investment is still higher than any other offer that we received. We will be able to provide more information after the transaction closes,” said Craig Hirai, executive director, HHFDC.
In addition to addressing base building systems deferred maintenance items, the terms of the RFP required the buyer to renovate all non-renovated apartment units. However, Komohale found that prior renovations were partial in nature and inconsistently completed. To maximize economies of scale and construction scheduling efficiencies, 100% of the Portfolio’s units will now be renovated – a significant variance from the RFP requirement. In addition to minimizing long-term replacement budgets, the 100% unit renovations will also provide a uniform standard throughout the properties.
Long-Term Rental Housing Affordability Preserved
Rents at the properties will remain affordable throughout the 75-year ground lease terms, with maximum rents of no greater than either 80 or 100 percent of the U.S. Department of Housing and Urban Development Area Median Income (AMI) rent guidelines.
• For existing residents at Pohulani Elderly, annual rent increases will be restricted to no more than two percent (2%) for the duration of the tenants’ residencies (subject to the AMI rent limits.)
• For existing residents at the five family properties, annual rent increases will be restricted to no more than two percent (2%) for the next five years and five percent (5%) for the subsequent 30 years (subject to the AMI rent limits.)
• The residencies of existing tenants who earn in excess of the AMI limits will be grandfathered, allowing them to stay in their units.
Rent Subsidies Increased and Extended
In connection with the portfolio restructuring and preservation, the HHFDC board awarded $24.25 million in project-based Rental Assistance Program (RAP) contracts to Komohale. The contracts increase and extend existing rent subsidies for households who currently participate in the program and earn less than 80 percent of the AMI.
• At Pohulani Elderly, HHFDC will provide an initial 20-year RAP contract that increases the maximum monthly subsidy from $250 to $300.
• At the four family properties where RAP subsidies are currently offered, HHFDC will provide 10-year RAP contracts that increase the maximum monthly subsidy from $175 to $225. In the sixth year of the contract, the maximum monthly subsidy will increase to $500.
• At Kekuilani Courts, where RAP subsidies are not currently offered, HHFDC will provide a five (5)-year RAP contract through which a subsidy of up to $500 per month will be available to qualified residents beginning in 2023.
Property Renovation Program
Komohale has committed to a $85.1 million renovation program for common-area and unit renovations to be completed within the first three years. Improvements will include replacement of cabinets, countertops, plumbing, appliances, flooring, and painting in units. Common areas will be refreshed with new paint and carpets, and community rooms will be renovated. In addition, building systems such as elevators, facades, roofing, and windows are budgeted for repair/replacement. The defective building siding at Honokōwai Kauhale will be replaced, as will the exterior stair systems.
Resident Education and Counseling Services Program
Komohale will offer residents a robust package of education and counseling services to enrich the lives of the properties’ tenants and their families, with focus on the following areas:
• Education, including after-school tutoring and enrichment, computer learning opportunities and English as a Second Language as well as General Equivalency Diploma classes;
• Financial literacy, including budgeting, credit utilization and debt management, income planning, and homeownership preparation; and
• Health, including screenings, diabetes prevention, exercise classes, and food distributions.
“Leveraging private funds through partnerships like this is a more efficient use of State resources. It’s more cost effective to sell the leasehold interest and have the Buyer pay for renovations and other capital improvements through the sale,” said Governor David Y. Ige.