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Chapter 11's ability to ensure new developments address housing needs for a broad spectrum <br /> of incomes has been inhibited by the excess credit feature of the ordinance. Projects that <br /> produce more affordable housing than required may sell credits to another party for use in <br /> meeting the Chapter 11 affordable housing requirements of a separate project. State law also <br /> requires the award of credits for projects sponsored by the Department of Hawaiian Home <br /> Lands (DHHL). In theory, the system of credits seems like a promising and flexible policy <br /> approach; however, the experiment with excess credits on the Big Island does not show <br /> evidence of a strong link between successful completion of affordable units and their ability to <br /> earn excess credits. Affordable developers primarily rely on State and Federal subsidy sources <br /> as well as debt financing for their projects, and generally have not been able to leverage excess <br /> credits as a source of financing for affordable housing development. Most excess credits earned <br /> over the past two decades remain unused, resulting in a glut of approximately 1,300 unused <br /> credits. This large, accrued balance of credits has the potential to offset future production of <br /> affordable housing under Chapter 11 for years to come. <br /> See Section 2 for a full summary of findings. <br /> 1.2 Recommendations for Updates to Chapter 11 <br /> Following are KMA's recommendations for updates to Chapter 11 based on the findings of the <br /> analysis and our experience with other programs: <br /> (1) Phase out, eliminate, or restrict use of excess credits. The existing excess credit <br /> system is not working as an effective tool to deliver affordable units and should be <br /> modified or phased out. Affordable projects have not been able to use credits to secure <br /> debt or equity financing. Affordable developers say credits do not induce the <br /> construction of affordable units and that they would build affordable units using other <br /> State and Federal subsidy sources regardless of the ability to earn credits. Development <br /> projects using excess credits to meet the requirement of Chapter 11 do not create <br /> inclusive communities with a mix of market rate and affordable housing intended by <br /> Chapter 11. Developers choose the excess credit option because the cost is less. <br /> However, requiring developers to purchase excess credits adds cost to projects without <br /> a clear benefit or link to affordable housing production. Funds from purchase of credits <br /> go to private parties or corporate entities that own credits and have no obligation to <br /> reinvest the funds in local affordable housing projects. If the system remains in place in <br /> its current form, it is likely to impair effectiveness of Chapter 11 going forward. <br /> The following is one potential approach to phasing out use of credits going forward. <br /> Legal review and coordination with the Department of Hawaiian Home Lands (DHHL) <br /> are required to refine the approach. <br /> Keyser Marston Associates, Inc. Page 2 <br /> \\SF-FS2\wp\13\13996\001\014-001.docx <br />