Factory-home builder off to struggling start

By Andrew Gomes
Advertiser Staff Writer

The Studmeister is an impressive machine. But these days the $120,000 computerized tool that bends and cuts sheet metal into steel-frame studs for home construction is fairly quiet inside the Kalaeloa warehouse of Quality Homes of the Pacific.

Kali Watson, the chief founder of Quality Homes of the Pacific, believes the company will overcome its start-up difficulties. Jeff Widener The Honolulu Advertiser

In the months since it started, Quality Homes has been forced to restructure management, expand home designs and bring in new investors in an effort to remain solvent in a fledgling industry where the only other Hawai'i factory-home builder recently landed in bankruptcy.

"It's a tough business, no doubt about it," said former Department of Hawaiian Home Lands chairman Kali Watson, chief founder of Quality Homes.

Any start-up business has its struggles, but the relatively unproven nature of the manufactured-home industry in the state also has complicated matters as lenders are wary to issue mortgages for a type of home with an unproven resale value in Hawai'i.

That was one of the problems that plagued Hawaiian Palisade Homes, which shut down in July and is seeking to reorganize under Chapter 11 bankruptcy protection.

Hawaiian Palisade, run by two Californians with little experience manufacturing homes in a factory, had additional setbacks not shared by Quality Homes, including labor, regulatory, and financing difficulties. The homebuilder's closure left about 120 buyers without homes, and it faces a suit by the state Office of Consumer Protection on charges that it used deceptive practices.

Quality Homes entered the Hawai'i market with more industry experience and a local connection in Watson, who is also a former chairman of the Hawaiian Homes Commission and past OHA staff attorney.

Workers put together one of Quality Homes' factory-built structures at the company's warehouse in Kalaeloa. Jeff Widener • The Honolulu Advertiser

"We need money to continue to operate the plant," Andy Karsten, former Quality Homes president and chief executive officer, wrote to the Office of Hawaiian Affairs in late June. "Our company is at a critical stage."

According to its business plan, Quality Homes, which operates out of a former Barbers Point Naval Air Station hangar, anticipated starting construction on 85 homes this year, and completing and selling 100 homes by next June.

Today, Quality Homes has 10 completed houses and two more under construction in the factory that employs about 20. Of the inventory, only three homes have been sold and paid for, at an average price of $50,000 (uninstalled), including one to a developer affiliated with Quality Homes.

A key contract for 45 homes at a Hawaiian Homelands project in Kapolei fell through, and lenders have been unwilling to issue consumer mortgages that would pay for the construction of customer houses because of unproven resale values for factory-built homes in Hawai'i.

"We took a hit on Kapolei, no doubt about it," Watson said.

The Kapolei project was awarded to a joint venture between the nonprofit Habitat for Humanity, a Big Island contractor and Quality Homes, but Habitat couldn't get a federal grant that would have paid for home construction for Quality Homes. The company was eliminated from the project.

Quality Homes also was unable to obtain an anticipated $1 million credit line needed to continue operations, because its principal owners were unwilling to personally guaranty the debt. That left the company to trim expenses and seek more capital.

Watson, who was Quality Homes chairman, is now the company's sole chief executive, replacing Karsten and former chief operating officer Robert Wilden.

Kitchens in Quality Homes’ houses look pleasant. However, Hawai‘i lenders are wary about granting mortgages for factory-built homes. Jeff Widener • The Honolulu Advertiser

A new investor partnership of local developer J. Douglas Kilpatrick III, contractor Donald G. Lee and a Las Vegas contractor was found to make a $600,000 cash infusion in return for 40 percent ownership of the company.

The Laborers' International Union Local 368, which initially invested $250,000 in Quality Homes with the plan to train and provide homes for members, decided to cash out its 25 percent stake. The union is to receive $50,000 down plus the greater of $8,000 a month or $2,000 per home sale.

A union representative did not return calls for comment. Watson said using Quality Homes to train union members will continue.

Other original Quality Homes investors — Karsten, Wilden and the Hawaiian Community Development Board, a nonprofit founded by Watson — each had their stakes of 12.5 percent diluted to 10 percent by the new investment.

OHA, which originally invested $500,000 in the company, will have its 50 percent stake reduced to 40 percent and get a $50,000 refund ($500 per house sold), but the agency will retain majority control by appointing three of five Quality Homes directors.

OHA spokesman Ryan Mielke said the agency is disappointed with Quality Homes' setbacks, but remains supportive of the investment.

"The goal of OHA was to invest in a company that employs and makes houses for Hawaiians," he said. "Whether OHA makes money is of course part of OHA's interest, but making money is not OHA's primary goal."

"We're not in the risk-taking business or (the business of financing) start-up companies," said OHA budget and finance committee chairman Oswald Stender. He said $500,000 was worth trying to provide 45 Hawaiian families with homes for $70,000 each, compared to other OHA programs that help Hawaiians own homes.

Watson said the company still seeks to supply other Hawaiian Homeland projects, as well as markets such as student housing, military housing, classrooms and clubhouses.

The company also has increased the size and extra options of its homes, which are all steel-framed and range in price from $75,000 to a little more than $100,000 for a 1,425-square-foot, four-bedroom model with a porch and garage.

But Quality Homes has not yet cleared a key obstacle: persuading lenders to issue mortgages that pay for construction of the homes.

The problem was critical for Hawaiian Palisade, which at one time had more than 100 loan commitments from GMAC Mortgage Corp. that were canceled after Fannie Mae, one of the country's largest purchasers of mortgages, decided not to participate.

"We were willing to try," said Bill Rizzo, Hawai'i district manager for GMAC Mortgage, which is no longer considering loans for manufactured housing in Hawai'i.

Mike Sessions, a former GMAC loan officer working with Hawaiian Palisade, recently joined American Savings Bank as senior loan officer in hopes of continuing his effort to help people with low incomes buy factory-made homes.

He said American Savings is reconsidering making construction loans for Quality Homes, after deciding not to because of Hawaiian Palisade's debacle. "It's not a yes," Sessions said, "but it's a (maybe.)"

Sessions said if the bank agrees to make loans on manufactured housing in Hawai'i, he feels two or three other local financial institutions might join in and possibly persuade Fannie Mae to buy the loans, which would allow local lenders to use the money to make more loans.

Standing on the company's factory floor recently, Watson said he is confident that lenders will come through.

"We're struggling a little bit, but we got some good people, a good (factory) and a good product," Watson said. "It's going to take some time."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.