Senators Grill HHFDC on Kona Project

posted in: Development, EH-XTRA, Land Use | 0

Posted 12/01/2010 

“So, I’m a little perplexed,” said Donna Mercado Kim, chair of the Senate Committee on Ways and Means after a lengthy interrogation of Karen Seddon, head of the Hawai`i Housing Finance and Development Corporation over terms of the agency’s agreement with Forest City to develop Kamakana Villages in Kona under section 201H of Hawai`i Revised Statutes, intended to spur development of affordable housing.

“We enter into this agreement. We give a $25 million loan for 15 years at no interest. We don’t know breakdown of units, don’t know what kind of units, and they can walk from the project – there’s no guarantee they’re going to finish it… There’s no penalty, and if they walk away, then it will be a challenge for us to find somebody else to finish it.”

“I wouldn’t quite characterize it that way – but yes,” Seddon replied.

“I can see now why there are concerns about this,” Kim said.

An Obvious Disconnect

The exchange came in a November 3 hearing called by Kim, the day before the Land Use Commission was holding its final hearing on the same project. Kim and fellow senators, including Josh Green, from Kona, wanted to know how a capital improvement project for the acquisition of land for a university campus, regional sports complex, and affordable housing had morphed into what is now a high-density residential and commercial center, where no more than 50 percent plus 1 of the dwelling units are to be aimed at families earning up to 140 percent of Hawai`i County’s adjusted median income.

Both Seddon and Dan Davidson, Seddon’s predecessor at the agency (and now director of the LUC), said they were unaware of the representations that had been made to the Legislature more than two decades ago, at the time the CIP appropriation was made.

Seddon attempted to explain that lack of information by noting that the appropriation was made to the Department of Land and Natural Resources.

“There was obviously a disconnect,” she said.

“What is the breakdown of affordable units by adjusted income percentages?” Kim asked.

Seddon could not give a hard answer, noting that it had changed a “couple of times – it sort of moved around from the original proposal.”

Rick Prahler, chief of HHFDC’s development branch, hedged a bit: “It’s a moving target right now,” he added.

“Just give us some idea of the last place you were, before the target moved,” Kim asked.

Neither Seddon nor Prahler could do that, with Prahler explaining that he was hesitant to do so, “because I don’t know if [Forest City has] made a public commitment to this set of numbers.”

No Cap on Profits

Kim also asked about the portions of the agreement that specified the developer’s investment in the project as well as its anticipated profit.

The HHFDC has provided an interest-free loan of $25 million from the state Dwelling Unit Revolving Fund (DURF), which is to cover costs of planning, acquiring permits and approvals, and part of the initial infrastructure costs. The development agreement also calls for another $84 million to be obtained in various subsidies. (According to HHFDC board meeting minutes, Forest City anticipates those subsidies might come in the form of Community Facilities District funding, Tax Increment Financing, as well as federal and county public assistance.)

With funding in place, HHFDC’s Stan Fujimoto told its board in 2008, when the DURF loan was approved, Forest City expects to make a profit of $23 million by the time the project is concluded (2023, with a possible five-year extension), representing 13 percent of the total land development costs.

Kim asked Seddon whether this 13 percent was a cap or an estimate.

“I don’t believe there’s a cap,” Seddon said.

“Do we know the up side potential?” Kim asked.

No, Seddon replied.

The development agreement calls for Forest City to receive an 18 percent internal rate of return, “post tax “as such tax may be applied to … Forest City Enterprises, Inc.), on any investment made by Forest City. In addition, it is entitled to a project management fee equal to 3 percent of development costs, a 1 percent “legal/accounting fee,” and a 5 percent “construction management fee.” These fees, however, don’t cover for “any legal, accounting, planning, or other professional services performed by third parties.” Those costs are to be folded into the land development budget, according to the development agreement. And all the fees are over and above the 18 percent rate of return.

Kim asked how the 3 percent management fee had been calculated. Seddon could not say. “If it’s based on the project cost,” Kim noted, “that’s another $5.4 million over and above the $23 million.”

“The 3 percent management fee, 1 percent accounting fee, 5 percent construction fee – all over their basic profit. So $15, $16 million more. And they get a loan with no interest for 15 years.”

No Penalties

Senator Suzanne Chun-Oakland was puzzled. “Why would the state enter into such an agreement?” she asked Seddon.

“The tools that we’re using, 201H, loaning DURF money for the interim, these are all tools that the Legislature has given us to support affordable housing,” Seddon replied.

But when Seddon could not provide a count of what units would be affordable and to what ranges of income, Chun-Oakland asked, “Why wouldn’t we hold the developer responsible for coming up with affordable units if we’re providing that kind of incentive and financial support? …Why are we not expecting something?”

Seddon noted that Forest City had entered into a contract to do just this.

Yet, “There’s no penalty for not fulfilling the contract,” Chun-Oakland noted. Seddon agreed.

Why not?

Seddon stated it was “normal practice. We don’t have penalties in our development agreements.”

 

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