Hawaii County’s incentives for building affordable housing don’t work, according to a company’s study of the County Code.

David Doezema, senior principal for real estate advisory firm Keyser Marston Associates, presented to a County Council committee this week a report outlining the effectiveness of Chapter 11 of the code, which requires that rezoned housing projects include a certain amount of affordable units, and offering some ways to fulfill that requirement.

The verdict, Doezema said, is that many of the provisions of Chapter 11 actually act contrary to their intended use and that it is not feasible for affordable housing to be built in many of the island’s districts.

In particular, Doezema focused on the county’s affordable housing credit system, which was introduced in 2005. Under the credit system, developers who build more than the minimum number of affordable housing units in a development can earn affordable housing credits that can be sold to other developers, who can use those purchased credits to satisfy their own affordable housing requirements.

The credit system has created challenges for the county, most notably a 2022 corruption case where in former county housing employee Alan Scott Rudo fraudulently distributed credits to business entities owned by himself and co-conspirators, and sold those credits for a profit.

Rudo received about $1.8 million in the scheme, and pleaded guilty in August 2022 of conspiracy to commit honest services wire fraud.

Among Doezema’s recommendations for improving the county’s affordable housing policy was a simple one: end the credit system entirely.

“We don’t see (the credits) as being an effective tool for encouraging affordable housing right now,” Doe­zema said, noting that while the system could work on paper, in reality the abundance of credits in circulation reduces the incentive for developers to build affordable housing, and that they function as a de facto fee the developers pay in lieu of planning actual affordable units.

“There’s some really great ideas behind it, it’s just, when you look at what’s actually happening, it’s not borne out,” Doezema said. “Right now it’s inhibiting the success of the ordinance.”

There are several ways developers can fulfill their Chapter 11 requirements, which generally require 10% to 13.5% of housing units to be affordable. But excess credits are by far the most frequently used, Doezema said, because developers are seeking the least complicated means of satisfying Chapter 11.

Even without the credits, though, Chapter 11 isn’t effective at generating housing, Doezema said. In a feasibility analysis of different housing types in different Big Island districts, the report found that it simply isn’t financially viable to build housing in some districts with the incentives being offered.

For example, Doezema illustrated that a 1,700-square- foot single-family home in Hilo would cost more to build under several different Chapter 11 incentives than the home’s market value. Single-family homes in Puna and Hamakua are similarly infeasible.

That said, Doezema said Chapter 11 isn’t really the main driver of whether a project is feasible: “Because of the way it’s structured, it’s not a big influence on the cost.” Meanwhile, he said developers have told him that even in the parts of the island where development is more affordable, the general state of the economy has tightened margins considerably.

Doezema said the county’s other incentive programs aren’t enough to make producing affordable housing units financially viable for most developers. However, he added that this isn’t necessarily only Chapter 11’s fault and is inextricably intertwined with countless changing economic factors.

Other recommendations for updating Chapter 11 included broadening its applicability beyond rezoning projects and reintroducing an “in-lieu fee” that developers would pay the county instead of developing affordable units. Doezema reiterated that the excess-credits system already acts like an in-lieu fee anyway and that Chapter 11 included such fees until 2011.

Council members lauded Doezema’s report and agreed that significant fixes to Chapter 11 are necessary to resolve the county’s housing crisis.

“I hate credits,” said Hamakua Council member Heather Kimball. “I know they were well intended, but they have dug us into a hole that, until we get rid of all of those excess credits, we are not going to be able to actually use Chapter 11 at all.

“Quick math puts it at $60 million to buy them all out, but that might be what it comes to.”