Kukui Gardens residents fear plan for prepayment

Mortgage prepayment could jeopardize HUD's oversight of potential buyers

As Kukui Gardens proceeds with plans to prepay the balance on its mortgage, residents who fear they are one step closer to becoming homeless are planning a demonstration to focus attention on their plight.

So far, residents have gained the sympathy of state lawmakers, including Gov. Linda Lingle, who visited the affordable-housing complex yesterday to talk to residents and management and to reaffirm her support for low-income housing.

HOUSING STRATEGIES Some of the options Carmel Partners plans to institute to maintain affordable units include: » Rental voucher programs at the federal level for qualifying families. » Real estate and excise tax exemptions through the state. » City extension of the property tax exemption through 2011. » Designating a portion of the property to construct high-density affordable housing.

Yet, it remains unclear whether Kukui Gardens will be allowed to prepay its mortgage, or how a prepayment would play out in the proposed sale of the complex to Carmel Partners Inc., a San Francisco-based private real estate firm.

Kukui Gardens notified its roughly 2,500 tenants last week that it wants to prepay the outstanding balance on the mortgage now rather than wait until the expiration date of May 1, 2011.

The move has residents concerned that if the mortgage is prepaid, then the federal Department of Housing and Urban Development will lose all authority over the project, including the power to accept or reject a buyer.

Kukui Gardens was built 36 years ago with a $16 million loan from the Ford Foundation that was secured by a Federal Housing Authority mortgage. The terms of the 40-year mortgage guarantee affordable housing for the life of the mortgage and ensure HUD oversight.

But some HUD officials have privately acknowledged they are not certain of the extent of their powers in the event of prepayment.

Cheryl Fukunaga, a project manager for HUD in Honolulu, said the federal agency has the authority to attach conditions to any sale in a "use agreement" that could include the requirement to keep rents affordable until 2011.

"If the loan is prepaid, the project would still be subject to a use agreement that would require the maintenance of affordable rents and income restrictions until May 1, 2011, the original maturity," she said.

Fukunaga said HUD could not stop the prepayment of the mortgage as long as Kukui Gardens meets all of the conditions under federal law. She said several similar projects have prepaid, "so there is a precedent for this."

In late spring, Carmel Partners emerged as the buyer with a $131 million offer for the complex on the edge of Chinatown. Carmel has repeatedly denied that it will raise rents prematurely to turn out residents to make way for luxury housing.

The sale is being driven by Kukui Gardens' board of directors, which includes members from the Marianist Center, the Catholic religious order that operates Chaminade University and Saint Louis School; St. Francis Medical Center; and the Clarence T.C. Ching Foundation.

Some critics of the sale to Carmel say the mortgage prepayment is a way for Kukui Gardens to ensure the sale to Carmel because HUD would be sidestepped.

"The buyers get around HUD's ruling if they prepay. They can practically do anything they want to do if they do the prepayments. There are going to be massive displacements if that happens," said Carol Anzai, president of the Kukui Gardens Association.

"That's what we're afraid of," said Anzai, adding that that they do not oppose the sale of Kukui Gardens, but want assurance that the units will remain affordable beyond 2011.

Residents plan to do a sign-waving demonstration along the Liliha Street side of the apartment complex Monday.

"My worst fear is that I'm going to be homeless," said Kelly Arrington, a 23-year resident.

During her visit, Lingle said she has 150 days to either support or oppose Kukui Gardens' plans to prepay the balance of its loan. Her administration's decision will be based on talks with everyone involved in the project, she said.

"That will help with what position we'll take on the prepayment request. It all ties back to whether or not it will allow this project to remain affordable or not," Lingle said.

She emphasized that her administration will not allow any action that takes Kukui Gardens out of the affordable category, even if it means blocking the sale to Carmel Partners. "One thing is clear: We can't afford to lose 857 affordable units, and we're not going to," she said.

In a news release, Chris Beda, managing partner and chief investment officer of Carmel Partners, said, "Our long-term business plan is to operate Kukui Gardens as rental housing. In the short term, we will operate the property consistent with the rental terms established in the standard form HUD use agreement."

Beda, who toured the complex with Lingle, said his company plans to work with local, state and federal officials to create a program that provides affordable rental units for residents after the HUD use agreement ends in 2011.

Alan Goda, an attorney for Kukui Gardens, said, "Once the loan and mortgage are off the property, then the regulatory agreement on the property goes away and in its place, there is a use agreement from HUD that could condition (affordable) rents until 2011."

Asked if HUD has the power to enforce those rents, Fukunaga said, "We've never had that problem before."

While HUD might be able to control affordability until 2011, it might not be able to control who buys the project if the mortgage is prepaid first and then put up for sale.

Goda said his understanding is that if the mortgage is prepaid and the project is then put up for sale, "we don't have to go back to HUD for approval" of the buyer. "But HUD certainly cares who we sell to. We can't sell to someone on the HUD bad-boy list," he said.

HUD encourages the sale of such projects to nonprofits they believe more likely to keep the complex for affordable housing. One question raised about the sale is whether Kukui Gardens gave nonprofits a reasonable chance to bid.

Officials from the two nonprofits known to have made bids have told the Star-Bulletin that the down-payment terms and swift timing on closing were difficult for a nonprofit to meet.

Goda said one reason Kukui Gardens wants to prepay is so that it can remove the first mortgage and then borrow money for needed maintenance and repairs. Goda said as soon as the mortgage is paid, "We can either go ahead and sell it or borrow funds to make repairs."