The Kahala Nui retirement community is described as a place where residents and staff live and work as one ohana, but a deep-seated rift exists in the family dynamic.
About two-thirds of the community’s independent residents recently expressed alarm in a letter to the chief executive and board of the nonprofit that owns and operates Kahala Nui over how to pay for buying the land under the complex while also pursuing development of a second retirement complex.
The Oct. 21 letter from about 240 residents raised concerns that their monthly occupancy fees would escalate due to the estimated $90 million land purchase and a roughly estimated $275 million expansion.
Using bond debt to finance the land purchase is the primary concern of these residents, who are rather wealthy individuals and generally love living at Kahala Nui, where amenities include white-tablecloth dining with wait staff, a bar, a pool and Jacuzzi, a fitness center, a beauty salon, a library, a card room, an art studio, weekly housekeeping and curated wellness and entertainment programs.
“We Kahala Nui residents fully approve acquiring the fee simple interest of our 6.5-acre property,” the letter states. “However, we are alarmed by the financial burden we may ultimately bear due to management and board decisions.”
Some residents also ran an ad in the Oct. 20 edition of the Honolulu Star-Advertiser questioning how Kahala Nui can afford the land purchase plus expansion and suggesting the nonprofit’s leadership is withholding information.
“The problem is there’s a real trust issue here,” said one resident who asked that their name not be used because they fear reprisals.
Three residents interviewed say the only way they see trust being restored is replacing top management.
Craig Courts, president and CEO of Kahala Senior Living Community Inc., said he believes only a small number of residents soundly stand behind the letter. He also believes dissent emanates from a relative few rejecting information management has shared about the investments because of ingrained mistrust stemming from past decisions that rankled many residents.
“It’s unfortunate that we have some of this going on,” Courts said. “This is not the culture we want (for residents). This is the last part of their life. They should be happy and enjoying it.”
Funding feud
The nonprofit, governed by an 11-member board, has an agreement to buy the land under the East Honolulu complex from the Roman Catholic Church of Hawaii, which had leased the property to the nonprofit for 60 years when Kahala Nui was built in 2005.
According to a public notice, the nonprofit intends to sell up to $140 million in tax-exempt bonds to investors, of which $40 million would pay off existing bond debt used to develop Kahala Nui while $10 million would be for property improvements.
Some concerned residents have questioned the prudence of incurring such debt, including up to $90 million for the land purchase, when the nonprofit has a roughly $160 million investment portfolio.
The portfolio was established largely with entry fee deposits from residents. Entry fees today range from $732,870 to $1.8 million depending on apartment size. If a resident moves out or dies, 90 percent or 95 percent of the fee is returned to the individual or their estate, depending on when the person moved in, and a new resident pays another entry fee.
Audrey Morabito, Kahala Nui’s chief financial officer, said using part of the nonprofit’s investment assets to pay for the land could actually increase the risk of higher monthly fee increases because accrued income from the portfolio has covered financial losses to operate Kahala Nui every year since opening 19 years ago.
“We’re doing the right thing for the residents, and we’re doing the right thing for the community,” she said. “Kahala Nui since inception has (had) operating losses. … Kahala Nui has never added to its reserves through operations.”
The operating loss was $2.8 million in 2023 and $4.1 million in 2022. The investment portfolio’s long-term average return has been about 8.5 percent and provides a roughly 3.5 percent return cushion over expected bond debt service.
Morabito said financing the land purchase will have no effect on future monthly fees. “Our investment portfolio will service the debt for the (land) purchase,” she said.
Monthly fee increases in recent years for residents have been modest, at 4 percent in 2023 and 5 percent this year. Next year, the fee will rise 7 percent. Morabito said a little more than half of next year’s increase is to pay for a spike in property insurance rates, something that has hit condominium complexes statewide.
Monthly fees for independent residents with their own apartment range from $4,125 to $8,262 depending on apartment size. The monthly fee for a second occupant in an apartment is $2,164.
Courts said the land purchase, which will eliminate ground lease rent expenses, will give Kahala Nui better longer-term stability to serve current and future residents with a level of service and amenities they expect.
