The administration of Mayor Kirk Caldwell reached out last week to top potential buyers of 12 public housing projects should a pending $142 million deal fall through, heightening the anxiety at Honolulu Hale about a tenuous situation that could have serious financial and legal ramifications for the city.

The Honolulu Affordable Housing Preservation Initiative is the city’s plan to get the city out of the affordable rental management business by offering 12 city housing projects under a 65-year lease. The Carlisle administration put out a request for proposals, and Honolulu Affordable Housing Partners in October 2012 won the right to make the purchase.

Honolulu Affordable Housing Partners, led by Arcadia, Calif.-based Highland Property Development LLC, promised to keep rental prices within federal affordable housing guidelines for the life of the lease. The consortium also promised up to $42 million in renovations.

The City Council passed bills approving the agreement by 6-2 votes on Oct. 11.

But after Honolulu Affordable Housing Partners issued the city a default notice on Dec. 10, the Caldwell administration gave the group and two other top bidders until 4 p.m. Christmas Eve to indicate whether they are still interested in and able to complete the transaction.

Members of the administration have declined to discuss the deal with the Honolulu Star-Advertiser.

"The administration would like to brief the Council first on any responses it may or may not have received by Tuesday’s deadline," Deputy Managing Director Georgette Deemer said.

William Rice, a managing partner for the purchasing group, said in the default notice that two resolutions introduced by Council Chairman Ernie Martin to either rescind or postpone the sale constituted a breach of the purchase agreement.

Martin introduced the resolutions after he and several colleagues expressed unhappiness about the details of the deal, and the way the administration decided how the sale’s $36 million in proceeds would be spent in particular.

Rice said the actions "undermined and made it impossible" for the consortium to obtain the financing necessary for the sale, at least not by a March 31 deadline stipulated in an ordinance approving the sale. Additionally, Rice said the partnership has spent $4 million to close the sale. He suggested the city could not only be liable for that amount, but possibly an additional $2 million in damages.

The Council chose to shelve the two resolutions but also refused to support a new resolution offered by the administration reaffirming support for the sale and extending the closing deadline indefinitely.

Caldwell has also warned that it has already programmed $30 million in proceeds into the current year’s $2 billion operating budget, and that a collapse of the deal could leave his administration scrambling to make up the shortfall.

Councilman Ron Menor, chairman of the Executive Matters and Legal Affairs Committee, said colleagues are "understandably concerned about the uncertainty of the sale," adding, "There are substantial financial as well as legal ramifications if the deal falls through."

Council members want to know the legal ramifications if the sale does not close by March 31, given the comments made by the purchaser, Menor said.

"I’d like to receive an update in regards to whether the buyer is planning to proceed with any legal action and, if so, what the likelihood is the city is able to defend such a lawsuit," Menor said. "I’d also like to know the total damages the city may have to pay."

That the administration has contacted two losing bidders to ask of their interest further "creates a lot of worries and uncertainty" about the pending deal, he said.

Councilman Breene Harimoto, who argued against the resolutions nullifying or delaying the sale, said he is most worried about what liability the city could incur if the deal falls through.

Additionally, he said, the city is operating the 12 complexes at a monthly loss of $500,000, a situation that will continue until they are sold. Some of the buildings involved are also in dire need of improvements and "the buyer was willing to pump its own money" toward renovations and repairs, Harimoto said.

A portion of Caldwell’s Housing First initiative was also expected to be funded from some of the proceeds of the sale.

Council Budget Chairwoman Ann Kobayashi, who has long raised concerns about the agreement with Rice’s group, said she’s puzzled why the administration chose only to seek out the interest of two losing bidders when there were seven bidders in all and other potential buyers who did not submit proposals due to stringent requirements that were later changed to accommodate Hawaii Affordable Housing Partners.

"I think they should just open it up to whoever," Kobayashi said.

She said she and colleagues have also been contacted by tenants living in the complexes worried that they will be forced out of their units despite assurances by city officials and the buyer to the contrary.

Kobayashi said the purchaser should not be given an extension if it cannot meet the March 31 deadline. Nor does she believe the city holds any responsibility if that happens.

"If they can’t close the deal, that’s not the city’s fault," she said.

Rice would not discuss the details of the situation when contacted by the Star-Advertiser. The entities that make up Honolulu Affordable Housing Partners include Honolulu real estate executive Richard Gushman and Honolulu attorney Stephen Gelber.

"We are in current contract discussions with the City and County and as such we are not in a position to discuss at this time," Rice said in an email.

Chuck Wathen, a partner in one of the two losing groups contacted, told the Star-Advertiser that his group submitted a response to the city on Tuesday.

His group "turned in an offer that we believe complies with the original request for proposal’s terms and conditions," Wathen said, and specifically retains a number of "work force" units for those who make 60 percent to 120 percent of Honolulu median income.

Wathen has stated repeatedly that the complexes should retain a tenant mix and has warned that the current deal, because it allows for rents to be raised by up to 10 percent annually, could displace more than 700 current tenants based on income eligibility.

Wathen’s group includes Pier Management Hawaii LLC, of which Wathen is the chief executive officer, Rockpoint Fund IV Acquisitions LLC and Pacific Housing Assistance Corp.

A call made to a local office for the third bidder contacted by the city was not returned. That group includes Honolulu-based EAH Housing, Carmel Partners LLC, Devine Gong Inc. and Catholic Charities Housing Development Corp.