The continuation of negotiations between the city and the group that agreed to pay $142 million for the lease interest in 12 Oahu housing complexes is contingent on the city’s agreement to arrange "seller financing" to the partners.
City attorneys have also determined that a deal with Honolulu Affordable Housing Partners LLC must be reached by March 31, or the city would be required to start from scratch, reopening the process for the so-called Honolulu Affordable Housing Preservation Initiative to other potential purchasers, a process that could take three years.
"We believe this is in the best interests of the city and the tenants affected by this transaction to move forward with (the buyers) as expeditiously as possible," city acting Mayor Ember Shinn said in an email to the Council.
William Rice, a representative for the buyers, said in a statement the partnership "believes that by working together we can maximize the benefit of our renovation plans for the residents, while increasing the amount of truly affordable housing in Honolulu, both now and for many generations to come."
Administration officials said that the cancellation of the sale could have significant ramifications for the city, including a $20 million hole in the current year’s $2 billion operating budget. The buyer had also promised to spend $50 million in improvements for the tenant properties in exchange for the 65-year lease.
Additionally, the partnership has suggested that the city would be responsible for $4 million it has spent to date on trying to close the deal, as well at least $2 million in damages.
The city has sought for more than a decade to get out of operating affordable housing.
City officials had given Honolulu Affordable Housing Partners LLC until the end of business Thursday to say whether it was still interested in, and able to, complete the purchase by a scheduled March 31 deadline. On Friday, Shinn told Council members that the deal, considered the largest transaction involving the city in recent years, was near collapse and in need of "extraordinary" salvage efforts.
Rice, the representative for partnership managing entity Highland Property Development LLC, issued a six-page response Monday, stating there would be a "reasonable possibility" the deal could close by March 31 if the city "is willing to provide seller financing to cover the purchase price and ‘bridge’ the financing for the transactions."
Rice pointed out that the partners’ legal position is still that they lost their financing because City Council Chairman Ernie Martin introduced two resolutions in early December calling on the administration to either rescind or delay the agreement with the partners because of Council members’ disenchantment with the way the administration determined how proceeds would be spent. The Council ultimately chose to drop the resolutions, but Rice told city officials that the introduction of the resolutions made it nearly impossible for the buyer to retain its financing strategy.
After receiving the buyer’s response Monday, Shinn also agreed to the partners’ additional request to extend a Dec. 31 deadline to give financial assurances that it could complete the deal by March 31, the new deadline.
Exactly how seller financing would work is unclear and, according to the communications between the city and the buyer, will be the key to the upcoming negotiations. Ostensibly, the buyers would be allowed to use the city’s financial leverage to meet its financing obligations.
Councilman Ron Menor, chairman of the Council Executive Matters and Legal Affairs Committee, said he intends to keep an open mind about the possibility of providing seller financing to the partners because of the significance of closing the deal. However, "the city administration needs to inform the City Council of any details about the financing before entering into such an agreement with the buyer."
Menor said any seller financing arrangement "must include assurances that there are adequate protections for the city in the event the buyer doesn’t comply with its obligations." The financing should also be short-term, he said.
"I wouldn’t want to see a seller-financing agreement that lasts for two or three years," Menor said.
Martin, in a written statement, applauded Shinn and the administration for their efforts and said he is "cautiously optimistic that we can achieve consensus on the terms of the sale."
He stressed, however, that the agreement to extend the deadline only offers a "reasonable possibility" of closing the deal. "This does little to dispel the apprehension that serious financial backing for the buyers’s initial bid may have been lacking from the start."
Seller financing is not unprecedented at the city, said Martin, a former deputy director of community services under former Mayor Mufi Hannemann. "It remains to be seen if the buyer’s terms on ‘bridge’ financing will be acceptable enough to close the deal."
