A planned agricultural home subdivision in Upcountry Maui is facing foreclosure after permitting delays and the deflated housing market upset the project, called Waiakoa Ranch.

An affiliate of lender iStar Financial filed a foreclosure suit in state Circuit Court last month against Kula 1800 Investment Partners LLC, which was working on subdividing about 1,860 acres of land zoned for agriculture into 86 home lots between five acres and more than 40 acres.

The suit, filed May 22, claims that Kula 1800 arranged to borrow $71.5 million, and defaulted on payments for an outstanding balance of about $18 million.

The lender is seeking to have the property sold at auction.

Charlie Jencks, a representative of Kula 1800, said the developer is hopeful of reaching an out-of-court agreement with iStar that will keep the project afloat with its present owner until the real estate market recovers.

"They're well on their way toward that," he said.

Kula 1800 bought the land in March 2006 from Maui Land and Pineapple Co. for $22.9 million.

The partnership included Steve Goodfellow of Maui construction firm Goodfellow Bros., though Jencks said Goodfellow is no longer involved.

Another Kula 1800 principal, according to public business records, is Michael Rosenfeld of Woodridge Capital, a developer of large-scale real estate projects on the Mainland and Canada over the past 20 years.

Kula 1800 also said it is a partner in Maui Cattle Co., a partnership among several Maui ranches including Haleakala Ranch, which leases the Kula 1800 property for cattle grazing.

Jencks said the developers of Waiakoa Ranch encountered some delays drilling wells to supply the subdivision, and obtained preliminary subdivision approval from the county in December 2006.

A sales office was established, with the project represented by Island Sotheby's International Realty. But Jencks said no sales were made. Road and utility infrastructure also has not been built, other than the supply wells.

Waiakoa Ranch is one of several controversial subdivisions pursued by developers in recent years seeking to capitalize on what was a booming housing market by selling home sites on land zoned for agriculture.

The project was marketed as an opportunity for peaceful living that balances private residences with agricultural activity, conserving open space and ensuring that cattle ranchers have long-term access to much of the property kept in pasture land.

Such projects, often called ag subdivisions or gentleman's farms, exploit a loophole in state law generally permitting one or two "farm dwellings" on lots as small as two acres if they are accessories to a primary agricultural operation.

Much of the criticism of ag subdivisions is that the farm dwellings — often luxury mansions and sometimes vacation rentals — are being built primarily as residences for nonfarmers and are making farmland unaffordable for bona-fide farmers.

Several ag subdivisions on Maui — including Pu'unoa, Launiupoko and Ukumehame — have been challenged as violations of state land-use law.

A Big Island project called Hokuli'a was ruled an illegal use of agriculture land by a state judge in 2003 after opponents challenged the project in court.

Hokuli'a comprised 750 one-acre home lots primarily around a Jack Nicklaus-designed golf course, which previously was an allowable use on ag land, and also included 200 acres for a leased coffee farm, a spa, tennis courts, club and beach house. The lawsuit was later settled, allowing completion of the luxury home subdivision.

Other projects, including Pe'ahi Farms and Ka'anapali Coffee Farms on Maui, have tried to more closely integrate farming with residential lot sales.

The plan for Pe'ahi Farms was 16 mostly two-acre home lots priced from about $1 million to $3 million, plus a 170-acre farm leased to a farm operator.

About $2 million from lot sales would help capitalize a nursery covering 15 to 30 acres, a 10-acre organic farm, high-protein grass for cattle grazing and fruit trees.

Ka'anapali Coffee Farms planned 108 house lots starting at $1.2 million amid 500 acres of existing coffee trees above Ka'anapali Resort.

On O'ahu, an affiliate of Beverly Hills, Calif.-based Kennedy Wilson Inc. is trying to develop 77 home lots on the roughly 2,700-acre Dillingham Ranch that would create 5-acre home lots over about 400 acres and help preserve the historical North Shore ranch.