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Saturday, November 23, 2013
Ethics complaint: HCDA Falsifies Kakaako Workforce Housing Affordability Formulas
By Ariel Salinas @ 6:40 PM :: 10849 Views :: Ethics, Development, Cost of Living

Aloha Ethics Commission,   

Many people in the Kaka'ako community are very concerned about the ethics of the Hawaii Community Development Authority (HCDA). We expect HCDA to uphold the needs of the existing community while promoting sustainable development in accordance with the law. What we are experiencing is something very different and heavily tilted in favor of irresponsible development.  Project after projects gets approved with no supporting improvements in infrastructure or public services. Exceptions and modifications to the laws get routinely approved by fiat from the HCDA executive director. There is very little meaningful input from the community on any of the decisions being made. The laws in question here are the minimum standard to protect the health, safety, and welfare of the community. Each exception granted further dilutes the overall greater good.

There exists a very close alignment of apparent HCDA political interests with the financial interests of developers. The 801 South street "workforce housing" project is a great example of a fraud perpetuated by the HCDA. The viability of the entire project hinges upon a false marketing claim of affordability that is factually debunked with careful analysis. Please read the attached document for a systematic deconstruction of this fraud.

Does this seem like an appropriate area for the Ethics Commission to pursue? It is likely that the same exact underlying affordability fraud underpins many of the other approved developments with reserved housing requirements in Kaka'ako.

I'm happy to answer any questions you may have on the matter.


Ariel Salinas

Attached: PDF Full Text Affordability Analysis

  *   *   *   *   *

Affordability Analysis of 801 South Street Tower B

by Ariel Salinas, Revised: 21 November 2013 (excerpts)


801 South Street Tower B is supposed to offer affordably priced units that comply with the

Hawaii workforce housing regulations (Hawaii Administrative Rules §15­218­55). In order to meet these regulations, at least 75% of the residential units are required to be set aside for purchase by families earning between 100% to 140% of the Area Median Income (AMI). The developer is requesting a number of critical concessions from the HCDA because they claim to meet the workforce housing requirement:

  • ­Floor area bonus of 100%, allowing double the normal residential density
  • ­107 foot tall parking structure, exceeding normal limits by 65%
  • ­Driveway curb cut of 6 feet from adjoining property (vs. 22 feet allowed)

Compliance with HAR §15­218­55 is crucial for the developer’s intent to maximize the scale of this project on a limited parcel of land. Otherwise, any development on this parcel would necessarily be significantly more modest in impact to the surrounding community. The apparent intent of this public policy is to provide flexibility on certain restrictions in order to maximize the overall greater good of the community, with the HCDA being the sole and ultimate arbiter between existing rules and the overall greater good.

This analysis will detail the original calculations put forth by the developer and HCDA, highlight & correct for the errors, omissions, and generous assumptions granted to the developer, and then re­run the calculations based on actual & realistic values. The intent of this analysis is to shed light on the affordability claims being put forth by HCDA and the developer by comparing the widely variant results of the two approaches.

The False Affordability Claim

On the last page of their permit application package, the developer calculates the maximum affordable price (MAP) of 1 and 2 bedroom unit types in Tower B:

  • MAP(1 Bedroom) = $654,980
  • ­MAP(2 Bedroom) = $715,213

These are the upper­ bound sales prices for a “workforce housing” development to meet the legal requirement to price affordably for 100­-140% AMI families. These upper bounds cater to the 140% AMI level, and represent the maximum affordability at the maximum income level allowed by the law.

This analysis will expose the underlying problem at hand; the input values to these calculations are fraught with so many cascading errors, extraordinarily generous assumptions, and omissions that the calculated maximum affordable price outputs are simply preposterous. For example, if “workforce” families could afford units at such prices there would be no demand to provision specifically affordable housing developments, since the existing Honolulu housing market would already be affordable….

Analyzing the Underlying Problems

There are nine distinct errors, omissions, or extraordinarily generous assumptions granted to the developer as input values to these calculations. This series of dubious values interact and cascade into a completely unrealistic picture of affordability. Per HCDA Executive Director Tony Ching in the supplemental community meeting held on 16 November 2013, the inputs to these calculations were provided to the developer by HCDA.

