The $131 million sale of the Kukui Gardens affordable housing complex near Chinatown has hit a snag.

A new restriction placed on the sale by the U.S. Department of Housing and Urban Development could lead to delays in a compromise plan worked out to preserve the affordability of the 857-unit complex.

The plan called for half of the 22-acre property to remain as affordable housing under the control of the tenants and half be developed by San Francisco-based Carmel Partners into a mixed-use residential, retail and office complex.

Residents were generally pleased with the plan because it would retain about 800 affordable units.

"This is an unfortunate setback," said Drew Astolfi, lead organizer for Faith Action for Community Equity, which represents tenants. "But this deal is going to go forward."

The U.S. Department of Housing and Urban Development told the nonprofit Kukui Gardens Corp., the owner of the property, on Monday that proceeds from the sale must be used to build more low-cost housing in Hawai'i.

Kukui Gardens Corp. had intended to transfer the proceeds to an affiliated nonprofit organization, the Clarence T.C. Ching Foundation.

While the new restrictions may not kill the deal, they could mean less money for the Catholic charities that the Ching Foundation has traditionally supported.

The Ching Foundation has contributed millions of dollars to Saint Louis School, Chaminade University and St. Francis Medical Center (now Hawaii Medical Center) since 1967. The foundation does not build affordable housing, and under HUD's restrictions it would not be eligible to receive money from the sale of Kukui Gardens.

The sale originally was supposed to close in February, but the date has been pushed back several times. It is now scheduled to close in November.

A spokesman for Kukui Gardens Corp. had no immediate comment yesterday, and the trust's attorney, Alan Goda, did not return calls

Chris Beda, Carmel's chief investment officer, also could not be reached.

HUD, which has to approve the deal, said money from the sale must be transferred to a separate nonprofit affordable housing developer.

"The trust funds must be disbursed ... for a public purpose approved by the HUD field office that promotes the expansion of the supply of low and moderate income housing," said Christopher Opfer, an attorney in HUD's Washington, D.C. office.

HUD's new directives took Kukui Gardens' residents by surprise.

Tenants met yesterday with representatives of Gov. Linda Lingle, U.S. Sen. Dan Inouye and U.S. Rep. Neil Abercrombie to discuss the ramifications of HUD's restrictions.

Jennifer Sabas, chief of staff for Inouye, said the senator is encouraging the parties to continue discussions and will help them seek clarification from HUD.

Developed in 1970 by local developer Clarence Ching with HUD funding, Kukui Gardens is one of the state's largest affordable-rental projects with about 2,500 residents.

Ching, who died in 1985, agreed to keep the units affordable until 2011 in exchange for the HUD financing.

Ching set up Kukui Gardens Corp. to operate the project but specified that proceeds from the eventual sale of the apartments go to his foundation.

Kukui Gardens Corp. said in January 2006 that it needed to sell the complex because it couldn't afford to make repairs that would cost as much as $12 million.

The company announced in April 2006 that it was selling the apartments to Carmel, whose original plans called for the demolition of the project to make way for 3,700 residential units and 235,000 square feet of retail and office space.

An uproar over the potential loss of affordable housing prompted the state Legislature to pass a bill calling for the use of eminent domain powers to acquire the buildings.

The bill was signed into law last year by Lingle and since then Carmel has agreed to preserve the property's affordable units.

The Kukui Gardens deal comes as HUD has taken a hard line on the sale of other federally subsidized housing projects around the country.

This month, HUD Secretary Alphonso Jackson denied approval for the $1.4 billion sale of the 5,881-unit Starrett City project in Brooklyn, N.Y., to a private developer.

Jackson echoed the concerns of New York Sens. Hillary Clinton and Charles Schumer, both Democrats, who fear the buyer would raise rents for residents of the nation's largest government subsidized housing project.

Proceeds must go to build more low-cost housing here, not to an affiliated nonprofit, officials say.