Global credit crisis hits Hawaii
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Only deep pockets kept the project afloat. Indeed, one of the remarkable things about the Moana Vista project is that the work so far has been done out of KC Rainbow’s cash flow. “You have to remember, I just came off a pretty successful project,” Leong says, alluding to the highly profitable Moana Pacific project. "But now, we're going to have to touch our loan. That's why presales are so important. Without presales, you can't touch that construction money." It's this gap in funding that has brought construction nearly to a standstill.
Of course, in real estate, it's possible to view almost any problem as a question of price. In December, KC Rainbow began slashing prices at Moana Vista, with units going for as much as 25 percent off. "I can tell you," says Leong, "right now, we're at the right price point. We've had very good interest in the project. People like what they see. so, I know there are buyers out there who like the price. I just don't know how many there are."
The Contractor's Perspective
Bill Wilson, president of Hawaiian Dredging, also views Hawaii development through the lens of the current credit crunch. "We've got four stories with projects that Dredging is working on, with four sets of issues," Wilson says. "Others, I'm not sure, have similar examples.
Hawaiian Dredging's Bill Wilson
"No. 1 is Maluaka on Maui." This luxury condominium project - plans included 69 high-end units on 500 acres of land attached to the Kapalua Resort - came out of a partnership that included Dowling Development and investment banker Morgan Stanley. Construction never started. "They put the financing together a year and a half ago," Wilson says, noting that, at the time, "there were still multiple financing options available." One by one, though, lenders dropped out as the capital markets collapsed. "They're not looking at revised development plans," he says, but the project is moribund.
Hawaiian Dredging's second story concerns Starwood's latest planned timeshare on Maui. "In this case, we were two months into construction," Wilson says. "That was a $300 million job. It was their preferred job in Hawaii." Nevertheless, despite their investment of time and money, Starwood blanched at pursuing the project in this economic climatem, pulling the plug on construction. "We negotiated a scope-of-work so that it could be put on hold," Wilson says. "Conceivably, we can start the project again in a year or two."
Hawaiian Dredging is also the contractor on KC Rainbow's Moana Vista project, which is Wilson's third story. In this case, of course, the company was already deeply committed to a project that appeared to be more than adequetly funded. The building was scheduled to be completed by 2009; instead, the tower crate sits idle, and the most optimistic finish date is well into 2011.
"No.4 is General Growth," says Wilson. "We filed a lien of $9 million against them." The credit troubles of General Growth Properties, the nation's second largest developer of shopping centers, and the owner of both Ala Moana and Ward shopping centers, have received a great deal of publicity. Although generally regarded as well-managed, the company has succumbed to the credit crisis. Its inability to refinance its extensive debt has put the company on the brink of failure. The spectre of bankruptcy has halted construction at Ward Villages, General Growth’s most recent development in Kakaako. Once again, Hawaiian Dredging is left holding the bag. “All I want is our little $9 million,” Wilson says. “And the majority of it doesn’t belong to us; it belongs to our sub-contractors.”
Other contractors have a similar view of the market. Roger Peters, the new executive vice president at dck pacific construction (formerly Dick Pacific), says, “I know of five out of about 15 projects that we’re tracking that have stalled because of lack of funding. And that’s not just on Oahu; that’s on Maui and the Big Island and Kauai.” In fact, one of the most alarming aspects of the capital shortage for developers is that it touches almost every sector: residential, commercial, industrial and retail.
Light at the End of the Tunnel?
One bright spot on the horizon is Halekauwila Place, an affordable-housing project in Kakaako being developed by Stanford Carr. This project, like so many others around the state, stalled due to inadequate funding. The details are telling: Although Carr was able to secure a $71 million construction loan from the National Electrical Benefit Fund, that still left him well short of the estimated $86 million price tag for the project. Normally, Carr points out, affordable housing is supported with tax credits, which the developer sells to investors. In the current market, though, there’s no appetite for tax credits. The project looked untenable.
But Halekauwila Place was very attractive to the Hawaii Community Development Authority. As Anthony Ching, executive director of the authority, points out, HCDA was eager to add the affordable housing units to the inventory in Kakaako. They also hoped to retire the tax credits so they couldn’t be sold to another developer. In the end, HCDA agreed to loan the developer $14 million. Perhaps just as important, the terms of the loan allows $4.5 million of that to be used for the critical permitting and entitlement period. “Essentially, the state is providing a soft second mortgage,” says Carr.
Affordable housing is hardly a salvation for developers, though. The margins are just too low, and few government agencies have the cash to lend. Instead, most developers and contractors look at the capital markets and see no near-term solution. They point to Kapolei: The plat map shows a quilt-work of projects in various stages of planning and construction. But most developers agree with the words of Stanford Carr: “If it hasn’t come out of the ground, it’s probably on hold.”
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