Affordable rental apartments in Kakaako serving low-income seniors could shift from state to private ownership as part of an effort to address financial challenges with the property.

A state-owned company ceased paying its share of maintenance fees 15 months ago in the mixed-use Honua­kaha complex, which includes the rental housing, privately owned condominiums and the headquarters for the Hawaii Community Development Authority.

HCDA, a state agency regulating development in Kakaako, owns the 150-unit rental housing component through a partnership but ceased making maintenance fee payments July 1, 2020, because apartment rental income wasn’t covering expenses.

The unpaid amount, which is owed to Honuakaha’s association of property owners that includes condo owners, totaled $654,144 as of this month, and the expense is projected to grow to $981,216 by June.

To correct the delinquency, the agency’s board on Wednesday unanimously voted to approve using up to $1 million from an HCDA special fund to make a 20-year no-interest loan to the HCDA-controlled company that owns the apartments.

The agency also plans to raise monthly apartment rents 5% annually, beginning in January, to help reduce operating losses and repay the loan. This increase for monthly rent amounts to an extra $30 for studios and $35 for one-bedroom units currently rented for $600 and $700, respectively, to existing tenants.

“That’s not going to completely bring us back into the black, but it’s going to help,” Deepak Neupane, who became HCDA’s executive director a year ago, told the agency’s board.

When apartments become available, rent for new tenants would be $960 for studios and $1,150 for one- bedroom units, according to Neupane’s financial recovery plan.

With only the 5% annual rent increases, it would take 10 years to make operations break even financially and then another 10 years to repay the loan.

However, Neupane noted that since the Honolulu Star- Advertiser reported on the delinquent maintenance fees last month, three real estate firms have contacted the agency expressing interest in buying the rental apartments. If an interested buyer submits an unsolicited proposal, the agency could consider selling, Neupane said during the board meeting.

The technical owner of the apartment portion of the property is Honuakaha Limited Partnership, which is controlled by HCDA as general partner.

First Hawaiian Bank, which financed development of the apartments mainly using federal tax credits provided by the state, is a limited partner and isn’t liable for maintenance fees.

HCDA developed Honua­kaha in 1995 as part of its mission to provide affordable housing in Kakaako by repurposing a historic former Royal Brewery building that was built in 1900 but had been vacant for more than 30 years after producing beer that included Primo and Royal brands.

The agency bought the five-story brick brewery building and an adjacent parking lot at 545 and 547 Queen St. from American Brewing Co., and used the lot to develop an eight-story building featuring the 150 rental apartments along with 93 fee-simple condos that were sold as affordable housing via a lottery.

The brewery building became HCDA’s headquarters in 2015 after renovations, litigation over renovations, and more renovations.

All of the rental apartments are reserved for seniors aged 62 and over with incomes no more than 60% of Honolulu’s median income.

Initial monthly rent 26 years ago was $375, well below the roughly $600 maximum considered affordable at the time for the income level, and HCDA over the decades has kept rents affordable to households earning closer to 30% of the median income. The last monthly rent increase at Honuakaha was a $50 hike in 2013.

Under current state guidelines, rents could be as high as $1,269 for studios and $1,359 for one-bedroom units while remaining affordable to households earning up to 60% of the median income, which equates to about $51,000 for a single person and $58,000 for a couple.

A requirement tied to the tax credits requires that HCDA maintain affordable rents at Honuakaha for 30 years. This term expires in 2025, though the agency aims to ensure that rents remain affordable long-term.