The state attorney general issued an opinion that could make it more difficult to sell the Kukui Gardens affordable rental complex to a San Francisco-based investment firm.

During a meeting with tenants at Kukui Gardens yesterday, Gov. Linda Lingle said she would take legal action against the U.S. Department of Housing and Urban Development if HUD allows the complex's owners to prepay the remaining balance of its HUD loan. Tenants said the prepayment would mean that HUD no longer would have any oversight of Kukui Gardens and could lead to the displacement of hundreds of seniors and low-income residents.

Owner Kukui Gardens Corp., which is selling the property to Carmel Partners for $130 million, said it needs the HUD approval to pay off the balance of its HUD loan to pay for deferred maintenance.

Lingle said in a letter to HUD officials and Kukui Gardens Corp. President Lawrence Ching that federal law only allows such prepayments in cases where a project no longer is meeting the needs of low-income tenants, which is not the case at Kukui Gardens.

"The state of Hawai'i objects to the prepayment in the strongest possible terms, both because it would be illegal and because it would be contrary to the interests of the state of Hawai'i and our citizens," Lingle said.

"We cannot afford to lose such a large number of affordable units for our lower-income tenants."

Nicole Pickens, spokeswoman for Kukui Gardens Corp., said the owners haven't seen the attorney general's opinion and had no comment. She said Kukui Gardens Corp. would welcome any alternatives that the governor is proposing for the apartment complex.

Pickens stressed that the owners are seeking to prepay the $2 million balance of their HUD loan so they can take out new loans to pay for much-needed repairs on the 36-year-old project.

Kukui Gardens, on the edge of Chinatown, is one of the largest affordable rental projects in Hawai'i. Development of the complex, which houses about 2,500 residents, was financed by loans guaranteed by HUD.

Public outcry over the sale prompted the state Legislature to approve a measure earlier this year giving Lingle the power to use the state's condemnation process to acquire Kukui Gardens. The bill was signed into law by Lingle in July.

Lingle — who was joined by Attorney General Mark Bennett, senior policy adviser Linda Smith and Department of Business, Economic Development and Tourism Director Ted Liu at yesterday's meeting — said the state would condemn the property only "as a last choice."

Condemnation would require that the state purchase the property and manage it. Lingle acknowledged that the state hasn't done a great job managing its own low-income housing.

Lingle said she prefers that a nonprofit or affordable housing developer would acquire the project.

"The state really, really doesn't have a great record managing this kind of housing," Lingle said.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.