WAILUKU - Maui County's Public Services Committee is considering a compromise to the controversial two-year-old residential work force housing policy.

Mayor Charmaine Tavares' administration produced a proposal Wednesday that would reduce from 40 percent to 30 percent the number of affordably priced homes a would-be developer must build to comply with the ordinance. However, the reduction would apply only to developers who build subdivisions with market-rate homes that are $600,000 or less, according to the bill. When at least half of a project's homes are priced over $600,000, the developer still would have to provide 50 percent affordable housing.

In a related action, a federal judge from the District of Hawaii has found that the Maui County residential work force housing ordinance is constitutional, a move that solidifies the ordinance, said Deputy Corporation Counsel Madelyn D'Enbeau. And the county is working on a settlement of some kind with Canadian developers, who wanted an exception from building affordable units to go along with their proposed Kihei condos and homes totaling 251 units.

The Maui County Council will vote today on a motion to free the county's attorneys to pursue the settlement, the details of which won't be public until finalized, D'Enbeau said.

As for the ordinance change, Housing and Human Concerns Department Deputy Director Jo-Ann Ridao told the committee Wednesday that the proposed 10 percent reduction for lower-priced projects is intended to help small developers. This is the second time this year the committee has looked at revising the ordinance to jump-start the local housing industry. Another list of recommendations apparently remains under committee consideration.

The existing legislation is "tying a noose" around the local home-building industry, said Dave DeLeon of the Realtors Association of Maui. And when committee members suggested expanding the ordinance to apply to commercial developments - such as shops, offices and restaurants, DeLeon said, he was appalled by the idea.

Many developers, contractors and even nonprofit leaders have argued that the work force housing ordinance, along with the county's new law that requires developers to come up with their own sustainable water source, is poisoning Maui's real estate well. At the least, it is doing damage until some significant alterations are made, they have said.

Ordinance critics have said Maui's construction industry would be much stronger today if it weren't for the new requirements, which were enacted around the same time as the economic crash.

Council Chairman Danny Mateo, who authored the original work force housing bill to remedy Maui's affordable housing deficit, said Wednesday that he's open to redrafting parts of the ordinance.

"Times have changed," Mateo said, referring to the still-tanking economy. "I think it's only appropriate that we change."

Despite these difficult economic times, there remains a need for affordable housing, Council Member Gladys Baisa added.

To date, the county has been sued twice with regard to the work force housing ordinance. In the second case, now in federal court on Oahu, Maui Land & Pineapple Co. argues its Kapalua Central Resort project should be exempt from the law, due to pre-existing agreements with the county, D'Enbeau said.

The Kamaole Pointe and Alaku Pointe case involves two project sites - one next to the Kihei Regency Apartments, the other off Aluku Place - on 6 acres. The projects are owned by investment groups in Calgary, Alberta.

More than a year ago, U.S. District Court Chief Judge David Ezra issued an order in the case that found the ordinance is legal, D'Enbeau said.

Ezra reduced the case to the question of whether the investors were denied due process during a county Policy Committee hearing July 24, 2007, when the group sought a waiver from the work force housing ordinance, D'Enbeau said.

Wednesday, Public Services Committee Chairman Wayne Nishiki said the council was required by law to re-examine the work force housing ordinance every two years. However, he added the council should be "sensitive to the islands' new economics."

The ordinance now requires developers of five or more market-priced residences to build 40 to 50 percent of the total project as affordable homes either on-site or somewhere in the same community plan area - or contribute land or cash payments in lieu of new homes.

DeLeon suggested the County Council come up with a sliding scale for affordable housing requirements, a scale that would factor in the existing economic climate and housing market.

Only three subdivisions that fit the work force housing ordinance criteria have been built in the past two years, Ridao said. Those are the KSD Development in Makawao; Maui developer Everett Dowling's contribution toward a Hale Mahaolu project for the elderly in Kihei; and a ML&P project in Kapalua.

Proponents of the work force housing ordinance also point to several massive-scale projects that have affordable housing components and are in the design-and-permitting phase. Honuaula is such a project.

But other projects, such as Makena Resort and the planned Hyatt Regency hotel-and-condominium expansion, are on hold indefinitely because of lost or stalled funding, respectively, Ridao said. The Hyatt's proposed $63.6 million 12-story tower would include 121 units.

Ridao has said about 3,100 dwellings have been proposed since the ordinance went into effect. However, Wednesday's committee discussion was bogged down by lingering interpretations of the law that could change dramatically how many affordable homes must be built out of those 3,100.

The Department of Housing and Human Concerns has operated with the interpretation that the requirements can be satisfied by building affordable homes in addition to the main project. But Council Member Jo Anne Johnson disagreed and said developers must include the affordable homes as part of the total number of homes in the original project.

The question also came up without resolution during the debate for the proposed Makena Resort almost a year ago. The developers in that massive housing-and-resort project since have defaulted on their loans, although the project very well could resurface with new investors in better times.

Deputy Corporation Counsel Kimberly Sloper told council members Wednesday that the administration's interpretation of the county requirement is: If a developer builds a 100-unit subdivision, 100 homes must be market rate and an additional 30 could be affordable, by federal income standards.

Johnson countered that her understanding of the law and new proposal was: Out of 100 homes built, 30 of those must be affordable, and 70 must be sold market rate.

The rule is tricky because of the in-lieu-of credits and other alternatives written into the ordinance, Sloper said.

Whatever new rules the Public Services Committee agrees on will not apply retroactively to developments already voted on by the County Council, officials said.

* Chris Hamilton can be reached at chamilton@mauinews.com.