Developers of tall buildings in Kaka'ako no longer have an option to pay the state cash for satisfying a requirement to provide moderate-priced housing.

Lawmakers passed the measure, House Bill 1186, early this month with the intent that it would help deliver moderate-priced housing to the market quicker if developers building in Kaka'ako had to provide such units as part of their projects instead of giving the state an equivalent amount of cash to develop affordable housing.

Gov. Linda Lingle let the bill become law yesterday without her signature, supporting the intent to produce affordable housing but raising the concern that the rule change would remove a flexible tool the state used to encourage development of moderate-priced housing.

The law applies to the Hawai'i Community Development Authority, which guides development in Kaka'ako. Agency rules require developers that build higher than 45 feet to provide 20 percent of any residential units at moderate prices or a cash equivalent. The rule aims to produce housing for "gap group" residents who earn too much to qualify for government assistance but not enough to qualify for a loan for a market-priced home.

Several projects have provided the gap-group units, while others have satisfied the requirement with cash or a mix of units and cash.

For instance, developer Alexander & Baldwin Inc. provided 63 gap-group units in its 352-unit Keola La'i tower on South Street completed last year, plus $1.2 million to HCDA in place of another seven units.

The agency's program has resulted in roughly 1,300 below-market condos for sale or rent in the area over more than two decades, but often units built with cash payments are developed well after the projects that contributed the money are complete.

Anthony Ching, HCDA executive director, initially opposed HB 1186, but in later testimony supported the change saying the present need for gap-group housing far outweighs the benefit of the cash option that helps stimulate development in Kaka'ako.

Kamehameha Schools, which is planning to develop 63 acres in the area with as many as 2,750 residential units, testified against the bill. Most testimony — including comments from affordable housing supporters, the Sierra Club Hawai'i Chapter and the Office of Hawaiian Affairs — supported the bill.