A large workforce housing project on the Big Island has been derailed by a dispute between Hawai'i County and the developer.

Kamakoa at Waikoloa was slated to deliver the first of 1,200 homes affordable to low- and moderate-income residents this year, but the county has severed a development agreement with developer UniDev Hawai'i LLC.

The county last week sued UniDev Hawai'i, a division of Maryland-based affordable housing development firm UniDev LLC.

The suit, which seeks unspecified monetary damages, claims that UniDev breached a commitment to finance the project, a failure that led the county to invest $40 million in the troubled project.

Infrastructure such as roads and sewer lines for an initial phase of 172 homes is nearing completion. Construction of homes marketed to buyers last year hasn't begun, and it's uncertain how and when the county will attempt to resume the project.

"The project is going to get built, it's just not with these guys," said Lincoln Ashida, corporation counsel for the county.

Jeff Minter, UniDev Hawai'i president, said the company was surprised by the lawsuit, and said it was the county and not the financing issue that has hindered development of Kamakoa.

"We've consistently said to them we are ready, willing and able to continue, and they've consistently said to us, 'No, no, no,' " Minter said.

Kamakoa has been in the works for about five years. The project was envisioned to provide homes for resort employees and public-sector workers in West Hawai'i, many of whom commute from East Hawai'i and contribute to nightmare rush-hour traffic.

Residences, including single-family homes and townhomes for sale and rent on leasehold land, were to be affordable to residents earning 50 percent to 140 percent of the county's median income.

The county in September 2004 issued a request for proposals to develop 268 acres of county land adjacent to Waikoloa Village, and UniDev was selected in 2005. Buildout of the community was expected to take about 10 years.

According to the lawsuit, UniDev pledged to finance 100 percent of the project but had trouble doing so. The suit said a $4.25 million loan from a pension fund in 2006 had to be repaid by the county a year later to avoid default. The county also kicked in $2 million to keep the project going, and later invested another $34 million mostly for infrastructure work.

But Minter said financing troubles were related to an unwillingness by county officials under prior mayor Harry Kim to approve a type of financing called Community Facilities District financing whereby infrastructure costs are covered by bonds that are paid off over many years by homeowners.

Minter said UniDev was prepared to obtain CFD financing in 2006 but the county balked. He said the company explored alternatives, but agreed to have the county float its own bonds to pay for infrastructure.

Minter added that the CFD bond market was destroyed amid the financial industry meltdown late last year, and that the relationship between UniDev and the county got worse after elections last November that resulted in Billy Kenoi replacing Kim as mayor.

The county's lawsuit alleges that a January audit of UniDev and two development entities it created for Kamakoa found understated development costs, improper billing of fees and no contracts for significant services.

Minter said UniDev will be filing a countersuit to collect fees it is owed by the county.

The county also questions whether UniDev could have built the homes and kept prices affordable at the prescribed income levels.

Minter said construction costs have risen in recent years, but that the company would have been able to rent units at prices affordable to tenants earning about 60 percent of the median income, and sell units to buyers earning 100 percent to 140 percent of the median income.

"We maintain they would be affordable," he said, adding that prices for a two-bedroom townhome started at about $220,000.

The developer began accepting applications a year ago, and held a lottery to select buyers in January. However, an initial phase of 124 for-sale units and 48 rentals won't be built as expected this year, Minter said.

The county said infrastructure construction will be completed, and that it intends to proceed with home construction by other means that are still undetermined.