The owner of the Kukui Gardens apartment complex downtown said it is closer to getting federal approval for the $130 million sale of the 22-acre, affordable rental project.

Kukui Gardens Corp. said yesterday that it submitted a notice with the federal Department of Housing and Urban Development of its intent to prepay the $2 million balance on its decades- old HUD loan.

The prepayment plan, if approved by HUD, would eliminate the need for the owners to seek HUD approval for the sale to San Francisco-based Carmel Partners.

Alan Goda, attorney for Kukui Gardens Corp., said the prepayment also will allow the owners to borrow money to conduct much-needed maintenance and repairs to the 36-year-old project.

Goda said Kukui Gardens Corp. cannot take out a second mortgage on its property but must finance repairs and construction from its operating revenues.

Goda said Kukui Gardens Corp. must give tenants and local government agencies 150 days' notice of its plans to pay off the loan, and that HUD is likely to approve or disapprove the prepayment request within 180 days.

If the prepayment plan is approved, rents at Kukui Gardens must remain affordable until 2011, Goda said. All rent increases until then must be in accordance with HUD guidelines and must be approved by HUD, Goda said.

However, HUD will no longer have regulatory oversight over the sale of the project, Goda said.

Kukui Gardens Corp., the nonprofit owner of the 22-acre apartment project, put the affordable housing project up for sale in January, raising concerns that a new owner would tear down the complex and build more expensive housing that will displace hundreds of low-income tenants.

The uproar prompted the state Legislature to pass a measure calling for the state to use its powers of eminent domain to acquire the building. The bill was signed into law by Gov. Linda Lingle on July 7.

Built in 1970, Kukui Gardens is one of the state's largest affordable rental projects. Construction of the complex was financed by a $16 million loan from HUD, which required the developers to keep all of the units affordable until 2011.

Drew Astolfi, lead organizer for the nonprofit activist group Faith Action for Community Equity, or FACE, said the prepayment plan is an attempt to circumvent local and regional HUD managers who are hesitant about approving such a sale.

The HUD office has told Kukui Gardens Corp. that proceeds from any sale must go into a third-party trust, whose mission is to invest in low-income and moderate-income housing. HUD also says it will have the final say on how that third-party trust can spend its money.

Kukui Gardens Corp. said it plans to send the proceeds to the nonprofit Clarence T.C. Ching Foundation, which has donated millions to local Catholic schools and hospitals but has never invested in affordable housing.

"They believe they are getting around the local rule-making," Astolfi said.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.