The Home Boys

A group of local businessmen have teamed up with a Mainland developer to bring affordable, work force housing to Hawaii

November, 2005

Last July, at the Big Island’s upscale Hapuna Beach Resort, Joe Blanco and several of his business associates met with county of Hawaii officials to discuss plans to build a work force housing development in nearby Waikoloa. In the morning, the real estate developers, which included attorneys Peter Hamasaki and Frank Mukai and engineer Dennis Hirota, mapped out their solution for the island’s affordable housing crunch. However, it wasn’t until dinner that the group learned about the serious economic and social impacts of the problem with which they were dealing.

“We called the hotel’s restaurant for dinner reservations and they said that they were fully booked for the night. We ended up going down there anyway, and the place was only half full,” says Blanco. “The manager explained to us that he had plenty of space. He just didn’t have enough people to staff the restaurant. It turns that the Kohala Coast is experiencing a shortage of about 800 workers. No one can afford to live in Kona, and they don’t want to make that two-hour drive [from Hilo] anymore.”

Later that evening, Blanco and his associates spoke with other hotel staff members, who work two jobs in the Kona area, but live in Hilo, 100 miles away. Some of the workers slept in their cars between shifts. “It’s sad to think about the personal toll that this kind of lifestyle is taking on these people,” says Blanco. “It’s even more troublesome when you think about the social costs for the community as a whole.”

All across the state, local residents are being pushed to the outer orbits of their communities, unable to live in the places that they work, because of rising housing prices. This is especially apparent in the high-end visitor enclaves on the Neighbor Islands. In Hawaii County, the median price for a previously owned, single-family home in July reached $370,000 compared to a 2005 Department of Housing and Urban Development estimated median family income of $52,500. Those are bargain-basement prices compared to Kauai, which leads all the Islands with an average price of $700,000. Median family income on that island is $57,900. Maui is close behind at $679,000 (median income of $62,350), but residents saw housing prices rise as high as $780,000 earlier this summer. The median price of a single-family home on Oahu (median income of $67,750) is $577,800.

But the dire shortage of work force housing is hardly a problem specific to Hawaii. According to the Joint Center for Housing Studies at Harvard University, between 1997 and 2001, the number of lower-middle- and middle-income households spending more than half their incomes on housing surged by more than 700,000.

In addition, according to the National Housing Conference, retail salespeople could not qualify to purchase median-priced homes in 60 metropolitan markets studied; elementary school teachers could not qualify in 32 markets; police officers in 28 markets; and licensed practical nurses in 57 markets. These are the people who make a city, a city.

Lost opportunity isn’t the only cost that a community and its citizens have to pay. A 2001 study by the Family Fund in Minnesota found that the Minneapolis-St. Paul metropolitan area loses out on $128 million in consumer spending annually, because it cannot provide enough work force housing to meet demand. The lack of housing has also caused the Twin Cities’ businesses to lose out on an estimated $137 million in income from prospective workers.

The social impacts of this widening housing gap can only be guessed at.

Something New, Something Old

Last July, Blanco and company were at the Hapuna to hammer out details on the Kamakoa Vistas, a housing development for the county of Hawaii, which offers some novel solutions to the island’s and state’s work force housing problem. The Honolulu real estate consultant is one of a collection of local real estate developers, construction professionals, attorneys and businessmen who have teamed up with Maryland-based institutional housing developer UniDev, LLC, to plan and build the Vistas.

At first glance, Kamakoa Vistas isn’t much different from the dozens of new communities popping up throughout the state. The project will feature 1,200-units, a mix of town homes, single-family homes and rental units, spread out on 268 acres of county land. With a little less than half of the acreage being devoted to parks, open space and community facilities, the Vistas, which is targeted for low- and moderate-income families, with household incomes that range from $26,250 to $73,500, or 50 percent to 140 percent of HUD’s 2005 Annual Area Median Income, will have a “villagelike setting.” It will also feature early 1900s-inspired “carriage-loaded” homes. The houses, which have their garages located in back, enhancing a small-town feel, are increasingly popular in many Island developments.

But the Vistas has two features that seem to solve the difficulties of building homes affordably and keeping them affordable. The solutions are both revolutionary and familiar at the same time.

The first problem is the high infrastructure costs. According to Hirota, a member of the Hawaii UniDev group and president of Sam O. Hirota, Inc. a local engineering firm, infrastructure construction is the single biggest driver of home costs in the Islands, especially in lava-rock rich Waikoloa.

“I’ve been in this business for 40 years, and the principle problem with the way land is developed here is the high cost of the construction of the infrastructure. And that is paid for up front,” says Hirota. “In the case of Waikoloa, we have infrastructure costs of $100,000 per home. That’s even before we hammer a single nail.”

In the UniDev Hawaii model, since the sponsor of the project, the county of Hawaii, is a nonprofit organization, will be able finance infrastructure construction with a tax-exempt bond. The county pays back the bond by levying a tax on the development’s residents, which can be deducted from the homeowners’ income taxes. The result is that home costs can be reduced by as much as a third.

“You have a house that would have gone for $300,000 now offered at $200,000. Suddenly, you have a lot of people who can afford that,” says Blanco. “The buyers we are targeting are the regular guys, who make good salaries. They just aren’t able to come up with that large down payment.”

The second challenge is keeping the housing affordable in perpetuity.

“Historically, we used to sell affordable units with a three or 10-year buy back. When the thing went to market, your affordable housing was suddenly gone,” says Ed Taira, housing administrator for the county of Hawaii.

