A developer and the state have revived an affordable housing project in Kaka'ako stalled by financing troubles, but only after a state agency guiding development in the area took the unusual step of lending money for the planned rental tower on state land.

Directors of the Hawai'i Community Development Authority yesterday agreed to make a $15 million loan that will allow local developer Stanford Carr to proceed with the $86.2 million Halekauwila Place project announced two years ago.

The deal is being hailed as a creative approach that will produce jobs, capital investment and affordable housing as growing numbers of Hawai'i residents face employment and housing struggles in a declining economy.

"This couldn't come at a more opportune time," Carr said.

The 201-unit project was announced in March 2007 when directors of the Hawai'i Housing Finance and Development Corp., a state agency, selected the plan by Carr over three competing plans responding to a request for proposals to build affordable rentals on a parcel of state land once occupied by the old Pohukaina School.

Carr's plan for a sleek 18-story complex designated for moderate-income renters was celebrated for its design that bears little resemblance to concrete monoliths typically erected for affordable housing.

But financing troubles delayed construction initially expected to start last year and be completed in 2010.

Carr had planned financing in the form of tax-exempt bonds floated by the state and underwritten by Citigroup for sale to investors. But the global financial crisis dried up the market for such bonds.

"There is no market for these things," Carr said. "We exhausted all our options."

Carr sought other financing, including applying for federal New Market Tax Credits, but only was able to get an electrical worker pension plan, the National Electrical Benefit Fund, to invest $71.2 million in the project.

In discussions between Carr and the state housing and Kaka'ako development agencies, the possibility was floated to have the latter contribute the $15 million balance in the form of a second mortgage.

"Basically it's helping save the project," said Karen Seddon, executive director of the Hawai'i Housing agency, which controls the land slated for the project on the makai-diamondhead corner of Keawe and Halekauwila streets.

Anthony Ching, Hawai'i Community Development Authority executive director, said the loan is unusual but was viewed as an opportunity with important public benefits of generating affordable housing and jobs as well as improving a long neglected piece of property in urban Honolulu.

"Our objective was a project restart," he said. "It's not a very attractive project to lenders."

Ching also said two other developers pursuing major residential projects in Kaka'ako — Kamehameha Schools and General Growth Properties — were considering making the $15 million investment in a move that would have reduced the requirement for either one to produce affordable housing in their projects.

Such a deal would have led to about 200 fewer affordable units being built in Kaka'ako, he said.

The loan, which carries a 50-year term and nominal interest, will come from the agency's general revolving fund containing almost $50 million.

The structure of the loan, Ching said, minimizes the risk of losing the investment should the developer default before construction is completed, by only providing $4.5 million before construction, and contributing the balance together with the Electrical Benefit Fund's $71.2 million as construction financing.

Though an affiliate of Stanford Carr Development is the project's developer with partner UniDev LLC, Halekauwila Place will be owned and managed by local nonprofit Pacific Housing Assistance Corp. The state will continue to own the land and is granting the project a 65-year lease at $1 a year.

Another twist that Carr made to the project to make longer-term financing easier after the Electrical Benefit Fund's loan matures in eight years, is to offer renters an option to buy up to 136 of the units as leasehold condominiums.

The rent-to-own provision allows renters to accumulate a portion of their monthly rent that can be used as a down payment if they elect to purchase.

Estimated rental rates are from $900 to $2,500 for the units that range from 540-square-foot studios to three-bedroom units with 1,310 square feet.

Tenants are permitted to earn 80 percent to 140 percent of Honolulu's median family income, which last year was $73,800. The rents will meet federal affordability guidelines for those income levels.

Based on federal guidelines, purchase prices could range from a little less than $300,000 to the $400,000s, though median incomes and interest rates at the time of an initial five-year purchase option period will determine prices.

Sales proceeds will help pay off part of the Electrical Benefit Fund note and reduce the amount of long-term financing that will be repaid with rental income.

If Halekauwila Place is developed, it would fulfill an old vision to reuse a piece of state property that for nearly three decades has been considered for affordable housing, a federal prison, state offices, a new school and use by the Office of Hawaiian Affairs.

The 1.25-acre project site is part of a nearly 7-acre block that includes Mother Waldron Park, a public library system operations building, a closed road and a parking lot.

The Hawai'i Housing agency piece comprises the parking lot, while other state agencies and the city own the rest of the block.

The larger site had long been home to Pohukaina School, which was built in 1912 and at one time had more than 1,100 elementary students. But Kaka'ako's residential population dwindled as industrial businesses transformed the area, and in 1967 the school was converted for use by disabled students. The school was relocated to Kaimuki in 1980, and the building was demolished.

In 1992, the Hawai'i Community Development Authority issued a request for proposals to build an affordable rental high-rise on the site, but that $54 million project fizzled amid the state's last economic downturn.