Problem 1: Impossible Interest Rate

The HCDA allowed the developer to use a 2.9% interest rate to calculate affordability for a conventional 30­year loan with 10% down. This is an extremely unrealistic assumption and is far out of touch with current and anticipated market conditions. Honolulu area banks agree and have set the prevailing mortgage qualifying rate for the 801 South St project at 5.5%. Banks are hedging against the imminent rise in interest rates from their historic lows (due to Federal Reserve’s shifting monetary policy), and thus are offering the long lock required for a building occupancy date several years in the future at 5.5%.

The public interest is not served by allowing for a 2.9% interest rate when 5.5% is the actual going rate for this development. This is the dominant contributing source of the magnitude of error in the MAP calculations.

This analysis will utilize an interest rate value of 5.50% to perform realistic and accurate affordability calculations.

Problem 2: Incorrect Real Property Taxes

The HCDA allowed the developer to use a flat Real Property Tax value that does not scale accordingly with unit price. The real property tax input value provided will underestimate this burden on the end consumer, and likewise overestimate affordability of all units in Tower B. While this makes calculations somewhat easier, a basic competence with spreadsheets allows for calculating actual values for a unit of arbitrary price (assuming sales price will be equal to tax assessment value).

In Honolulu, property tax is calculated as $3.50 per $1,000 value on an annual basis. This analysis will utilize actual property tax values, as calculated based on price.

Problem 3: Incorrect Mortgage Insurance Premium

Similar to the Real Property Tax, the monthly mortgage insurance premiums (MIP) given by the HCDA and the developer are likewise underestimated and not tailored for the amount of insurance required. Again, the flat value given eases the complexity of the calculation but basic spreadsheets arithmetic can provide for actual values based on maximum affordable prices. The MIP input value provided will underestimate burden on the end consumer, and likewise overestimate affordability of all units in Tower B.

In cases of minimal risk of default (ie: best case), MIP is commonly calculated as .5% of the total loan amount divided by 12 months. This analysis will utilize actual MIP values of a best case scenario, as calculated based on the total financed amount.

Problem 4: Omission of Homeowners Insurance

The HCDA and the developer have omitted any costs related to homeowners insurance even though insurance costs are specifically required by law (HAR §15­218­34) to be included in

calculations. Homeowners insurance is generally a requirement for a residential condo mortgage loan and costs can vary based on many factors.

This analysis will utilize an estimated monthly homeowners insurance cost values of $40, $45, and $50 for 1/1, 2/1.5, and 2/2 units respectively.

Problem 5: Extremely Generous Household Size Assumptions

Per the HCDA, the average household size in Kaka’ako is currently 1.8 persons per unit. Meanwhile, the average workforce-­eligible household size being assumed by the developer is 3.5 persons per unit for Tower B, which is nearly double the actual current value. This overestimate of household size in turn tends to drastically overestimate the calculated affordability per HUD guidelines because the prescribed income is scaled upwards with the household size.

This analysis will utilize the household size assumptions of 2, 3, and 4 for 1/1, 2/1.5, and 2/2 units respectively. This brings down the average to 3.25 persons per unit, which is still much higher than the actual current value of 1.8 but is a conservative improvement over the value given by the HCDA.

Problem 6: Incorrect Household Size Income Scaling Adjustment

Per the developer’s permit application package, the scaling adjustment provided for the 1 bedroom units is incorrect based on the listed household size of 2. Again, HUD guidelines define income scaling commensurate with household size. This error tends to incorrectly overestimate affordability for all 1 bedroom units in the development. Also, the scaling adjustment for 2 bedroom 1.5 bath units has been corrected in accordance with the revised household size assumptions made in Problem 5.

For this analysis, corrected values of 0.8, 0.9, and 1.0 will be utilized for income scaling based on household sizes for 1/1, 2/1.5 and 2/2 units respectively.

Problem 7: Underestimated Association Dues (Maintenance Fees)

The developer uses a monthly association dues value of $250 and $305 for a 1 bedroom and 2 bedroom, respectively. This figure is unbelievably low and indefensible. To justify this claim, the developer (in the permit application) compares the proposed Tower B project dues to other supposedly similar housing projects. None of these projects are intuitively comparable (ie: 1 bedroom to 1 bedroom, 2 bedroom to 2 bedroom) to Tower B because the overall magnitude of 801 South street eclipses all other projects, and the sizes of the other units are all approximately 20% smaller than 801 South Tower B. Nonetheless, this analysis will examine and correct the errors found with the developer’s given approach, and then propose a more direct comparison of 801 South St Tower B with Tower A.

