The nation's credit crisis has delayed the sale of the low-income portion of the Kukui Gardens apartments and could jeopardize the construction of additional affordable units at the downtown rental complex.

For nearly three years, the fate of Kukui Gardens, one of the state's largest and oldest affordable rental projects, has been in limbo after the former owner of the 857-unit low-income apartments offered to sell the property for upscale development.

The affordable housing complex was saved last year after a grassroots campaign by tenants, community leaders and elected officials persuaded Kukui Gardens' buyers, San Francisco-based Carmel Partners, to sell half, or 11 acres of the land and more than 400 apartments, to low-income housing builders for $72 million.

The affordable developers, EAH Housing and Devine & Gong of San Francisco, say they plan to build 400 additional, low-income housing units at a cost of $18 million, preserving a total of about 800 affordable rentals.

But the deal has been threatened by the collapse of the financial markets, which has left EAH and Devine & Gong searching for new funding sources.

Chan U Lee, senior associate at Devine & Gong, said the sale of the property was supposed to close Jan. 1 but won't close until March.

Lee said the worst-case scenario is that EAH and Devine & Gong won't be able to find investors for the affordable housing project and will convert it into market-priced housing.

"We're in serious trouble" if we can't find investors, said Drew Astolfi, lead organizer for Faith Action for Community Equity, which represents tenants.

The state helped put together the funding of the affordable project by offering $64 million in state bonds and $5 million in state tax credits. The remaining $21 million was to be raised using federal tax credits.

The developers are having difficulty finding investors to take advantage of the $5 million state tax credit.

The federal tax credits can't be tapped until the state credits are fully used, Lee said.

STRUGGLING PROJECTS

Kukui Gardens is just one of many low-income housing projects nationwide struggling with the downturn in the market for housing tax credits.

The state and federal tax credits are typically used by investment firms, pension funds and banks to offset any income they earn.

Lee said she hopes the market for state housing tax credits rebounds soon. But if it doesn't, Lee said the developers would have to make up the loss of $26 million in federal and state tax credit funding by charging much higher rents.

According to Lee, the developers had a tentative agreement with Massachusetts Mutual Life Insurance Co. and financial giant Aegon Investment to purchase the housing tax credits.

But the deal unraveled in November, shortly after the nation's financial markets began to plunge, she said.

The funding shortfall has prompted several Kukui Gardens tenants to ask Hawai'i's largest banks to invest in the Kukui Gardens state credits.

Carol Anzai, president of the Kukui Gardens Residents Association, said tenants last week delivered dozens of letters from tenants to officials at First Hawaiian Bank, American Savings Bank, Bank of Hawaii and Central Pacific Bank.

The letters describe the importance of preserving the low-income housing, she said.

"Like a lot of residents, I'm nervous," said Anzai, a Kukui Gardens resident for 36 years. "If it's just delayed, it's OK. But I'm just worried that the (redevelopment) is not going to happen."

HOUSING TAX CREDITS

Built in 1970 by the late developer Clarence Ching, Kukui Gardens is a 22-acre low-income rental project that's bordered by Liliha, Vineyard, Beretania and 'A'ala streets. The former owners, Kukui Gardens Corp., put the complex up for sale in January 2006.

Kukui Gardens sold the property to Carmel for $131 million.

According to Lee, the state tax credits have been a tough sell during the weak economy because there is not a large market for them.

Unlike federal low-income housing tax credits, which can be used to offset federal income taxes that investors earn anywhere in the country, state housing credits can only be used to offset income that a company or investment firm earns in Hawai'i.

What's more, those state housing tax credits have to compete with more lucrative state tax credits for the local technology industry, she said. The Hawai'i tax credits for high-tech investment can be used to offset income earned over a five-year period whereas the state tax credits for affordable housing development must be spread over a 10-year period.

"The state credits have been a challenge," said Janice Takahashi, chief planner for the state Hawai'i Housing Finance and Development Corp.

"We're hoping that the market improves a little bit and the tax credits can be more marketable."