Affordable rental housing development in Hawaii practically came to a halt earlier this year because of financial market constraints, but a flurry of state and federal stimulus awards in recent months is advancing eight projects that were stalled or endangered.

The projects moving forward involve close to 1,000 units on Oahu, the Big Island, Maui and Kauai, and include two that were already under construction.

The emergency funding has been key for continuing production of badly needed low-income rentals, including units affordable to residents earning as little as 30 percent of the median income, that are built by private developers with government assistance.

But one downside also has emerged: Half of the projects receiving rescue financing involve developers buying and rehabilitating existing affordable housing, which helps extend the life of present inventory but doesn't increase the supply. The acquisition projects began competing with new housing projects after a popular market of financing for acquisition projects dried up.

Also, the emergency financing distributions mean several projects in early stages of planning that applied for financing had their applications deferred because projects closer to construction that had unanticipated additional financing needs were given preference.

"We just want to see these projects get built," said Darren Ueki, finance manager for the Hawaii Housing Finance and Development Corp., the state agency administering state and federal tax-credit financing and other funding programs for private affordable housing developers.

Ueki said that in past years there might be a dozen or so projects in the agency's pipeline that are considered fully financed, and maybe two or three may encounter shortfalls or challenges due to construction cost increases, tax-credit pricing or other circumstances. This year, 14 projects in the pipeline had financing challenges.

"None of (the problems) were within their control," he said. "They are reputable developers with solid projects."

Trouble arose for the projects amid the global financial crisis and mortgage industry meltdown that began late last year when a key tool for financing affordable housing projects — low-income housing tax credits — lost much of their value.

These tax credits issued by the state and federal government are a crucial tool for many affordable housing projects assisted by Housing Finance. The credits, which are issued by the agency on a competitive basis to developers, are then sold to investors who can reduce their taxes over 10 years. So a $1 million credit can be worth up to $10 million to investors.

Before the financial crisis unfolded, investors were paying 85 cents or so for each $1 of blended state and federal tax credits. After the crisis, developers couldn't find buyers for credits at all, or found skittish investors offering a pittance — in some cases less than 30 cents for state tax credits — which left huge financial holes in projects.

In response, two federal stimulus programs plus state grants, loans and additional tax credits amounting to $24.9 million were distributed in recent months by Housing Finance to fill the holes.

One federal program guarantees developers at least 85 cents per $1 of tax credit if no investor is willing to pay more for the credit. The agency also plans to provide an additional $7 million in loans or grants from the state rental housing trust fund this month that should help another three or so projects move ahead.

Some of the projects receiving extra aid include the acquisition and expansion of Kukui Gardens in Downtown Honolulu, the planned 30-unit Ainakea Senior Residences in Kapaau on the Big Island and two existing affordable projects on Maui and Kauai being acquired by California-based Micon Real Estate.

The biggest project to benefit from the extra financing is Hale Wai Vista, a rental complex under construction in Waianae consisting of 216 units with two or three bedrooms at rents from $507 to $950 a month.

The project by local nonprofit development firm Hawaii Housing Development Corp. arranged much of its financing in 2006 for a $23 million first phase with 84 units, but delays arose with zoning and permitting and community opposition to building height.

Construction began on the first phase in January, but the delayed timing caught the project up in the financial market turmoil that drastically reduced the value of its state and federal tax credits. The developer initially expected to sell the credits for an average 82 cents on the dollar, but the yield this year fell to 51 cents on the dollar, which produced a $5.7 million deficit for Hale Wai. Meanwhile, construction costs rose by $1.7 million.

"The meltdown of the low-income housing tax credit equity practically brought all affordable housing projects to a stop," said Gary Furuta, project manager for Hale Wai.

Hale Wai's developer was able to make up for some of the shortfall from other private and public financing sources, but came back to Housing Finance for an extra $1 million from the state rental housing trust fund, $2 million from additional state and federal tax credits and $2 million from a special federal Tax Credit Assistance Program.

The developer also obtained $3 million in state and federal tax credits to help advance the $36 million second phase of Hale Wai. Construction on the first phase is expected to be completed late this year or early next year.

Giving the extra tax credits to Hale Wai and the other projects with budget shortfalls meant that developers seeking tax credits, loans or grants from Housing Finance to get their projects started had their applications deferred.

For instance, 10 developers sought $20.2 million from the state's rental housing trust fund in February, but six were deferred from consideration because they had not previously received awards.

The tax credit program this year attracted eight applications seeking $14.4 million in credits, but six were deferred to provide credits to troubled projects.

Another change to the Housing Finance programs was that developers proposing to build new affordable housing faced competition from developers proposing to buy and rehabilitate existing affordable housing. This occurred because the market for another type of tax credits typically used by developers buying and improving affordable housing dried up.

Ueki said the agency found that its criteria for selecting projects to finance slightly favored acquisition/rehab projects. He said the agency, which equally values preservation and construction of affordable housing, is considering revising its criteria to give more equal weight to both types of projects.

Agency staff chose a strategy to advance projects that were the closest to getting built, and the agency's board decided to support that strategy. "It wasn't an easy decision," Ueki said. "We had to go with what were the strongest projects."

Some of the federal stimulus programs required that the awards go to projects that previously received tax credits, and that proceeds from additional tax credits be spent by 2011 or 2012.

One developer who had a financing application deferred said it was unfortunate that much of the aid went to pay for purchasing existing affordable housing instead of new construction that would employ more people.

"The agency didn't do a bad thing," said the developer, who asked not to be named so as not to harm future chances of obtaining awards from Housing Finance. "The board had to make some tough decisions."