The closest comparable is 1133 Waimanu because it is a high­rise located in Kaka’ako. For 1133 Waimanu, the developer claims that monthly dues are $275 for a 1 bedroom unit and $375 for a 2 bedroom unit. This claim is incorrect and can be verified with a simple real estate search….

Problem 8: No Purchase of Additional Parking Stalls

The developer assumes that a family of four residing in a 2­bedroom unit will only require 1 parking spot. This is a highly undesirable situation for most families with two working parents and two school­aged children. The developer has included a 106 foot tall 10 story parking structure in the proposal, with 788 stalls reserved for residents. There are 1.92 parking stalls per unit in the developer’s proposal, so it is reasonable and still conservative to expect the 2 bedroom 2 bath units to purchase at least 1 additional stall, while accounting for no additional parking purchases from the 1/1 and 2/1.5 units.

This analysis will assume that only the larger sized 2 bedroom 2 bath units will require 1 additional parking stall.

Problem 9: Omission of Condo Utility Costs

The developer has omitted any accounting of utility cost. Condo utility costs typically include electricity, water, sewer, and cable. Utility costs, and electricity in particular, have gone up significantly in urban Honolulu over the past few years. Most condo developments include water, sewer, and cable costs that are bundled into the association dues but it is currently unknown what is included for this particular development. Per §15­218­34, the affordability calculation must include costs required by the bylaws of the condominium property regime. In the absence

of this information, this analysis will assume some utilities are not accounted for in the association dues and will add on additional costs to comprehensively represent the true total cost of homeownership.

This analysis will utilize a monthly utility cost values of $80, $90 and $100 for 1/1, 2/1.5, and 2/2 units respectively in order to estimated utility costs per unit above and beyond the listed association dues.

Final Problem

One final factor, which will be explained but not corrected, is the maximum percentage of income a household can spend on housing costs in order to achieve affordability. The HCDA claims that housing costs are affordable as long as a household spends up to 33% of its annual income on them. This value is higher than the figure used by U.S. Department of Housing and Urban Development (HUD) to define affordability:

The generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing. Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care.

By granting an arbitrary 33% threshold for these calculations instead of the generally accepted definition of 30%, HCDA is creating a situation where occupants of supposedly affordable housing units are expected to have difficulties affording necessities such as food, clothing, transportation, and medical care.

This analysis will allow for a 33% threshold with the acknowledged caveat that buying a unit at that cost level will tend to further impoverish many of the households who are supposedly being provided for with “workforce housing.”

The problematic input value assumptions are detailed in Table 4 along with proposed realistic corrections:


Input Assumptions

1 Bedroom

2 Bedroom 1.5 Bath

2 Bedroom 2 Bath








1. Interest Rate







2. Real Property Tax







3. Mortgage

Insurance Premium







4. Homeowners








5. Household Size







6. Household Size

Income Adjustment







7. Association Dues







8. Additional

Parking Stalls







9. Utilities







Table 4: Nine Errors, Omissions, and Extraordinarily Generous Assumptions

Actual Affordability

Now that these problems have been highlighted and corrected for, the following detailed calculations paint a starkly contrasting picture of the same situation that was originally provided by the HCDA and the developer:


140% Area Median Income Level

1 Bedroom

2 Bedroom 1.5 Bath

2 Bedroom 2 Bath

Maximum Affordable Price (MAP)




Yearly Income (140% AMI)




Maximum Monthly Housing Expense




Additional Parking





Amount Financed (10% down)




Interest Rate




Monthly Interest




Monthly Principal




Association Dues




Real Property Tax




Mortgage Insurance Premium












Monthly Reserve




Total Monthly Housing Expense




Table 5: Detailed Maximum Affordable Price Calculations (Corrected)

As detailed in table 5, when the calculations are re­run with corrected and actual input values, the true costs of ownership are more accurately reflected and the maximum affordable prices are brought down to intuitively reasonable levels. A direct comparison of the HCDA conclusions with this analysis’ corrected conclusions is shown in table 6:


140% Area Median Income Level

1 Bedroom

2 Bedroom  1.5 Bath

2 Bedroom 2 Bath

Maximum Affordable Price (HCDA)




Maximum Affordable Price (Corrected)




HCDA Overestimate




Table 6: Quantification of HCDA Overestimates


Audio: Ariel Salinas interview on PBS


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