A nonprofit developer has received tax-credit financing to start work on long-awaited affordable rentals at 'Ewa Villages, but 20 percent of the units originally planned for low-income families will be replaced by market-priced housing.

Hui Kauhale Inc. yesterday said it obtained $11 million in state and federal tax credits to help it start the 192-unit project with an initial 64 rentals that it estimates will cost $18 million.

Construction is expected to begin in October 2007, with units completed by the end of 2008 for tenants earning no more than 60 percent of the median income in Honolulu, or $42,780 for a family of four.

Under city guidelines, monthly rental rates for the two- and three-bedroom units should range from around $960 to $1,100, though rents will change as the annual median income is adjusted.

Affordable rentals are in critical short supply for residents who have seen housing opportunities slip away because of dramatically rising rents driven by property values that have roughly doubled over the past five years.

According to a study conducted for the state, 30,000 affordable-housing units — including 17,000 rentals — are needed statewide.

While the Hui Kauhale project will be a small but significant step in the effort to alleviate the shortage, the city-affiliated project won't be as large as originally planned.

The city in 1999 issued a request for proposals to develop affordable housing on 23 acres of vacant city land off Renton Road across from 'Ewa Elementary School.

In 2001, the city selected Hui Kauhale for the project. Hui Kauhale, an affiliate of California-based affordable housing developer EAH Housing Inc., purchased the land in 2003 for $5.9 million, using $5 million in city-administered federal community redevelopment block grants.

The developer initially planned 240 low-income rentals, and projected that construction might begin in 2006.

Kevin Carney, vice president of EAH Housing Hawaii, said difficulty obtaining enough financing led Hui Kauhale to arrange a transfer of eight acres to a for-profit developer expected to build 50 homes that will sell at market prices.

The project now involves 192 units in 14 two-story buildings plus a community center, landscaped open space and a court for volleyball and basketball.

In return for the land transfer, the for-profit developer will build infrastructure needed for the affordable rentals Hui Kauhale estimates is worth around $5 million.

Carney said trying to obtain enough tax-credit or other financing to build all 240 affordable rentals would have made the project uncertain. "There's only so much funding," he said.

Carney added that the city has accepted the change, which he said was suggested by the local Housing & Urban Development office.

Officials from the city and HUD could not be reached yesterday for comment.

"They understand what our problem is," Carney said. "They said, 'We'd rather have some affordable housing than no affordable housing.' "

St. Francis Healthcare Foundation has faced similar pressure in part because of dramatically rising construction costs, and recently modified its plan to build 325 low-cost rental units for seniors at 'Ewa Villages by making 125 homes market-priced.

Hui Kauhale said it is committed to being part of the solution to providing affordable housing in Hawai'i.

"Long-term affordability in Honolulu is key to keeping a healthy housing market that is not subject to a currently ever-increasing income divide," Carney said.

'Ewa Villages is a city initiative established in 1993 to preserve the plantation village community after the Oahu Sugar mill closed.

The city bought 600 acres of private property, invested in infrastructure and worked with developers to renovate and build homes in and around Tenney, Renton and Varona villages near the end of Renton Road.

Completed projects include a golf course, park, Alzheimer's care facility, 96 homes developed by Unity House and a 126-lot subdivision created by Self-Help Housing Corp. of Hawaii.

The Hui Kauhale and St. Francis projects would complete redevelopment of Tenney and Renton villages. Varona village still awaits revitalization.

The 128-unit balance of Hui Kauhale's affordable rental project is subject to obtaining financing, which will largely be sought through tax credits the developer obtains and sells to for-profit companies.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.