Expansion plan
If Kahala Nui expands, it wouldn’t be on the existing campus, and all costs would be funded by residents who move into a second facility, according to Courts and Morabito.
The nonprofit for many years has explored expansion on Oahu, or possibly on a neighbor island, to accommodate strong demand. About 650 people are on a waitlist, so someone who joins the list today likely would wait six to eight years to move in.
Currently, about 350 residents live in Kahala Nui’s 270 independent-living apartments, and about 100 are in the onsite Hi‘olani Care Center that includes 62 assisted-living units and 60 skilled-nursing beds. Residents must be at least 62 to reside at Kahala Nui, and the oldest resident is 105.
No definitive expansion site or timetable exists, according to Courts, though he has told residents that a new facility with about 150 independent-living apartments could cost around $275 million. Such an expense, he added, would be financed by tax-exempt bonds solely paid for by residents occupying the new project and not by existing Kahala Nui residents.
“Anything we do that is growth-related … it has to support itself financially,” he said. “We are not going to look at the current Kahala Nui to subsidize it.”
Still, some Kahala Nui residents don’t believe assurances from Courts and Morabito regarding monthly fees not rising because of the land purchase or expansion, which would not have its own assisted-living center.
Courts acknowledged that this in part stems from some changes he sought after being hired three years ago when his predecessor, who was CEO for 13 years, retired. Two other Kahala Nui leaders, an executive director and chief financial officer, also left about the same time.
Foundation of mistrust
One of the aggravating events was a fee hike to $25,000 from $1,500 for residents to switch apartments about two years ago. Courts said Kahala Nui spends on average $75,000 to renovate an apartment after someone leaves, including new flooring, cabinets and appliances, but was charging next to nothing if an existing resident wanted a unit vacated by someone else.
Courts said he neglected to give a required 60-day notice for the change, and after an uproar he apologized and no increase was made.
Another issue was a proposed 8 percent increase to the monthly resident fee for 2023 that Courts said was in response to high inflation. Some residents complained, and management later reduced the increase to 4 percent after telling residents that refinancing debt made the lower figure possible.
Some residents, however, believe the debt refinancing was already anticipated and was used as a face-saving excuse.
One of three residents interviewed, all of whom who didn’t want their names disclosed for fear of reprisals, said it seemed to them like new upper management wasn’t prioritizing the financial well-being of residents over business finances. This resident, who has lived at Kahala Nui for close to a decade, also said there had been no big problems with prior management.
“And now, it’s completely different,” the resident said.
Another issue raised by some residents is a decision to factor depreciation of the Kahala Nui property into operating expenses. One resident said cash flow from operations is positive for Kahala Nui, which should support lower monthly fee increases.
Morabito said depreciation is factored properly because it accounts for the need to maintain and renovate the property. She also said that entry fee deposits, which must be mostly refunded, is included in the cash flow total but isn’t from operations.
In a June 2023 letter to Kahala Nui’s board, about 260 residents said they lacked confidence in Courts and described the departure of the highly regarded former CFO as suspicious. The letter also criticized the previous big proposed increases to the apartment change fee and monthly fee.
“These serious management and fiscal issues require immediate Board action,” the letter said. “They impact Residents’ financial security and well-being, erode confidence in the corporation and tarnish Kahala Nui’s standing in the community.”
Residents do not have a representative on the board, but one elected representative can attend board meetings. There also is a resident association council that interacts with management and is led by former state lawmaker Barbara Marumoto.
In a recent email to the board, the council reiterated concerns over the planned bond sale and possible expansion impacting their financial security.
“There is a belief that resident voices are not being fully considered in the decision-making process,” the email said.
A meeting held Monday, Nov. 11, to air out issues tied to the planned bond sale was described as contentious by some residents who attended, and “ugly” by one.
Courts said he understands that residents are concerned about their finances, but he believes that only a small handful of residents clearly understand the nonprofit’s financial operations and effort to sustain itself in perpetuity.
“This is a very complex business,” he said. “We appreciate and understand that, yes, this does create anxiety. It creates uncertainty for them.”