The UniDev solution to this dilemma is familiar to Island residents: leasehold land. But this familiar arrangement has a slight twist to it. At the Vistas, the County will retain ownership of the land and residents will sign leases, which last as short or as long as the homeowner wishes. However, the residents won’t be charged a monthly ground rent. It will be leasehold in name only. When owners do decide to sell their property, they have to sell it back to the nonprofit sponsoring entity. The property’s appreciation will be tied to the rise or fall of the Consumer Price Index (CPI), keeping a lid on large profit taking and ensuring that the property continues to be affordable for the next qualified buyer.

The leasehold model doesn’t just benefit the buyers. It will also be an income generator for the sponsor. Since the selling prices of the homes are tied to HUD annual median income levels, if income increases outpace the rise of the CPI, the sponsor can resell homes at the higher level. In addition, income from rental units (as long as they qualify as affordable housing) is exempt from both county general excise taxes and real property taxes. In the case of the Waikoloa Vistas, all home sale or rental income will be reinvested into the development.

 

Buyer Beware?

But the big question remains: Will the idea (and the homes) sell? Will a price- and profit-controlled arrangement have acceptance in a market that sees real estate as a lucrative investment?

“The system is designed to give buyers the opportunity to own a home and save money,” says Blanco. “A lot of our residents will be first-time homeowners, who will use this as a stepping stone to future home purchases.”

Buyers might also be enticed by 100 percent financing offered by mortgage lender Fannie Mae.

Taira believes that buyers, especially longtime Big Island residents, will readily accept the arrangement, since it is a somewhat familiar concept. “The county’s position has always been that we want a housing solution that is appropriate for the Big Island, not something transplanted from Honolulu or California,” says Taira. “Villagelike communities built on leasehold land? People talk about New Urbanism, but it also sounds a lot like the plantation all over again. I told the land planners that it’s back to the future for Big Island housing. The local guys laughed. The Mainland guys didn’t know what I was talking about.”

However, some question the inherent fairness of offering premium, affordable housing to a select few in a select area. Moreover, the ultimate beneficiaries of the development may not be the residents, but the area employers, who in the end don’t have to pay a liveable wage to their workers.

“Low-cost housing is a misnomer, because the extra money always has to come from somewhere, usually the taxpayer. It’s a lottery for the fortunate few, and it would be no different than if the county used taxpayer money and dropped it on people randomly and told them to buy homes at market rates,” says David Hammes, professor of Economics at the University of Hawaii at Hilo. “It is a well-intentioned way of providing area businesses with a cheaper labor force. But shouldn’t employers be paying their people enough so they can afford a $300,000 house? In the end, why are we subsidizing big hotel chains or the county, who aren’t paying their workers a liveable wage?”

Final details on Kamakoa Vistas are being ironed out and Taira and Blanco hope to sign a formal agreement by the end of the year. According to the developers’ preliminary timeline, the group hopes to begin infrastructure construction in November 2006 and start vertical construction in April 2007.

UniDev and its local partners have also taken their back-to-the future housing model to Hawaii’s healthcare industry. In July, St. Francis Healthcare System of Hawaii announced plans to build a $100-million residential-care community on 23 acres in Ewa Beach. The project, named Franciscan Vistas, will feature 326 affordable town homes and 150 rental units for seniors and utilize the same combination of creative financing and leasehold land ownership. The Vistas will serve as a long-term care and residential-care facility, as well as work force housing for the religious staff.

 

Building a Better Community

Since plans for both projects were publicly announced last summer, Blanco says that his group has received numerous inquires from large, private-sector employers. They have made presentations to county housing and have their eyes on a couple of properties in the downtown Honolulu area. He’s hopeful that once this new finance and ownership model is introduced (or reintroduced) to Hawaii homebuyers and employers, people will look at leasehold home ownership in a new light.

According to some in the industry, this new housing paradigm could also be a substantial economic engine in itself, fueling the Islands’ construction industry for decades. “I see 30 years’ worth of work in Hawaii. I look around and see so many different things that need to be done,” says Cecil Phillips, president and CEO of Place Properties, an Atlanta-based, institutional housing developer and manager, with 2004 gross revenues of $50 million. Phillips, who is actively pursuing projects in the Islands, says, “In 1964, when the last building boom began, Social Security was rock solid, Medicare and Medicaid weren’t invented yet, gasoline was 18 cents a gallon and you could get a 30-year mortgage for 2 percent. So you have to find new ways to build. This is a burden for governments, but it’s also an opportunity for business. We have to educate the public sector on how you attract private capital and how to borrow to build.”

But for many Island developers and construction professionals, the construction of affordable, work force housing has less to do with taking advantage of a business opportunity than it has to do with preserving a way of life.

“Our fundamental thing is that if people who are critical to servicing the community can’t live in the community, then you don’t have a community,” says Blanco. “Hawaii is a very special place for us. If the rich live in one area and the poor in another far, far away, that isn’t Hawaii anymore.”

“I’m in construction, so I love all the work. I don’t have any problem with the luxury stuff we’ve been doing now. It’s work, and we welcome it,” adds James Yamada Jr., chief executive officer and president of A-1 A-Lectrician Inc., one of the construction partners at Waikoloa Vistas. Yamada, incidentally, is also building an extension to his Oahu home for his son to live in. He says, “But projects like this [Waikoloa Vistas] have lasting, true value to the community. This is something to get excited about. It’s real and will have a real benefit. We all know how tough it is now, we all have families.”

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